10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

____________

FORM 10-Q

(Mark One)
	☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 or organization)	45-1505676 (I.R.S. 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)
Not Applicable (Former name, former address and former fiscal year, if changed since last report)

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 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☑

As of October 30, 2015, there were 21,700,835 shares outstanding of the registrant’s common stock, $0.01 par value.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION		Page
Item 1.	Financial Statements.
	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014	3
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2015 and 2014	4
	Condensed Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2015	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	38
Item 4.	Controls and Procedures.	38
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings.	39
Item 1A.	Risk Factors.	39
Item 6.	Exhibits.	42
SIGNATURE		43

1

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements andNotes to Condensed Consolidated Financial Statements.

Interactive Intelligence Group, Inc.

Condensed Consolidated Balance Sheets

As of September 30, 2015 and December 31, 2014

(in thousands, except share amounts)

	September 30, 2015			December 31, 2014
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	93,044		$	36,168
Short-term investments	53,519			20,041
Accounts receivable, net of allowance for doubtful  accounts
of $1,378 at September 30, 2015 and  $1,052 at December 31, 2014	92,458			87,413
Prepaid expenses	33,109			29,417
Other current assets	14,785			14,655
Total current assets	286,915			187,694
Long-term investments	33,147			5,495
Property and equipment, net	46,002			44,785
Capitalized software, net	44,411			33,598
Goodwill	41,668			43,732
Intangible assets, net	14,925			16,517
Other assets, net	6,080			6,902
Total assets	$	473,148		$	338,723
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	11,106		$	10,236
Accrued liabilities	14,393			18,299
Accrued compensation and related expenses	19,499			19,211
Deferred license and hardware revenues	10,474			5,945
Deferred recurring revenues	81,928			76,647
Deferred services revenues	11,423			9,925
Total current liabilities	148,823			140,263
Convertible notes	116,466			—
Long-term deferred revenues	17,358			18,158
Deferred tax liabilities, net	2,405			2,437
Other long-term liabilities	6,960			7,135
Total liabilities	292,012			167,993
Shareholders' equity:
Common stock, $0.01 par value; 100,000,000 authorized;
21,684,072 issued and outstanding at September 30, 2015,
21,278,858 issued and outstanding at December 31, 2014	217			213
Additional paid-in capital	230,309			196,691
Accumulated other comprehensive loss, net of tax	(10,482		)	(5,561		)
Accumulated deficit	(38,908		)	(20,613		)
Total shareholders' equity	181,136			170,730
Total liabilities and shareholders' equity	$	473,148		$	338,723

See Accompanying Notes to Condensed Consolidated Financial Statements

2

Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2015 and 2014

(in thousands, except share amounts)

(unaudited)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Revenues:
Recurring	$	59,228		$	48,095		$	167,286		$	136,121
License and hardware	22,668			27,764			71,299			72,158
Services	15,473			13,603			44,590			40,461
Total revenues	97,369			89,462			283,175			248,740
Costs of revenues (1)(2):
Costs of recurring	21,626			16,816			59,623			46,196
Costs of license and hardware	5,777			7,109			18,858			20,632
Costs of services	11,318			11,550			34,083			33,365
Total costs of revenues	38,721			35,475			112,564			100,193
Gross profit	58,648			53,987			170,611			148,547
Operating expenses (1)(2):
Sales and marketing	32,400			30,651			97,384			89,559
Research and development	20,536			15,528			51,067			45,233
General and administrative	11,894			11,272			36,874			33,544
Total operating expenses	64,830			57,451			185,325			168,336
Operating loss	(6,182		)	(3,464		)	(14,714		)	(19,789		)
Other (expense) income:
Interest (expense) income, net	(1,963		)	274			(2,405		)	831
Other expense	(424		)	(279		)	(983		)	(665		)
Total other (expense) income	(2,387		)	(5		)	(3,388		)	166
Loss before income taxes	(8,569		)	(3,469		)	(18,102		)	(19,623		)
Income tax (expense) benefit	(1,183		)	1,326			(193		)	8,119
Net loss	$	(9,752	)	$	(2,143	)	$	(18,295	)	$	(11,504	)
Net loss per share:
Basic	$	(0.45	)	$	(0.10	)	$	(0.85	)	$	(0.55	)
Diluted	(0.45		)	(0.10		)	(0.85		)	(0.55		)
Shares used to compute net loss per share:
Basic	21,664			20,904			21,568			20,851
Diluted	21,664			20,904			21,568			20,851
(1) Amounts include amortization of purchased intangibles from business combinations, as follows:
Costs of license and hardware	$	178		$	177		$	532		$	363
General and administrative	439			472			1,330			1,420
Total intangible amortization expense	$	617		$	649		$	1,862		$	1,783
(2) Amounts include stock-based compensation expense, as follows:
Costs of recurring revenues	$	484		$	385		$	1,470		$	1,059
Costs of services revenues	183			117			476			338
Sales and marketing	1,199			1,248			2,914			3,381
Research and development	1,663			741			3,445			3,047
General and administrative	1,218			851			3,311			2,453
Total stock-based compensation expense	$	4,747		$	3,342		$	11,616		$	10,278

See Accompanying Notes to Condensed Consolidated Financial Statements

3

Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Net loss	$	(9,752	)	$	(2,143	)	$	(18,295	)	$	(11,504	)
Other comprehensive loss:
Foreign currency translation adjustment	(2,215		)	(2,641		)	(5,024		)	(1,985		)
Net unrealized investment gain (loss) - net of tax	53			(95		)	103			(121		)
Comprehensive loss	$	(11,914	)	$	(4,879	)	$	(23,216	)	$	(13,610	)

See Accompanying Notes to Condensed Consolidated Financial Statements

4

Interactive Intelligence Group, Inc.

Condensed Consolidated Statementof Shareholders' Equity

For the Nine Months Ended September 30, 2015

(in thousands)

(unaudited)

	Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
	Shares	Amount
Balances, December 31, 2014	21,279	$	213	$	196,691		$	(5,561	)	$	(20,613	)	$	170,730
Stock-based compensation expense	—	—		12,913			—			—			12,913
Exercise of stock options	131	4		2,465			—			—			2,469
Issuances of common stock	61	—		1,215			—			—			1,215
Tax withholding on restricted stock unit awards	153	—		(3,476		)	—			—			(3,476		)
Issuance of retirement plan shares	60	—		2,523			—			—			2,523
Equity component of convertible notes	—	—		31,756			—			—			31,756
Equity component of convertible notes issuance cost	—	—		(1,028		)	—			—			(1,028		)
Payment for capped call premiums	—	—		(12,750		)	—			—			(12,750		)
Net loss	—	—		—			—			(18,295		)	(18,295		)
Foreign currency translation adjustment	—	—		—			(5,024		)	—			(5,024		)
Net unrealized investment loss	—	—		—			103			—			103
Balances, September 30, 2015	21,684	$	217	$	230,309		$	(10,482	)	$	(38,908	)	$	181,136

See Accompanying Notes to Condensed Consolidated Financial Statements

5

Interactive Intelligence Group, Inc.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2015 and 2014

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2015			2014
Operating activities:
Net loss	$	(18,295	)	$	(11,504	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation	12,586			11,376
Amortization	5,664			1,783
Other non-cash items	(3,053		)	(520		)
Stock-based compensation expense	11,616			10,278
Deferred income taxes	(32		)	(7,906		)
Amortization (accretion) of investment premium (discount)	(866		)	193
Loss on disposal of fixed assets	48			40
Amortization of convertible notes issuance costs	229			—
Amortization of convertible notes discount	1,819			—
Changes in operating assets and liabilities:
Accounts receivable	(5,045		)	9,480
Prepaid expenses	(3,681		)	(6,663		)
Other current assets	(130		)	(5,004		)
Accounts payable	870			570
Accrued liabilities	(568		)	487
Accrued compensation and related expenses	288			927
Deferred license and hardware revenues	4,704			(3,957		)
Deferred recurring revenues	5,150			1,431
Deferred services revenues	654			(5,963		)
Other assets and liabilities	647			1,887
Net cash provided by (used in) operating activities	12,605			(3,065		)
Investing activities:
Sales of available-for-sale investments	22,159			35,350
Purchases of available-for-sale investments	(82,321		)	(32,967		)
Purchases of property and equipment	(14,470		)	(17,072		)
Capitalized software	(13,849		)	(13,320		)
Acquisitions, net of cash acquired	—			(9,173		)
Unrealized loss (gain) on investment	1			(35		)
Net cash used in investing activities	(88,480		)	(37,217		)
Financing activities:
Proceeds from issuance of convertible notes	150,000			—
Payment for convertible notes issuance costs	(4,674		)	—
Payment for capped call premiums	(12,750		)	—
Principal payments on capital lease obligations	(33		)	—
Proceeds from stock options exercised	2,469			6,454
Proceeds from issuance of common stock	1,215			914
Tax withholding on restricted stock unit awards	(3,476		)	(2,704		)
Net cash provided by financing activities	132,751			4,664
Net increase (decrease) in cash and cash equivalents	56,876			(35,618		)
Cash and cash equivalents, beginning of period	36,168			65,881
Cash and cash equivalents, end of period	$	93,044		$	30,263
Cash paid during the period for:
Interest	$	59		$	—
Income taxes	897			2,389
Other non-cash item:
Purchase of property and equipment payable at end of period	187			2,944

See Accompanying Notes to Condensed Consolidated Financial Statements

6

Interactive Intelligence Group, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2015and 2014(unaudited)

1. FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Interactive Intelligence Group, Inc. (“the Company,” “we,” “us” and “our”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions for Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, certain information and note disclosures normally included in the Company’s financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, at the respective balance sheet dates, and the reported amounts of revenues and expenses during the respective reporting periods. Despite management’s best effort to establish good faith estimates and assumptions, actual results could differ from these estimates. In management’s opinion, the Company’s accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature, except as otherwise noted) for the fair presentation of the results of the interim periods presented.

The Company’s accompanying condensed consolidated financial statements as of December 31, 2014 have been derived from the Company’s audited consolidated financial statements at that date but do not include all of the information and notes required by GAAP for complete financial statements. These accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2014, included in the Company’s most recent Annual Report on Form 10-K as filed with the SEC on February 27, 2015. The Company’s results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions. 

2. SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

For a complete summary of the Company’s significant accounting policies and critical accounting estimates, refer to Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

In April 2015, the Financial Accounting Standards Board ("FASB") issued FASB Accounting Standards Update ("ASU") No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement ("FASB ASU 2015-05"), which clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. Public business entities must apply the new requirement in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity can elect to adopt the amendments either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. Early adoption is permitted for all entities. The Company is evaluating the effect that FASB ASU 2015-05 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.

In April 2015, the FASB issued FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the debt liability instead of presenting the debt issuance costs as a separate asset. Public business entities must apply the new requirements in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued. The Company elected to early adopt FASB ASU 2015-03 in the second quarter of 2015 and has presented convertible notes issuance costs as a direct deduction from the convertible notes liability in the accompanying balance sheet as of September 30, 2015.

7

In May 2014, the FASB issued FASB ASU No. 2014-9, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. FASB ASU 2014-9 will replace most existing U.S. GAAP revenue recognition guidance when it becomes effective. As originally issued, the new standard was to become effective for the Company on January 1, 2017, and early adoption is not permitted.  In August 2015, the FASB issued FASB ASU No. 2015-14. Deferral of the Effective Date, which declared a one-year deferral of the effective date of the new revenue recognition standard. As a result, the new standard will become effective for the Company beginning with the first quarter of 2018. FASB ASU 2014-9 permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that FASB ASU 2014-9 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.

The Company capitalizes costs related to its PureCloud Platform^SM and certain projects described below for internal use in accordance with FASB Accounting Standards Codification (“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. During the three and nine months ended September 30, 2015, the Company capitalized $900,000 and $11.7 million, respectively, of costs related to the development of its PureCloud Platform, compared to the capitalization of $5.1 million and $9.6 million during the same periods in 2014. Of the total development costs capitalized related to PureCloud Collaborate^SM, the Company began amortizing a small portion of those costs during the first quarter of 2015, with such amortization included in costs of recurring revenue. The Company began amortizing additional development costs related to PureCloud Collaborate, PureCloud Communicate^SM and PureCloud Engage^SM during the third quarter of 2015. The Company will continue to capitalize development costs related to new PureCloud offerings and will begin amortizing such costs once those offerings are released for general availability.

Additionally, the Company is implementing new business systems to meet its internal business needs. The Company has no plans to market such software externally. During the three and nine months ended September 30, 2015, the Company capitalized $500,000 and $3.5 million, respectively, of costs associated with development and implementation of these systems, compared to the capitalization of $500,000 and $1.9 million during the same periods in 2014.

During the three and nine months ended September 30, 2015, there were no other material changes to the Company’s significant accounting policies or critical accounting estimates.

3. NET LOSSPER SHARE

Basic net loss per share is calculated based on the weighted-average number of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net income per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive. Potential common shares consist of shares of common stock issuable upon the exercise of stock options and vesting of restricted stock units (“RSUs”). The calculation of diluted net loss per share excludes shares underlying stock options outstanding that would be anti-dilutive. The following table sets forth the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Net loss, as reported (A)	$	(9,752	)	$	(2,143	)	$	(18,295	)	$	(11,504	)
Weighted average shares of common stock outstanding (B)	21,664			20,904			21,568			20,851
Dilutive effect of employee stock options and RSUs	—			—			—			—
Common stock and common stock equivalents (C)	21,664			20,904			21,568			20,851
Net loss per share:
Basic (A/B)	$	(0.45	)	$	(0.10	)	$	(0.85	)	$	(0.55	)
Diluted (A/C)	(0.45		)	(0.10		)	(0.85		)	(0.55		)

8

The Company’s calculation of diluted net loss per share for the three and nine months ended September 30, 2015 excludes RSUs and stock options to purchase approximately 404,000 and 368,000 shares of the Company’s common stock, respectively, compared to 1.2 million and 1.0 million shares during the same periods in 2014.

4. INVESTMENTS

FASB ASC Topic 820, Fair Value Measurement (“FASB ASC 820”), as amended, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes the following three levels of inputs that may be used to measure fair value:

• Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

• Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s short-term investments all mature in less than one year and its long-term investments all mature within three years. Both short-term and long-term investments are considered available for sale. The Company’s assets that are measured at fair value on a recurring basis are classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include money market securities and U.S government securities. Such instruments are classified within Level 1 of the fair value hierarchy. The Company invests in money market funds that are traded daily and does not adjust the quoted price for such instruments. The types of instruments valued based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include corporate notes, agency bonds, commercial paper and certificates of deposit. Such instruments are classified within Level 2 of the fair value hierarchy. The Company uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments. 

9

The following table sets forth a summary of the Company’s financial assets, classified as cash and cash equivalents, short-term investments and long-term investments on its condensed consolidated balance sheets, measured at fair value as of September 30, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at September 30, 2015 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash & cash equivalents:
Cash	$	80,585	$	80,585	$	—	$	—
Money market funds	12,459		12,459		—		—
Total	$	93,044	$	93,044	$	—	$	—
Short-term investments:
Agency bonds	$	32,029	$	—	$	32,029	$	—
Corporate notes	21,490		—		21,490		—
Total	$	53,519	$	—	$	53,519	$	—
Long-term investments:
Corporate notes	$	33,147	$	—	$	33,147	$	—
Total	$	33,147	$	—	$	33,147	$	—

	Fair Value Measurements at December 31, 2014 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash & cash equivalents:
Cash	$	34,452	$	34,452	$	—	$	—
Money market funds	1,716		1,716		—		—
Total	$	36,168	$	36,168	$	—	$	—
Short-term investments:
Corporate notes	$	19,241	$	—	$	19,241	$	—
Commercial paper	800		—		800		—
Total	$	20,041	$	—	$	20,041	$	—
Long-term investments:
U.S. government securities	$	1,000	$	1,000	$	—	$	—
Corporate notes	4,495		$	—	4,495		—
Total	$	5,495	$	1,000	$	4,495	$	—

10

5. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

The Company evaluates the creditworthiness of its customers and partners on a periodic basis and generally does not require collateral. The Company records unbilled accounts receivable, which represents amounts recognized as revenues for invoices that have not yet been sent to customers. This balance fluctuates depending on the contractual billing milestones and work performed related to projects specified in the contract. When the work performed is ahead of the billing milestones related to a services engagement, unbilled accounts receivable will be recorded. The balance of unbilled accounts receivable recorded within accounts receivable on the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 was $9.9 million and $8.0 million, respectively.

In addition, the Company records deferred revenues, which represent cash collections for which the Company cannot yet recognize revenues. The balance of deferred revenues also fluctuates depending on the contractual billing milestones and work performed related to projects specified in the contract. When the billing milestones and related cash collections occur prior to the product or service being delivered, deferred revenues will be recorded. The balance of deferred revenues recorded on the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 was $121.2 million and $110.7 million, respectively.

No customer or partner accounted for more than 10% of the Company’s accounts receivable as of September 30, 2015 or December 31, 2014 or for more than 10% of the Company’s revenues for the three and nine months ended September 30, 2015 or 2014. The Company’s top five partners collectively represented 13% and 17% of the Company’s accounts receivables balance at September 30, 2015 and December 31, 2014, respectively.

6. STOCK-BASED COMPENSATION

Stock Option Plan

The Company’s  2006 Equity Incentive Plan, as amended and as assumed by Interactive Intelligence Group, Inc. (the “2006 Plan”) authorizes the Board of Directors or the Compensation Committee, as applicable, to grant incentive and nonqualified stock options, stock appreciation rights, restricted stock, RSUs, performance shares, performance units and other stock-based awards. After adoption of the 2006 Plan by the Company’s shareholders in May 2006, the Company may no longer make any grants under previous plans. At the Company’s 2013 Annual Meeting of Shareholders held on May 22, 2013, the Company’s shareholders approved an amendment to the 2006 Plan which increased the number of shares available for issuance under the 2006 Plan by 2,000,000 shares. A maximum of 9,050,933 shares are available for delivery under the 2006 Plan. The number of shares available under the 2006 Plan is subject to adjustment for certain changes in the Company’s capital structure. The exercise price of options granted under the 2006 Plan is equal to the closing price of the Company’s common stock, as reported by The NASDAQ Global Select Market, on the business day immediately preceding the date of grant. As of September 30, 2015, there were 1,548,731 shares of stock available for issuance for equity compensation awards under the 2006 Plan.

During 2014 and prior, the Company granted RSUs and three types of stock options. The first type of stock option was non-performance-based subject only to time-based vesting, and these stock options were granted by the Company as annual grants to executives, to certain new employees and to newly-elected non-employee directors.  These stock options vest in four equal annual installments beginning one year after the grant date.  The fair value of these option grants is determined on the date of grant and the related compensation expense is recognized for the entire award on a straight-line basis over the requisite service period.

The second type of stock option granted by the Company was performance-based subject to cancellation if the specified performance targets are not met. If the applicable performance targets have been achieved, the options will vest in four equal annual installments beginning one year after the performance-related period has ended. The fair value of these stock option grants is determined on the date of grant and the related compensation expense is recognized over the related service period, including the initial period for which the specified performance targets must be met.

The third type of stock option granted by the Company was director options granted to non-employee directors annually. These options were similar to the non-performance-based options described above except that the director options vest one year after the grant date. The fair value of these option grants is determined on the date of the grant and the related compensation expense is recognized over one year. These director options were generally granted at the Company’s Annual Meeting of Shareholders during the second quarter of each fiscal year.

