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Interactive Intelligence Inc. (NASDAQ:ININ)

Q2 2008 Earnings Call Transcript

July 28, 2008 4:30 pm ET

Executives

Don Brown - President and CEO

Steve Head - CFO

Paul Weber - VP of Sales for North America

Analysts

Irit Jakoby - Susquehanna

Shyam Patil - Raymond James

Graham Green - Verus Capital

Tavis McCourt - Morgan Keegan

Craig Nankervis - First Analysis

J.D. Padgett - The Boston Company

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Interactive Intelligence Second Quarter 2008 Earnings Conference Call. Just as a reminder, today's call is being recorded. At this time, all lines are in a listen only mode. (Operator Instructions).

And now at this time it is my pleasure to turn the program over to Dr. Don Brown, President and CEO of Interactive Intelligence. Please go ahead, sir.

Steve Head

Hello?

Operator

Please stand by. (Technical Difficulty).

Steve Head

…As a result of a variety of potential risks and uncertainties. For more information, you should look to our 2007 Form 10-K which we filed with the SEC, and which describes factors, risks, and uncertainties that could cause our actual results to differ materially. The company disclaims any obligation or undertaking to update or revise any forward-looking statement. Also during this call we may refer to non-GAAP financial measures. These non-GAAP results eliminate the impact of non-cash stock option expense, and non-cash income tax expense and benefits. Management uses these non-GAAP financial measures in analyzing the business.

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

Don Brown

Thanks, Steve. I'll start with the big picture and then Steve will drill down into the details. Following Steve's comments, I'll take a few minutes to update you on the progress of our 2008 plans.

For second quarter of 2008, we recognized revenues of $30.6 million, which is up 13% compared to the revenues that we posted in the second quarter of last year. Revenues were strong for new customers with 95 new customers signed during the second quarter. We had two new customers submitting orders totaling over $1million, and one over $900,000. And as we have reported in our earlier announcement, our lower overall top line revenue growth is associated with a lower dollar amount of orders received from existing customers. The volume for number of orders was fine. But the dollar amount was less than expected. As we've done further analysis, and spoken to customers and partners, we think there are a couple of conclusions we can draw.

One, we aren't seeing evidence that the upgraded orders from our installed base are going away, or being replaced by competitors. But two, customers are being a bit more cautious as they work on analyzing trends in their own businesses. So why the greater slowdown in add-on business, and not the same pullback in new orders? Often, these add-on orders are for additional applications, that are not as critical to the core operation, things like speech recognition, work force management, or screen recording. They also are sometimes tied to additional user licenses which aren't required if our customer has slowed the pace of their own hiring.

To contrast this situation to new customer orders, those most often include core functionalities such as the ACD or IP PBX. They often replace an old legacy system that's being phased out. And those purchases were more likely to have been planned over a longer period of time. In the second quarter we had 11 customers that submitted orders totaling $250,000 or more, including the two mentioned above that exceeded $1 million. And seven of these 11 were new customers.

We achieved record services revenues in the quarter of $15.3 million, an increase of 22% from the second quarter of last year. We are reporting non-GAAP income, and EPS in earnings release. On a non-GAAP basis, earnings for the second quarter were $2.4 million, or $0.13 per diluted share. This compares to $3.2 million or $0.17 per diluted share, the same quarter last year.

Given those highlights, I'll now turn the call over to Steve for some more detail, and then come back with some additional comments.

Steve Head

Thanks, Don. As usual I will comment on our operating performance, then the balance sheet and then the cash flows.

Starting with our operating performance, we had two major items that impact the information that we'll discuss. First, on a GAAP basis, we recorded income tax expense of $700,000 in the second quarter, which compares to $103,000 in the same quarter last year. As we've discussed in prior calls, we recorded a large tax credit in the fourth quarter of 2007, to recognize deferred tax assets related to tax operating loss and credit carry-forwards. As a result of recognizing that asset we are now recording tax expense. Most of which does not require cash payments. On a non-GAAP basis our tax expense was $44,000. We recorded non-cash stock option expense of $944,000 for the second quarter of 2008, compared to $806,000 in the second quarter of 2007.

