Interactive Intelligence 10-K/A 2014 FY Annual report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K/A (Amendment No. 1)
(Mark One)
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File Number 000-54450
INTERACTIVE INTELLIGENCE GROUP, INC. (Exact name of registrant as specified in its charter)
Indiana (State or Other Jurisdiction of Incorporation)	45-1505676 (IRS Employer Identification No.)
7601 Interactive Way Indianapolis, IN 46278 (Address of principal executive offices, including zip code)
(317) 872-3000 (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value per share	The NASDAQ Stock Market LLC (The NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☑    No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ☐    No ☑

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☑   No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)  is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☑	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    

Yes  ☐    No ☑

Assuming solely for the purposes of this calculation that all directors and executive officers of the registrant are “affiliates”, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, based upon the closing sale price per share of the registrant’s common stock on June 30, 2014 as reported on The NASDAQ Global Select Market on that date was $942,455,424. 

As of February 15, 2015, there were 21,436,302 shares outstanding of the registrant’s common stock, $0.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the information required by Part III of this Form 10-K are incorporated by reference from portions of the registrant’s Proxy Statement for its 2015 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 2014.

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EXPLANATORY NOTE

This Amendment No. 1 to Form 10-K (Form 10-K/A) (the “Amended Filing”) is being filed solely for the purpose of modifying one table contained in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Interactive Intelligence Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, originally filed with the U.S. Securities and Exchange Commission on February 27, 2015 (the “Original Filing”). The table that is being modified is the first table within “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”  The corrected table is as follows:

	Years Ended December 31,
	2014			2013			2012
Product Revenue		72	%		75	%		73	%
Recurring Revenues		66			70			73
Support fees		84			84			83
Cloud-based		32			20			26
Services Revenues		20			26			31
Total Revenues		60			64			67

In accordance with the rules of the Securities and Exchange Commission, this Amended Filing sets forth the complete text of Item 7, as amended to modify this table.  This Amended Filing does not modify or update any other disclosures set forth in the Original Filing and does not otherwise reflect events occurring after the date of the Original Filing.

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide investors with an understanding of our past performance, as well as our current and potential future financial condition and should be read in conjunctionwith other sections of this Annual Report on Form 10-K, including Item 1 “Business;” Item 6 “Selected Financial Data;” and Item 8 “Financial Statements and Supplementary Data.” Investors should carefully review the information contained in this Annual Report on Form 10-K under Item 1A “Risk Factors”. The following will be discussed:

· Overview

· Outlook for 2015

· Critical Accounting Policies and Estimates

· Revenues and Order Trends and Acquisition Highlights

· Trends and Non-GAAP Metrics

· Comparison of Years Ended December 31, 2014, 2013 and 2012

· Liquidity and Capital Resources

· Contractual Obligations

· Off-Balance Sheet Arrangements

Overview

Our Business

Interactive Intelligence Group, Inc. (“Interactive Intelligence”, “we”, “us”, or “our”) is a global provider of software and services for collaboration, communications, and customer engagement. Our primary offering is our Customer Interaction Center™ (“CIC”) product suite, a multichannel communications platform that can be deployed on-premises or through the cloud as Communications as a Service (“CaaS”). We are a recognized leader in the worldwide contact center market, where our software applications provide a range of pre-integrated inbound and outbound communications functionality. We utilize this same communications platform to provide solutions for unified communications, workforce optimization and business process automation. Our solutions are broadly applicable, and are used by businesses and organizations in various industries, including teleservices, insurance, banking, accounts receivable management, utilities, healthcare, retail, technology, government and business services. We continue to invest in the development of our technology, particularly in our next generation cloud communication platform, Interactive Intelligence PureCloudSM (“PureCloud”). The first PureCloud service was released in January 2015, and significant additional services are anticipated to be released in the first half of 2015.

In addition to CIC and business process automation, we have acquired companies that provide document management, accounts receivable management and contact center capacity planning solutions. These solutions complement the functionality of CIC, expand our market potential, and provide cross-selling opportunities. Our CIC and accounts receivable management solutions can be deployed on-premises or delivered via the cloud.

We continue to invest, develop and roll out our new PureCloud PlatformSM, our highly scalable, multi-tenant, next generation cloud communication platform.  This platform leverages contemporary open source technologies and Amazon Web Services as the deployment back-end, targeting both the small business market and large organizations.  

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We provide hardware including servers, gateways and telephone handsets, which are principally obtained from third parties including Hewlett-Packard Company, AudioCodes and Polycom. Certain items such as our Session Initiation Protocol (“SIP”) Station for contact center agents are manufactured to our specifications, and we assemble our Interaction Gateway® using custom designed servers and third party voice cards.

In the past several years there has been a migration of contact centers from legacy Time Division Multiplex (“TDM”) based technology from larger competitors such as Avaya, Aspect and Genesys to Voice over Internet Protocol (“VoIP”). We compete primarily with the incumbent TDM providers and Cisco when customers are implementing VoIP technology. We continue to see an increase in customers moving from on-premises to cloud-based alternatives. Our cloud-based competitors are principally inContact and Five9.

We market our solutions directly to customers and through a network of approximately 350 partners throughout the world. We acquired partners or the related Interactive Intelligence business of partners in South Africa and the Netherlands in 2012 and New Zealand in 2013 to increase our direct presence internationally. In 2014, our partners accounted for 37% of all orders received, with 63% of our orders sold directly to customers. Geographically, 76% of our orders received in 2014 were from the Americas, 15% from Europe, the Middle East and Africa (“EMEA”) and 9% from the Asia-Pacific (“APAC”) region.

For further information on our business and the products and services we offer, see Part I, Item 1, “Business” in this Annual Report on Form 10-K.

Outlook for 2015

Our guidance for 2015 includes estimated cloud order growth of approximately 40%, and an approximate 8% decline in on-premises orders.