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In 2015, the Company began granting RSUs in lieu of stock options. The Company grants performance-based and non-performance-based RSUs to directors, executives, certain key employees, and certain new employees, and the fair value of the RSUs is determined on the date of grant. Non-performance-based RSUs granted to executives, certain key employees, certain new employees and new non-employee directors vest in four equal annual installments beginning one year after the grant date. Non-performance-based RSUs granted annually to non-employee directors vest in full one year after the grant date. Performance-based RSUs vest in four equal annual installments once the individual has achieved the performance targets. RSUs are not included in issued and outstanding common stock until the shares are vested and settlement has occurred.

The 2006 Plan may be terminated by the Company’s Board of Directors at any time.

Stock-Based Compensation Expense Information

The following table summarizes the allocation of stock-based compensation expense related to employee and director stock options and RSUs under FASB ASC Topic 718, Compensation – Stock Compensation (“FASB ASC 718”) for the three and nine months ended September 30, 2015 and 2014 (in thousands):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Stock-based compensation expense by category:
Costs of recurring revenues	$	484		$	385		$	1,470		$	1,059
Costs of services revenues	183			117			476			338
Sales and marketing	1,199			1,248			2,914			3,381
Research and development	1,663			741			3,445			3,047
General and administrative	1,218			851			3,311			2,453
Total stock-based compensation expense	$	4,747		$	3,342		$	11,616		$	10,278
Effect of stock-based compensation expense on net loss per share:
Basic	$	(0.22	)	$	(0.16	)	$	(0.54	)	$	(0.49	)
Diluted	(0.22		)	(0.16		)	(0.54		)	(0.49		)

During the three and nine months ended September 30, 2015, the Company capitalized $100,000 and $1.3 million, respectively, of stock-based compensation expense related to capitalized software, compared to $931,000 of stock-based compensation expenses that were capitalized during the three and nine months ended September 30, 2014.

Stock Option and RSU Valuation

The Company estimated the fair value of stock options using the Black-Scholes valuation model.

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There were no stock options granted during the first nine months of 2015. The weighted-average estimated per option value of non-performance-based and performance-based options granted under the 2006 Plan during the nine months ended September 30, 2014 used the following assumptions:

	Nine Months Ended   September 30,
Valuation assumptions for non-performance-based options:	2014
Dividend yield	—	%
Expected volatility	60.86	%
Risk-free interest rate	1.43	%
Expected life of option (in years)	4.00
	Nine Months Ended   September 30,
Valuation assumptions for performance-based options:	2014
Dividend yield	—	%
Expected volatility	59.51	%
Risk-free interest rate	1.60	%
Expected life of option (in years)	4.50
	Nine Months Ended   September 30,
Valuation assumptions for annual director options:	2014
Dividend yield	—	%
Expected volatility	61.70	%
Risk-free interest rate	1.17	%
Expected life of option (in years)	4.00

RSUs are valued using the fair market value of the Company’s stock on the date of grant and expense is recognized on a straight line basis taking into account an estimated forfeiture rate.

Stock Option and RSU Activity

The following table sets forth a summary of stock option activity for the nine months ended September 30, 2015:

	Options			Weighted-Average Exercise Price
Balances, beginning of year	1,350,799			$	32.95
Options granted	—			—
Options exercised	(131,834		)	18.70
Options cancelled, forfeited or expired	(35,977		)	47.61
Options outstanding	1,182,988			34.09
Option price range	$ 6.66 - 66.39
Weighted-average fair value of options granted	$	—
Options exercisable	883,432			$	30.06

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The following table sets forth information regarding the Company’s stock options outstanding and exercisable as of September 30, 2015:

					Options Outstanding				Options Exercisable
Range of Exercise Prices					Number	Weighted- Average Remaining Contractual Life	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$	6.66	—	$	18.90	51,225	0.66	$	13.17	51,225	$	13.17
19.66		—	19.66		218,130	0.46	19.66		218,130	19.66
19.77		—	22.92		3,400	1.64	21.76		2,150	21.09
24.50		—	24.50		224,379	2.48	24.50		154,379	24.50
25.00		—	30.92		63,250	2.55	27.06		49,500	26.72
32.33		—	32.33		182,250	1.49	32.33		176,625	32.33
32.53		—	37.76		60,500	2.14	33.36		48,000	33.31
39.97		—	39.97		137,905	3.56	39.97		62,471	39.97
48.12		—	66.21		87,000	4.14	50.30		81,750	49.33
66.39		—	66.39		154,949	4.44	66.39		39,202	66.39
Total shares/average price					1,182,988	2.36	$	34.09	883,432	$	30.06

The total intrinsic value of options exercised during the quarter ended ended September 30, 2015 was $3.2 million. The aggregate intrinsic value of options outstanding as of September 30, 2015 was $4.4 million and the aggregate intrinsic value of options currently exercisable as of September 30, 2015 was $4.0 million. The aggregate intrinsic value represents the total intrinsic value, based on the Company’s closing stock price per share of $29.71as of September 30, 2015, which would have been realized by the option holders had all option holders exercised their options as of that date. The total number of in-the-money optionsexercisable as of September 30, 2015represented approximately467,884shares with a weighted average exercise price of$21.12.

As of September 30, 2015, there was $5.2 million of total unrecognized compensation expense related to non-vested stock options. This expense is expected to be recognized over the weighted average remaining vesting period of 1.48 years.

The following table sets forth a summary of RSU activity for the nine months ended September 30, 2015:

	Awards		Weighted- Average Grant Date Price
Balances, beginning of year	592,364		$	50.24
RSUs granted	490,155		43.16
RSUs vested	(231,003	)	46.23
RSUs forfeited	(61,505	)	48.63
RSUs outstanding	790,011		47.14

As of September 30, 2015, there was $32.6 million of total unrecognized compensation expense related to non-vested RSUs. This expense is expected to be recognized over the weighted average remaining vesting period of 2.53 years.

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7. INCOME TAXES

The Company’s effective tax rate, without the effect of discrete items, for the three and nine months ended September 30, 2015 was (12.7)% and (10.0)%, respectively, compared to 38.2% and 40.6%, respectively, for the same periods in 2014.  During the three months ended September 30, 2015, the Company recorded $101,000 of expense related to discrete items. During the nine months ended September 30, 2015, the Company recorded a net credit of $1.6 million related to discrete items, including a net credit of $1.9 million recorded during the first quarter of 2015 to correct an error in the Company's valuation reserve for deferred tax assets. The error is not considered material to the current or previously reported results. During the nine months ended September 30, 2014, the Company recorded a $150,000 credit related to a discrete item, and no discrete items were recorded during the three months ended September 30, 2014. With the effects of these discrete items, the Company’s effective tax rate was (13.9)% and (1.1)% for the three and nine months ended September 30, 2015, compared to 38.2% and 41.4% for the three and nine months ended September 30, 2014. The Company’s effective tax rate for the three and nine months ended September 30, 2015 was lower than the federal statutory tax rate of 35.0% primarily due to the allocation of book operating results between the U.S. and foreign entities and the impact of permanent tax differences on pre-tax operating results during the three and nine months ended September 30, 2015. In addition, we recorded a full U.S. valuation allowance in the fourth quarter of 2014 to reduce the carrying value of the Company's deferred tax assets and are no longer recognizing an income tax benefit for U.S. losses.

8. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company has received notification from competitors and other technology providers claiming that the Company’s technology infringes upon their proprietary rights. The Company cannot assure you that these matters can be resolved amicably without litigation, or that the Company will be able to enter into licensing arrangements on terms and conditions that would not have a material adverse effect on its business, financial condition or results of operations.

From time to time, the Company is also involved in certain legal proceedings in the ordinary course of conducting its business. While the ultimate liability pursuant to these actions cannot currently be determined, the Company believes these legal proceedings will not have a material adverse effect on its financial position or results of operations. Litigation, in general, and intellectual property litigation, in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.

Guarantees

The Company provides indemnifications of varying scope and amount to certain customers against claims of intellectual property infringement made by third parties arising from the use of its solutions.The Company’s direct software license agreements include certain provisions for indemnifying customers, in material compliance with their license agreement, against liabilities if the Company’s software products infringe upon a third party's intellectual property rights, over the life of the agreement. There is no maximum potential amount of future payments set under the guarantee. However, the Company may at any time and at its option and expense:  (i) procure the right of the customer to continue to use the Company’s software that may infringe a third party’s rights; (ii) modify its software so as to avoid infringement; or (iii) require the customer to return its software and refund the customer the fee actually paid by the customer for its software less depreciation based on a five-year straight-line depreciation schedule. The customer’s failure to provide timely notice or reasonable assistance will relieve the Company of its obligations under this indemnification to the extent that it has been actually and materially prejudiced by such failure. To date, the Company has not incurred, nor does it expect to incur, any material related costs and, therefore, has not reserved for such liabilities, in accordance with FASB ASC Topic 460, Guarantees.  

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

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Lease Commitments

The Company’s world headquarters are located in approximately 425,000 square feet of space in four office buildings in Indianapolis, Indiana. In May 2014, the Company entered into new separate lease agreements with Duke Realty Limited Partnership for three of the office buildings, one of which expires in March 2018 and two of which expire on or after June 30, 2025. Also in May 2014, the Company entered into a lease agreement with Duke Construction Limited Partnership to expand its world headquarters to include a fourth, build-to-suit office building in Indianapolis, Indiana.  The construction of the fourth office building was completed in June 2015 and the lease term expires in June 2025.

Contractual Obligations

The following amounts set forth in the table are as of September 30, 2015 (in thousands): 

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Contractual Obligations
Convertible notes	$	159,405	$	1,905	$	3,750	$	153,750	$	—
Capital lease obligations	548		245		303		—		—
Operating lease obligations	96,009		3,850		26,716		19,404		46,039
Purchase obligations	11,580		6,255		5,325		—		—
Verint agreement	5,000		250		1,250		3,500		—
Other obligations	1,702		—		—		1,702		—
Total	$	274,244	$	12,505	$	37,344	$	178,356	$	46,039

As set forth in the Contractual Obligations table, the Company has operating lease obligations and purchase obligations that are not recorded in its 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 (“FASB ASC 840”). The obligations include the operating leases of the Company’s world headquarters, some of which extend to the year 2025, and the leases of several other locations for its offices in the United States and 20 other countries with initial lease terms of up to five years. The Company rents office space for sales, services, development and international offices under month-to-month leases. In accordance with FASB ASC 840, rental expense is recognized ratably over the lease period, including those leases containing escalation clauses.

The convertible notes obligation set forth in the Contractual Obligations table includes principal payments and estimated interest payments based on the terms of the Company's 1.25% convertible senior notes due 2020.

The capital lease obligations set forth in the Contractual Obligations table represent future payments on leases classified as capital leases and disclosed pursuant to FASB ASC 840. The obligations include capital leases of hardware and software assets with initial lease terms of up to three years.

Also set forth in the Contractual Obligations table are contingent amounts payable to Verint Americas Inc. ("Verint") in accordance with the terms of an agreement between the Company and Verint, entered into effective March 6, 2015, with an initial term of five years. Under the terms of the agreement, Verint granted to the Company limited rights to sell Verint product and the Company agreed to pay Verint license fees. If sales of Verint product are not maintained at levels as stated in the agreement, the Company could potentially owe Verint up to $5 million. No accrual has been recorded as of September 30, 2015, as the Company anticipates selling at least the minimum amounts of Verint product set forth in the agreement.

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Other Contingencies

The Company has received and may continue to receive certain payroll tax credits and real estate tax abatements that were granted to the Company based upon specified growth projections.  If the Company’s actual performance is less than those projections, the Company may be subject to repayment of some or all of the tax credits or payment of additional real estate taxes in the case of the abatements.  The Company does not believe that it will be subject to payment of any money related to these taxes; however, the Company cannot provide assurance as to the outcome.

9. ACQUISITIONS

OrgSpan Acquisition

On May 14, 2014, the Company entered into a stock purchase agreement and acquired OrgSpan, Inc. (“OrgSpan”), a privately held provider of cloud-based enterprise social communications solutions.  The Company purchased OrgSpan to leverage technology that provided efficient deployment of the Company’s PureCloud Platform. As previously disclosed, Donald E. Brown, the Company’s Chairman of the Board, President and Chief Executive Officer, was a founder and majority stockholder of OrgSpan.  The Company purchased OrgSpan for approximately $14.1 million, partially funded with cash on hand, which included the repayment of OrgSpan’s outstanding debt of approximately $8.0 million. OrgSpan’s outstanding debt consisted primarily of operating loans provided by Dr. Brown bearing interest at a rate of 4.25% per annum. Approximately $1.4 million in cash was paid to OrgSpan’s stockholders (other than Dr. Brown) and to holders of vested OrgSpan stock options. In exchange for his shares of OrgSpan stock, Dr. Brown has the right to receive an aggregate of 98,999 shares of the Company’s common stock (the “Restricted Shares”), representing approximately $4.7 million of the purchase price, which Restricted Shares vest and are to be issued by the Company upon the achievement of certain performance-based conditions tied to the launch and sales of the Company’s PureCloud Platform, which incorporates certain OrgSpan products and technology. The difference between the $15.6 million purchase price previously disclosed in the Form 8-K filed on May 14, 2014 and the $14.1 million noted above is a result of the difference in the value of the 98,999 Restricted Shares received by Dr. Brown for accounting purposes. The Company also retained 38 OrgSpan employees as part of the transaction.

With the first commercial release of its PureCloud Platform in June 2015, the Company met the first performance-based condition for the Restricted Shares set forth in the stock purchase agreement. As a result, the Company issued 32,999 of the Restricted Shares to Dr. Brown during July 2015, which shares were not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act. Any additional Restricted Shares issued to Dr. Brown will also be unregistered.

The acquisition was accounted for using the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations (“FASB ASC 805”). The results of OrgSpan’s operations were included in the Company’s condensed consolidated financial statements commencing on the acquisition date.

The purchase price allocations for the OrgSpan transaction were prepared by the Company’s management utilizing a third-party valuation report, which was prepared in accordance with the provisions of FASB ASC 805, and other tools available to the Company, including conversations with OrgSpan’s management and historical data from the Company’s other acquisitions. The following table summarizes the fair value of the intangible and other assets acquired and liabilities assumed at the date of the acquisition (in thousands):

	May 1, 2014
Cash and cash equivalents	$	61
Prepaid expenses	54
Property and equipment, net	144
Intangible assets, net	5,766
Goodwill	8,202
Total assets acquired	14,227
Accrued accounts payable	(5		)
Other current liabilities	(44		)
Other long-term liabilities	(128		)
Net assets acquired	$	14,050

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Professional fees related to this acquisition and recognized as of September 30, 2015 totaled $613,000, and included transaction costs such as legal, accounting, and valuation services, which were expensed as incurred. These costs are included within general and administrative expenses on the condensed consolidated statements of operations for the periods incurred. All of these costs were incurred and recognized during 2014.

The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to OrgSpan’s existing trained workforce. The goodwill is expected to be deductible for tax purposes, as the Company made a Section 338(h)(10) election for this acquisition.

Intangible assets acquired resulting from this acquisition consisted of technology, which is amortized on a straight-line basis. The following sets forth the current net book value of technology acquired and its original economic useful life (dollars in thousands):

	As of September 30, 2015
	Gross Amount		Accumulated Amortization		Net Amount		Economic Useful Life (in years)
Technology	$	5,766	$	817	$	4,949	10

Pro Forma Results

The Company has not furnished pro forma financial information related to its acquisition of OrgSpan because such information is not material individually or in the aggregate to the overall financial results of the Company.

10. DERIVATIVES

The Company enters into derivative contracts to mitigate its foreign currency risk associated with transacting business internationally.  The Company uses foreign currency forward contracts to hedge the revaluation exposure of its net monetary assets and liabilities including cash, accounts receivable, accounts payable and certain intercompany payables and receivables.  These hedges are not designated under GAAP, and all realized and unrealized gains and losses are recorded as incurred within other income (expense) on the Company’s condensed consolidated statements of operations.  The objective is to offset the gains and losses on the underlying exposures with the gains and losses from the forward contracts.  The Company’s hedging policy prohibits entering into hedge contracts that are speculative in nature.

The Company records the fair value of its outstanding hedge contracts in other current assets and accrued liabilities depending upon the market value of the forward contracts at each balance sheet date.  The following table summarizes the notional amount and fair value of the Company’s outstanding currency contracts at September 30, 2015 and December 31, 2014, respectively (in thousands):

	USD Equivalent Notional Amount
	September 30, 2015		December 31, 2014
Euro	$	2,915	$	3,041
Japanese Yen	1,501		—
US Dollar	600		600
Swedish Krona	119		249
Australian Dollar	—		738
Total	$	5,135	$	4,628
	Fair Value USD(1)
	September 30, 2015		December 31, 2014
Derivative Asset	$	32	$	17

___________

(1) The fair value measurement of these derivative contracts falls within Level 2 of the fair value hierarchy as defined in FASB ASC 820. See Note 4 - Investments for further information.

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During the three and nine months ended September 30, 2015, the Company recorded a hedging loss of $139,000 and a hedging gain of $281,000, respectively, compared to a hedging gain of $305,000 and a hedging loss of $82,000 for the same periods last year.

In May 2015, the Company issued $150 million aggregate principal amount of its 1.25% convertible senior notes (the "Notes") due June 1, 2020, unless earlier purchased by the Company or converted. In connection with the pricing of the Notes, the Company entered into privately-negotiated capped call transactions (the "capped call transactions") with each of Morgan Stanley & Co. LLC, JPMorgan Chase Bank, National Association, London Branch and Royal Bank of Canada. The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of the Company's common stock that underlie the Notes. The Company used approximately $12.8 million of the net proceeds from the issuance of the Notes to pay the cost of the capped call transactions. The strike price of the purchased call option is the same as the initial conversion price per share of the Notes of $61.24. The capped call transactions have an initial cap price of $79.38 per share. These capped call transactions are recorded within equity on the condensed consolidated balance sheet as of September 30, 2015 and are not remeasured as long as they continue to meet the conditions for equity classification.

11. CONVERTIBLE NOTES

In May 2015, the Company issued $150 million aggregate principal amount of its Notes due June 1, 2020, unless earlier purchased by the Company or converted. Interest is payable semi-annually, in arrears, on June 1 and December 1 of each year.

The Notes were sold in a private placement under a purchase agreement entered into by and among the Company and Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC, as representatives of the several initial purchasers named therein, for resale to qualified institutional buyers as defined in, and in reliance on, Rule 144A under the Securities Act.

The Notes are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee (the "indenture"). The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends or the incurrence of senior debt or other indebtedness.

If converted, holders of the Notes will receive, at the Company's election, cash, shares of the Company's common stock, or a combination of cash and shares. The initial conversion terms are as follows:

	Initial Conversion Rate per $1,000 Principal Amount	Initial Conversion Price per Share
1.25% Convertible Senior Notes	16.3303	$	61.24

Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. Except for certain circumstances set forth in the indenture, holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited.

Holders may convert the Notes under the following circumstances:

• during any calendar quarter commencing after the calendar quarter ending on September 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

• during the five business day period after any 5 consecutive trading day period (the ‘‘measurement period’’) in which the trading price (as defined below) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day;

• upon the occurrence of specified corporate transactions pursuant to the indenture; or

• at any time on or after March 3, 2020.

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Holders of the Notes have the right to require the Company to repurchase for cash all or a portion of the Notes prior to maturity upon the occurrence of a fundamental change, including, among other things, a change of control, at a purchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate transactions that constitute a fundamental change, the Company is required to increase the conversion rate for a holder who elects to convert the Notes in connection with such change of control.

In connection with the pricing of the Notes, the Company entered into capped call transactions. The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of the Company's common stock that underlie the Notes. The Company used approximately $12.8 million of the net proceeds from the issuance of the Notes to pay the cost of the capped call transactions. The strike price of the purchased call option is the same as the initial conversion price per share of the Notes of $61.24. The capped call transactions have an initial cap price of $79.38 per share. These capped call transactions are recorded within equity on the condensed consolidated balance sheet as of September 30, 2015 and are not remeasured as long as they continue to meet the conditions for equity classification.