Our partners continue to generate the majority of our orders, with 66% of orders coming from the channel during the second quarter. As Don stated, we signed 95 new customers in the quarter for our products, our contacts center enterprise messaging, and IP PBX solutions. The overall average new customer order in the quarter was $92,000, with the average new customer order of $111,000 for contact center and large enterprise IP PBX licenses.

Geographically, the orders were generally consistent with prior quarters, with 69% from North America, and the remainder from the rest of the world, principally EMEA. We continue to have orders for specialized hardware from our CIC customers, this is in part a result of the Interaction Media Server, and the Interaction Gateway, two appliances, which we developed and delivered to enhance scalability and functionality. The orders of these appliances increased significantly, compared to the second quarter last year.

The timing of revenue recognition for orders is dependent on a number of considerations and only a portion of the orders were recognized in the quarter. For the second quarter of 2008, services revenue increased as the number of users, and the related support fees increased. Services revenue includes professional services, and education services. Support revenues were 78% of services revenues for the quarter. Product margin was 74% in the second quarter up 2008, down from 76% in the second quarter a year ago. As we discussed in prior calls, the product margin varies from quarter-to-quarter, based on the number of media server and gateway appliances licensed, and the cost related to third party software, and IP PBX handset sales.

Cost of services increased principally, due to an increase in staffing and related travel. Our services margin in the second quarter of 2008 was 60%, which is up from 59% in the second quarter of 2007. Gross profit was a record $20.6 million in the second quarter of 2008, and the margin was 67% of total revenues, compared to 68% in the second quarter of last year. Total operating expenses on a GAAP basis for the second quarter of 2008 were $19.4 million, a sequential increase of about $400,000 over the first quarter of this year.

These operating expenses were 63% of total revenues in the second quarter, compared to 60% in the second quarter of 2007. Non-GAAP operating income, which excludes the stock option expense, was $2.2 million or 7.2% of revenues, compared to $3 million or 10.9% of revenues in the second quarter of 2007. This change reflects operating expense increases relatively greater than the revenue increase. We are taking actions to minimize expense increases in the near-term, until we see revenue acceleration.

Other income, principally interest income was $292,000 in the second quarter of 2008. This is a decrease primarily as a result of lower interest rates earned on cash and investments. And as I've mentioned non-GAAP foreign and miscellaneous other taxes totaled $44,000 in the second quarter.

We continue to have over $20 million of tax operating loss carry-forwards which will offset about $8 million of taxes, otherwise payable plus tax credit carry forwards to offset another $1.5 million of taxes. The tax effect of these amounts is included in the June 30 deferred tax assets of $11.9 million. Also because of stock option exercises, there are additional compensation deductions for tax purposes, of $23 million, which will result in a reduction of taxes otherwise payable, of approximately $9 million. The value of these compensation deductions are not recorded as an asset, and will only be recognized when they are realized.

Since we recognize the deferred tax assets in the fourth quarter of 2007 we recorded income tax expense for GAAP purposes beginning in the first quarter of this year. We continue to record taxes based on an effective rate of 45%. We had expected the rate to be lower due to research and experimentation tax credits. However, that credit has expired, and has not yet been reinstated. Also, our non-cash option expense related incentive stock option is added back to the taxable amount for the tax calculation, which results in an increase in the effective rate. As I again already mentioned, most of the expense is non-cash, and reduce the deferred tax asset on the balance sheet.

At the end of June, our staffing worldwide totaled 638 people. Our outstanding shares for basic earnings for share calculations increased because of stock option exercises. However, our outstanding shares for diluted per share calculations decreased in the quarter, as a result of the decline in the stock price, and resulting impact on the calculated shares outstanding.

Turning to the balance sheet. At June 30, we have $49.7 million of cash and short-term investments. This compares to $49.4 million at March 31. This increase in cash is primarily the result of cash flows from operations, offset in part by additions of equipment, and we continue to be debt free.

Accounts receivable day sales outstanding at June 30, were 76 days. This is a decrease from March 31, DSO of 84 days.