Our guidance also includes estimated total recognized revenue of approximately $380 million, which represents growth of approximately 11% compared to 2014. We expect recurring revenues, which include both maintenance contracts and cloud-based revenues, to represent approximately 60% of total revenues. We continue to add new premises-based customers as certain organizations continue to prefer our on-premises solution over the cloud; however, we expect a slight decline in product revenues in 2015. We are executing on our strategy to increase revenues in future years with a revenue model that is increasingly driven by recurring sources.

Finally, our guidance includes an estimated non-GAAP operating loss of approximately $7 million, reflecting the continued increase of cloud orders as a percentage of our total orders, as well as increases in investments in developing and deploying our cloud solution and increased spending to further expand our sales and marketing efforts.  Our full year 2015 non-GAAP net loss per share is expected to be approximately $0.15 based on 21.5 million diluted shares outstanding and a pro forma tax benefit of 53%.  

Critical Accounting Policies and Estimates

We believe our accounting policies listed below are important to understanding our historical and future performance, as these policies affect our reported amounts of revenues and expenses and are applied to significant areas involving management’s judgments and estimates. Such accounting policies require significant judgments, assumptions and estimates used in the preparation of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, and actual results could differ materially from the amounts reported based on these policies. These policies, and our procedures related to these policies, are described below. See also Note 2 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a further summary of our significant accounting policies and methods used in the preparation of our consolidated financial statements.

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Sources of Revenues and Revenue Recognition Policy

Product revenues are generated from licensing the right to use our software solutions on-premises, and in certain instances,  selling hardware as a component of our solution. Recurring revenues are generated from fees from our cloud offerings and annual support fees from on-premises license agreements. Services revenues are generated primarily from professional and educational services fees. Revenues are generated by direct sales to customers and by indirect sales through our partner channels.

Product Revenues

The following criteria must be met before we can recognize any revenue from a perpetual license agreement:

· Persuasive evidence of an arrangement exists;

· The fee is fixed or determinable;

· Collection is probable; and

· Delivery has occurred.

Upon meeting the revenue recognition criteria above, we immediately recognize as product revenues the residual amount of the total contract fees if sufficient vendor specific objective evidence (“VSOE”) of fair value exists to support allocating a portion of the total fee to the undelivered elements of the arrangement. If sufficient VSOE of fair value for the undelivered elements does not exist, we recognize the initial license fee as product revenues ratably over the initial term of the support agreement once support is the only undelivered product support. The support period is generally 12 months but may be up to 18 months for initial orders because support begins when the licenses are downloaded, when support commences, or no more than six months following the contract date. If the contract includes prepaid support, the support period may be up to 36 months. We determine VSOE of fair value for support in on-premises arrangements based on substantive renewal rates the customer must pay to renew the support. The VSOE of fair value for other services is based on amounts charged when the services are sold in stand-alone sales.

We recognize revenues related to any hardware sales when the hardware is delivered and all other revenue recognition criteria noted above are met.

Recurring Revenues

We generate recurring revenues from our cloud offerings and annual support fees. Cloud customers pay a minimum monthly fee to use a specified number of software licenses, plus any overages over the minimum. Customers are billed the greater of their minimum monthly fee or actual usage, and revenues are recognized monthly as services are delivered. The total contract fee also includes an implementation fee, which is recognized ratably over the term of the contract.

We recognize annual support fees ratably over the post-contract support period, which is typically 12 months, but may extend up to three years if prepaid.

Services Revenues

We generate services revenues from professional services, which include implementing our solutions, and from educational services, which consist of training courses for customers and partners. Services revenues are recognized as the services are performed.

Goodwill and Other Intangible Assets

We review goodwill and intangible assets with indefinite lives for impairment at least annually in accordance with Financial Accounting Standards Board (“FASB”) Account Standards Update (“ASU”) 2011-08,

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Testing Goodwill for Impairment, which amends FASB Accounting Standards Codification (“ASC”) Topic 350, Intangibles – Goodwill and Other (“FASB ASC 350”). This guidance requires us to perform the goodwill impairment analysis annually or when a change in facts and circumstances indicates that the fair value of an asset may be below its carrying amount.  Application of goodwill impairment testing involves judgment, including but not limited to, the identification of reporting units and estimation of the fair value of each reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment. We test goodwill at the operating segment level as we have determined that the characteristics of the reporting units within our operating segment are similar and allows for their aggregation in accordance with the applicable accounting guidance. Based on the review of the qualitative events and circumstances outlined in FASB ASU 2011-08, we determined that it was more likely than not that the fair value of our reporting unit was greater than its carrying amount, and the two-step process of the goodwill impairment test was not necessary to perform. Identifiable intangible assets such as intellectual property trademarks and patents are amortized over a 10 to 15 year period using the straight-line method. In addition, other intangible assets, such as customer relationships, core technology and non-compete agreements are amortized over a 5 to 18 year period using the straight-line method. We determined no indication of impairment existed as of December 31, 2014 when the annual impairment tests were performed for goodwill and intangible assets.

See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information on goodwill and other intangible assets.

Stock-Based Compensation Expense

Consistent with FASB ASC Topic 718, Compensation – Stock Compensation (“FASB ASC 718”), we continue to use the Black-Scholes option-pricing model as our method of valuation for stock option awards. Our determination of fair value of stock option awards on the date of grant using the Black-Scholes option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and an expected risk-free rate of return. If factors change and we use different assumptions for estimating stock-based compensation expense associated with awards granted in future periods, stock option compensation expense may differ materially in the future from that recorded in the current period.