In accounting for the issuances of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“convertible notes discount”) is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

	Par Value Outstanding		Equity Component Recorded at Issuance			Liability Component of Par Value as of
(In thousands)						September 30, 2015		December 31, 2014
1.25% Convertible Senior Notes	$	150,000	$	31,756	(1)	$	116,466	$	—

___________ 

(1) This amount represents the equity component recorded at the initial issuance of the Notes.

In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to expense using the effective interest rate method over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in shareholders’ equity.

The Notes consisted of the following (in thousands):

	As of
	September 30, 2015			December 31, 2014
Liability component:
1.25% Convertible Senior Notes (1)	$	150,000		$	—
Less: convertible notes discount, net (2)	(29,937		)	—
Less: convertible notes issuance costs (2)	(3,597		)	—
Net carrying amount	$	116,466		$	—

___________ 

(1) The effective interest rate of the Notes is 6.25%. The interest rate is based on the interest rates of similar liabilities at the time of issuance that did not have an associated convertible feature.

(2) Included in the condensed consolidated balance sheet as of September 30, 2015 within convertible notes and is amortized over the term of the Notes using the effective interest rate method.

The total estimated fair value of the Notes at September 30, 2015 was $121.2 million. The fair value was determined based on inputs that are observable in the market (Level 2) and was based on the closing trading price per $100 of the Notes as of the last day of trading for the third quarter of 2015.

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Based on the closing price of the Company’s common stock of $29.71 on September 30, 2015, the if-converted value of the Notes fell below the principal amount by approximately $77.2 million. Based on the terms of the Notes, the Notes were not convertible at any time during the three or nine months ended September 30, 2015.

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Item 2. 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 our investors with an understanding of our past performance, our financial condition and our prospects and should be read in conjunction with other sections of this Quarterly Report on Form 10-Q. Investors should carefully review the information contained in this report under Part II, Item 1A “Risk Factors” and in the Part I, Item 1A “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The following will be discussed and analyzed:

• Forward-Looking Information

• Overview

• Revenue, Order Trends, Outlook and Business Highlights

• Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

• Liquidity and Capital Resources

• Critical Accounting Policies and Estimates

Forward-Looking Information

Certain statements in this Quarterly Report on Form 10-Q contain “forward-looking” information (as defined in the Private Securities Litigation Reform Act of 1995,Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that involve risks and uncertainties which may cause actual results to differ materially from those predicted in the forward-looking statements. Forward-looking statements can often be identified by the use of such verbs as “expects,” “anticipates,” “believes,” “intend,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” or similar verbs or conjugations of such verbs. This forward-looking information includes but is not limited to statements regarding our plans, objectives, expectations, intentions, future financial performance (including our outlook for 2015 and beyond), future financial condition and other statements that are not historical facts. If any of our assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors, including, but not limited to, worldwide economic conditions and their impact on customer purchasing decisions; rapid technological changes and competitive pressures in the industry; our profitability; and our ability to: manage successfully our growth, meet debt service requirements, manage successfully our increasingly complex third-party relationships resulting from the software and hardware components being licensed or sold with our solutions, maintain successful relationships with certain suppliers which may be impacted by the competition in the technology industry, maintain successful relationships with our current and any new partners, maintain and improve our current products, develop new products, protect our proprietary rights and sensitive customer information adequately, successfully integrate acquired businesses and improve our brand and name recognition, as well as other factors set forth in our Securities and Exchange Commission (“SEC”) filings.

Overview

We are a global provider of software and cloud services for customer engagement, unified communications and collaboration. We are a recognized leader in the worldwide contact center market, where our software applications provide a range of inbound and outbound communications functionality. We offer three types of solutions for our customers' needs: on-premises, single-tenant cloud and multi-tenant cloud. Our customers select the delivery model that best meets their needs. Our solutions 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 PureCloud (“PureCloud”). Our PureCloud Platform^SM is a multi-tenant, single instance platform that leverages Amazon Web Services (“AWS”) technology. Our PureCloud Collaborate^SM service was released in March 2015, and our PureCloud Communicate^SM and PureCloud Engage^SM services were released in June 2015.

For further information on our business and the products and services we offer, refer to the Part I, Item 1 “Business” section of our Annual Report on Form 10-K for the year ended December 31, 2014.

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Our management monitors certain key measures to assess our financial results. In particular, we track trends in recurring revenues as well as on-premises orders, the annual contract values of cloud subscriptions, overage fees from cloud subscriptions 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 controlling costs. We also regularly examine operating cash flow and free cash flow, which we define as operating cash flow less capital expenditures. Trends in revenue, operating expenses and net income will affect cash flow, as will other factors such as cash collections on accounts receivables, cash used for vendor payments and capital expenditures. For additional discussions regarding trends, see “Revenue,  Order Trends, Outlook and Business Highlights,” “Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2015 and 2014” and "Liquidity and Capital Resources" below.

Our management also monitors diluted earnings per share (“EPS”), a key measure of performance also used by analysts and investors, based on accounting principles generally accepted in the United States of America (“GAAP”). In addition to measures based on GAAP, our management monitors non-GAAP operating income and margin, non-GAAP net income and non-GAAP 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 the amortization of the convertible notes discount and issuance costs, 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 amortization of the convertible notes discount and issuance costs 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, amortization of the convertible notes discount and issuance costs 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 related to acquisitions, amortization of the convertible notes discount and issuance costs and pro forma income tax expense for our internal budgets.

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Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included below (in thousands, except per share amounts):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Net loss, as reported	$	(9,752	)	$	(2,143	)	$	(18,295	)	$	(11,504	)
Purchase accounting adjustments:
Increase to revenues	2			4			8			14
Reduction of operating expenses:
Customer relationships	387			427			1,171			1,285
Acquired technology	178			177			532			363
Non-compete agreements	53			45			159			135
Acquisition costs	—			10			1			610
Total	620			663			1,871			2,407
Non-cash stock-based compensation expense:
Costs of recurring revenues	484			385			1,470			1,059
Costs of services revenues	183			117			476			338
Sales and marketing	1,199			1,248			2,914			3,381
Research and development	1,663			741			3,445			3,047
General and administrative	1,218			851			3,311			2,453
Total	4,747			3,342			11,616			10,278
Amortization of convertible notes discount and issuance costs	1,535			—			2,047			—
Non-GAAP income tax expense adjustment	1,899			(1,606		)	1,254			(5,016		)
Non-GAAP net (loss) income	$	(951	)	$	256		$	(1,507	)	$	(3,835	)
Operating loss, as reported	$	(6,182	)	$	(3,464	)	$	(14,714	)	$	(19,789	)
Purchase accounting adjustments	620			663			1,871			2,407
Non-cash stock-based compensation expense	4,747			3,342			11,616			10,278
Non-GAAP operating (loss) income	$	(815	)	$	541		$	(1,227	)	$	(7,104	)
Diluted loss per share, as reported	$	(0.45	)	$	(0.10	)	$	(0.85	)	$	(0.55	)
Purchase accounting adjustments	0.03			0.03			0.09			0.12
Non-cash stock-based compensation expense	0.22			0.16			0.54			0.49
Amortization of convertible notes discount and issuance costs	0.07			—			0.09			—
Non-GAAP income tax expense adjustment	0.09			(0.08		)	0.06			(0.24		)
Non-GAAP diluted (loss) income per share	$	(0.04	)	$	0.01		$	(0.07	)	$	(0.18	)

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Revenue, Order Trends, OutlookandBusinessHighlights

The tables below show our total revenues (in millions) for the most recent five quarters and the years ended December 31, 2014, 2013 and 2012 and the percentage change over the prior year period, and a summary of on-premises orders received and cloud subscription annual contract values (“ACV”) during the three and nine months ended September 30, 2015 and 2014. ACV is the annual minimum dollar value of cloud subscription revenues from contracts signed during the applicable period.

Period	Revenues		Year-over-Year Growth %
Three Months Ended:
September 30, 2015	$	97.4	9	%
June 30, 2015	96.3		21
March 31, 2015	89.5		13
December 31, 2014	92.6		2
September 30, 2014	89.5		15
Year Ended December 31:
2014	$	341.3	7	%
2013	318.2		34
2012	237.4		13

On-Premises Orders and Cloud Subscription Annual Contract Values (ACV)

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Increase (decrease) in dollar amount from prior year period:
On-premises orders	(14	)%		(9	)%		6	%		(14	)%
Cloud subscription ACV	(34	)%	(1)	89	%	(2)	(19	)%	(3)	30	%	(4)
Number of new on-premises customers	30			43			107			124
Number of new cloud subscription customers	39			28			91			71
Total orders greater than $250,000	50			56			128			129

______

(1) Includes one large contract signed in the third quarter of 2014. Excluding this contract, cloud subscription ACV growth was 4%.

(2) Includes one large contract signed in the third quarter of 2014. Excluding this contract, cloud subscription ACV growth was 20%.

(3) Includes two large contracts signed in the first quarter of 2014, one large contract signed in the second quarter of 2014, and one large contract signed in the third quarter of 2014. Excluding these contracts, cloud subscription ACV growth was 28%.

(4) Includes one large contract signed in the second quarter of 2013, two large contracts signed in the first quarter of 2014, one large contract signed in the second quarter of 2014, and one large contract signed in the third quarter of 2014. Excluding these contracts, cloud subscription ACV growth was 23%.

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Geographic Mix

The following table shows the percentage of on-premises orders and cloud subscription ACV derived from each of our geographic regions for the periods presented:

	Three Months Ended September 30,				Nine Months Ended   September 30,
	2015		2014		2015		2014
On-premises orders:
Americas	78	%	77	%	72	%	72	%
Europe, Middle East, and Africa	16		15		22		20
Asia-Pacific	6		8		6		8
Cloud subscription ACV:
Americas	74	%	87	%	71	%	84	%
Europe, Middle East, and Africa	18		7		20		11
Asia-Pacific	8		6		9		5

Foreign Currency Impact on Profitability

Due to the continued strengthening of the US dollar against international currencies, we recognized $4.0 million and $9.7 million less in revenue for the three and nine months ended September 30, 2015, respectively, than we would have utilizing foreign exchange rates in effect during the prior year periods. Since we operate in many international locations, the year-over-year change in foreign exchange rates positively impacted the expenses we recorded for the three and nine months ended September 30, 2015, resulting in a net negative impact on operating income of $500,000 and $1.2 million for the three and nine months ended September 30, 2015, respectively.

Outlook for 2015

As our business continues to shift towards the licensing of cloud solutions, and revenues related to these licenses are recognized over the contract period, we have reported and may continue to report periods of operating losses. We are currently projecting non-GAAP operating income in the range of $500,000 to $1.3 million for the full year of 2015. There can be no assurance that our outlook for 2015 as provided in our Annual Report on Form 10-K for the year ended December 31, 2014, and as modified above or otherwise, will be achieved, and actual results may be materially and adversely different from our current projections. 

Convertible Notes Issuance

In May 2015, we issued $150 million aggregate principal amount of 1.25% convertible senior notes (the "Notes") due June 1, 2020, unless earlier purchased by us or converted. Interest is payable semi-annually, in arrears, on June 1 and December 1 of each year. See Note 11 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our issuance of the Notes. For a discussion of the impact of the Notes offering on our liquidity and the expected use of the proceeds from the offering, see "Liquidity and Capital Resources" below.

Comparison of Results of Operations for theThree and Nine Months Ended September 30, 2015and 2014

Revenues

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

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Recurring revenues include renewals of the support fees from on-premises license agreements and revenues from our implemented cloud solutions. The support fees are recognized over the support period, generally between one and three years. Cloud subscriptions have historically been for periods of up to five years; however, beginning in 2015, we began offering one year contracts to simplify the contracting process, accelerate the sales cycle and encourage annual upfront cash payments.

License and hardware revenues include license fees for on-premises software and sale of hardware. Not all on-premises 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, license and hardware 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 license and hardware orders are related to support and recognized over the support period as recurring revenues.

Services revenues primarily include professional and educational 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 training classes.

Total revenues for the three and nine months ended September 30, 2015 were negatively impacted by $4.0 million and $9.7 million, respectively, due to year-over-year changes in foreign exchange rates.

					Percent of Total Revenues				Increase or (Decrease)
	Three Months Ended   September 30,				Three Months Ended   September 30,
	2015		2014		2015		2014		2015 vs. 2014
	($ in thousands)
Recurring	$	59,228	$	48,095	60.8	%	53.8	%	23	%
License and hardware	22,668		27,764		23.3		31.0		(18	)
Services	15,473		13,603		15.9		15.2		14
Total revenues	$	97,369	$	89,462					9

					Percent of Total Revenues				Increase or (Decrease)
	Nine Months Ended   September 30,				Nine Months Ended   September 30,
	2015		2014		2015		2014		2015 vs. 2014
	($ in thousands)
Recurring	$	167,286	$	136,121	59.1	%	54.7	%	23	%
License and hardware	71,299		72,158		25.2		29.0		(1	)
Services	44,590		40,461		15.7		16.3		10
Total revenues	$	283,175	$	248,740					14

Recurring Revenues

The breakdown of recurring revenues was as follows:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
	2015		2014		2015		2014
	($ in thousands)				($ in thousands)
Support fees	$	33,291	$	33,429	$	98,389	$	94,517
Cloud subscriptions	25,937		14,666		68,897		41,604
Total	$	59,228	$	48,095	$	167,286	$	136,121

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Support fees remained relatively consistent between the three month periods in 2015 and 2014. Support fees increased between the nine month periods in 2015 and 2014 with the continued growth of our installed base of on-premises customers. Renewal rates were consistent between the 2015 and 2014 three and nine month periods.  

Cloud subscription revenues increased 77% and 66%, respectively, between the three and nine month periods in 2015 and 2014. The increase was due to new customer implementations as well as overage fees as existing customers expanded their usage of our cloud solutions. The net price per user per month for our primary offerings varies from period to period, but remained within a consistent range during the first nine months of 2015 compared to the first nine months of 2014.

Our unbilled future cloud subscription user revenues were $305.6 million and $265.9 million as of September 30, 2015 and 2014, respectively.  These unbilled cloud subscription revenues are not included in deferred revenues on our balance sheet, but represent the remaining minimum value of non-cancellable agreements that have not been invoiced to the customer.

Licenseand HardwareRevenues

License and hardware revenues decreased during both the three and nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014. The decrease in license and hardware revenues during the three months ended September 30, 2015 compared to the same period in 2014 was primarily due to a 14% decrease in on-premises orders received during the 2015 period compared to the corresponding period in 2014. In addition, our license and hardware revenues decreased due to the impact of the deferral of revenues from on-premises orders received but not recognizable based on contract terms, offset by the recognition of previously deferred on-premises orders, during each of the respective periods. Partially offsetting the decrease in license and hardware revenues during the nine months ended September 30, 2015 compared to the same period in 2014 was a 6% increase in on-premises orders received during the 2015 period compared to the corresponding period in 2014.

Services Revenues

Services revenues increased during both the three and nine months ended September 30, 2015 compared to the same periods in 2014 primarily due to a higher number of on-premises orders received in the first half of 2015 compared to the first half of 2014. While we generate services revenues from both on-premises orders and cloud subscriptions, on-premises orders have historically involved deployments requiring more customized solutions and longer professional services engagements per implementation than cloud subscriptions.

Costs of Revenues

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

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 costs, 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 offerings to improve over time as this portion of our business continues to scale and as we implement improvements in our infrastructure.

Costs of license and hardware revenues consist of hardware costs (including media servers, Interaction Gateway^® appliances and Interaction SIP Stations™ 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 costs 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 services revenues consist primarily of compensation expenses for our professional services and educational personnel. 

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							Percent of Total Revenues				Increase or (Decrease)
	Three Months Ended   September 30,						Three Months Ended   September 30,
	2015			2014			2015		2014		2015 vs. 2014
	($ in thousands)
Recurring	$	21,626		$	16,816		22.2	%	18.8	%	29	%
License and hardware	5,777			7,109			5.9		7.9		(19	)
Services	11,318			11,550			11.6		12.9		(2	)
Total cost of revenues	$	38,721		$	35,475						9
Recurring revenue gross margin	63.5		%	65.0		%
License and hardware revenue gross margin	74.5		%	74.4		%
Services revenue gross margin	26.9		%	15.1		%

							Percent of Total Revenues				Increase or (Decrease)
	Nine Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015		2014		2015 vs. 2014
	($ in thousands)
Recurring	$	59,623		$	46,196		21.1	%	18.6	%	29	%
License and hardware	18,858			20,632			6.7		8.3		(9	)
Services	34,083			33,365			12.0		13.4		2
Total cost of revenues	$	112,564		$	100,193						12
Recurring revenue gross margin	64.4		%	66.1		%
License and hardware revenue gross margin	73.6		%	71.4		%
Services revenue gross margin	23.6		%	17.5		%

Costs of Recurring Revenues

Costs of recurring revenues increased in both comparative periods primarily due to an increase in staffing to support our expanding customer base and the growing number of cloud 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 cloud deployments around the world. Additionally, of the total development costs capitalized related to PureCloud Collaborate^SM, we began amortizing a small portion of those costs during the first quarter of 2015 and began amortizing additional development costs related to PureCloud Collaborate, PureCloud Communicate^SM and PureCloud Engage^SM during the third quarter of 2015. Gross margin on cloud subscriptions increased significantly in both comparative periods as we gained efficiencies in our operations with automated deployments and improved support. However, the gross margin on recurring revenue decreased overall due to the relative increase in cloud revenues which historically have had a lower gross margin than support fees.

Costs ofLicenseand HardwareRevenues

Costs of license and hardware revenues decreased in both comparative periods primarily due to decreased license and hardware revenues for the corresponding periods. Our license and hardware revenue gross margin increased in both comparative periods due to an increase in software license revenues, which historically have had a higher margin than hardware.

Costs of Services Revenues

Costs of services revenues remained relatively consistent during both the three and nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014. Our services gross margin increased in both comparative periods as we were able to obtain more routine implementation services through the use of lower cost personnel.

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Gross Profit

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
	($ in thousands)						($ in thousands)
Gross Profit	$	58,648		$	53,987		$	170,611		$	148,547
Change from prior period	9		%	7		%	15		%	1		%
Gross margin	60.2		%	60.3		%	60.2		%	59.7		%

Gross margin increased during the nine months ended September 30, 2015 compared to the same period in 2014 primarily due to improvement in cloud subscriptions and services gross margins resulting from realized efficiencies in our operating model.

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 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, including lead generation, 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, 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.

					Percent of Total Revenues				Increase
	Three Months Ended   September 30,				Three Months Ended   September 30,
	2015		2014		2015		2014		2015 vs. 2014
	($ in thousands)
Sales and marketing	$	32,400	$	30,651	33.3	%	34.3	%	6	%
Research and development	20,536		15,528		21.1		17.4		32
General and administrative	11,894		11,272		12.2		12.6		6
Total operating expenses	$	64,830	$	57,451					13

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					Percent of Total Revenues				Increase
	Nine Months Ended   September 30,				Nine Months Ended   September 30,
	2015		2014		2015		2014		2015 vs. 2014
	($ in thousands)
Sales and marketing	$	97,384	$	89,559	34.4	%	36.0	%	9	%
Research and development	51,067		45,233		18.0		18.2		13
General and administrative	36,874		33,544		13.0		13.5		10
Total operating expenses	$	185,325	$	168,336					10

Sales and Marketing 

Sales and marketing expenses increased in both comparative periods primarily due to increases in compensation expenses and other related expenses resulting from sales staffing increases. 