Totaled deferred revenues at June 30 were $39.1 million, a decrease of $3.1 million since March 31. And there's two pieces that we report on the balance sheet. The first is deferred product revenues, which decreased $1.4 million compared to March 31. This is a function of the fact that we recorded a lower dollar amount of term license orders from existing customers in the quarter compared to the past. The second item is deferred services revenue, which had a sequential decrease of $1.7 million.

As we analyze the deferred services revenue, the reduction was principally because of two factors. First, professional services have shifted more to time and material contracts from fixed bid contracts, together with fewer new professional services engagements in the second quarter. And second, we signed several multi-year support agreements in 2007, that are not yet due for renewal. The balance in deferred services has decreased $463,000 from December 31, but is still up $6.2 million from June 30 last year. Based on our analysis of renewal billings and revenue to be recognized, we currently expect an increase in the balances of deferred services by September 30, of this year.

We have included a statement of cash flows in the release. I'll make a few comments on those numbers. In 2008 second quarter cash flow from operations was $1.4 million compared to $2.1 million in 2007. Other major uses and sources of cash included the purchase of property and equipment, totaling $1.5 million in the second quarter of this year. During this year, we are expanding into two floors of a new building, that is next to our existing corporate office. Which is resulting in various property additions over amounts incurred in the prior year.

Don, that wraps up my comments on the financials.

Don Brown

Thanks, Steve. Before shifting into the Q&A let me address some additional business items relative to the quarter. In May, we hosted our annual user forum. We had over 300 customers in attendance, along with 25 strategic partners, such as Polycom and [Nuance], as well as a large number of our own employees. The conference was held here in Indianapolis, and we presented 63 breakout sessions, during the three-day event, covering everything from core CIC functionality to messaging Interaction Dialer, Optimizer and EIC. Pretty much every part of our product line. The conference received an overall satisfaction rating of 98% by the attendees. And although we hold regional user forums in other parts of the world, we also had several large multinational customers attend this event.

Selling through a channel can sometimes make it challenging to maintain a close relationship with our customers. Our user forum is a way to help accomplish this, and be sure our customers know about all the ways they can best utilize our products and services. We appreciate the time our customers made to be with us. And congratulate those within our company for putting on such a fine event.

On the product front we made several significant product announcements during the quarter. We released version 3.0 of Interaction Dialer, this is a really powerful release, offering skills based dialing, which can significantly enhance the success of dialing campaigns by ensuring that agents are matched appropriately with the calls that are being initiated. Additionally version 3.0 increases the scalability of the product, and also made available the ability to integrate our dialer with the collection management application from Ontario Systems. The dialer market is still a very strong segment for us, and we think these enhancements and additions will make our product even more competitive.

We also announced early in the quarter, as part of our spring media tour, our integration with Microsoft Office Communications Server or OCS. As most of you know, Microsoft has made significant marketing noise around OCS, and its role as the basis for their unified communications strategy. Our integration, adds significant value to OCS, including the addition of Call Center and IP PBX capabilities, synchronized presence, and a company wide directory for all CIC, EIC, and OCS users. We continue to get good cooperation from Microsoft, including marketing assistance, and sales leads.

The final product announcement we made in Q2 focused on an area we label as customer feedback management. With this announcement we launched a product called Interaction Feedback, which is a software application that automates the gathering of customer satisfaction survey data. Capturing this voice of the customer, is a missing part of many contact center metrics, and one we've seen significant interest for from our customers and prospects.

As a part of the customer feedback management announcement, we also disclosed our development plans in the area of realtime speech analytics. Though this won't be deliverable until next year, we're making good progress with this development, and think it will be a major differentiator for us.

During the quarter we launched a new corporate website, and I'd invite you to take a look at it, at inin.com. We think the redesign improves navigation, does a better job of showcasing the three market segments that we address, and overall helps to reinforce our brand messaging. By the way, I am happy to let you know that we have improved our brand recognition to 72% among our target contact center audience, up from 58% a year ago.

The second quarter also seemed to be awards season. We were recognized by CIO Zone as one of the 60 fastest growing software companies. Business Week named us among its top 50 hot growth companies. And Fortune Small Business ranked us as one of America's fastest growing small public companies. Each of these awards takes into account several different metrics over the past two to three years. And we were recognized by the Indiana Chamber of Commerce as one of the best places to work in the fine State of Indiana, an award that we're all very proud of.