We record compensation expense for stock-based awards using the straight-line method, which is recorded into earnings over the vesting period of the award. Stock-based compensation expense recognized under FASB ASC 718 for the years ended December 31, 2014, 2013 and 2012 was $13.3 million, $9.2 million and $6.7 million, respectively. See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information on our stock-based compensation.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

FASB ASC Topic 740, Income Taxes (“FASB ASC 740”), establishes financial accounting and reporting standards for the effect of income taxes. We are subject to federal and state income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, or cash flows.

In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax

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assets is dependent upon generation of future taxable income prior to the period in which temporary differences such as loss carryforwards and tax credits expire. Management considers the scheduled reversal of deferred tax liabilities, if any (including the impact of available carryback and carryforward periods), projected future taxable income and tax planning strategies in making this assessment. During the fourth quarter of 2014, we recorded a deferred income tax expense of $33.4 million related to recording a valuation allowance to reduce a significant portion of our deferred tax assets. We have incurred cumulative tax losses in recent periods due to our business model shift to the cloud. Such tax losses may continue for a period of time. This deferred income tax expense reflects our assessment that it is more likely than not that the deferred tax assets will not be realizable in the foreseeable future, but has no effect on our ability to use deferred tax assets, such as loss carryforwards and tax credits, to reduce future tax payments.

See Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information on our income taxes.

Research and Development

Research and development (“R&D”) expenditures for our on-premises and CaaS solutions are generally expensed as incurred. FASB ASC Topic 985, Software, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on our product development process, technological feasibility is established upon completion of a working model. Historically, costs incurred by us between completion of the working model and the point at which the product is ready for general release have been insignificant.

We capitalize costs related to our PureCloud Platformand certain projects described below for internal use in accordance with FASB ASC 350-40, Internal Use Software.  Once a solution has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use.  The capitalization of costs ceases upon completion of all substantial testing.  Costs incurred in the preliminary stages of development, maintenance and training costs are expensed as incurred. 

R&D expenses were $59.5 million, $50.4 million and $45.7 million in 2014, 2013 and 2012, respectively. In addition to these R&D expenses, we capitalized $16.9 million and $3.6 million of development costs for internal use software during 2014 and 2013, respectively, related to the development of our PureCloud Platform. The Company will continue to capitalize development costs related to this project and will begin amortizing such costs once the software is ready for production beginning in 2015. Our R&D group is structured into technical teams, each of which follows formal processes for enhancements, release management and technical reviews. R&D expenses include a testing department that utilizes automated techniques to stress test our core software. We continue to make R&D a priority in our business in order to remain on the forefront of innovation.

Legal Proceedings

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs in connection with loss contingencies are expensed as incurred.

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Revenues and Order Trends and Acquisition Highlights

The following tables set forth our total revenues (in millions) and the annual growth percentage over the previous year for the past five years, a summary of the orders received during 2014 and 2013, and the geographic mix of those orders.

Revenues

Year	Revenues		Growth %
2014	$	341.3	7	%
2013		318.2	34
2012		237.4	13
2011		209.5	26
2010		166.3	27

Orders
	Years Ended December 31,
	2014			2013
Increase in dollar amount from prior year:
Total orders		11	%		30	%
On-premise orders		(8)	%		(1)	%
Cloud-based orders		29	%		87	%
Cloud-based orders as a % of total orders		59	%		50	%
Orders from new customers as a % of total orders		53	%		43	%
Direct orders as a % of total orders		63	%		65	%
Number of new on-premises customers		180			226
Number of new cloud-based customers		111			90
Total orders greater than $250,000		207			192

Geographic Mix

The following table shows the percentage of orders derived from each of our geographic regions for the periods presented:

	Years Ended December 31,
	2014			2013			2012
Americas		76	%		80	%		73	%
Europe, Middle East, and Africa		15			13			18
Asia-Pacific		9			7			9

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Acquisitions

On May 14, 2014, we entered into a stock purchase agreement and acquired OrgSpan, Inc. (“OrgSpan”), a privately held provider of cloud-based enterprise social communication solutions.  We funded the purchase of OrgSpan partially with cash on hand and partially with restricted shares of our common stock.  On April 1, 2013, we entered into an agreement with Amtel Communications Ltd. (“Amtel”), and acquired certain Interactive Intelligence-related contact center assets of Amtel.  We purchased these assets with cash on hand. Additional details for each acquisition are as follows:

				Working
				Capital
	Description of	Purchase			Amount		Escrow		# of
Company	Company	Price			Acquired		Amount		Employees
OrgSpan	Cloud-based enterprise social communications solutions provider	$	14.1 million			-		-	38
Amtel	Reseller	$	725,000			-		-	5

See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further information on our acquisitions.

Trends and Non-GAAP Metrics

Our management monitors certain key measures to assess our financial results. In particular, we track trends in on-premises and cloud-based orders and contracted professional services from quarter to quarter and in comparison to the prior year actual results and current year projected amounts. We also review leading market indicators to identify trends in economic conditions. In addition to orders and revenues, management reviews costs of revenue, operating expenses and staffing levels to ensure we are managing new expenditures and controlling costs. For additional discussions regarding trends, see “Revenues and Order Trends and Acquisition Highlights” and “Comparison of Years Ended December 31, 2014, 2013 and 2012” below.

In addition to measures based on accounting principles generally accepted in the United States (“GAAP”), our management monitors non-GAAP operating income and margin, non-GAAP net income and non-GAAP diluted earnings per share (“EPS”) to analyze our business. These non-GAAP measures include revenue which was not recognized on a GAAP basis due to purchase accounting adjustments, exclude non-cash stock-based compensation expense, certain acquisition-related expenses, the amortization of certain intangible assets related to acquisitions and non-cash expense related to establishing the valuation allowance for our deferred tax assets, and adjust for non-GAAP income tax expense. 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, amortization of intangibles related to acquisitions and expenses related to the valuation allowance for our deferred tax assets are non-cash, and non-GAAP income tax expense is pro forma based on non-GAAP earnings. We believe 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 our results of operations. Further, our management believes that these non-GAAP measures improve management's and investors' ability to compare our financial performance with other companies in the technology industry. Because stock-based compensation expense, certain acquisition-related expenses and amortization of intangibles related to acquisitions amounts can vary significantly between companies, it is useful to compare results excluding these amounts. Our management also reviews financial statements that exclude stock-based compensation expense, certain acquisition-related expenses, amortization of intangibles amounts related to acquisitions, expense related to the valuation allowance for our deferred tax assets and pro forma income tax expense for its internal budgets. 