Research and Development

Research and development expenses increased in both comparative periods primarily due to increases in compensation expenses resulting from staffing increases as well as the utilization of Amazon Web Services to support the PureCloud Platform development. The increase during the three months ended September 30, 2015 compared to the same period in 2014 was also due to lower capitalization of development costs for the PureCloud Platform. During the three and nine months ended September 30, 2015, we capitalized $900,000 and $11.7 million, respectively, of costs related to the development of the PureCloud Platform, compared to the capitalization of $5.1 million and $9.6 million during the same periods in 2014. Of the total development costs capitalized related to PureCloud Collaborate^SM, we began amortizing a small portion of those costs during the first quarter of 2015, with such amortization included in costs of recurring revenue. We began amortizing additional development costs related to PureCloud Collaborate, PureCloud Communicate^SM and PureCloud Engage^SM during the third quarter of 2015. We will continue to capitalize development costs related to new PureCloud offerings and will begin amortizing such costs once those offerings are released for general availability.

General and Administrative

General and administrative expenses increased in both comparative periods primarily due to an increase in compensation expenses resulting from staffing increases to support our overall growth in our business, as well as, for the nine months ended September 30, 2015, increased bad debt expense during the first quarter of 2015 related primarily to one partner.

Other (Expense) Income:

Interest (Expense) Income, net

Interest (expense) income, net, consists of interest expense related to our Notes issued in May 2015 as well as interest earned from investments, receivables and interest-bearing cash accounts. Other (expense) income, which was not material in any periods reported, is also included.

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Interest (expense) income, net breakdown	Three Months Ended   September 30,							Nine Months Ended   September 30,
	2015				2014			2015				2014
	($ in thousands)							($ in thousands)
Interest income on investments	$	169			$	128		$	254			$	492
Interest income on receivables	7				93			127				323
Other (expense) income	(119		)		56			(20		)		57
Interest expense	(2,020		)	(1)	(3		)	(2,766		)	(1)	(41		)
Total interest (expense) income, net	$	(1,963	)		$	274		$	(2,405	)		$	831

______

(1) Includes the interest accrual for the semi-annual coupon payment and amortization of the convertible notes discount and issuance costs, which are related to the Notes.

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 invest in subprime assets.

Return on investments	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015				2014
	($ in thousands)						($ in thousands)
Cash, cash equivalents, and investments (average)	$	182,312		$	77,766		$	120,707			$	88,690
Interest income on investments, net	169			128			303			(1)	492
Return on investments	0.09		%	0.16		%	0.25		%	(1)	0.55		%

______

(1) Excludes a one-time adjustment to interest income. This amount has been excluded in order to reflect the actual return on investments earned during the period.

Changes in interest income for the three and nine months ended September 30, 2015 compared to the same periods in 2014 was primarily due to the differences in interest rates on the investment vehicles that we utilized. The increase in interest income for the three months ended September 30, 2015 compared to the same period in 2014 was also due to the investment of proceeds obtained through our Notes issuance in the second quarter of 2015. We continue to review our investment options in an effort to increase our interest income while keeping our risk of losing principal to a minimum.

OtherExpense

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.

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
	($ in thousands)						($ in thousands)
Other expense	$	(424	)	$	(279	)	$	(983	)	$	(665	)

Other expense increased during the three and nine months ended September 30, 2015 compared to the same periods last year due to increased foreign currency losses on unhedged exposures.  We regularly review our foreign currency exposures for inclusion in our hedging program.

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Income Tax (Expense) / Benefit

	Three Months Ended   September 30,					Nine Months Ended   September 30,
	2015			2014		2015			2014
	($ in thousands)					($ in thousands)
Income tax (expense) benefit	$	(1,183	)	$	1,326	$	(193	)	$	8,119

Our effective tax rate, without the effect of discrete items, for the three and nine months ended September 30, 2015 was (12.7)% and (10.0)%, respectively, compared to 38.2% and 40.6%, respectively, for the same periods in 2014. During the three months ended September 30, 2015, we recorded $101,000 of expense related to discrete items. During the nine months ended September 30, 2015, we recorded a net credit of $1.6 million related to discrete items, including a net credit of $1.9 million recorded during the first quarter of 2015 to correct an error in our valuation reserve for deferred tax assets. During the nine months ended September 30, 2014, we recorded a $150,000 credit related to a discrete item, and no discrete items were recorded during the three months ended September 30, 2014. With the effects of these discrete items, our effective tax rate was (13.9)% and (1.1)% for the three and nine months ended September 30, 2015, compared to 38.2% and 41.4% for the three and nine months ended September 30, 2014. In addition, we recorded a full U.S. valuation allowance in the fourth quarter of 2014 to reduce the carrying value of our deferred tax assets and are no longer recognizing an income tax benefit for U.S. losses. If the U.S. federal research and development tax credit is extended through 2015, our worldwide annual effective tax rate, including discrete items, is expected to be 4.64%.  This tax rate was determined by considering the U.S. federal statutory tax rate, rates in various states and international jurisdictions in which we have operations and certain income tax credits. 

Net income before taxes for our foreign subsidiaries, under both the cost plus and reseller models, for the three and nine months ended September 30, 2015 was $1.0 million and $2.7 million, respectively, compared to $1.1 million and $2.7 million, respectively, for the same periods in 2014. The recorded foreign tax expense for the three and nine months ended September 30, 2015 was $226,000 and $626,000, respectively, compared to $242,000 and $590,000, respectively, for the same periods in 2014. Our foreign effective tax rate for the nine months ended September 30, 2015 was 23.4%. During the first quarter of 2015, we recorded $219,000 in foreign tax expense related to a German tax audit. No additional discrete items were recorded for the three and nine months ended September 30, 2015. The impact of our foreign effective income tax rates could become material 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 for the use of our cloud solutions, payments related to licensing our on-premises solutions as well as from selling hardware, renewals of support agreements 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 determine our liquidity by combining cash and cash equivalents and short-term and long-term investments as shown in the table below. During the second quarter of 2015, we sold $150 million aggregate principal amount of the Notes. We used approximately $12.8 million of the net proceeds from the offering to pay the cost of the capped call transactions entered in connection with the pricing of the Notes. We intend to use the remainder of the net proceeds from the offering of the Notes for working capital and other general corporate purposes, and may also pursue acquisitions in the future. Based on our current expectations, we believe that our current liquidity position 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 center infrastructure, facility buildouts, and information technology equipment.

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	September 30, 2015		December 31, 2014
	($ in thousands)
Cash and cash equivalents	$	93,044	$	36,168
Short-term investments	53,519		20,041
Long-term investments	33,147		5,495
Total liquidity	$	179,710	$	61,704

We believe that the funds of Interactive Intelligence Group, Inc. 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 September 30, 2015, Interactive Intelligence Group, Inc. held a total of $1.3 million in its various foreign bank accounts and its foreign subsidiaries held a total of $23.8 million in their various bank accounts. The temporary difference related to unremitted earnings of our foreign affiliates as of September 30, 2015, that have not been subject to U.S. income taxation as dividends and are indefinitely invested outside the United States, was  $25.2 million. If we were to repatriate all of those earnings to Interactive Intelligence Group, Inc. in the form of dividends, the incremental U.S. federal income tax net of applicable foreign tax credits would be $5.6 million.

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

	September 30, 2015		December 31, 2014
	($ in thousands)
Euro	$	7,131	$	5,501
Canadian dollar	7,058		4,894
Australian dollar	2,519		2,763
South African rand	1,895		1,532
British pound	1,731		2,759
New Zealand dollar	1,493		2,446
Venezuelan Bolivar	1,320		—
Other foreign currencies	2,029		1,542
Total	$	25,176	$	21,437

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

	Nine Months Ended   September 30,
	2015			2014
	($ in thousands)
Beginning cash and cash equivalents	$	36,168		$	65,881
Cash provided by (used in) operating activities	12,605			(3,065		)
Cash used in investing activities	(88,480		)	(37,217		)
Cash provided by financing activities	132,751			4,664
Ending cash and cash equivalents	$	93,044		$	30,263
Days sales outstanding (DSO)	85			71

Cash flow provided by operations was $12.6 million during the first nine months of 2015 compared to cash used in operations of $3.1 million during the same period in 2014. Cash flow from operations consists of our earnings adjusted for various non-cash expenses, such as depreciation and amortization, as well as balance sheet changes. Our cash flow from operations during the first nine months of 2015 compared to 2014 was primarily affected by changes in deferred revenues, deferred income taxes and accounts receivable.

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Deferred revenues increased during the first nine months of 2015 and decreased during the same period in 2014, resulting in increased cash flow from operations when comparing the two periods. The increase in deferred revenues during the first nine months of 2015 was primarily due to more license and hardware revenues from on-premises orders received during the period but not recognizable being deferred compared to the revenues recognized from previously deferred on-premises orders during the nine months ended September 30, 2015. The decrease in deferred revenues during the first nine months of 2014 was primarily due to more revenues being recognized from previously deferred on-premises orders compared to the license and hardware revenues from on-premises orders received during the period but not recognizable that were deferred during the nine months ended September 30, 2014. The increase in deferred revenues during the first nine months of 2015 compared to the same period in 2014 was also due to increased deferred cloud subscription revenues as a result of increases in the amount of upfront payments received.

Cash used related to deferred income taxes was less during the first nine months of 2015 compared with the same period in 2014. Deferred income taxes did not affect cash flow from operations during 2015 because of the full valuation allowance recorded during the fourth quarter of 2014.

Accounts receivable provided less operating cash flow during the first nine months of 2015 compared with the same period in 2014. This decrease was primarily due to the timing of certain large on-premises orders received during 2015.

Cash used in investing activities increased $51.3 million in the first nine months of 2015 compared to the same period in 2014, primarily due to the investment of proceeds from the Notes offering, including the purchase of $82.3 million and sale of $22.2 million available-for-sale investments during the first nine months of 2015, compared to the purchase of $33.0 million and sale of $35.4 million of available-for-sale investments during the first nine months of 2014. In addition, we spent $9.3 million in cash in 2014 related to the acquisition of OrgSpan, compared to no acquisitions during the first nine months of 2015.

Cash provided by financing activities increased $128.1 million in the first nine months of 2015 compared to the same period in 2014 primarily due to the issuance of the Notes during the second quarter of 2015, partially offset by decreased proceeds from option exercises.

Contractual Obligations

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 leases of our world headquarters and the leases of several other locations for our offices in the United States and 20 other countries. For an updated Contractual Obligations table as of September 30, 2015, which also includes principal payments and estimated interest payments on the Notes, capital lease obligations and contingent amounts payable under our agreement with Verint Americas Inc., see Note 8 – Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q. 

Off-Balance Sheet Arrangements

Except as set forth in the Contractual Obligations table disclosed in Note 8 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q, we had no off-balance sheet arrangements that have had 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 September 30, 2015. 

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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 related to indemnification claims 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 for on-premises contracts and for the term of the contract for cloud subscriptions, provided the customer is in material compliance with the applicable agreement. Certain exceptions to these warranties may also apply. 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.

Critical Accounting Policies and Estimates

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The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. Actual results may differ from those estimates and judgments under different assumptions or conditions. We have discussed the critical accounting policies that we believe affect our more significant estimates and judgments used in the preparation of our consolidated financial statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” section of our Annual Report on Form 10-K for the year ended December 31, 2014 and in Note 2 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014. For a further summary of certain accounting policies, see Note 2 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We develop software solutions in the United States and license our software and sell our services worldwide. As a result, our financial results could be affected by market risks, including changes in foreign currency exchange rates, interest rates or weak economic conditions in certain markets. Market risk is the potential of loss arising from unfavorable changes in market rates and prices.

Foreign Currency Exchange Rates

We transact business in certain foreign currencies including the Euro, Canadian dollar, Australian dollar, South African rand, British pound, New Zealand dollar and Venezuelan Bolivar, among others. However, as a majority of the orders we receive are denominated in United States dollars, a strengthening of the dollar could make our solutions more expensive and less competitive in foreign markets. We continue to mitigate our foreign currency risk by generally transacting business and paying salaries in the functional currency of each of the major countries in which we do business, thus creating natural hedges. Additionally, as our business matures in foreign markets, we may price our products and services in certain other local currencies. If this were to occur, foreign currency fluctuations could have a greater impact on us and may have an adverse effect on our results of operations. As of September 30, 2015, we had outstanding hedging arrangements for the Euro, Japanese Yen, Swedish Krona and United States Dollar. For the three and nine months ended September 30, 2015, we recorded foreign currency losses of $340,000 and $900,000, respectively, primarily due to unhedged exposures.

For the three and nine months ended September 30, 2015, approximately 21% of our revenues and 16% and 17% of our expenses, respectively, were denominated in a foreign currency. As of September 30, 2015, we had net monetary assets valued in foreign currencies subject to foreign currency transaction gains or (losses), consisting primarily of cash and receivables, partially offset by accounts payable, with a carrying value of approximately $3.6 million. A 10% change in foreign currency exchange rates would have changed the carrying value of these net assets by approximately $400,000 as of September 30, 2015, with a corresponding foreign currency gain (loss) recognized in our condensed consolidated statements of operations, if not hedged.

Interest Rate Risk

We invest cash balances in excess of operating requirements in securities that have maturities of up to three years and are diversified among security types. The carrying value of these securities approximates market value. These securities bear interest at fixed interest rates. Based on the weighted average maturities of the investments, if market interest rates were to increase by 100 basis points from the level at September 30, 2015, the fair value of our portfolio would decrease by approximately $829,000.

In May 2015, we issued $150 million aggregate principal amount of Notes due June 1, 2020, unless earlier purchased by us or converted, which have a fixed 1.25% coupon rate. The fair value of the Notes will be impacted by a change in market interest rates. See Note 11 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our issuance of the Notes.

Item 4.Controls and Procedures.

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. We carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer and principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015, pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.  

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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Item 1. Legal Proceedings.

The information set forth under “Legal Proceedings” in Note 8 of Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors.

In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of our common stock, you also should carefully review and consider the information contained in our other reports and periodic filings that we make with the SEC, including, without limitation, the information contained under the caption Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. Those risk factors could materially affect our business, financial condition and results of operations. 

The risks that we describe in our public filings are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we presently deem to be immaterial, also may materially adversely affect our business, financial condition and results of operations. Except as set forth below, there have been no material additions or changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

A Failure or Compromise of Our Information Security Measures Could Result in Substantial Harm to Our Reputation, Daily Operations, or Profitability

We utilize web-based systems and applications to process new orders and to provide support services to our customers and partners. Because these systems are Internet-facing, they are necessarily subject to a variety of cyber-attacks, which, if successful, could disrupt our ability to process new orders and our ability to provide support services effectively. Additionally, we house corporate intellectual property and varying amounts of sensitive customer information on our private network.

We have implemented technical and administrative controls designed to protect the confidentiality, integrity, and availability of these systems and the data they house. We have also implemented commercially available products and system tools designed to monitor, detect and/or prevent cyber-attacks and other malicious activity that may occur on our systems. Additionally, we have developed and implemented processes to respond to and mitigate identified issues quickly and effectively.

If these security measures fail, are compromised or we fail to detect and mitigate any such compromise promptly, it could result in the loss of intellectual property, the breach of sensitive customer information entrusted to our care, damage to our reputation, disruption of routine operations, and/or significant financial expense related to the mitigation or response to, or litigation resulting from, any particular issue.

Through September 30, 2015, no known data breaches or related events have occurred that, either individually or in the aggregate, were of a material nature that resulted in any material financial impact or any material loss or exposure of sensitive data.

We Incurred Indebtedness By Issuing Convertible Senior Notes, and Our Debt Repayment, Conversion and Repurchase Obligations May Adversely Affect Our Financial Condition and Cash Flows From Operations in the Future.

In May 2015, we issued $150.0 million aggregate principal amount of 1.25% convertible senior notes (the “Notes”) due June 1, 2020, unless earlier purchased or converted. Interest is payable semi-annually, in arrears, on June 1 and December 1 of each year, commencing on December 1, 2015. Our indebtedness may impair our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes. A portion of our cash flows from operations may have to be dedicated towards repaying the principal beginning in 2020 or earlier if necessary, or in the event the conditional conversion feature of the Notes is triggered, one or more holders elect to convert their Notes and we settle all or a portion of our conversion obligation through the payment of cash. In addition, if the conditional conversion feature is triggered, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

In addition, holders of the Notes have the right to require us to repurchase all or a portion of their Notes upon the occurrence of a fundamental change, including, among other things, a change in control, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase Notes surrendered therefor.

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Our ability to meet our debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. We cannot control many of these factors. Our future operations may not generate sufficient cash to enable us to repay our debt. If we fail to make a payment on our debt, we could be in default on such debt. If we are at any time unable to pay our indebtedness when due, we may be required to renegotiate the terms of the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that, in the future, we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

The Accounting Method for Convertible Debt Securities That May Be Settled in Cash, Such As the Notes, Could Have a Material Effect on Our Reported Financial Results.

FASB ASC Subtopic 470-20 ("FASB ASC 470-20"), Debt with Conversion and Other Options, requires an entity to separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s non-convertible debt interest rate. Accordingly, the equity component of the Notes is required to be included in the additional paid-in capital section of shareholders’ equity on our consolidated balance sheet at the issuance date, and the value of the equity component is treated as original issue discount for purposes of accounting for the debt component of the Notes. As a result, we will be required to recognize a greater amount of non-cash interest expense in our consolidated income statements in the current and future periods presented as a result of the amortization of the discounted carrying value of the Notes to their principal amount over the term of the Notes. We will report lower net income (or greater net losses) in our consolidated financial results because FASB ASC 470-20 will require interest to include both the current period’s amortization of the original issue discount and the instrument’s convertible cash coupon. This could adversely affect our future consolidated financial results, the trading price of our common stock and the trading price of the Notes.

In addition, under certain circumstances, in calculating earnings per share, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares of our common stock issuable upon conversion of the Notes, if any, are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, diluted earnings per share is calculated as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, were issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, if any, then our diluted consolidated earnings per share would be adversely affected.

The Capped Call Transactions May Affect the Value of the Notes and Our Common Stock.

In connection with the pricing of the Notes, we entered into capped call transactions with the option counterparties. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, upon any conversion of any Notes, with such reduction and/or offset subject to a cap. In connection with establishing their initial hedge of the capped call transactions, the option counterparties and/or their respective affiliates entered into various derivative transactions with respect to our common stock. This activity or any reduction in such continued activity could affect the market price of our common stock or the Notes.

In addition, the option counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Notes, which could affect our ability to convert the Notes and, to the extent the activity occurs during any observation period related to a conversion of Notes, it could affect the number of shares issuable upon conversion of the Notes. We cannot predict what effect the capped call transactions could have on the price of our common stock.

Conversion of the Notes May Dilute the Ownership Interest of Existing Shareholders, Including Holders Who Had Previously Converted Their Notes, or May Otherwise Depress the Price of Our Common Stock.

The conversion of the Notes into shares of our common stock, to the extent that we choose not to deliver all cash for the conversion value, will dilute the ownership interests of existing shareholders. Any sales in the public market of the common stock issuable upon conversion of the Notes could adversely affect prevailing market prices of our common stock. In addition,

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the existence of the Notes may encourage short selling by market participants due to this dilution or may facilitate trading strategies involving the Notes and our common stock.