Turning to our operating plan. The pillars of our plan for this year, which we presented back in January, are the following. We'll continue to go up market. We think our success in these larger organizations has shown that we are a very good option for contact centers and enterprises, of just about any size. And that these large deals expand on our strong reputation in the mid-size and larger market. We have many large deals already in the sales process.

We will focus this year on positioning ourselves more as a solutions provider, rather than just a software company. We have the consulting and professional services, the support infrastructure, experienced channel partners, and a strong mix of on-premise and hosted products to make this a selling advantage for us. And we'll continue to expand geographically with special emphasis on specific countries, including Japan, Germany, and the UK, where we feel we have a great opportunity to grow our revenues.

I'll wrap up my comments with a few additional items. As we've reported, this last quarter had some challenges for us. In some areas we did really well. Yet in others we saw weakness. We've analyzed the business as a management team, spoken to customers, met with partners, and we're still optimistic. We're not losing business to competitors, but instead seeing delays in purchases, even sometimes when we have verbal approvals, because of a more cautious buying environment.

Our products are still being well received. The migration to voice-over-IP by businesses is still in full swing, with several years of growth ahead. Industry analysts indicate there is a significant IP adoption remaining, and strong growth rate for IP telephony. We continue to win more large deals, in line with our strategy of moving up market. We are being positively recognized by analyst firms such as Gartner, Yankee, and Frost & Sullivan. And our brand is more recognized than it ever has been, in the history of our company. We see a lot of positives to our business.

Given this backdrop, I'll address the share repurchase plan that we announced in the earnings release, and our outlook for the rest of the year. As we stated in the release, our board has reviewed our outlook for the future, and our current cash position, and the current stock price. And has authorized the repurchase of up to $10 million of our common stock. We believe this is a prudent investment, and good use of our cash. We're generating positive cash flow. However, the interest we're earning in the bank has declined, as rates have gone down this year. We believe that the repurchase of our shares is a good alternative use of the cash. If over time, we're able to generate higher levels of earnings, then the repurchase of our shares will provide a good return to our shareholders.

Regarding our outlook, we continue to manage our business for the long-term. We think that's the smart thing to do, and the thing that will deliver satisfaction to our customers, a good return for our shareholders, and a great place to work for our employees. However, our experience in the quarter indicates that companies may defer decisions, when they're business outlook for the year is not as clear. As a result, we are revising our guidance for the year, to reflect our expectation of annual revenue growth in the range of 10% to 15%. And if we're able to hit those revenue levels, non-GAAP operating income in the range of 7.5% to 8.5%. We fully expect to increase operating income in future years, but see this is a year that given the revised revenue expectation and investment decisions already made, may not achieve the level of earnings we'd anticipated at the beginning of the year.

With that, I'll turn the call back to the operator to open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Irit Jakoby, with Susquehanna.

Irit Jakoby - Susquehanna

Hi good afternoon. Thank you for taking my question. You mentioned the lower orders from existing customers, were both the result of not adding new applications, and also not adding as many seats as you would have hoped. Which one do you think was the more dominant in creating the slowdown for you?

Don Brown

At this point I don't have an analysis, Irit, that clearly indicates it. It's just as we look through it, and we look at the level of orders we've received in prior quarters from existing customers, the level was clearly down, and the comments we're getting, we're hearing from partners, and from our salespeople, are just deferrals and making decisions by some of our current customers on upgrades, of various things. Both C counts and applications.

Irit Jakoby - Susquehanna

And in terms of applications is there anything on the product road map that would be a catalyst down the line for accelerating application adoption?

Don Brown

Well, the only things that we've announced are the ones that I mentioned here earlier, the Interaction Feedback. We are in the planning stages of the next major release of our product, that we hope to get out sometime next year, that will have a number of new application capabilities. But we're not ready to publicly talk about those yet.

Irit Jakoby - Susquehanna

Okay. And in terms of partner contribution in the quarter, was it similar to previous quarters?