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The following table provides a reconciliation of GAAP net income (loss), GAAP operating income (loss) and GAAP diluted EPS with their non-GAAP counterparts for the years ended December 31, 2014, 2013 and 2012:

	Years Ended December 31,
	2014		2013		2012
	($ in thousands, except per share amounts)
Net income (loss), as reported	$	(41,367)	$	9,515	$	906
Purchase accounting adjustments:
Increase to revenues:
Recurring		17		202		522
Reduction of operating expenses:
Customer relationships		1,701		1,682		1,341
Technology		540		196		163
Non-compete agreements		180		180		180
Acquisition costs		612		48		281
Total		3,050		2,308		2,487
Non-cash stock-based compensation expense:
Costs of recurring revenues		1,345		806		523
Costs of services revenues		432		245		147
Sales and marketing		4,077		3,109		2,250
Research and development		4,027		2,733		1,886
General and administrative		3,378		2,354		1,871
Total		13,259		9,247		6,677
Non-GAAP income tax expense adjustment		(6,665)		(4,388)		-
Deferred tax asset valuation allowance		33,420		-		-
Non-GAAP net income	$	1,697	$	16,682	$	10,070
Operating income (loss), as reported	$	(17,779)	$	14,397	$	1,083
Purchase accounting adjustments		3,050		2,308		2,487
Non-cash stock-based compensation expense		13,259		9,247		6,677
Non-GAAP operating income (loss)	$	(1,470)	$	25,952	$	10,247
Diluted EPS, as reported	$	(1.98)	$	0.45	$	0.04
Purchase accounting adjustments		0.15		0.11		0.12
Non-cash stock-based compensation expense		0.63		0.44		0.34
Non-GAAP income tax expense adjustment		(0.31)		(0.21)		-
Deferred tax asset valuation allowance		1.60		-		-
Non-GAAP diluted EPS	$	0.09	$	0.79	$	0.50

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Comparison of Years Ended December 31, 2014, 2013 and 2012

Revenues

Our revenues include:  (i) product revenues; (ii) recurring revenues; and (iii) services revenues.  These revenues are generated through direct sales to customers and through our partner channels.

Product revenues include license fees for on-premises software and sales of hardware. Not all software and hardware product orders are recognized as revenue when they are received because of product general availability, certain contractual terms or the collection history with particular customers or partners. Consequently, product revenues for any particular period not only reflect certain orders received in the current period, but also include certain orders received but deferred in previous periods and recognized in the current period. In addition, a portion of product orders are related to support and recognized over the support period as recurring revenues.

Recurring revenues include renewals of the support fees from on-premises license agreements and all revenues from our cloud solutions. The support fees are recognized over the support period, generally between one and three years. Cloud-based orders are typically for periods of one to five years, with an overall weighted average contract term of 55 months as of December 31, 2014.

Services revenues primarily include professional and education services fees. Services revenues fluctuate based on the solution implementation requirements of our customers and partners as well as the number of attendees at our educational classes. We believe services revenues will continue to grow as product and cloud-based revenues increase, order sizes increase and as we license a greater percentage of our orders directly to our customers. 

	Years Ended December 31,						Percent of Total Revenues			Increase (Decrease) Between Periods
	2014		2013		2012		2014	2013	2012	2014 vs. 2013	2013 vs. 2012
	($ in thousands)						(%)			(%)
Product	$	99,200	$	117,708	$	88,626	29.1	37.0	37.3	(16)	33
Recurring		187,373		147,941		118,343	54.9	46.5	49.8	27	25
Services		54,723		52,585		30,396	16.0	16.5	12.8	4	73
Total revenues	$	341,296	$	318,234	$	237,365				7	34

Product Revenues 2014 vs. 2013

Product revenues decreased primarily due to an 8% decline in the total dollar amount of product orders received, as well as the deferral of $12.3 million of on-premises orders received during 2014 that were not recognizable based on their contract terms. During 2014, we received orders for 94,000 on-premises CIC users compared to 118,000 in 2013, a decrease of 20%. While the mix of solutions varies year to year, we experienced stable per seat pricing.

Product Revenues 2013 vs. 2012

Product revenues increased primarily due to the recognition of $17.7 million in revenues that were previously deferred because of contract terms. The dollar amount of product orders was relatively flat year over year. We received orders for 118,000 on-premises CIC users in 2013 compared to 116,000 in 2012, an increase of 2%. While the mix of solutions varies year to year, we experienced stable per seat pricing.

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Recurring Revenues 2014 vs. 2013 and 2013 vs. 2012

The breakdown of recurring revenues was as follows:

	Years Ended December 31,						Increase Between Periods
	2014		2013		2012		2014 vs. 2013	2013 vs. 2012
	($ in thousands)						(%)
Support fees	$	126,882	$	113,767	$	96,322	12	18
Cloud-based		60,491		34,174		22,021	77	55
Total	$	187,373	$	147,941	$	118,343	27	25

Recurring revenues increased in both comparative periods due to volume-driven increases from new customers, upgrades and additional subscriptions from existing customers and the recognition of revenues from previously deployed cloud solutions. Our support fees increased with the continued growth of our installed base of on-premises customers as well as from our recent acquisitions. Cloud-based revenues increases were primarily driven by the average number of CaaS delivered licensed seats of 31,000 in 2014, up from 15,000 in 2013, and 8,000 in 2012.  In addition to increases in the number of CaaS delivered licensed seats, there were slight increases in per seat pricing for cloud-based orders between 2014, 2013 and 2012. 