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Item 6. Exhibits

(a) Exhibits

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Exhibit	Filing Date	Filed Herewith
3.1	Articles of Incorporation of the Company, as currently in effect	S-4/A (Registration No.333-173435)	Annex II to the Proxy Statement / Prospectus	4/27/2011
3.2	Amended By-Laws of the Company, as currently in effect	S-4/A (Registration No. 333-173435)	Annex III to the Proxy Statement / Prospectus	4/27/2011
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
32.1	Certification of the Chief Executive Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				X
32.2	Certification of the Chief Financial Officer, pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002				X
101	The following materials from Interactive Intelligence Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting language):  (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Loss; (iv) Condensed Consolidated Statement of Shareholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements				X

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	Interactive Intelligence Group, Inc. (Registrant)
Date: November 6, 2015	By: /s/     Ashley A. Vukovits
	Ashley A. Vukovits Chief Financial Officer, Senior Vice President of Administration, Secretary and Treasurer (Principal Financial Officer and Principal Accounting Officer)

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EX-31.1

EXHIBIT 31.1

CERTIFICATION 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

I, Donald E. Brown, M.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Interactive Intelligence Group, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Donald E. Brown, M.D.

Donald E. Brown, M.D.

President and Chief Executive Officer

(Principal Executive Officer)

November 6, 2015

EX-31.2

EXHIBIT 31.2

CERTIFICATION 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

I, Ashley A. Vukovits, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Interactive Intelligence Group, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Ashley A. Vukovits

Ashley A. Vukovits

Chief Financial Officer, Senior Vice President of Administration,

Secretary and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

November 6, 2015

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Interactive Intelligence Group, Inc. (the "Registrant") on Form 10-Q for the quarterly period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald E. Brown, M.D., Chairman of the Board, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report, to which this certification is attached as Exhibit 32.1, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Donald E. Brown, M.D.

Donald E. Brown, M.D.

President and Chief Executive Officer

(Principal Executive Officer)

November 6, 2015

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Interactive Intelligence Group, Inc. (the "Registrant") on Form 10-Q for the quarterly period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ashley A. Vukovits, Chief Financial Officer, Senior Vice President of Administration, Secretary and Treasurer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report, to which this certification is attached as Exhibit 32.2, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

/s/ Ashley A. Vukovits

Ashley A. Vukovits

Chief Financial Officer, Senior Vice President of Administration,

Secretary and Treasurer

(Principal Financial Officer and Principal Accounting Officer)

November 6, 2015

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COMMITMENTS AND CONTINGENCIES (Schedule Of Contractual Obligations) (Details) $ in Thousands	Sep. 30, 2015 USD ($)
Debt Instrument [Line Items]
Capital lease obligations	$ 548
Capital lease obligations, Less than 1 Year	245
Capital lease obligations, 1-3 Years	303
Operating lease obligations	96,009
Operating lease obligations, Less than 1 Year	3,850
Operating lease obligations, 1-3 Years	26,716
Operating lease obligations, 3-5 Years	19,404
Operating lease obligations, More than 5 Years	46,039
Purchase obligations	11,580
Purchase obligations, Less than 1 Year	6,255
Purchase obligations, 1-3 Years	5,325
Verint agreement	5,000
Verint agreement, Less than 1 Year	250
Verint agreement, 1-3 Years	1,250
Verint agreement, 3-5 Years	3,500
Other obligations	1,702
Other obligations, 3-5 Years	1,702
Contractual Obligations	274,244
Contractual Obligations, Less than 1 Year	12,505
Contractual Obligations, 1-3 Years	37,344
Contractual Obligations, 3-5 Years	178,356
Contractual Obligations, More than 5 Years	46,039
Convertible Debt
Debt Instrument [Line Items]
Long-term convertible debt	159,405
Long-term convertible debt, Less than 1 Year	1,905
Long-term convertible debt, 1-3 Years	3,750
Long-term convertible debt, 3-5 Years	153,750
Long-term convertible debt, More than 5 years	$ 0

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CONVERTIBLE NOTES (Schedule of Long-term Debt Instruments) (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Debt Instrument [Line Items]
Less: debt discount, net	$ (29,937)	$ 0
Less: debt issuance costs	(3,597)	0
Convertible notes	116,466	0
Convertible Debt | Convertible 1.25% Senior Notes
Debt Instrument [Line Items]
Par Value Outstanding	$ 150,000	$ 0
Effective interest rate	6.25%

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CONVERTIBLE NOTES (Schedule of Debt Conversions) (Details) - Convertible Debt - Convertible 1.25% Senior Notes	1 Months Ended
	May. 31, 2015 $ / shares
Debt Instrument [Line Items]
Initial Conversion Rate per $1,000 Principal Amount	16.3303
Initial Conversion Price per Share (dollars per share)	$ 61.24

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STOCK-BASED COMPENSATION (Schedule of Valuation Assumptions) (Details)	9 Months Ended
	Sep. 30, 2014
Non-Performance-Based Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Dividend yield	0.00%
Expected volatility	60.86%
Risk-free interest rate	1.43%
Expected life of option (in years)	4 years
Performance-Based Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Dividend yield	0.00%
Expected volatility	59.51%
Risk-free interest rate	1.60%
Expected life of option (in years)	4 years 6 months
Director Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Dividend yield	0.00%
Expected volatility	61.70%
Risk-free interest rate	1.17%
Expected life of option (in years)	4 years

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DERIVATIVES (Tables)

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule Of Derivative Notional Amount And Fair Value

The following table summarizes the notional amount and fair value of the Company’s outstanding currency contracts at September 30, 2015 and December 31, 2014, respectively (in thousands):

	USD Equivalent Notional Amount
	September 30, 2015		December 31, 2014
Euro	$	2,915	$	3,041
Japanese Yen	1,501		—
US Dollar	600		600
Swedish Krona	119		249
Australian Dollar	—		738
Total	$	5,135	$	4,628
	Fair Value USD(1)
	September 30, 2015		December 31, 2014
Derivative Asset	$	32	$	17

___________

(1) The fair value measurement of these derivative contracts falls within Level 2 of the fair value hierarchy as defined in FASB ASC 820. See Note 4 - Investments for further information.

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ACQUISITIONS (Intangible Assets Acquired And Economic Useful Life) (Details) - Technology $ in Thousands	9 Months Ended
	Sep. 30, 2015 USD ($)
Acquired Finite-Lived Intangible Assets [Line Items]
Gross Amount	$ 5,766
Accumulated Amortization	817
Net Amount	$ 4,949
Economic Useful Life (in years)	10 years

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INCOME TAXES (Details) - USD ($)	3 Months Ended			9 Months Ended
	Sep. 30, 2015	Mar. 31, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Income Tax Disclosure [Abstract]
Effective tax rate without the effect of discrete item	(12.70%)		38.20%	(10.00%)	40.60%
Discrete items	$ 101,000	$ (1,900,000)	$ 0	$ (1,600,000)	$ (150,000)
Effective income tax rate	(13.90%)		38.20%	(1.10%)	41.40%
Federal statutory tax rate	35.00%			35.00%

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CONVERTIBLE NOTES (Convertible Debt) (Details) - Convertible Debt - Convertible 1.25% Senior Notes - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Debt Instrument [Line Items]
Par Value Outstanding	$ 150,000	$ 0
Equity Component Recorded at Issuance	31,756
Liability Component of Par Value as of	$ 116,466	$ 0

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SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2015

Accounting Changes and Error Corrections [Abstract]

SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

For a complete summary of the Company’s significant accounting policies and critical accounting estimates, refer to Note 2 of Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

In April 2015, the Financial Accounting Standards Board ("FASB") issued FASB Accounting Standards Update ("ASU") No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement ("FASB ASU 2015-05"), which clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. Public business entities must apply the new requirement in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity can elect to adopt the amendments either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. Early adoption is permitted for all entities. The Company is evaluating the effect that FASB ASU 2015-05 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.

In April 2015, the FASB issued FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the debt liability instead of presenting the debt issuance costs as a separate asset. Public business entities must apply the new requirements in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued. The Company elected to early adopt FASB ASU 2015-03 in the second quarter of 2015 and has presented convertible notes issuance costs as a direct deduction from the convertible notes liability in the accompanying balance sheet as of September 30, 2015.

In May 2014, the FASB issued FASB ASU No. 2014-9, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. FASB ASU 2014-9 will replace most existing U.S. GAAP revenue recognition guidance when it becomes effective. As originally issued, the new standard was to become effective for the Company on January 1, 2017, and early adoption is not permitted.  In August 2015, the FASB issued FASB ASU No. 2015-14. Deferral of the Effective Date, which declared a one-year deferral of the effective date of the new revenue recognition standard. As a result, the new standard will become effective for the Company beginning with the first quarter of 2018. FASB ASU 2014-9 permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that FASB ASU 2014-9 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.

The Company capitalizes costs related to its PureCloud Platform^SM and certain projects described below for internal use in accordance with FASB Accounting Standards Codification (“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. During the three and nine months ended September 30, 2015, the Company capitalized $900,000 and $11.7 million, respectively, of costs related to the development of its PureCloud Platform, compared to the capitalization of $5.1 million and $9.6 million during the same periods in 2014. Of the total development costs capitalized related to PureCloud Collaborate^SM, the Company began amortizing a small portion of those costs during the first quarter of 2015, with such amortization included in costs of recurring revenue. The Company began amortizing additional development costs related to PureCloud Collaborate, PureCloud Communicate^SM and PureCloud Engage^SM during the third quarter of 2015. The Company will continue to capitalize development costs related to new PureCloud offerings and will begin amortizing such costs once those offerings are released for general availability.

Additionally, the Company is implementing new business systems to meet its internal business needs. The Company has no plans to market such software externally. During the three and nine months ended September 30, 2015, the Company capitalized $500,000 and $3.5 million, respectively, of costs associated with development and implementation of these systems, compared to the capitalization of $500,000 and $1.9 million during the same periods in 2014.

During the three and nine months ended September 30, 2015, there were no other material changes to the Company’s significant accounting policies or critical accounting estimates.

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DERIVATIVES (Details)	1 Months Ended	3 Months Ended		9 Months Ended
	May. 31, 2015 USD ($) $ / shares $ / unit	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)
Derivative [Line Items]
Hedging gains (losses)		$ (139,000)	$ 305,000	$ 281,000	$ (82,000)
Payment for capped call premiums				$ 12,750,000	$ 0
Convertible Debt | Convertible 1.25% Senior Notes
Derivative [Line Items]
Outstanding debt	$ 150,000,000
Interest rate	1.25%
Call Option | Convertible Debt | Convertible 1.25% Senior Notes
Derivative [Line Items]
Payment for capped call premiums	$ 12,800,000
Strike price (usd per share) | $ / shares	$ 61.24
Initial cap price (usd per share) | $ / unit	79.38

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INVESTMENTS (Financial Assets Measured At Fair Value) (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	$ 93,044	$ 36,168
Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Maturity period	1 year
Investments, Total	$ 53,519	20,041
Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Maturity period	3 years
Investments, Total	$ 33,147	5,495
Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	93,044	36,168
Quoted Prices in Active Markets for Identical Assets (Level 1) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0	1,000
Significant Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	0	0
Significant Other Observable Inputs (Level 2) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	53,519	20,041
Significant Other Observable Inputs (Level 2) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	33,147	4,495
Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	0	0
Significant Unobservable Inputs (Level 3) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0	0
Significant Unobservable Inputs (Level 3) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0	0
Cash
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	80,585	34,452
Cash | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	80,585	34,452
Cash | Significant Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	0	0
Cash | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	0	0
Money market funds
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	12,459	1,716
Money market funds | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	12,459	1,716
Money market funds | Significant Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	0	0
Money market funds | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash & cash equivalents, Total	0	0
Agency bonds | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	32,029
Agency bonds | Quoted Prices in Active Markets for Identical Assets (Level 1) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0
Agency bonds | Significant Other Observable Inputs (Level 2) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	32,029
Agency bonds | Significant Unobservable Inputs (Level 3) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0
Corporate notes | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	21,490	19,241
Corporate notes | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	33,147	4,495
Corporate notes | Quoted Prices in Active Markets for Identical Assets (Level 1) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0	0
Corporate notes | Quoted Prices in Active Markets for Identical Assets (Level 1) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0	0
Corporate notes | Significant Other Observable Inputs (Level 2) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	21,490	19,241
Corporate notes | Significant Other Observable Inputs (Level 2) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	33,147	4,495
Corporate notes | Significant Unobservable Inputs (Level 3) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	0	0
Corporate notes | Significant Unobservable Inputs (Level 3) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total	$ 0	0
Commercial paper | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		800
Commercial paper | Quoted Prices in Active Markets for Identical Assets (Level 1) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		0
Commercial paper | Significant Other Observable Inputs (Level 2) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		800
Commercial paper | Significant Unobservable Inputs (Level 3) | Short-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		0
U.S. government securities | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		1,000
U.S. government securities | Quoted Prices in Active Markets for Identical Assets (Level 1) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		1,000
U.S. government securities | Significant Other Observable Inputs (Level 2) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		0
U.S. government securities | Significant Unobservable Inputs (Level 3) | Long-term investments
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Investments, Total		$ 0

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NET LOSS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Earnings Per Share [Abstract]
Net (loss), as reported	$ (9,752)	$ (2,143)	$ (18,295)	$ (11,504)
Weighted average shares of common stock outstanding (shares)	21,664	20,904	21,568	20,851
Dilutive effect of employee stock options and RSUs	0	0	0	0
Common stock and common stock equivalents (shares)	21,664	20,904	21,568	20,851
Basic (A/B) (in dollars per share)	$ (0.45)	$ (0.10)	$ (0.85)	$ (0.55)
Diluted (A/C) (in dollars per share)	$ (0.45)	$ (0.10)	$ (0.85)	$ (0.55)
Stock options excluded from diluted net income (loss) per share (shares)	404	1,200	368	1,000

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DERIVATIVES (Schedule Of Derivative Notional Amount And Fair Value) (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Derivatives, Fair Value [Line Items]
Notional Amount	$ 5,135	$ 4,628
Derivative Asset
Derivatives, Fair Value [Line Items]
Derivative Asset	32	17
Euro
Derivatives, Fair Value [Line Items]
Notional Amount	2,915	3,041
Japanese Yen
Derivatives, Fair Value [Line Items]
Notional Amount	1,501
US Dollar
Derivatives, Fair Value [Line Items]
Notional Amount	600	600
Swedish Krona
Derivatives, Fair Value [Line Items]
Notional Amount	$ 119	249
Australian Dollar
Derivatives, Fair Value [Line Items]
Notional Amount		$ 738

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ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK (Details) $ in Millions	3 Months Ended		9 Months Ended	12 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014	Sep. 30, 2015 USD ($) customer	Dec. 31, 2014 USD ($) customer
Concentration Risk [Line Items]
Unbilled accounts receivable | $	$ 9.9		$ 9.9	$ 8.0
Deferred Revenue | $	$ 121.2		$ 121.2	$ 110.7
Accounts Receivable | Customer Concentration Risk
Concentration Risk [Line Items]
Number of customers or partners with significant holding			0	0
Percentage of concentration risk			10.00%	10.00%
Accounts Receivable | Top Five Partners
Concentration Risk [Line Items]
Number of customers or partners with significant holding			5	5
Percentage of concentration risk			13.00%	17.00%
Revenue | Customer Concentration Risk
Concentration Risk [Line Items]
Percentage of concentration risk	10.00%	10.00%	10.00%	10.00%

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STOCK-BASED COMPENSATION (Details)		3 Months Ended		9 Months Ended		12 Months Ended
	May. 22, 2013 shares	Sep. 30, 2015 USD ($) $ / shares shares	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($) item $ / shares shares	Sep. 30, 2014 USD ($)	Dec. 31, 2014 item stock_option_type
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of types of stock options | stock_option_type						3
Options granted (shares)				0
Total intrinsic value of options exercised | $				$ 3,200,000
Aggregate intrinsic value of options outstanding | $		$ 4,400,000		4,400,000
Aggregate intrinsic value of options currently exercisable | $		$ 4,000,000		$ 4,000,000
Company's closing stock price per share | $ / shares		$ 29.71		$ 29.71
Total unrecognized compensation cost related to non-vested stock options | $		$ 5,200,000		$ 5,200,000
Weighted average remaining vesting period				1 year 5 months 23 days
Non-Performance-Based Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of equal annual installments | item						4
Award vesting period						1 year
Performance-Based Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of equal annual installments | item						4
Award vesting period						1 year
Director Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Award vesting period						1 year
Period of recognizing compensation expense						1 year
Non Performance Based Restricted Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of equal annual installments | item				4
Award vesting period				1 year
Performance Based Restricted Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of equal annual installments | item				4
In the Money Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total number of in-the-money options exercisable		467,884		467,884
Weighted average exercise price (dollars per share) | $ / shares		$ 21.12		$ 21.12
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Options granted (shares)				490,155
Weighted average remaining vesting period				2 years 6 months 11 days
Total unrecognized compensation cost related to non-vested RSUs | $		$ 32,600,000		$ 32,600,000
Capitalized software, net
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation, capitalized amount | $		$ 100,000	$ 931,000	$ 1,300,000	$ 931,000
2006 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Additional shares available for issuance	2,000,000
Shares available for delivery	9,050,933
Shares of stock available for issuance for equity compensation awards		1,548,731		1,548,731

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FINANCIAL STATEMENT PRESENTATION

9 Months Ended

Sep. 30, 2015

Organization, Consolidation and Presentation of Financial Statements [Abstract]

FINANCIAL STATEMENT PRESENTATION

FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Interactive Intelligence Group, Inc. (“the Company,” “we,” “us” and “our”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions for Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, certain information and note disclosures normally included in the Company’s financial statements prepared in accordance with GAAP have been condensed, or omitted, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, at the respective balance sheet dates, and the reported amounts of revenues and expenses during the respective reporting periods. Despite management’s best effort to establish good faith estimates and assumptions, actual results could differ from these estimates. In management’s opinion, the Company’s accompanying condensed consolidated financial statements include all adjustments necessary (which are of a normal and recurring nature, except as otherwise noted) for the fair presentation of the results of the interim periods presented.

The Company’s accompanying condensed consolidated financial statements as of December 31, 2014 have been derived from the Company’s audited consolidated financial statements at that date but do not include all of the information and notes required by GAAP for complete financial statements. These accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2014, included in the Company’s most recent Annual Report on Form 10-K as filed with the SEC on February 27, 2015. The Company’s results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of all significant intercompany accounts and transactions.