Steve Head

It was 66% of the orders which is right in line with last year, that I think was 65%. So it was -- first quarter was 75% of partners which is a little unusual. This quarter was more typical at 66%.

Irit Jakoby - Susquehanna

And last question from me, you mentioned in the press release that you're adjusting your operating expenses, given market conditions. Where do you see yourselves cutting back on previously planned investments?

Don Brown

You worded that nicely. Because it's cutting back on previously planned, it's not cutting back on the level we're at right now. In fact, we expect expenses will continue to increase. But it's -- in all the areas of the business, we're trying to limit the amount of the expense increase over the next couple of quarters, until we see revenue starting to accelerate again. Some of the things we've already made commitments on, both on staffing levels and for the new office space, things like that, are expenses we're going to have because the commitments are there. It's just holding the line, as much as we can, on the level that we're at now.

Irit Jakoby - Susquehanna

Okay. Thank you very much. And I'll pass it on.

Operator

Our next question will come from Shyam Patil, with Raymond James.

Shyam Patil - Raymond James

Hi. Just a question on the guidance. Could you talk about what the new guidance assumes in terms of contribution from new versus existing, maybe license and services as well?

Don Brown

Well, on the overall revenue, we'd expect it to be more like this quarter, which is about 50/50. We've got a very nice services revenue stream, which is mostly support. We expect that will continue to grow, because the installed basis is expanding. But the -- what the real accelerator is when product is growing. It becomes 52% or 53% of total. So, since that's based on what we're seeing, it's going to be a little lower, we're expecting the mix to be more like 50/50.

As far as the mix between new and existing, we've continued to have the majority of our business come from existing customers, and this quarter, it was clearly the majority versus some of the other quarters. We expect to continue to see good growth from both sides of the business. From both new customers and from existing customers.

Shyam Patil - Raymond James

Okay. And then the deal pushouts -- have you noticed a difference between Enterprise and contact center deals? Or is it uniform across?

Don Brown

When we looked at it, I think it's relatively uniform in what we've seen. If I just look at the numbers and where they came in vis-à-vis prior periods, there was more growth expected in different regions around the world. So it wasn't just a US issue that we seemed to experience, and it wasn't contact center versus Enterprise.

Shyam Patil - Raymond James

Got it. Just got a couple more. Any particular vertical where you're seeing maybe more caution from customers versus others? Or is it anything by geography as well?

Don Brown

No. We looked at a number of opportunities that we were hoping to close during the quarter, and it was a variety of different industries. If we just look at our performance, it was not just one region of the world. Our two biggest areas are North America and Europe, and they were both similarly affected.

Shyam Patil - Raymond James

Okay. And then my last question. When we think about free cash flow for the year, should we think about it coming in roughly in line with the non-GAAP income, even though it might have been a little below this quarter?

Don Brown

Overall, I would expect it probably will be in line. If you -- each individual quarter varies some, if you look at last year. If you look at a period like a year as a whole. Then it seems to work its way out.

Shyam Patil - Raymond James

Okay. Thank you.

Operator

And our next question will come from [Graham Green], with [Verus Capital].

Graham Green - Verus Capital

Don can you tell me about the pricing environment? Are you being -- seeing a lot of pricing pressure?

Don Brown

I'll lob that one over to Paul. Paul?

Paul Weber

Graham, I've not seen any significant pressure on the pricing side, per se. And not really much on the competitive side either. It's just been more of a go through the whole purchase process, but then holding off on the actual commitment.

Graham Green - Verus Capital

Okay. That's helpful. And then Don, can you talk about any update on business process automation? When that might be started to rollout, and kind of what your expectations are for that?

Don Brown

We're still really excited about the process automation. We won't be rolling it out until next year. There's just enough involved there. We'll do some early field testing with some existing customers, and partners, and we continue to kind of make the rounds, and talk to a number of customers about process automation, think it's a tremendous long-term direction for us, and hope to see some actual revenue contribution from it next year. But we're not going to see anything from it this year.

Graham Green - Verus Capital

Okay, and then the last thing is, you guys have been focused on expanding in geography, especially in the Far East, for a couple of quarters. Is there anything going on there that has been unexpected? When do you expect that to catch on a little bit?