Our unbilled future cloud-based user revenues were $298.5 million and $183.5 million as of December 31, 2014 and 2013, respectively. These unbilled cloud-based revenues are not included in deferred revenues on our balance sheet, but represent the remaining minimum value of non-cancellable agreements that have not yet been invoiced to the customer.  Unbilled cloud-based revenues continue to increase as we build our cloud customer base.  

Service Revenues 2014 vs. 2013 and 2013 vs. 2012

Services revenues increased in both comparative periods primarily due to growth in the number and scope of professional service engagements, for both on-premises and cloud-based deployments. The 4% year-over-year increase in services revenues during 2014 was lower than the increase experienced in previous years because of the shift in our business to the cloud, which usually involves deployments requiring shorter professional services engagements. 

Costs of Revenues

Our costs of revenues include cost of:  (i) product revenues; (ii) recurring revenues; and (iii) services revenues. 

Costs of product revenues consist of hardware costs (including media servers, Interaction Gateway® appliances and Interaction SIP StationsTM that we develop, as well as servers, telephone handsets and gateways that we purchase and resell), royalties for third-party software and other technologies included in our solutions, as well as personnel and product distribution facility costs. These costs can fluctuate depending on which software solutions are licensed (including third-party software) and the dollar amount of orders for hardware and appliances.

Costs of recurring revenues consist primarily of compensation expenses for technical support personnel as well as costs associated with deploying our cloud offerings. Some costs related to our cloud offerings, such as equipment expenses, are recognized over time, but others such as compensation and travel-related expenses are recognized as incurred.  Some of these costs are fixed while others are variable based on usage and call volume. We expect operating margins for our cloud-based offerings to improve over time as this portion of our business continues to scale and as we implement improvements in our infrastructure.

Costs of services revenues consist primarily of compensation expenses for our professional services, client success and educational personnel. 

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	Years Ended December 31,									Percent of Total Revenues			Increase (Decrease) Between Periods
	2014			2013			2012			2014	2013	2012	2014 vs. 2013	2013 vs. 2012
	($ in thousands)									(%)			(%)
Product	$	27,549		$	29,233		$	24,329		8.1	9.2	10.2	(6)	20
Recurring		63,917			44,961			32,227		18.7	14.1	13.6	42	40
Services		44,056			38,760			21,099		12.9	12.2	8.9	14	84
Total costs of revenues	$	135,522		$	112,954		$	77,655					20	45
Product revenue gross margin		72.2	%		75.2	%		72.5	%
Recurring revenue gross margin		65.9	%		69.6	%		72.8	%
Services revenue gross margin		19.5	%		26.3	%		30.6	%

Costs of Product Revenues 2014 vs. 2013

Costs of product revenues decreased primarily due to lower product revenues and the related decreases in costs of third party goods sold and direct operating expenses.  Our overall product revenue gross margin decreased due to a higher mix of hardware sales received during 2014, which have a lower margin than software licenses, and increases in third party costs.  Third party costs fluctuate based on the mix of software sold. 

Costs of Product Revenues 2013 vs. 2012

Costs of product revenues increased primarily due to the related increase in cost of goods sold recognized in conjunction with $17.7 million in product revenue recognized in 2013 that had previously been deferred.  Overall product revenue gross margin improved primarily due to a higher mix of software licenses, which contribute a higher margin than hardware sales.

Costs of Recurring Revenues 2014 vs. 2013 and 2013 vs. 2012

Costs of recurring revenues increased in both comparative periods primarily due to increases in compensation expenses related to staffing increases to support our expanding customer base and the growing number of cloud-based deployments, as well as related increases in depreciation, telecommunications, data center and other related expenses as we continue to build the infrastructure to support our could deployments around the world.  The gross margin on recurring revenues decreased due to the relative increase in cloud revenues, which have a lower gross margin than support fees.

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Costs of Services Revenues 2014 vs. 2013 and 2013 vs. 2012

Costs of services revenues increased, resulting in a decrease in services revenue gross margin, primarily due to an increase in compensation, travel, and other direct expenses resulting from an increase in staff hired to meet the demand for our professional services.  We also supplemented our services staff by increasing our utilization of third parties in each year to assist with customer implementations, resulting in increased outsourced services expense.

Gross Profit 2014 vs. 2013 and 2013 vs. 2012

	Years Ended December 31,
	2014			2013			2012
	($ in thousands)
Gross Profit	$	205,234		$	205,084		$	159,547
Change from prior year		0	%		29	%		11	%
Gross margin		60.1	%		64.4	%		67.2	%

Gross margin decreased in both comparative periods primarily due to our investment in technical staff and increased data center costs to support our expanding cloud customer base. We are rapidly adding new cloud-based customers and have built out our data centers for potential customers in advance of revenue generation.

Operating Expenses

Our operating expenses include costs for:  (i) sales and marketing; (ii) research and development; and (iii) general and administrative operations. 

Sales and marketing expenses primarily include compensation, travel, and promotional costs related to our sales, marketing, client success and channel management operations for our on-premises and cloud-based deployments. We expect sales and marketing expenses to increase in future periods as we continue expanding our sales organization and increasing our marketing and other promotional efforts, which we believe are critical to our future growth as we continue to increase our market share and expand internationally. 

Research and development expenses are comprised primarily of compensation expense, allocated overhead costs and depreciation expenses. We believe that continued investment in research and development is critical to our future growth, particularly because our competitive position in the marketplace is directly related to the timely development of new and enhanced solutions. As a result, we expect research and development expenses will continue to increase in future periods.

