Cost Management

Finance Chief Eyes Steady Shift to the Cloud

The new CFO of Interactive Intelligence Group will try to balance on-premises software against the priority of a cloud solution.
David KatzAugust 19, 2015

Talk about a smooth transition to the CFO role.

Ashley Vukovits, CFO, Interactive Intelligence Group

Ashley Vukovits, CFO, Interactive Intelligence Group

During the August 3 earnings call of Interactive Intelligence Group, a software and cloud services provider that has long focused on corporate telephone contact centers, new finance chief Ashley Vukovits picked up the phone with apparent seamlessness.

That might have been expected, considering her 20 years of experience in corporate finance, capped by 12 years at Interactive Intelligence. Most recently, she served for eight years as vice president of finance at the company. In that slot, she oversaw the function almost in its entirety, managing more than 70 employees, with the CFO assuming a more strategic purview.

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Now, until she hires a new executive to take over her old job, Vukovits will be taking on big-picture concerns along her existing accounting, budgeting, and financial-planning responsibilities. “Given my tenure with the company, there is no doubt that the transition will be very smooth,” she assured analysts.

Her transition is bound to be a lot easier than the shift in emphasis the company is making from providing on-premises software to serving customers in the context of the cloud. Interactive Intelligence began about 20 years ago providing applications for clients to use onsite to receive and route phone calls.

Later, the company began leasing data centers and fortifying them with equipment by means of which clients could access the software. While still offering the on-premises software, the company is stressing the development of its two cloud-based businesses: a single-tenant offering based on the on-premises software and PureCloud, a newer, multi-tenant offering situated on Amazon Web Services servers.

A funny thing has happened on the way to the cloud, however. The company’s existing on-premises business isn’t going away so fast. In fact, its 21% year-over-year rise in second-quarter revenue, to $96.3 million, was “primarily due to better-than-expected on-premises demand during the quarter,” Vukovits reported during the earnings call.

Recently, Vukovits talked to CFO about balancing the different aspects of the business, the financial challenges of the transition, and what it’s like working for a “visionary” – which is how she refers to her boss, company founder and chief executive Don Brown. An edited version of the interview follows.

What will the transition from on-premises solutions to the cloud mean for your job as CFO?
The key to this transition, and where I see myself most leading, is the preparation for what the market may bring us. That means planning for the cloud, but certainly being prepared for alternatives. One thing we saw in the first two quarters of this year was more on-premise business. Several other of our competitors in the market saw the same thing, and that’s not a bad thing. In fact, in the short term, it actually makes our financials look even better.

We – and me specifically as the CFO – have to do a good job in preparing for those alternatives. So, overall, we want to be the leader in the market. And whether that comes in as premise business, our single-tenant cloud business, or our multi-tenant PureCloud business, we plan to be ready to accept that business and service it.

A big challenge for me is just making sure that the market – our analysts and investors – understands that’s the dynamic. We can’t necessarily predict how this business is going to come in and in what form it will be. But we can continue to grow our market share and be a leader in this industry.

How will the changeover affect the company’s financial reporting and its underlying finances?
Transitioning to the cloud will have a big effect on the look and feel of our financials. When you have a recurring-revenue base [via the cloud] versus an on-premise revenue base where you recognize revenue up front, your revenues build more slowly in the former. Your profitability can sometimes suffer, as well as cash flow.

If we start at the top line, under revenue-recognition guidelines, you recognize sale orders under premise licenses up front. You have a recurring revenue stream through the maintenance. When the customer renews its maintenance each year, we recognize that revenue for the entire year then.

From a cloud perspective, we may sell a one-year subscription. We’re going to recognize that revenue equally over that year. Sometimes those customers pay upfront and sometimes they don’t. That’s where the cash flow comes in. In the past, we haven’t had a big effort to collect that cash upfront. But we have started that initiative here in 2015, and we have seen that percentage increase. We still have a large percentage of our customers that aren’t paying upfront – that are paying either quarterly or monthly. That changes your cash flow stream.

How are you coping with that cash-flow delay?
We just did a convertible debt offering in May and raised $150 million. Besides strengthening our balance sheet, one of the reasons we did it was to make sure we were prepared if we transitioned to the cloud quicker than anticipated, since the premise business has been a cash generator.

M&A is unusually hot. How does Interactive Intelligence see the merger market right now?
That was another reason for the debt offering. We have done some acquisition activity in the past couple of years, and we wanted to have the ability to continue to do that if we found things that made sense.

There are a lot of small startups that crank out really cool technology that interests larger participants in the market. I’d say it’s pretty hot in the technology industry. When I think about our M&A activity in the last couple of years, one strategy we had was to go out and buy partners in a couple of the geographic areas where we believed it would benefit us to make those relationships direct and grow them.

I think we’ve done everything in that area we’re probably going to do. I don’t see us doing a lot of going out and purchasing a partner in a specific country. Where I see us continuing to look is those little tuck-in technology firms. What we’re going to look at is the question: Is there technology that will either sit on top of or beside our current platform that would allow our customers to provide better and more integrated services to their customers?

We always look to build things. But can we get there quicker by purchasing something from the outside, some technology that we can actually embed in our product that helps our customers with their customer service?

How are you dealing with cybersecurity?
It’s something we take very seriously, and cyber security reports through me. It’s important for our single-tenant cloud customers. The risk depends on how a customer is configured. Sometimes they’re configured so that all the data stay at their site. They can put a device on their premise that doesn’t house the software but houses their data. But there’s also another way they can implement our solution in which their data do flow up to our data center.

What are the challenges of working with a “visionary” CEO?
Don Brown is always looking, not only a couple of years down the road, but ten years down the road on what he thinks is going to be the next technology. Many years ago he saw the opportunity for cloud. Rather than having that software solution sitting at the customers’ sites, they can connect to our data centers and use that same service. The good thing about that is that I feel like we’re in great hands for the future.

The challenges of being a CFO and working with that kind of CEO is that he always wants to invest more in the business – and in research and development, particularly. We do need to invest in that, and our percent of R&D to revenue is higher than some of our competitors because we do put back more into the business and more into developing the future. But at the same time, we need to be aware of what impact that has on our financials and what our ultimate goals are. Sometimes we have to be scaling that back and at other times letting it flow.