Don Brown

Well one area as I mentioned in the call, in the Far East, that we have been targeting is Japan. And we were pretty disappointed with our results in Japan for the quarter. Our expectations for the rest of the year are greater there. We have done some hiring, and have added some additional resources. We do see Japan as one of those key markets for us, a place where we can get a good price for our software. It's not like selling in India, or China, where you have to give 80% to 90% discounts. So that's one thing we like about it. The Japanese appreciate quality and functionality.

So along with, say Germany, the U.K., South Africa, the Netherlands, and of course North America, those are really our key markets. We're in the Japan for long-term, for the long run. We've already got a pretty good customer base there, so we're not going to let one slow quarter affect us too much. I think we will some start to see some additional contribution even yet this year.

Graham Green - Verus Capital

And the last thing I have is, can you talk any more about how aggressive you might get with the share repurchase? I know it's $10 million. Is that something you want to execute fairly quickly, or is it just in place to give you some more flexibility?

Don Brown

I don't think we're going to comment about any particular strategy. We're not just going to do something like this for window dressing. I'll say that, that's not the mentality of our Board. But we do have parameters around it. And we'll execute judiously. But at least the levels stock has been at, we think it would be a good use of the cash we've got.

Graham Green - Verus Capital

Thanks for your time.

Operator

And we'll take our next question from Tavis McCourt, with Morgan Keegan.

Tavis McCourt - Morgan Keegan

Hi, thanks for taking my question. Steve, first one is for you. Can you give us a sense in any given quarter, what percentage of the product revenues are booked, shipped, and recognized in that quarter, versus pull down from deferred revenues?

Steve Head

It varies a little bit every quarter. We've got various assumptions in our revenue models to deal with it. Regions of the world are all treated differently, just because of the nature of the partners. And our collection histories with those. There's-- we've never given a precise order number, and we're not going to start doing that.

There's a trend as we've talked about in the past, that when revenues are growing rapidly, the dollar amount of orders is growing rapidly. It's not automatically reflected in the revenues reported immediately. And same thing a little bit, when orders slow down. Some quarters are up, and some quarters that are down. But our product revenues are steadier than that.

Tavis McCourt - Morgan Keegan

Did you mention the overall order growth rate in the quarter?

Steve Head

The order growth rate in the quarter was actually down 13% year-over-year. That was against an exceptional second quarter that we had last year.

Tavis McCourt - Morgan Keegan

Can you talk a little bit about, you mentioned you don't think you're losing any share at the point of sale. Can we talk a little bit about your win rate right now? Has it changed in the last three to four quarters? How closely do you track the statistic? Is it more difficult because of the large indirect portion of your business?

Don Brown

It's essentially impossible because of the indirect portion of our business, it's hard enough anyways. Even with the direct sales force to get real good information. It's mostly anecdotal, and I again there I would defer to Paul for any specific comments from the field.

Paul Weber

We've not seen any change up. We feel that our win ratio and our core business has stayed where it's always been. We're not seeing any significant competitive threats to our contact center business that we'd ever seen before. Again, I think we're still winning the same percentage of the deals we've always won. Just have seen some hold off on the actual buying.

Tavis McCourt - Morgan Keegan

Great, thanks a lot.

Operator

(Operator Instructions). We move to Craig Nankervis, with First Analysis.

Craig Nankervis - First Analysis

Thanks very much. I guess on the revenue guidance, can your just explain how much the lower outlook is based on existing customer outlook, versus the new customer outlook? Has your new customer pipeline changed much in the last quarter or so, or is it all related to your existing customer business?

Don Brown

Paul can comment on the amount of activity. Generally speaking, it was just a result of the fact that we've seen the softness in purchasing over the last couple of quarters. We've mentioned it even beginning in the fourth quarter of last year. It's been trailing along here for a little while. It was a little more pronounced this quarter, than we've seen it. The activity level continues to be very, very high.

Craig Nankervis - First Analysis

So, maybe Paul, could you just comment on the relative healthiness of the new customer pipeline versus how you've seen it maybe three or six months ago?