General and administrative expenses include compensation expense as well as general corporate expenses that are not allocable to other departments, such as legal, other professional fees and bad debt expense. We expect that general and administrative expenses will continue to increase as we continue to expand staffing and our infrastructure consistent with our growth strategy.

As our cloud-based orders as a percentage of total orders increase, operating expenses as a percentage of total revenues may increase because revenues for cloud-based deployments are recognized over time while most related operating expenses are recognized as incurred.

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	Years Ended December 31,						Percent of Total Revenues			Increase Between Periods
	2014		2013		2012		2014	2013	2012	2014 vs. 2013	2013 vs. 2012
	($ in thousands)						(%)			(%)
Sales and marketing	$	119,143	$	103,777	$	81,539	34.9	32.6	34.4	15	27
Research and development		59,482		50,397		45,682	17.4	15.8	19.2	18	10
General and administrative		42,507		34,651		29,722	12.5	10.9	12.5	23	17
Total operating expenses	$	221,132	$	188,825	$	156,943				17	20

Sales and Marketing 2014 vs. 2013 and 2013 vs. 2012

Sales and marketing expenses increased in both comparative periods primarily due to increases in compensation and travel expenses resulting from staffing increases.  We also increased spending on marketing programs, including promotional and branding initiatives.

Research and Development 2014 vs. 2013 and 2013 vs. 2012

Research and development expenses increased in both comparative periods primarily due to increases in compensation and other related expenses resulting from staffing increases through staff hired and acquired.  Additionally, expenses related to outsourced services for localization and third party data center services as well as recruiting expenses increased to support staffing increases.

We capitalized $16.9 million and $3.6 million of development costs for internal use software for our PureCloud Platform during 2014 and 2013, respectively. We will continue to capitalize certain development costs related to this project and will amortize such costs as the related software functionality is ready for production, which is expected to occur during the first half of 2015. Including these capitalized costs, research and development costs increased 41% in 2014 compared to 2013 and 18% in 2013 compared to 2012.

General and Administrative 2014 vs. 2013 and 2013 vs. 2012

General and administrative expenses increased in both comparative periods primarily due to an increase in compensation cost, primarily resulting from staffing increases to support our overall personnel growth and increases in expenses related to legal services, software, consulting, professional development and recruiting to support growth in our business.

Other Income (Expense)

Interest Income, net

Interest income, net, consists of interest earned from investments, receivables and interest-bearing cash accounts. Interest expense and fees, which were not material in any periods reported, are also included.

Interest income, net breakdown	Years Ended December 31,
	2014		2013		2012
	($ in thousands)
Interest income on investments	$	596	$	576	$	958
Interest income receivables		410		197		15
Other interest (expense)		5		60		(201)
Total interest income, net	$	1,011	$	833	$	772

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We invest in longer term investments with maturities up to three years to increase our overall yield on investments and monitor the allocation of funds in our investment accounts to maximize our return on investment within our established investment policy. We do not have any investments in subprime assets.

Return on investments	Years Ended December 31,
	2014			2013			2012
	($ in thousands)
Cash, cash equivalents, and investments (average)	$	84,767		$	94,230		$	86,550
Interest income on investments		596			576			958
Return on investments		0.70	%		0.61	%		1.11	%

Our return on investments has been relatively constant in 2014, 2013, and 2012 and the changes in interest income were primarily due to the changes in the levels of our invested balances throughout each year.

Other Expense

Other expense primarily includes foreign currency gains and losses. These foreign currency gains and losses fluctuate based on the amount of receivables we generate in certain international currencies, the exchange gain or loss that results from foreign currency disbursements and receipts, the cash balances and exchange rates at the end of a reporting period and the effectiveness of our hedging activities.

	Years Ended December 31,
	2014		2013		2012
	($ in thousands)
Other expense	$	727	$	2,142	$	189

Other Expense 2014 vs. 2013

Other expense decreased primarily due to foreign currency exposures that were unhedged during a portion of 2013.  We began hedging certain intercompany loan receivables denominated in South African Rand and the euro during the first quarter of 2013.  These exposures were hedged throughout all of 2014.

Other Expense 2013 vs. 2012

Other expense increased primarily due to the revaluation of certain intercompany loan receivables denominated in the South African Rand and the euro, which weakened against the U.S. dollar during the first quarter of 2013. We began hedging our exposure related to these amounts as of April 1, 2013.  We also realized losses on certain hedge contracts in 2013 that we adjusted to be in line with our current transfer pricing method.

Income Tax Expense
	Years Ended December 31,
	2014			2013			2012
	($ in thousands)
Income (loss) before tax	$	(17,495)		$	13,088		$	1,666
Income tax expense		23,872			3,573			760
Effective tax rate		(137)	%		27	%		46	%
Valuation allowance	$	33,420		$	135		$	-
Tax payments		2,410			882			3,213

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Our effective tax rate was (137.2%) for the year ended December 31, 2014 compared to 27% for the year ended December 31, 2013. The tax rate was determined by considering the federal tax rate, rates in various states and international jurisdictions in which we have operations, and a portion of the amount of stock-based compensation that is not deductible for income tax purposes. The change in the effective tax rate was principally due to the recording of a deferred income tax expense of $33.4 million during the fourth quarter of 2014 related to recording a valuation allowance to reduce a significant portion of our deferred tax assets, resulting in a total valuation allowance as of December 31, 2014 of $33.6 million. As of December 31, 2013, the valuation allowance was $135,000. The deferred income tax expense reflects our assessment that it is more likely than not that the deferred tax assets will not be realizable in the foreseeable future, but has no effect on our ability to use deferred tax assets, such as loss carryforwards and tax credits, to reduce future tax payments. Cash payments related to income taxes were $2.4 million in 2014; however, due to establishing an allowance for net deferred tax assets, we recorded income tax expense of $23.9 million for the year ended December 31, 2014.

