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Interactive Intelligence Exploring Sale?

Even as it cranks up its cloud contact center business, Interactive Intelligence is reportedly exploring a potential sale, according to a Reuters report published late last week. The potential sale is "the latest sign of the consolidation sweeping the telecommunications software and equipment industry, as rapid technological change and fierce competition force companies to seek more scale," Reuters reporters Liana Baker and Greg Roumeliotis wrote in a post citing sources close to the matter who wished to remain anonymous.

Interactive is meeting with boutique investment bank Union Square Advisors on a sale process that reportedly has attracted other telecom software companies and private equity firms, Reuters reported. Further, Interactive's shares rose 13% to $50.37 following the Reuters report, lending to a $1.1 billion market capitalization. At the time of this writing, share price sat at $55.92.

Interactive's move parallels that of Avaya, which recently began similar explorations of a sale after years of financial uncertainty and unsuccessful private equity backings, the reporters noted.

Despite any similarities between Interactive and Avaya, the potential sale is likely surprising to many No Jitter readers and analysts alike for a number of reasons. First, Interactive has a reputation for being a bit of a family business. CEO Don Brown co-founded the company in 1994 and has been at the helm since 1995.

Second, the company seems to be having success with its PureCloud strategy (see "Interactive Intelligence: Cloud Bet Paying Off"). At Interactions, its June customer conference, Interactive said it signed 118 new PureCloud customers in the first quarter of 2016, which is five times as many new customers signed in the fourth quarter of 2015. In Q2, as reported during an earnings call yesterday, Interactive brought on an additional 204 PureCloud customers, 70% more than it did in the first quarter.

"PureCloud is happening," Brown said in the earnings call. "One number -- 204 -- the number of newly licensed PureCloud customers in the quarter, tells much of this story. We had 24 PureCloud customers at the end of last year. Six months later we had well over 300. This rapid growth reflects the considerable interest and demand we're seeing from both small and large businesses across all our major geographic markets. This growth also happened with the strong support and involvement of our partners, who accounted for 37% of this quarter's PureCloud deals."

While cloud subscriptions have increased 43% over last year, and total revenues are up 13% to $108.8 million for Q2, the shifting orientation from an opex-oriented premises revenue model to the cloud's subscription-based capex model continues to mire Interactive in net losses. In Q1 2016, Interactive reported a $13.2 million net loss, which compares to $3.5 million net loss in Q1 2015. In Q2 2016, it reported a net loss of $10.2 million, which compares to $5.1 million net loss reported in Q2 a year ago.

Analysts Weigh In

I reached out to a couple of regular No Jitter contributors, Dave Michels, principal analyst at TalkingPointz, and Blair Pleasant, president and principal analyst of COMMfusion, for their thoughts on this news. Here's what they had to say:

"This is an interesting development in a rapidly changing market," Blair said. "Interactive Intelligence did a nice job of moving to the cloud with PureCloud, but this 'restart,' as the company calls it, came at a cost in several ways. Just like other contact center and UC vendors that have to continue to support existing premises-based customers while focusing resources and attention on the cloud, Interactive Intelligence is basically at a crossroads.

"It made it clear at its recent analyst conference that new product innovations will be cloud-first, and some new capabilities may not be available for the on-prem products. This doesn't sit well with existing on-prem customers who may be feeling like second-class citizens. It's increasingly difficult to compete with 'born in the cloud' vendors that don't have to support existing premises-based customers and can put all of their effort into their cloud services," she continued.

"I'm actually surprised that Dr. Don Brown is looking to possibly sell the company, as he has always had tight control over the company's strategy, roadmap, and execution, and I didn't expect him to be willing to give up control. That being said, he's done a fabulous job of nurturing the company and having the vision to pivot to the cloud, and is looking for a change as the company enters into its next stage."

Dave came at this potential news from a slightly different angle:

"It seems unlikely that Don Brown would want to sell the company at this time," he said. "He owns something like 18%, and the company has plenty of cash. However, the contact center-as-a-service space is really heating up, and there's no doubt several companies may be interested, especially since the stock has been around two times revenue -- lower than peers and much lower than other software-as-a-service companies.

"Despite what they say, companies are always for sale. The question is if shareholders think PureCloud will deliver a higher, near-term valuation. PureCloud is designed to disrupt its own business which is a painful thing to endure and has short-term consequences to valuation. The company is completely focused on PureCloud, and that is impacting customer satisfaction on existing core services. A reasonable offer may be hard to turn down."

Commenting further on Interactive's transition of its business model to cloud, Dave added the company "is in the process of disrupting its own business. This is a beautiful story when successful, but when it fails there can be nothing left. Don Brown may simply be looking for a way to spread the risk."

Coincidentally, No Jitter met with Interactive marketing team members yesterday at the company's Indianapolis headquarters, ahead of the earnings call. They uniformly responded, "We don't comment on rumors," when asked about a potential sale. While that could virtually mean anything, or nothing, Brown shared no insight of his own. During the Q&A, Brown joked with analysts saying he had not heard any of the sale rumors, before indicating that he would also not be commenting on rumors or speculation.

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