Paul Weber

Sure. I think from a number of new customers in the quarter, we had a strong quarter, and the activity does continue to be very high. And again from a competitive win perspective? We're winning more than our fair share of the opportunities we're in. bUt again, I think the softness goes to what we referred to before, as people holding off on the actual signing of the contracts.

Craig Nankervis - First Analysis

Can your just review the sales process for follow on business for follow on business? The typically visibility you have for that, versus your visibility for new customer revenue?

Paul Weber

Sure. On any type of significant order, any order of $40,000 or more, the territory managers are tracking that business, as if from a pipeline perspective through to the forecast, and potential acquisition. We also have an inside sales force that tracks these additional business orders as well. We track it down to the dollar, on what's the proposed amount of the purchase, what are the number of seats, etc., the revenue to us, and the estimated time of closure, and we track that monthly.

Craig Nankervis - First Analysis

Steve, did you talk about linearity? Could you? The quarter was back-end loaded.

Steve Head

But from that standpoint it was like many other quarters. We've had more percent of business in the third month, and a lower percent of business in the third month. We-- we're optimistic about achieving a higher revenue level than where we did come in, obviously. And it was only right at the end of the quarter that several fairly significant opportunities that we were hoping for, were delayed.

Craig Nankervis - First Analysis

I see. Okay. And any Vonexus comments?

Steve Head

Business was solid there. Continued to be up a little bit. But you know, just like the rest of the business, was not quite to the level that we would have hoped for.

Craig Nankervis - First Analysis

Thanks very much.

Operator

And we take a question from J.D. Padgett, The Boston Company.

J.D. Padgett - The Boston Company

Hello, just one question, trying to think about the new revenue guidance. It seems like to get to the lower end of that range, you'd probably need to see deterioration in the product revenue, maybe in this quarter, quarter over quarter. Would that be the right way to look at it, because I would guess services has got to be pretty steady and maybe even continuing to grow on a sequential basis? And I was just trying to get a better understanding for what it would take to get to the lower end of the new revenue guidance range.

Steve Head

We'd rather shoot for the higher end or above it.

J.D. Padgett - The Boston Company

Exactly.

Don Brown

We really looked at it, and we've never really commented on quarters. We really look at it on a year, and we're really talking about the full year guidance. We're obviously hoping we can do better than those numbers. But at the same time, the experience that we've had, in this last quarter in particular, with the softness in decision-making, is just making us be cautious and realistic about what the environment is right now.

J.D. Padgett - The Boston Company

There's nothing from a seasonal perspective that makes a September quarter more difficult for you guys, is there? I I can't remember what percentage of your revenue might be in from Europe.

Don Brown

We do about-- 25% of orders come from Europe. Because order patterns typically-- Q3 is a little softer than the Q2. But we've had Q3 be stronger than Q2 sometimes. Every year is a little bit-- varies. But generally speaking Q3 is a little bit softer than Q2.

J.D. Padgett - The Boston Company

From an order perspective?

Don Brown

Right.

J.D. Padgett - The Boston Company

But that doesn't necessarily correlate to product revenues?

Steve Head

There's not a direct correlation.

J.D. Padgett - The Boston Company

So, to get to only 10% growth for the year, means there's going to be a dip somewhere, and it's hard to believe it would be in the forth quarter, when hopefully we get some semblance of a budget flush this year like normal. It sounds like that is consistent with what you're saying. You just kind of want to be cautious given what we've seen, and shoot for a mid to upper, or even better end of the range.

Don Brown

At this point, there's a lot of things going on in the economy, that we don't know how they're going to play out. We'll just have to see what that means, and what it means to companies making decisions. What we're really experiencing, as we've already talked about, and as we talk to partners, is that we're continuing to-- we've got competitive advantages. And we're competitive on pricing, and it's just getting down to decisions being made by the customers.

J.D. Padgett - The Boston Company

Okay. Thank you.

Operator

And at this time gentlemen, we have no other questions standing by on our question roster. I'd like to turn the call back to you for additional or closing comments.

Don Brown

That's it, thanks for listening, and we'll be back here in three months.

Operator

Thank you everyone for your participation in today's conference. And you may disconnect at this time.

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Source: Interactive Intelligence Inc., Q2 2008 Earnings Call Transcript
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