As of December 31, 2014, we had $10 million of various tax credit carryforwards to offset taxable income and taxes payable as described in Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.

In December 2014, the research and development tax credit was extended through December 31, 2014. During 2014, we generated $2.5 million of federal and state research and development tax credits.

We have historically used a cost plus basis for calculating taxes in most foreign tax jurisdictions in which we operate.  A cost plus tax basis limits the taxes paid in these foreign jurisdictions to a markup of the costs that we incur in these jurisdictions and is not tied to the actual revenues generated.

Foreign subsidiaries	Years Ended December 31,
	2014		2013		2012
	($ in thousands)
Income (loss) before taxes	$	3,463	$	3,000	$	(9,500)
Tax expense (benefit)		840		6,800		(2,900)

During the second quarter of 2013, we implemented a change in our transfer pricing methodology with respect to our foreign subsidiaries. This resulted in income at our foreign subsidiaries in 2014 and 2013, as compared with the loss in 2012. Due to this change in methodology, we recorded a tax expense of $6.8 million for the year ended December 31, 2013. Our 2014 tax expense reflects a full year under the new methodology. The impact of the foreign effective income tax rates could increase as we expand our operations in foreign countries and calculate foreign income taxes based on operating results in those countries. 

Liquidity and Capital Resources

We generate cash from the collection of payments related to licensing our solutions as well as from selling hardware, renewals of support agreements, payments for use of our cloud solutions and the delivery of other services. We use cash primarily to pay our employees (including salaries, commissions and benefits), lease office space, pay travel expenses, pay for marketing activities, pay vendors for hardware, other services and supplies, purchase property and equipment, pay research and development costs and fund acquisitions.  We continue to be debt free. 

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As our order mix continues to shift to a higher percentage of cloud-based orders as a percentage of total orders, our liquidity may decrease due to cash collection being spread over the term of the contract. Additionally, since we continue to invest in infrastructure for our cloud solution ahead of orders, our margin on cloud-based orders is lower than on-premises orders, which may decrease our liquidity.  We expect our margin on cloud-based orders will increase as we continue to build a stream of recurring revenues and implement changes in our cloud infrastructure. The table below shows the gross margins on each line of business:

	Years Ended December 31,
	2014			2013			2012
Product Revenue		72	%		75	%		73	%
Recurring Revenues		66			70			73
Support fees		84			84			83
Cloud-based		32			20			26
Services Revenues		20			26			31
Total Revenues		60			64			67

We determine our liquidity by combining cash and cash equivalents and short-term and long-term investments as shown in the table below. Based on our current expectations, we believe that our current liquidity position, when combined with our anticipated cash flows from operations and borrowing capacity, will be sufficient to satisfy our working capital requirements and current or expected obligations associated with our operations over the next 12 months.  Our largest potential capital outlay in the future is expected to be related to purchases of data centers and information technology equipment. If our liquidity is not sufficient to satisfy our working capital requirements and current or expected obligations associated with our operations over the next 12 months, we may need to raise additional capital, either through the capital markets or debt financings.

	December 31, 2014		December 31, 2013
	($ in thousands)
Cash and cash equivalents	$	36,168	$	65,881
Short-term investments		20,041		32,162
Long-term investments		5,495		9,787
Total liquidity	$	61,704	$	107,830

We believe that the funds of Interactive Intelligence and its subsidiaries that are held in foreign accounts can be transferred into the U.S. with limited tax consequences. Given our liquidity in the U.S., however, we do not have plans to repatriate earnings from our foreign subsidiaries. As of December 31, 2014, Interactive Intelligence held a total of $1.0 million in its various foreign bank accounts and its foreign subsidiaries held a total of $21.0 million in their various bank accounts.  The temporary difference related to unremitted earnings of our foreign subsidiaries as of December 31, 2014, that have not been subject to United States income taxation as dividends and are indefinitely invested outside the United States, was $22.7 million. If we were to repatriate all of those earnings to Interactive Intelligence in the form of dividends, the incremental U.S. federal income tax net of applicable foreign tax credits would be $4.9 million.

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The following table shows the U.S. dollar equivalent of our foreign account balances for the stated periods:

	As of December 31,
	2014		2013		2012
	($ in thousands)
Euro	$	5,501	$	9,561	$	8,807
Canadian dollar		4,894		1,581		3,577
Australian dollar		2,763		5,886		6,137
British pound		2,759		1,401		2,405
New Zealand dollar		2,446		1,699		771
South African rand		1,532		4,108		3,001
Other foreign currencies		1,542		1,391		512
Total	$	21,437	$	25,627	$	25,210

The following table shows cash flows from operating activities, investing activities and financing activities for the stated periods:

	Years Ended December 31,						Increase (Decrease) Between Periods
	2014		2013		2012		2014 vs. 2013		2013 vs. 2012
	($ in thousands)
Beginning cash and cash equivalents	$	65,881	$	45,057	$	28,465	$	20,824	$	16,592
Cash (used in) provided by operating activities		(1,716)		27,375		20,868		(29,091)		6,507
Cash used in investing activities		(35,203)		(34,028)		(11,318)		(1,175)		(22,710)
Cash provided by financing activities		7,206		27,477		7,042		(20,271)		20,435
Ending cash and cash equivalents	$	36,168	$	65,881	$	45,057	$	(29,713)	$	20,824
Days sales outstanding (DSO)		85		80		87

Cash flows provided by (used in) operations consist of our earnings, adjusted for various non-cash expense, such as depreciation and amortization, and balance sheet changes. The three most significant items that impacted our cash flow from operations during each of the comparative periods were our net income (loss) and changes in accounts receivables, and deferred revenues.  