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STOCK-BASED COMPENSATION (Allocation of Stock-Based Compensation Expense) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 4,747	$ 3,342	$ 11,616	$ 10,278
Effects of Stock-based compensation: Basic (dollars per share)	$ (0.22)	$ (0.16)	$ (0.54)	$ (0.49)
Effects of Stock-based compensation: Diluted (dollars per share)	$ (0.22)	$ (0.16)	$ (0.54)	$ (0.49)
Costs of recurring revenues
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 484	$ 385	$ 1,470	$ 1,059
Costs of services revenues
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	183	117	476	338
Sales and marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	1,199	1,248	2,914	3,381
Research and development
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	1,663	741	3,445	3,047
General and administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock-based compensation expense	$ 1,218	$ 851	$ 3,311	$ 2,453

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ACQUISITIONS (Details) - OrgSpan, Inc. $ in Thousands		1 Months Ended	9 Months Ended
	May. 14, 2014 USD ($) employee shares	Jul. 31, 2015 shares	Sep. 30, 2015 USD ($)
Business Acquisition [Line Items]
Consideration transferred	$ 14,100
Outstanding debt	$ 8,000
Interest rate	4.25%
Cash paid for acquisition	$ 1,400
Equity interests issued and issuable, shares | shares	98,999
Shares exchanged for acquisition, value	$ 4,700
Preliminary purchase price	$ 15,600
Number of OrgSpan employees retained | employee	38
Recognized professional fees			$ 613
Restricted shares
Business Acquisition [Line Items]
Shares exchanged for acquisition | shares		32,999

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Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 93,044	$ 36,168
Short-term investments	53,519	20,041
Accounts receivable, net of allowance for doubtful accounts of $1,378 at September 30, 2015 and $1,052 at December 31, 2014	92,458	87,413
Prepaid expenses	33,109	29,417
Other current assets	14,785	14,655
Total current assets	286,915	187,694
Long-term investments	33,147	5,495
Property and equipment, net	46,002	44,785
Capitalized software, net	44,411	33,598
Goodwill	41,668	43,732
Intangible assets, net	14,925	16,517
Other assets, net	6,080	6,902
Total assets	473,148	338,723
Current liabilities:
Accounts payable	11,106	10,236
Accrued liabilities	14,393	18,299
Accrued compensation and related expenses	19,499	19,211
Deferred license and hardware revenues	10,474	5,945
Deferred recurring revenues	81,928	76,647
Deferred services revenues	11,423	9,925
Total current liabilities	148,823	140,263
Convertible notes	116,466	0
Long-term deferred revenues	17,358	18,158
Deferred tax liabilities, net	2,405	2,437
Other long-term liabilities	6,960	7,135
Total liabilities	292,012	167,993
Shareholders' equity:
Common stock, $0.01 par value; 100,000,000 authorized; 21,684,072 issued and outstanding at September 30, 2015, 21,278,858 issued and outstanding at December 31, 2014	217	213
Additional paid-in capital	230,309	196,691
Accumulated other comprehensive loss, net of tax	(10,482)	(5,561)
Accumulated deficit	(38,908)	(20,613)
Total shareholders' equity	181,136	170,730
Total liabilities and shareholders' equity	$ 473,148	$ 338,723

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CONVERTIBLE NOTES (Details)	1 Months Ended	9 Months Ended
	May. 31, 2015 USD ($) trading_days $ / shares $ / unit	Sep. 30, 2015 USD ($) $ / shares	Sep. 30, 2014 USD ($)
Debt Instrument [Line Items]
Payment for capped call premiums		$ 12,750,000	$ 0
Company's closing stock price per share | $ / shares		$ 29.71
Common Stock
Debt Instrument [Line Items]
Company's closing stock price per share | $ / shares		$ 29.71
Convertible Debt | Convertible 1.25% Senior Notes
Debt Instrument [Line Items]
Aggregate principal amount	$ 150,000,000
Redemption price in event of change of control, percentage	100.00%
If-converted value amount below principal		$ 77,200,000
Convertible Debt | Convertible 1.25% Senior Notes | Calendar quarter ending on September 30, 2015
Debt Instrument [Line Items]
Number of trading days, whether or not consecutive | trading_days	20
Number of consecutive trading days	30 days
Percentage of the conversion price	130.00%
Convertible Debt | Convertible 1.25% Senior Notes | Measurement period
Debt Instrument [Line Items]
Number of trading days, whether or not consecutive | trading_days	5
Number of consecutive trading days	5 days
Percentage of the conversion price	98.00%
Call Option | Convertible Debt | Convertible 1.25% Senior Notes
Debt Instrument [Line Items]
Payment for capped call premiums	$ 12,800,000
Strike price (usd per share) | $ / shares	$ 61.24
Initial cap price (usd per share) | $ / unit	79.38
Significant Other Observable Inputs (Level 2) | Convertible Debt | Convertible 1.25% Senior Notes
Debt Instrument [Line Items]
Fair value of notes		$ 121,200,000

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Condensed Consolidated Statement of Shareholders' Equity - 9 months ended Sep. 30, 2015 - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive Loss	Accumulated Deficit
Beginning Balance at Dec. 31, 2014	$ 170,730	$ 213	$ 196,691	$ (5,561)	$ (20,613)
Beginning Balance (in shares) at Dec. 31, 2014	21,278,858	21,279,000
Stock-based compensation expense	$ 12,913		12,913
Exercise of stock options	2,469	$ 4	2,465
Exercise of stock options (shares)		131,000
Issuances of common stock	1,215		1,215
Issuances of common stock (in shares)		61,000
Tax withholding on restricted stock unit awards	(3,476)		(3,476)
Tax withholding on restricted stock awards (in shares)		153,000
Issuance of retirement plan shares	2,523		2,523
Issuance of retirement plan shares (in shares)		60,000
Equity component of convertible notes	31,756		31,756
Equity component of convertible notes issuance cost	(1,028)		(1,028)
Payment for capped call premiums	(12,750)		(12,750)
Net loss	(18,295)				(18,295)
Foreign currency translation adjustment	(5,024)			(5,024)
Net unrealized investment loss	103			103
Ending Balance at Sep. 30, 2015	$ 181,136	$ 217	$ 230,309	$ (10,482)	$ (38,908)
Ending Balance (in shares) at Sep. 30, 2015	21,684,072	21,684,000

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STOCK-BASED COMPENSATION (Summary of Stock Options Outstanding and Exercisable) (Details)	9 Months Ended
	Sep. 30, 2015 $ / shares shares
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Options outstanding, number (shares) | shares	1,182,988
Options outstanding, weighted-average remaining contractual life (in years)	2 years 4 months 10 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 34.09
Options exercisable, number | shares	883,432
Options exercisable, weighted-average exercise price (dollars per share)	$ 30.06
Range 1
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	6.66
Option price range, upper limit (dollars per share)	$ 18.90
Options outstanding, number (shares) | shares	51,225
Options outstanding, weighted-average remaining contractual life (in years)	7 months 28 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 13.17
Options exercisable, number | shares	51,225
Options exercisable, weighted-average exercise price (dollars per share)	$ 13.17
Range 2
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	19.66
Option price range, upper limit (dollars per share)	$ 19.66
Options outstanding, number (shares) | shares	218,130
Options outstanding, weighted-average remaining contractual life (in years)	5 months 16 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 19.66
Options exercisable, number | shares	218,130
Options exercisable, weighted-average exercise price (dollars per share)	$ 19.66
Range 3
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	19.77
Option price range, upper limit (dollars per share)	$ 22.92
Options outstanding, number (shares) | shares	3,400
Options outstanding, weighted-average remaining contractual life (in years)	1 year 7 months 21 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 21.76
Options exercisable, number | shares	2,150
Options exercisable, weighted-average exercise price (dollars per share)	$ 21.09
Range 4
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	24.50
Option price range, upper limit (dollars per share)	$ 24.50
Options outstanding, number (shares) | shares	224,379
Options outstanding, weighted-average remaining contractual life (in years)	2 years 5 months 23 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 24.50
Options exercisable, number | shares	154,379
Options exercisable, weighted-average exercise price (dollars per share)	$ 24.50
Range 5
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	25.00
Option price range, upper limit (dollars per share)	$ 30.92
Options outstanding, number (shares) | shares	63,250
Options outstanding, weighted-average remaining contractual life (in years)	2 years 6 months 18 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 27.06
Options exercisable, number | shares	49,500
Options exercisable, weighted-average exercise price (dollars per share)	$ 26.72
Range 6
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	32.33
Option price range, upper limit (dollars per share)	$ 32.33
Options outstanding, number (shares) | shares	182,250
Options outstanding, weighted-average remaining contractual life (in years)	1 year 5 months 27 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 32.33
Options exercisable, number | shares	176,625
Options exercisable, weighted-average exercise price (dollars per share)	$ 32.33
Range 7
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	32.53
Option price range, upper limit (dollars per share)	$ 37.76
Options outstanding, number (shares) | shares	60,500
Options outstanding, weighted-average remaining contractual life (in years)	2 years 1 month 21 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 33.36
Options exercisable, number | shares	48,000
Options exercisable, weighted-average exercise price (dollars per share)	$ 33.31
Range 8
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	39.97
Option price range, upper limit (dollars per share)	$ 39.97
Options outstanding, number (shares) | shares	137,905
Options outstanding, weighted-average remaining contractual life (in years)	3 years 6 months 22 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 39.97
Options exercisable, number | shares	62,471
Options exercisable, weighted-average exercise price (dollars per share)	$ 39.97
Range 9
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	48.12
Option price range, upper limit (dollars per share)	$ 66.21
Options outstanding, number (shares) | shares	87,000
Options outstanding, weighted-average remaining contractual life (in years)	4 years 1 month 21 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 50.30
Options exercisable, number | shares	81,750
Options exercisable, weighted-average exercise price (dollars per share)	$ 49.33
Range 10
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Option price range, lower limit (dollars per share)	66.39
Option price range, upper limit (dollars per share)	$ 66.39
Options outstanding, number (shares) | shares	154,949
Options outstanding, weighted-average remaining contractual life (in years)	4 years 5 months 9 days
Options outstanding, weighted-average exercise price (dollars per share)	$ 66.39
Options exercisable, number | shares	39,202
Options exercisable, weighted-average exercise price (dollars per share)	$ 66.39

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STOCK-BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Allocation of Stock-Based Compensation Expense

The following table summarizes the allocation of stock-based compensation expense related to employee and director stock options and RSUs under FASB ASC Topic 718, Compensation – Stock Compensation (“FASB ASC 718”) for the three and nine months ended September 30, 2015 and 2014 (in thousands):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Stock-based compensation expense by category:
Costs of recurring revenues	$	484		$	385		$	1,470		$	1,059
Costs of services revenues	183			117			476			338
Sales and marketing	1,199			1,248			2,914			3,381
Research and development	1,663			741			3,445			3,047
General and administrative	1,218			851			3,311			2,453
Total stock-based compensation expense	$	4,747		$	3,342		$	11,616		$	10,278
Effect of stock-based compensation expense on net loss per share:
Basic	$	(0.22	)	$	(0.16	)	$	(0.54	)	$	(0.49	)
Diluted	(0.22		)	(0.16		)	(0.54		)	(0.49		)

Schedule of Valuation Assumptions

The weighted-average estimated per option value of non-performance-based and performance-based options granted under the 2006 Plan during the nine months ended September 30, 2014 used the following assumptions:

	Nine Months Ended   September 30,
Valuation assumptions for non-performance-based options:	2014
Dividend yield	—	%
Expected volatility	60.86	%
Risk-free interest rate	1.43	%
Expected life of option (in years)	4.00
	Nine Months Ended   September 30,
Valuation assumptions for performance-based options:	2014
Dividend yield	—	%
Expected volatility	59.51	%
Risk-free interest rate	1.60	%
Expected life of option (in years)	4.50
	Nine Months Ended   September 30,
Valuation assumptions for annual director options:	2014
Dividend yield	—	%
Expected volatility	61.70	%
Risk-free interest rate	1.17	%
Expected life of option (in years)	4.00

Summary of Stock Option Activity

The following table sets forth a summary of stock option activity for the nine months ended September 30, 2015:

	Options			Weighted-Average Exercise Price
Balances, beginning of year	1,350,799			$	32.95
Options granted	—			—
Options exercised	(131,834		)	18.70
Options cancelled, forfeited or expired	(35,977		)	47.61
Options outstanding	1,182,988			34.09
Option price range	$ 6.66 - 66.39
Weighted-average fair value of options granted	$	—
Options exercisable	883,432			$	30.06

Summary of Stock Options Outstanding and Exercisable

The following table sets forth information regarding the Company’s stock options outstanding and exercisable as of September 30, 2015:

					Options Outstanding				Options Exercisable
Range of Exercise Prices					Number	Weighted- Average Remaining Contractual Life	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$	6.66	—	$	18.90	51,225	0.66	$	13.17	51,225	$	13.17
19.66		—	19.66		218,130	0.46	19.66		218,130	19.66
19.77		—	22.92		3,400	1.64	21.76		2,150	21.09
24.50		—	24.50		224,379	2.48	24.50		154,379	24.50
25.00		—	30.92		63,250	2.55	27.06		49,500	26.72
32.33		—	32.33		182,250	1.49	32.33		176,625	32.33
32.53		—	37.76		60,500	2.14	33.36		48,000	33.31
39.97		—	39.97		137,905	3.56	39.97		62,471	39.97
48.12		—	66.21		87,000	4.14	50.30		81,750	49.33
66.39		—	66.39		154,949	4.44	66.39		39,202	66.39
Total shares/average price					1,182,988	2.36	$	34.09	883,432	$	30.06

Summary of RSU activity

The following table sets forth a summary of RSU activity for the nine months ended September 30, 2015:

	Awards		Weighted- Average Grant Date Price
Balances, beginning of year	592,364		$	50.24
RSUs granted	490,155		43.16
RSUs vested	(231,003	)	46.23
RSUs forfeited	(61,505	)	48.63
RSUs outstanding	790,011		47.14

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STOCK-BASED COMPENSATION (Summary of RSU Activity) (Details)	9 Months Ended
	Sep. 30, 2015 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
RSUs granted (shares)	0
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Balances, beginning of year (shares)	592,364
RSUs granted (shares)	490,155
RSUs vested (shares)	(231,003)
RSUs forfeited (shares)	(61,505)
Options outstanding at end of year (shares)	790,011
Weighted-Average Exercise Price, Balance, beginning of year (dollars per share) | $ / shares	$ 50.24
Weighted-Average Exercise Price, RSUs granted (dollars per share) | $ / shares	43.16
Weighted-Average Exercise Price, RSUs vested (dollars per share) | $ / shares	46.23
Weighted-Average Exercise Price, RSUs forfeited (dollars per share) | $ / shares	48.63
Weighted-Average Exercise Price, Options outstanding (dollars per share) | $ / shares	$ 47.14

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ACQUISITIONS (Tables)

9 Months Ended

Sep. 30, 2015

Business Combinations [Abstract]

Fair Value Of The Intangible And Other Assets Acquired And Liabilities Assumed

The following table summarizes the fair value of the intangible and other assets acquired and liabilities assumed at the date of the acquisition (in thousands):

	May 1, 2014
Cash and cash equivalents	$	61
Prepaid expenses	54
Property and equipment, net	144
Intangible assets, net	5,766
Goodwill	8,202
Total assets acquired	14,227
Accrued accounts payable	(5		)
Other current liabilities	(44		)
Other long-term liabilities	(128		)
Net assets acquired	$	14,050

Intangible Assets Acquired And Economic Useful Life

The following sets forth the current net book value of technology acquired and its original economic useful life (dollars in thousands):

	As of September 30, 2015
	Gross Amount		Accumulated Amortization		Net Amount		Economic Useful Life (in years)
Technology	$	5,766	$	817	$	4,949	10

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Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Operating activities:
Net loss	$ (18,295)	$ (11,504)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation	12,586	11,376
Amortization	5,664	1,783
Other non-cash items	(3,053)	(520)
Stock-based compensation expense	11,616	10,278
Deferred income taxes	(32)	(7,906)
Amortization (accretion) of investment premium (discount)	(866)	193
Loss on disposal of fixed assets	48	40
Amortization of convertible notes issuance costs	229	0
Amortization of convertible notes discount	1,819	0
Changes in operating assets and liabilities:
Accounts receivable	(5,045)	9,480
Prepaid expenses	(3,681)	(6,663)
Other current assets	(130)	(5,004)
Accounts payable	870	570
Accrued liabilities	(568)	487
Accrued compensation and related expenses	288	927
Deferred license and hardware revenues	4,704	(3,957)
Deferred recurring revenues	5,150	1,431
Deferred services revenues	654	(5,963)
Other assets and liabilities	647	1,887
Net cash provided by (used in) operating activities	12,605	(3,065)
Investing activities:
Sales of available-for-sale investments	22,159	35,350
Purchases of available-for-sale investments	(82,321)	(32,967)
Purchases of property and equipment	(14,470)	(17,072)
Capitalized software	(13,849)	(13,320)
Acquisitions, net of cash acquired	0	(9,173)
Unrealized loss (gain) on investment	1	(35)
Net cash used in investing activities	(88,480)	(37,217)
Financing activities:
Proceeds from issuance of convertible notes	150,000	0
Payment for convertible notes issuance costs	(4,674)	0
Payment for capped call premiums	(12,750)	0
Repayments of Long-term Capital Lease Obligations	(33)	0
Proceeds from stock options exercised	2,469	6,454
Proceeds from issuance of common stock	1,215	914
Tax withholding on restricted stock unit awards	(3,476)	(2,704)
Net cash provided by financing activities	132,751	4,664
Net increase (decrease) in cash and cash equivalents	56,876	(35,618)
Cash and cash equivalents, beginning of period	36,168	65,881
Cash and cash equivalents, end of period	93,044	30,263
Cash paid during the period for:
Interest	59	0
Income taxes	897	2,389
Other non-cash item:
Purchase of property and equipment payable at end of period	$ 187	$ 2,944

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Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Current assets:
Accounts receivable, allowance for doubtful accounts	$ 1,378	$ 1,052
Shareholders' equity:
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	100,000,000	100,000,000
Common stock, shares issued (in shares)	21,684,072	21,278,858
Common stock, shares outstanding (in shares)	21,684,072	21,278,858

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DERIVATIVES

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES

DERIVATIVES

The Company enters into derivative contracts to mitigate its foreign currency risk associated with transacting business internationally.  The Company uses foreign currency forward contracts to hedge the revaluation exposure of its net monetary assets and liabilities including cash, accounts receivable, accounts payable and certain intercompany payables and receivables.  These hedges are not designated under GAAP, and all realized and unrealized gains and losses are recorded as incurred within other income (expense) on the Company’s condensed consolidated statements of operations.  The objective is to offset the gains and losses on the underlying exposures with the gains and losses from the forward contracts.  The Company’s hedging policy prohibits entering into hedge contracts that are speculative in nature.

The Company records the fair value of its outstanding hedge contracts in other current assets and accrued liabilities depending upon the market value of the forward contracts at each balance sheet date.  The following table summarizes the notional amount and fair value of the Company’s outstanding currency contracts at September 30, 2015 and December 31, 2014, respectively (in thousands):

	USD Equivalent Notional Amount
	September 30, 2015		December 31, 2014
Euro	$	2,915	$	3,041
Japanese Yen	1,501		—
US Dollar	600		600
Swedish Krona	119		249
Australian Dollar	—		738
Total	$	5,135	$	4,628
	Fair Value USD(1)
	September 30, 2015		December 31, 2014
Derivative Asset	$	32	$	17

___________

(1) The fair value measurement of these derivative contracts falls within Level 2 of the fair value hierarchy as defined in FASB ASC 820. See Note 4 - Investments for further information.

During the three and nine months ended September 30, 2015, the Company recorded a hedging loss of $139,000 and a hedging gain of $281,000, respectively, compared to a hedging gain of $305,000 and a hedging loss of $82,000 for the same periods last year.

In May 2015, the Company issued $150 million aggregate principal amount of its 1.25% convertible senior notes (the "Notes") due June 1, 2020, unless earlier purchased by the Company or converted. In connection with the pricing of the Notes, the Company entered into privately-negotiated capped call transactions (the "capped call transactions") with each of Morgan Stanley & Co. LLC, JPMorgan Chase Bank, National Association, London Branch and Royal Bank of Canada. The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of the Company's common stock that underlie the Notes. The Company used approximately $12.8 million of the net proceeds from the issuance of the Notes to pay the cost of the capped call transactions. The strike price of the purchased call option is the same as the initial conversion price per share of the Notes of $61.24. The capped call transactions have an initial cap price of $79.38 per share. These capped call transactions are recorded within equity on the condensed consolidated balance sheet as of September 30, 2015 and are not remeasured as long as they continue to meet the conditions for equity classification.

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Oct. 30, 2015
Document and Entity Information [Abstract]
Entity Registrant Name	Interactive Intelligence Group, Inc.
Entity Central Index Key	0001517650
Current Fiscal Year End Date	--12-31
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		21,700,835
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2015

XML

CONVERTIBLE NOTES

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

CONVERTIBLE NOTES

CONVERTIBLE NOTES

In May 2015, the Company issued $150 million aggregate principal amount of its Notes due June 1, 2020, unless earlier purchased by the Company or converted. Interest is payable semi-annually, in arrears, on June 1 and December 1 of each year.