Accounts receivables increased $7.0 million, or 9%, as of December 31, 2014 compared to December 31, 2013 and $12.0 million, or 18% as of December 31, 2013 compared to December 31, 2012.  Our 2013 DSO was lower than our typical run rate as a result of strong collections during the fourth quarter of 2013 and a year-over-year increase in fourth quarter revenue of $20.2 million or 29%.  Our 2014 DSO returned to a more typical level.

Increases in deferred revenues increase our cash flow from operations and decreases in deferred revenues decrease our cash flow from operations.  Total current and long-term deferred revenues decreased by $5.3 million as of December 31, 2014 compared to December 31, 2013 primarily because of the decrease in on-premises orders and long-term support agreements received in 2014.  Deferred revenues increased by $23.9 million as of December 31, 2013 compared to December 31, 2012 primarily due to the growth in advance billings of support for our installed base of on-premises customers, and a corresponding increase in long-term support agreements received in 2013, which are reflected on the balance sheet as long-term deferred revenues.  In 2015, we are focused on collecting up-front payments for our cloud services, which we believe will increase deferred revenues and cash flow from operations.

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Cash used in investing activities increased $1.2 million in 2014 compared to 2013 primarily due to increased investment in capitalized software of $14.3 million (including $13.3 million for PureCloud), an $8.5 million increase in cash used to fund acquisitions, and a $600,000 increase in cash used to purchase property, plant and equipment.  These increases were offset by a $22.2 million increase in proceeds from the sale of available-for-sale investments during 2014 as compared to 2013.  Cash used in investing activities increased $22.7 million in 2013 compared to 2012 primarily due to a $34.4 million decrease in proceeds resulting from the sale of available-for-sale investments, a $10.5 million increase in the purchase of property, plant and equipment, and a $5.3 million increase in capitalized software (including $3.6 million for PureCloud), partially offset by a $21.9 million decrease in cash used to fund acquisitions.

Cash provided by financing activities decreased $20.2 million in 2014 compared to 2013 primarily due to a $13.5 million decrease in tax benefits from stock-based payment arrangements, a $5.5 million decrease in proceeds from stock options exercised, and a $1.7 million increase in tax withholdings on RSUs, partially offset by a $500,000 increase in proceeds from the issuance of common stock.   Cash provided by financing activities increased $20.4 million in 2013 compared to 2012 primarily due to a $11.9 million increase in tax benefits from stock-based payment arrangements and a $9.1 million increase in proceeds from stock options exercised.

Contractual Obligations

The following amounts set forth in the table are as of December 31, 2014 (in thousands).

	Payments Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Contractual Obligations
Operating lease obligations	$	104,828	$	13,527	$	26,643	$	19,008	$	45,650
Purchase obligations		15,541		8,980		6,561		-		-
Other obligations		1,702		-		-		1,702		-
Total	$	122,071	$	22,507	$	33,204	$	20,710	$	45,650

As set forth in the Contractual Obligations table, we have operating lease obligations and purchase obligations that are not recorded in our consolidated financial statements. The operating lease obligations represent future payments on leases classified as operating leases and disclosed pursuant to FASB ASC Topic 840, Leases. These obligations include the operating lease of our world headquarters and the leases of several other locations for our offices in the United States and 20 other countries.  See Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion on our lease commitments.

In addition, we have signed obligations for activities after December 31, 2014, such as marketing related initiatives, which are included in our purchase obligations. Finally, other obligations include amounts regarding our tax liabilities and uncertain tax positions related to FASB ASC 740. See Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion on our uncertain tax positions.

In addition to the amounts set forth in the table above, we have contractual obligations with certain third-party technology companies to pay royalties to them based upon future licensing of their products and patented technologies as well as purchase obligations in which the payments due are based on a percentage of our revenues, and are therefore unknown. We cannot estimate what these future amounts will be.

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Off-Balance Sheet Arrangements

Except as set forth in the Contractual Obligations table, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources as of December 31, 2014.

    We provide indemnifications of varying scope and amount to certain customers against claims of intellectual property infringement made by third parties arising from the use of our solutions. Our software license agreements, in accordance with FASB ASC Topic 460, Guarantees, include certain provisions for indemnifying customers, in material compliance with their license agreement, against liabilities if our software products infringe upon a third party's intellectual property rights, over the life of the agreement. We are not able to estimate the potential exposure related to the indemnification provisions of our license agreements but have not incurred expenses under these indemnification provisions. We may at any time and at our option and expense:  (i) procure the right of the customer to continue to use our software that may infringe a third party’s rights; (ii) modify our software so as to avoid infringement; or (iii) require the customer to return our software and refund the customer the fee actually paid by the customer for our software less depreciation which is generally based on a five-year straight-line depreciation schedule. The customer’s failure to provide timely notice or reasonable assistance will relieve us of our obligations under this indemnification to the extent that we have been actually and materially prejudiced by such failure. To date, we have not incurred, nor do we expect to incur, any material related costs and, therefore, have not reserved for such liabilities.

Our software license agreements also include a warranty that our software products will substantially conform to our software user documentation for a period of one year, provided the customer is in material compliance with the software license agreement. To date, we have not incurred any material costs associated with these product warranties, and as such, we have not reserved for any such warranty liabilities in our operating results.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

arch
		Interactive Intelligence Group, Inc.
		(Registrant)
Date: March 4, 2015	By:	/s/ Stephen R. Head
		Stephen R. Head
		Chief Financial Officer, Senior Vice President of Finance and Administration, Secretary and Treasurer

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	INDEX TO EXHIBITS
		Incorporated by Reference
Exhibit					Filed
Number	Exhibit Description	Form	Exhibit	Filing Date	Herewith
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002				X

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