The Notes were sold in a private placement under a purchase agreement entered into by and among the Company and Morgan Stanley & Co. LLC, J.P. Morgan Securities LLC and RBC Capital Markets, LLC, as representatives of the several initial purchasers named therein, for resale to qualified institutional buyers as defined in, and in reliance on, Rule 144A under the Securities Act.

The Notes are governed by an indenture between the Company, as issuer, and U.S. Bank National Association, as trustee (the "indenture"). The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends or the incurrence of senior debt or other indebtedness.

If converted, holders of the Notes will receive, at the Company's election, cash, shares of the Company's common stock, or a combination of cash and shares. The initial conversion terms are as follows:

	Initial Conversion Rate per $1,000 Principal Amount	Initial Conversion Price per Share
1.25% Convertible Senior Notes	16.3303	$	61.24

Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. Except for certain circumstances set forth in the indenture, holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited.

Holders may convert the Notes under the following circumstances:

• during any calendar quarter commencing after the calendar quarter ending on September 30, 2015 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

• during the five business day period after any 5 consecutive trading day period (the ‘‘measurement period’’) in which the trading price (as defined below) per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day;

• upon the occurrence of specified corporate transactions pursuant to the indenture; or

• at any time on or after March 3, 2020.

Holders of the Notes have the right to require the Company to repurchase for cash all or a portion of the Notes prior to maturity upon the occurrence of a fundamental change, including, among other things, a change of control, at a purchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, following certain corporate transactions that constitute a fundamental change, the Company is required to increase the conversion rate for a holder who elects to convert the Notes in connection with such change of control.

In connection with the pricing of the Notes, the Company entered into capped call transactions. The capped call transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Notes, the number of shares of the Company's common stock that underlie the Notes. The Company used approximately $12.8 million of the net proceeds from the issuance of the Notes to pay the cost of the capped call transactions. The strike price of the purchased call option is the same as the initial conversion price per share of the Notes of $61.24. The capped call transactions have an initial cap price of $79.38 per share. These capped call transactions are recorded within equity on the condensed consolidated balance sheet as of September 30, 2015 and are not remeasured as long as they continue to meet the conditions for equity classification.

In accounting for the issuances of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes as a whole. The excess of the principal amount of the liability component over its carrying amount (“convertible notes discount”) is amortized to interest expense over the term of the Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

	Par Value Outstanding		Equity Component Recorded at Issuance			Liability Component of Par Value as of
(In thousands)						September 30, 2015		December 31, 2014
1.25% Convertible Senior Notes	$	150,000	$	31,756	(1)	$	116,466	$	—

___________ 

(1) This amount represents the equity component recorded at the initial issuance of the Notes.

In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative values. Transaction costs attributable to the liability component are being amortized to expense using the effective interest rate method over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in shareholders’ equity.

The Notes consisted of the following (in thousands):

	As of
	September 30, 2015			December 31, 2014
Liability component:
1.25% Convertible Senior Notes (1)	$	150,000		$	—
Less: convertible notes discount, net (2)	(29,937		)	—
Less: convertible notes issuance costs (2)	(3,597		)	—
Net carrying amount	$	116,466		$	—

___________ 

(1) The effective interest rate of the Notes is 6.25%. The interest rate is based on the interest rates of similar liabilities at the time of issuance that did not have an associated convertible feature.

(2) Included in the condensed consolidated balance sheet as of September 30, 2015 within convertible notes and is amortized over the term of the Notes using the effective interest rate method.

The total estimated fair value of the Notes at September 30, 2015 was $121.2 million. The fair value was determined based on inputs that are observable in the market (Level 2) and was based on the closing trading price per $100 of the Notes as of the last day of trading for the third quarter of 2015.

Based on the closing price of the Company’s common stock of $29.71 on September 30, 2015, the if-converted value of the Notes fell below the principal amount by approximately $77.2 million. Based on the terms of the Notes, the Notes were not convertible at any time during the three or nine months ended September 30, 2015.

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Condensed Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Revenues:
Recurring	$ 59,228	$ 48,095	$ 167,286	$ 136,121
License and hardware	22,668	27,764	71,299	72,158
Services	15,473	13,603	44,590	40,461
Total revenues	97,369	89,462	283,175	248,740
Costs of revenues:
Costs of recurring	21,626	16,816	59,623	46,196
Costs of license and hardware	5,777	7,109	18,858	20,632
Costs of services	11,318	11,550	34,083	33,365
Total costs of revenues	38,721	35,475	112,564	100,193
Gross profit	58,648	53,987	170,611	148,547
Operating expenses:
Sales and marketing	32,400	30,651	97,384	89,559
Research and development	20,536	15,528	51,067	45,233
General and administrative	11,894	11,272	36,874	33,544
Total operating expenses	64,830	57,451	185,325	168,336
Operating loss	(6,182)	(3,464)	(14,714)	(19,789)
Other (expense) income:
Interest (expense) income, net	(1,963)	274	(2,405)	831
Other expense	(424)	(279)	(983)	(665)
Total other (expense) income	(2,387)	(5)	(3,388)	166
Loss before income taxes	(8,569)	(3,469)	(18,102)	(19,623)
Income tax (expense) benefit	(1,183)	1,326	(193)	8,119
Net loss	$ (9,752)	$ (2,143)	$ (18,295)	$ (11,504)
Net loss per share:
Basic (in dollars per share)	$ (0.45)	$ (0.10)	$ (0.85)	$ (0.55)
Diluted (in dollars per share)	$ (0.45)	$ (0.10)	$ (0.85)	$ (0.55)
Shares used to compute net loss per share:
Basic (shares)	21,664	20,904	21,568	20,851
Diluted (shares)	21,664	20,904	21,568	20,851
Amounts include amortization of purchased intangibles from business combinations
Total intangible amortization expense	$ 617	$ 649	$ 1,862	$ 1,783
Amounts include stock-based compensation expense
Total stock-based compensation expense	4,747	3,342	11,616	10,278
Costs of license and hardware
Amounts include amortization of purchased intangibles from business combinations
Total intangible amortization expense	178	177	532	363
General and administrative
Amounts include amortization of purchased intangibles from business combinations
Total intangible amortization expense	439	472	1,330	1,420
Amounts include stock-based compensation expense
Total stock-based compensation expense	1,218	851	3,311	2,453
Costs of recurring revenues
Amounts include stock-based compensation expense
Total stock-based compensation expense	484	385	1,470	1,059
Costs of services revenues
Amounts include stock-based compensation expense
Total stock-based compensation expense	183	117	476	338
Sales and marketing
Amounts include stock-based compensation expense
Total stock-based compensation expense	1,199	1,248	2,914	3,381
Research and development
Amounts include stock-based compensation expense
Total stock-based compensation expense	$ 1,663	$ 741	$ 3,445	$ 3,047

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ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

9 Months Ended

Sep. 30, 2015

Risks and Uncertainties [Abstract]

ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK

The Company evaluates the creditworthiness of its customers and partners on a periodic basis and generally does not require collateral. The Company records unbilled accounts receivable, which represents amounts recognized as revenues for invoices that have not yet been sent to customers. This balance fluctuates depending on the contractual billing milestones and work performed related to projects specified in the contract. When the work performed is ahead of the billing milestones related to a services engagement, unbilled accounts receivable will be recorded. The balance of unbilled accounts receivable recorded within accounts receivable on the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 was $9.9 million and $8.0 million, respectively.

In addition, the Company records deferred revenues, which represent cash collections for which the Company cannot yet recognize revenues. The balance of deferred revenues also fluctuates depending on the contractual billing milestones and work performed related to projects specified in the contract. When the billing milestones and related cash collections occur prior to the product or service being delivered, deferred revenues will be recorded. The balance of deferred revenues recorded on the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 was $121.2 million and $110.7 million, respectively.

No customer or partner accounted for more than 10% of the Company’s accounts receivable as of September 30, 2015 or December 31, 2014 or for more than 10% of the Company’s revenues for the three and nine months ended September 30, 2015 or 2014. The Company’s top five partners collectively represented 13% and 17% of the Company’s accounts receivables balance at September 30, 2015 and December 31, 2014, respectively.

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INVESTMENTS

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

INVESTMENTS

INVESTMENTS

FASB ASC Topic 820, Fair Value Measurement (“FASB ASC 820”), as amended, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes the following three levels of inputs that may be used to measure fair value:

• Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

• Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s short-term investments all mature in less than one year and its long-term investments all mature within three years. Both short-term and long-term investments are considered available for sale. The Company’s assets that are measured at fair value on a recurring basis are classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include money market securities and U.S government securities. Such instruments are classified within Level 1 of the fair value hierarchy. The Company invests in money market funds that are traded daily and does not adjust the quoted price for such instruments. The types of instruments valued based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include corporate notes, agency bonds, commercial paper and certificates of deposit. Such instruments are classified within Level 2 of the fair value hierarchy. The Company uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments. 

The following table sets forth a summary of the Company’s financial assets, classified as cash and cash equivalents, short-term investments and long-term investments on its condensed consolidated balance sheets, measured at fair value as of September 30, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at September 30, 2015 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash & cash equivalents:
Cash	$	80,585	$	80,585	$	—	$	—
Money market funds	12,459		12,459		—		—
Total	$	93,044	$	93,044	$	—	$	—
Short-term investments:
Agency bonds	$	32,029	$	—	$	32,029	$	—
Corporate notes	21,490		—		21,490		—
Total	$	53,519	$	—	$	53,519	$	—
Long-term investments:
Corporate notes	$	33,147	$	—	$	33,147	$	—
Total	$	33,147	$	—	$	33,147	$	—

	Fair Value Measurements at December 31, 2014 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash & cash equivalents:
Cash	$	34,452	$	34,452	$	—	$	—
Money market funds	1,716		1,716		—		—
Total	$	36,168	$	36,168	$	—	$	—
Short-term investments:
Corporate notes	$	19,241	$	—	$	19,241	$	—
Commercial paper	800		—		800		—
Total	$	20,041	$	—	$	20,041	$	—
Long-term investments:
U.S. government securities	$	1,000	$	1,000	$	—	$	—
Corporate notes	4,495		$	—	4,495		—
Total	$	5,495	$	1,000	$	4,495	$	—

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COMMITMENTS AND CONTINGENCIES (Tables)

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

Schedule Of Contractual Obligations

The following amounts set forth in the table are as of September 30, 2015 (in thousands): 

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Contractual Obligations
Convertible notes	$	159,405	$	1,905	$	3,750	$	153,750	$	—
Capital lease obligations	548		245		303		—		—
Operating lease obligations	96,009		3,850		26,716		19,404		46,039
Purchase obligations	11,580		6,255		5,325		—		—
Verint agreement	5,000		250		1,250		3,500		—
Other obligations	1,702		—		—		1,702		—
Total	$	274,244	$	12,505	$	37,344	$	178,356	$	46,039

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SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Policies)

9 Months Ended

Sep. 30, 2015

Accounting Changes and Error Corrections [Abstract]

New Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board ("FASB") issued FASB Accounting Standards Update ("ASU") No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement ("FASB ASU 2015-05"), which clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. Public business entities must apply the new requirement in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. An entity can elect to adopt the amendments either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. Early adoption is permitted for all entities. The Company is evaluating the effect that FASB ASU 2015-05 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.

In April 2015, the FASB issued FASB ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs on the balance sheet as a direct deduction from the debt liability instead of presenting the debt issuance costs as a separate asset. Public business entities must apply the new requirements in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued. The Company elected to early adopt FASB ASU 2015-03 in the second quarter of 2015 and has presented convertible notes issuance costs as a direct deduction from the convertible notes liability in the accompanying balance sheet as of September 30, 2015.

In May 2014, the FASB issued FASB ASU No. 2014-9, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. FASB ASU 2014-9 will replace most existing U.S. GAAP revenue recognition guidance when it becomes effective. As originally issued, the new standard was to become effective for the Company on January 1, 2017, and early adoption is not permitted.  In August 2015, the FASB issued FASB ASU No. 2015-14. Deferral of the Effective Date, which declared a one-year deferral of the effective date of the new revenue recognition standard. As a result, the new standard will become effective for the Company beginning with the first quarter of 2018. FASB ASU 2014-9 permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that FASB ASU 2014-9 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the guidance on its ongoing financial reporting.

Internal Use Software

The Company capitalizes costs related to its PureCloud Platform^SM and certain projects described below for internal use in accordance with FASB Accounting Standards Codification (“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.

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company has received notification from competitors and other technology providers claiming that the Company’s technology infringes upon their proprietary rights. The Company cannot assure you that these matters can be resolved amicably without litigation, or that the Company will be able to enter into licensing arrangements on terms and conditions that would not have a material adverse effect on its business, financial condition or results of operations.

From time to time, the Company is also involved in certain legal proceedings in the ordinary course of conducting its business. While the ultimate liability pursuant to these actions cannot currently be determined, the Company believes these legal proceedings will not have a material adverse effect on its financial position or results of operations. Litigation, in general, and intellectual property litigation, in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.

Guarantees

The Company provides indemnifications of varying scope and amount to certain customers against claims of intellectual property infringement made by third parties arising from the use of its solutions.The Company’s direct software license agreements include certain provisions for indemnifying customers, in material compliance with their license agreement, against liabilities if the Company’s software products infringe upon a third party's intellectual property rights, over the life of the agreement. There is no maximum potential amount of future payments set under the guarantee. However, the Company may at any time and at its option and expense:  (i) procure the right of the customer to continue to use the Company’s software that may infringe a third party’s rights; (ii) modify its software so as to avoid infringement; or (iii) require the customer to return its software and refund the customer the fee actually paid by the customer for its software less depreciation based on a five-year straight-line depreciation schedule. The customer’s failure to provide timely notice or reasonable assistance will relieve the Company of its obligations under this indemnification to the extent that it has been actually and materially prejudiced by such failure. To date, the Company has not incurred, nor does it expect to incur, any material related costs and, therefore, has not reserved for such liabilities, in accordance with FASB ASC Topic 460, Guarantees.  

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

Lease Commitments

The Company’s world headquarters are located in approximately 425,000 square feet of space in four office buildings in Indianapolis, Indiana. In May 2014, the Company entered into new separate lease agreements with Duke Realty Limited Partnership for three of the office buildings, one of which expires in March 2018 and two of which expire on or after June 30, 2025. Also in May 2014, the Company entered into a lease agreement with Duke Construction Limited Partnership to expand its world headquarters to include a fourth, build-to-suit office building in Indianapolis, Indiana.  The construction of the fourth office building was completed in June 2015 and the lease term expires in June 2025.

Contractual Obligations

The following amounts set forth in the table are as of September 30, 2015 (in thousands): 

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Contractual Obligations
Convertible notes	$	159,405	$	1,905	$	3,750	$	153,750	$	—
Capital lease obligations	548		245		303		—		—
Operating lease obligations	96,009		3,850		26,716		19,404		46,039
Purchase obligations	11,580		6,255		5,325		—		—
Verint agreement	5,000		250		1,250		3,500		—
Other obligations	1,702		—		—		1,702		—
Total	$	274,244	$	12,505	$	37,344	$	178,356	$	46,039

As set forth in the Contractual Obligations table, the Company has operating lease obligations and purchase obligations that are not recorded in its 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 (“FASB ASC 840”). The obligations include the operating leases of the Company’s world headquarters, some of which extend to the year 2025, and the leases of several other locations for its offices in the United States and 20 other countries with initial lease terms of up to five years. The Company rents office space for sales, services, development and international offices under month-to-month leases. In accordance with FASB ASC 840, rental expense is recognized ratably over the lease period, including those leases containing escalation clauses.

The convertible notes obligation set forth in the Contractual Obligations table includes principal payments and estimated interest payments based on the terms of the Company's 1.25% convertible senior notes due 2020.

The capital lease obligations set forth in the Contractual Obligations table represent future payments on leases classified as capital leases and disclosed pursuant to FASB ASC 840. The obligations include capital leases of hardware and software assets with initial lease terms of up to three years.

Also set forth in the Contractual Obligations table are contingent amounts payable to Verint Americas Inc. ("Verint") in accordance with the terms of an agreement between the Company and Verint, entered into effective March 6, 2015, with an initial term of five years. Under the terms of the agreement, Verint granted to the Company limited rights to sell Verint product and the Company agreed to pay Verint license fees. If sales of Verint product are not maintained at levels as stated in the agreement, the Company could potentially owe Verint up to $5 million. No accrual has been recorded as of September 30, 2015, as the Company anticipates selling at least the minimum amounts of Verint product set forth in the agreement.

Other Contingencies

The Company has received and may continue to receive certain payroll tax credits and real estate tax abatements that were granted to the Company based upon specified growth projections.  If the Company’s actual performance is less than those projections, the Company may be subject to repayment of some or all of the tax credits or payment of additional real estate taxes in the case of the abatements.  The Company does not believe that it will be subject to payment of any money related to these taxes; however, the Company cannot provide assurance as to the outcome.

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STOCK-BASED COMPENSATION

9 Months Ended

Sep. 30, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

Stock Option Plan

The Company’s  2006 Equity Incentive Plan, as amended and as assumed by Interactive Intelligence Group, Inc. (the “2006 Plan”) authorizes the Board of Directors or the Compensation Committee, as applicable, to grant incentive and nonqualified stock options, stock appreciation rights, restricted stock, RSUs, performance shares, performance units and other stock-based awards. After adoption of the 2006 Plan by the Company’s shareholders in May 2006, the Company may no longer make any grants under previous plans. At the Company’s 2013 Annual Meeting of Shareholders held on May 22, 2013, the Company’s shareholders approved an amendment to the 2006 Plan which increased the number of shares available for issuance under the 2006 Plan by 2,000,000 shares. A maximum of 9,050,933 shares are available for delivery under the 2006 Plan. The number of shares available under the 2006 Plan is subject to adjustment for certain changes in the Company’s capital structure. The exercise price of options granted under the 2006 Plan is equal to the closing price of the Company’s common stock, as reported by The NASDAQ Global Select Market, on the business day immediately preceding the date of grant. As of September 30, 2015, there were 1,548,731 shares of stock available for issuance for equity compensation awards under the 2006 Plan.

During 2014 and prior, the Company granted RSUs and three types of stock options. The first type of stock option was non-performance-based subject only to time-based vesting, and these stock options were granted by the Company as annual grants to executives, to certain new employees and to newly-elected non-employee directors.  These stock options vest in four equal annual installments beginning one year after the grant date.  The fair value of these option grants is determined on the date of grant and the related compensation expense is recognized for the entire award on a straight-line basis over the requisite service period.

The second type of stock option granted by the Company was performance-based subject to cancellation if the specified performance targets are not met. If the applicable performance targets have been achieved, the options will vest in four equal annual installments beginning one year after the performance-related period has ended. The fair value of these stock option grants is determined on the date of grant and the related compensation expense is recognized over the related service period, including the initial period for which the specified performance targets must be met.

The third type of stock option granted by the Company was director options granted to non-employee directors annually. These options were similar to the non-performance-based options described above except that the director options vest one year after the grant date. The fair value of these option grants is determined on the date of the grant and the related compensation expense is recognized over one year. These director options were generally granted at the Company’s Annual Meeting of Shareholders during the second quarter of each fiscal year.

In 2015, the Company began granting RSUs in lieu of stock options. The Company grants performance-based and non-performance-based RSUs to directors, executives, certain key employees, and certain new employees, and the fair value of the RSUs is determined on the date of grant. Non-performance-based RSUs granted to executives, certain key employees, certain new employees and new non-employee directors vest in four equal annual installments beginning one year after the grant date. Non-performance-based RSUs granted annually to non-employee directors vest in full one year after the grant date. Performance-based RSUs vest in four equal annual installments once the individual has achieved the performance targets. RSUs are not included in issued and outstanding common stock until the shares are vested and settlement has occurred.

The 2006 Plan may be terminated by the Company’s Board of Directors at any time.

Stock-Based Compensation Expense Information

The following table summarizes the allocation of stock-based compensation expense related to employee and director stock options and RSUs under FASB ASC Topic 718, Compensation – Stock Compensation (“FASB ASC 718”) for the three and nine months ended September 30, 2015 and 2014 (in thousands):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Stock-based compensation expense by category:
Costs of recurring revenues	$	484		$	385		$	1,470		$	1,059
Costs of services revenues	183			117			476			338
Sales and marketing	1,199			1,248			2,914			3,381
Research and development	1,663			741			3,445			3,047
General and administrative	1,218			851			3,311			2,453
Total stock-based compensation expense	$	4,747		$	3,342		$	11,616		$	10,278
Effect of stock-based compensation expense on net loss per share:
Basic	$	(0.22	)	$	(0.16	)	$	(0.54	)	$	(0.49	)
Diluted	(0.22		)	(0.16		)	(0.54		)	(0.49		)

During the three and nine months ended September 30, 2015, the Company capitalized $100,000 and $1.3 million, respectively, of stock-based compensation expense related to capitalized software, compared to $931,000 of stock-based compensation expenses that were capitalized during the three and nine months ended September 30, 2014.

Stock Option and RSU Valuation

The Company estimated the fair value of stock options using the Black-Scholes valuation model.

There were no stock options granted during the first nine months of 2015. The weighted-average estimated per option value of non-performance-based and performance-based options granted under the 2006 Plan during the nine months ended September 30, 2014 used the following assumptions:

	Nine Months Ended   September 30,
Valuation assumptions for non-performance-based options:	2014
Dividend yield	—	%
Expected volatility	60.86	%
Risk-free interest rate	1.43	%
Expected life of option (in years)	4.00
	Nine Months Ended   September 30,
Valuation assumptions for performance-based options:	2014
Dividend yield	—	%
Expected volatility	59.51	%
Risk-free interest rate	1.60	%
Expected life of option (in years)	4.50
	Nine Months Ended   September 30,
Valuation assumptions for annual director options:	2014
Dividend yield	—	%
Expected volatility	61.70	%
Risk-free interest rate	1.17	%
Expected life of option (in years)	4.00

RSUs are valued using the fair market value of the Company’s stock on the date of grant and expense is recognized on a straight line basis taking into account an estimated forfeiture rate.

Stock Option and RSU Activity

The following table sets forth a summary of stock option activity for the nine months ended September 30, 2015:

	Options			Weighted-Average Exercise Price
Balances, beginning of year	1,350,799			$	32.95
Options granted	—			—
Options exercised	(131,834		)	18.70
Options cancelled, forfeited or expired	(35,977		)	47.61
Options outstanding	1,182,988			34.09
Option price range	$ 6.66 - 66.39
Weighted-average fair value of options granted	$	—
Options exercisable	883,432			$	30.06

The following table sets forth information regarding the Company’s stock options outstanding and exercisable as of September 30, 2015:

					Options Outstanding				Options Exercisable
Range of Exercise Prices					Number	Weighted- Average Remaining Contractual Life	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
$	6.66	—	$	18.90	51,225	0.66	$	13.17	51,225	$	13.17
19.66		—	19.66		218,130	0.46	19.66		218,130	19.66
19.77		—	22.92		3,400	1.64	21.76		2,150	21.09
24.50		—	24.50		224,379	2.48	24.50		154,379	24.50
25.00		—	30.92		63,250	2.55	27.06		49,500	26.72
32.33		—	32.33		182,250	1.49	32.33		176,625	32.33
32.53		—	37.76		60,500	2.14	33.36		48,000	33.31
39.97		—	39.97		137,905	3.56	39.97		62,471	39.97
48.12		—	66.21		87,000	4.14	50.30		81,750	49.33
66.39		—	66.39		154,949	4.44	66.39		39,202	66.39
Total shares/average price					1,182,988	2.36	$	34.09	883,432	$	30.06

The total intrinsic value of options exercised during the quarter ended ended September 30, 2015 was $3.2 million. The aggregate intrinsic value of options outstanding as of September 30, 2015 was $4.4 million and the aggregate intrinsic value of options currently exercisable as of September 30, 2015 was $4.0 million. The aggregate intrinsic value represents the total intrinsic value, based on the Company’s closing stock price per share of $29.71as of September 30, 2015, which would have been realized by the option holders had all option holders exercised their options as of that date. The total number of in-the-money optionsexercisable as of September 30, 2015represented approximately467,884shares with a weighted average exercise price of$21.12.

As of September 30, 2015, there was $5.2 million of total unrecognized compensation expense related to non-vested stock options. This expense is expected to be recognized over the weighted average remaining vesting period of 1.48 years.

The following table sets forth a summary of RSU activity for the nine months ended September 30, 2015:

	Awards		Weighted- Average Grant Date Price
Balances, beginning of year	592,364		$	50.24
RSUs granted	490,155		43.16
RSUs vested	(231,003	)	46.23
RSUs forfeited	(61,505	)	48.63
RSUs outstanding	790,011		47.14

As of September 30, 2015, there was $32.6 million of total unrecognized compensation expense related to non-vested RSUs. This expense is expected to be recognized over the weighted average remaining vesting period of 2.53 years.

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INCOME TAXES

9 Months Ended

Sep. 30, 2015

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

The Company’s effective tax rate, without the effect of discrete items, for the three and nine months ended September 30, 2015 was (12.7)% and (10.0)%, respectively, compared to 38.2% and 40.6%, respectively, for the same periods in 2014.  During the three months ended September 30, 2015, the Company recorded $101,000 of expense related to discrete items. During the nine months ended September 30, 2015, the Company recorded a net credit of $1.6 million related to discrete items, including a net credit of $1.9 million recorded during the first quarter of 2015 to correct an error in the Company's valuation reserve for deferred tax assets. The error is not considered material to the current or previously reported results. During the nine months ended September 30, 2014, the Company recorded a $150,000 credit related to a discrete item, and no discrete items were recorded during the three months ended September 30, 2014. With the effects of these discrete items, the Company’s effective tax rate was (13.9)% and (1.1)% for the three and nine months ended September 30, 2015, compared to 38.2% and 41.4% for the three and nine months ended September 30, 2014. The Company’s effective tax rate for the three and nine months ended September 30, 2015 was lower than the federal statutory tax rate of 35.0% primarily due to the allocation of book operating results between the U.S. and foreign entities and the impact of permanent tax differences on pre-tax operating results during the three and nine months ended September 30, 2015. In addition, we recorded a full U.S. valuation allowance in the fourth quarter of 2014 to reduce the carrying value of the Company's deferred tax assets and are no longer recognizing an income tax benefit for U.S. losses.

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ACQUISITIONS

9 Months Ended

Sep. 30, 2015

Business Combinations [Abstract]

ACQUISITIONS

ACQUISITIONS

OrgSpan Acquisition

On May 14, 2014, the Company entered into a stock purchase agreement and acquired OrgSpan, Inc. (“OrgSpan”), a privately held provider of cloud-based enterprise social communications solutions.  The Company purchased OrgSpan to leverage technology that provided efficient deployment of the Company’s PureCloud Platform. As previously disclosed, Donald E. Brown, the Company’s Chairman of the Board, President and Chief Executive Officer, was a founder and majority stockholder of OrgSpan.  The Company purchased OrgSpan for approximately $14.1 million, partially funded with cash on hand, which included the repayment of OrgSpan’s outstanding debt of approximately $8.0 million. OrgSpan’s outstanding debt consisted primarily of operating loans provided by Dr. Brown bearing interest at a rate of 4.25% per annum. Approximately $1.4 million in cash was paid to OrgSpan’s stockholders (other than Dr. Brown) and to holders of vested OrgSpan stock options. In exchange for his shares of OrgSpan stock, Dr. Brown has the right to receive an aggregate of 98,999 shares of the Company’s common stock (the “Restricted Shares”), representing approximately $4.7 million of the purchase price, which Restricted Shares vest and are to be issued by the Company upon the achievement of certain performance-based conditions tied to the launch and sales of the Company’s PureCloud Platform, which incorporates certain OrgSpan products and technology. The difference between the $15.6 million purchase price previously disclosed in the Form 8-K filed on May 14, 2014 and the $14.1 million noted above is a result of the difference in the value of the 98,999 Restricted Shares received by Dr. Brown for accounting purposes. The Company also retained 38 OrgSpan employees as part of the transaction.

With the first commercial release of its PureCloud Platform in June 2015, the Company met the first performance-based condition for the Restricted Shares set forth in the stock purchase agreement. As a result, the Company issued 32,999 of the Restricted Shares to Dr. Brown during July 2015, which shares were not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act. Any additional Restricted Shares issued to Dr. Brown will also be unregistered.

The acquisition was accounted for using the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations (“FASB ASC 805”). The results of OrgSpan’s operations were included in the Company’s condensed consolidated financial statements commencing on the acquisition date.

The purchase price allocations for the OrgSpan transaction were prepared by the Company’s management utilizing a third-party valuation report, which was prepared in accordance with the provisions of FASB ASC 805, and other tools available to the Company, including conversations with OrgSpan’s management and historical data from the Company’s other acquisitions. The following table summarizes the fair value of the intangible and other assets acquired and liabilities assumed at the date of the acquisition (in thousands):

	May 1, 2014
Cash and cash equivalents	$	61
Prepaid expenses	54
Property and equipment, net	144
Intangible assets, net	5,766
Goodwill	8,202
Total assets acquired	14,227
Accrued accounts payable	(5		)
Other current liabilities	(44		)
Other long-term liabilities	(128		)
Net assets acquired	$	14,050

Professional fees related to this acquisition and recognized as of September 30, 2015 totaled $613,000, and included transaction costs such as legal, accounting, and valuation services, which were expensed as incurred. These costs are included within general and administrative expenses on the condensed consolidated statements of operations for the periods incurred. All of these costs were incurred and recognized during 2014.

The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to OrgSpan’s existing trained workforce. The goodwill is expected to be deductible for tax purposes, as the Company made a Section 338(h)(10) election for this acquisition.

Intangible assets acquired resulting from this acquisition consisted of technology, which is amortized on a straight-line basis. The following sets forth the current net book value of technology acquired and its original economic useful life (dollars in thousands):

	As of September 30, 2015
	Gross Amount		Accumulated Amortization		Net Amount		Economic Useful Life (in years)
Technology	$	5,766	$	817	$	4,949	10

Pro Forma Results

The Company has not furnished pro forma financial information related to its acquisition of OrgSpan because such information is not material individually or in the aggregate to the overall financial results of the Company.

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STOCK-BASED COMPENSATION (Summary of Stock Option Activity) (Details)	9 Months Ended
	Sep. 30, 2015 $ / shares shares
Options
Options granted (shares) | shares	0
Stock Options
Options
Balances, beginning of year (shares) | shares	1,350,799
Options granted (shares) | shares	0
Exercise of stock options (shares) | shares	(131,834)
Options cancelled, forfeited or expired (shares) | shares	(35,977)
Options outstanding at end of year (shares) | shares	1,182,988
Option price range, lower limit (dollars per share)	$ 6.66
Option price range, upper limit (dollars per share)	$ 66.39
Options exercisable (shares) | shares	883,432
Weighted-Average Exercise Price
Weighted-Average Exercise Price, Balance, beginning of year (dollars per share)	$ 32.95
Weighted-Average Exercise Price, Options granted (dollars per share)	0.00
Weighted-Average Exercise Price, Options exercised (dollars per share)	18.70
Weighted-Average Exercise Price, Options cancelled, forfeited or expired (dollars per share)	47.61
Weighted-Average Exercise Price, Options outstanding (dollars per share)	34.09
Weighted-Average Exercise Price, Options exercisable (dollars per share)	$ 30.06

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INVESTMENTS (Tables)

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

Financial Assets Measured At Fair Value

The following table sets forth a summary of the Company’s financial assets, classified as cash and cash equivalents, short-term investments and long-term investments on its condensed consolidated balance sheets, measured at fair value as of September 30, 2015 and December 31, 2014 (in thousands):

	Fair Value Measurements at September 30, 2015 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash & cash equivalents:
Cash	$	80,585	$	80,585	$	—	$	—
Money market funds	12,459		12,459		—		—
Total	$	93,044	$	93,044	$	—	$	—
Short-term investments:
Agency bonds	$	32,029	$	—	$	32,029	$	—
Corporate notes	21,490		—		21,490		—
Total	$	53,519	$	—	$	53,519	$	—
Long-term investments:
Corporate notes	$	33,147	$	—	$	33,147	$	—
Total	$	33,147	$	—	$	33,147	$	—

	Fair Value Measurements at December 31, 2014 Using
Description	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash & cash equivalents:
Cash	$	34,452	$	34,452	$	—	$	—
Money market funds	1,716		1,716		—		—
Total	$	36,168	$	36,168	$	—	$	—
Short-term investments:
Corporate notes	$	19,241	$	—	$	19,241	$	—
Commercial paper	800		—		800		—
Total	$	20,041	$	—	$	20,041	$	—
Long-term investments:
U.S. government securities	$	1,000	$	1,000	$	—	$	—
Corporate notes	4,495		$	—	4,495		—
Total	$	5,495	$	1,000	$	4,495	$	—

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CONVERTIBLE NOTES (Tables)

9 Months Ended

Sep. 30, 2015

Debt Disclosure [Abstract]

Schedule of Debt Conversions

If converted, holders of the Notes will receive, at the Company's election, cash, shares of the Company's common stock, or a combination of cash and shares. The initial conversion terms are as follows:

	Initial Conversion Rate per $1,000 Principal Amount	Initial Conversion Price per Share
1.25% Convertible Senior Notes	16.3303	$	61.24

Convertible Debt

	Par Value Outstanding		Equity Component Recorded at Issuance			Liability Component of Par Value as of
(In thousands)						September 30, 2015		December 31, 2014
1.25% Convertible Senior Notes	$	150,000	$	31,756	(1)	$	116,466	$	—

___________ 

(1) This amount represents the equity component recorded at the initial issuance of the Notes.

Schedule of Long-term Debt Instruments

The Notes consisted of the following (in thousands):

	As of
	September 30, 2015			December 31, 2014
Liability component:
1.25% Convertible Senior Notes (1)	$	150,000		$	—
Less: convertible notes discount, net (2)	(29,937		)	—
Less: convertible notes issuance costs (2)	(3,597		)	—
Net carrying amount	$	116,466		$	—

___________ 

(1) The effective interest rate of the Notes is 6.25%. The interest rate is based on the interest rates of similar liabilities at the time of issuance that did not have an associated convertible feature.

(2) Included in the condensed consolidated balance sheet as of September 30, 2015 within convertible notes and is amortized over the term of the Notes using the effective interest rate method.

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ACQUISITIONS (Fair Value Of The Intangible And Other Assets Acquired And Liabilities Assumed) (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014	May. 01, 2014
Business Acquisition [Line Items]
Goodwill	$ 41,668	$ 43,732
OrgSpan, Inc.
Business Acquisition [Line Items]
Cash and cash equivalents			$ 61
Prepaid expenses			54
Property and equipment, net			144
Intangible assets, net			5,766
Goodwill			8,202
Total assets acquired			14,227
Accrued accounts payable			(5)
Other current liabilities			(44)
Other long-term liabilities			(128)
Net assets acquired			$ 14,050

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Condensed Consolidated Statements of Comprehensive Loss - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Statement of Comprehensive Income [Abstract]
Net loss	$ (9,752)	$ (2,143)	$ (18,295)	$ (11,504)
Other comprehensive loss:
Foreign currency translation adjustment	(2,215)	(2,641)	(5,024)	(1,985)
Net unrealized investment gain (loss) - net of tax	53	(95)	103	(121)
Comprehensive loss	$ (11,914)	$ (4,879)	$ (23,216)	$ (13,610)

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NET LOSS PER SHARE

9 Months Ended

Sep. 30, 2015

Earnings Per Share [Abstract]

NET LOSS PER SHARE

NET LOSSPER SHARE

Basic net loss per share is calculated based on the weighted-average number of common shares outstanding in accordance with FASB ASC Topic 260, Earnings per Share. Diluted net income per share is calculated based on the weighted-average number of common shares outstanding plus the effect of dilutive potential common shares. When the Company reports a net loss, the calculation of diluted net loss per share excludes potential common shares as the effect would be anti-dilutive. Potential common shares consist of shares of common stock issuable upon the exercise of stock options and vesting of restricted stock units (“RSUs”). The calculation of diluted net loss per share excludes shares underlying stock options outstanding that would be anti-dilutive. The following table sets forth the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Net loss, as reported (A)	$	(9,752	)	$	(2,143	)	$	(18,295	)	$	(11,504	)
Weighted average shares of common stock outstanding (B)	21,664			20,904			21,568			20,851
Dilutive effect of employee stock options and RSUs	—			—			—			—
Common stock and common stock equivalents (C)	21,664			20,904			21,568			20,851
Net loss per share:
Basic (A/B)	$	(0.45	)	$	(0.10	)	$	(0.85	)	$	(0.55	)
Diluted (A/C)	(0.45		)	(0.10		)	(0.85		)	(0.55		)

The Company’s calculation of diluted net loss per share for the three and nine months ended September 30, 2015 excludes RSUs and stock options to purchase approximately 404,000 and 368,000 shares of the Company’s common stock, respectively, compared to 1.2 million and 1.0 million shares during the same periods in 2014.

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SUMMARY OF CERTAIN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS (Details) - USD ($) $ in Millions	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Accounting Changes and Error Corrections [Abstract]
Capitalized costs related to development	$ 0.9	$ 5.1	$ 11.7	$ 9.6
Capitalized costs with development and implementation of business systems	$ 0.5	$ 0.5	$ 3.5	$ 1.9

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COMMITMENTS AND CONTINGENCIES (Narrative) (Details) ft² in Thousands	1 Months Ended	9 Months Ended
	May. 31, 2014 building	Sep. 30, 2015 ft² building country	May. 31, 2015
Operating Leased Assets [Line Items]
Amortization period		5 years
Warranty period		1 year
Size Of Building | ft²		425
Number Of Office Buildings		4
Number on countries in which there are leases | country		20
Capital leases term		3 years
Verint agreement, term		5 years
Convertible 1.25% Senior Notes | Convertible Debt
Operating Leased Assets [Line Items]
Interest rate			1.25%
International Locations
Operating Leased Assets [Line Items]
Lease term		5 years
Duke Realty Limited Partnership
Operating Leased Assets [Line Items]
Number Of Office Buildings	3
Duke Realty Limited Partnership | Expires March 2018
Operating Leased Assets [Line Items]
Number Of Office Buildings	1
Duke Realty Limited Partnership | Expires on or after June 2025
Operating Leased Assets [Line Items]
Number Of Office Buildings	2

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NET LOSS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2015

Earnings Per Share [Abstract]

Calculation Of Basic And Diluted Net Income Per Share

The following table sets forth the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended   September 30,						Nine Months Ended   September 30,
	2015			2014			2015			2014
Net loss, as reported (A)	$	(9,752	)	$	(2,143	)	$	(18,295	)	$	(11,504	)
Weighted average shares of common stock outstanding (B)	21,664			20,904			21,568			20,851
Dilutive effect of employee stock options and RSUs	—			—			—			—
Common stock and common stock equivalents (C)	21,664			20,904			21,568			20,851
Net loss per share:
Basic (A/B)	$	(0.45	)	$	(0.10	)	$	(0.85	)	$	(0.55	)
Diluted (A/C)	(0.45		)	(0.10		)	(0.85		)	(0.55		)