BROADSOFT, INC. - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________________________________

FORM 10-Q

________________________________________________________________________

(Mark One)



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

For the Quarterly Period Ended June 30, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34777

________________________________________________________________________

BroadSoft, Inc.

(Exact name of registrant as specified in its charter)

________________________________________________________________________



Delaware		52 2130962
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9737 Washingtonian Boulevard, Suite 350 Gaithersburg, MD		20878
(Address of principal executive offices)		(Zip Code)

(301) 977-9440

Registrant’s telephone number, including area code:

(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 x No o

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 x No o

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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, on July 31, 2014, was 28,678,701.

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BroadSoft, Inc.

Table of Contents



	Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013	4
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2014 and 2013	6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	7
Notes to Unaudited Condensed Consolidated Financial Statements	8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	18
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	38
ITEM 4. Controls and Procedures	39
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	41
ITEM 1A. Risk Factors	41
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
ITEM 3. Defaults Upon Senior Securities	41
ITEM 4. Mine Safety Disclosures	41
ITEM 5. Other Information	41
ITEM 6. Exhibits	42
SIGNATURES	43

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PART I. Financial Information


ITEM 1.	Financial Statements

BroadSoft, Inc.

Unaudited Condensed Consolidated Balance Sheets



	June 30, 2014			December 31, 2013
	(In thousands, except share and per share data)
Assets:
Current assets:
Cash and cash equivalents	$	70,607		$	69,866
Short-term investments	86,120			93,664
Accounts receivable, net of allowance for doubtful accounts of $132 and $128 at June 30, 2014 and December 31, 2013, respectively	59,461			66,595
Deferred tax assets, current	1,771			4,559
Other current assets	46,435			12,597
Total current assets	264,394			247,281
Long-term assets:
Property and equipment, net	15,589			10,110
Long-term investments	41,959			23,340
Restricted cash	20			581
Intangible assets, net	17,848			20,390
Goodwill	65,760			65,192
Deferred tax assets	1,049			16,482
Other long-term assets	12,349			8,121
Total long-term assets	154,574			144,216
Total assets	$	418,968		$	391,497
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable and accrued expenses	$	22,445		$	14,957
Deferred revenue, current	66,884			71,258
Total current liabilities	89,329			86,215
Convertible senior notes	94,246			91,549
Deferred revenue	13,908			6,404
Deferred tax liabilities	1,307			3,506
Other long-term liabilities	4,050			3,312
Total liabilities	202,840			190,986
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized at June 30, 2014 and December 31, 2013; no shares issued and outstanding at June 30, 2014 and December 31, 2013	—			—
Common stock, par value $0.01 per share; 100,000,000 shares authorized at June 30, 2014 and December 31, 2013; 28,672,306 and 28,305,143 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively	287			283
Additional paid-in capital	275,731			254,736
Accumulated other comprehensive loss	(1,120		)	(1,525		)
Accumulated deficit	(58,770		)	(52,983		)
Total stockholders’ equity	216,128			200,511
Total liabilities and stockholders’ equity	$	418,968		$	391,497

The accompanying notes are an integral part of these condensed consolidated financial statements.

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Operations



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands, except per share data)
Revenue:
License software	$	25,649		$	24,699		$	42,791		$	45,541
Subscription and maintenance support	21,958			16,306			43,084			31,491
Professional services and other	4,877			3,004			10,527			6,602
Total revenue	52,484			44,009			96,402			83,634
Cost of revenue:
License software	2,529			2,119			4,651			4,579
Subscription and maintenance support	8,606			4,780			16,052			9,393
Professional services and other	3,726			2,872			7,215			5,565
Total cost of revenue	14,861			9,771			27,918			19,537
Gross profit	37,623			34,238			68,484			64,097
Operating expenses:
Sales and marketing	17,146			15,536			35,002			29,265
Research and development	12,227			12,935			25,552			25,303
General and administrative	7,777			8,104			16,682			15,541
Total operating expenses	37,150			36,575			77,236			70,109
Income (loss) from operations	473			(2,337		)	(8,752		)	(6,012		)
Other expense:
Interest expense, net	1,796			1,700			3,568			3,375
Other, net	(206		)	(26		)	(169		)	56
Total other expense, net	1,590			1,674			3,399			3,431
Loss before income taxes	(1,117		)	(4,011		)	(12,151		)	(9,443		)
Benefit from income taxes	(2,782		)	(996		)	(6,364		)	(4,111		)
Net income (loss)	$	1,665		$	(3,015	)	$	(5,787	)	$	(5,332	)
Net income (loss) per common share:
Basic	$	0.06		$	(0.11	)	$	(0.20	)	$	(0.19	)
Diluted	$	0.06		$	(0.11	)	$	(0.20	)	$	(0.19	)
Weighted average common shares outstanding:
Basic	28,617			28,055			28,518			28,015
Diluted	29,725			28,055			28,518			28,015
Stock-based compensation expense included above:
Cost of revenue	$	851		$	1,269		$	2,042		$	2,266
Sales and marketing	2,565			3,799			5,979			6,557
Research and development	2,304			3,609			5,510			6,487
General and administrative	1,662			2,536			4,233			4,447

The accompanying notes are an integral part of these condensed consolidated financial statements.

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(In thousands)
Net income (loss)	$	1,665		$	(3,015	)	$	(5,787	)	$	(5,332	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	148			(5		)	428			(635		)
Unrealized loss on investments	(37		)	(102		)	(23		)	(105		)
Total other comprehensive income (loss), net of tax	111			(107		)	405			(740		)
Comprehensive income (loss)	$	1,776		$	(3,122	)	$	(5,382	)	$	(6,072	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except per share data)



	Total Stockholders’ Equity			Common Stock Par Value $0.01 Per Share			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit
	Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit
Balance December 31, 2013	$	200,511		28,305	$	283	$	254,736		$	(1,525	)	$	(52,983	)
Issuance of common stock for exercise of stock options and vesting of RSUs, net of effect of withholding tax	(5,094		)	367	4		(5,098		)	—			—
Stock-based compensation expense	17,169			—	—		17,169			—			—
Tax windfall benefits on exercises of stock options	8,924			—	—		8,924			—			—
Foreign currency translation adjustment	428			—	—		—			428			—
Unrealized loss on investments	(23		)	—	—		—			(23		)	—
Net loss	(5,787		)	—	—		—			—			(5,787		)
Balance June 30, 2014	$	216,128		28,672	$	287	$	275,731		$	(1,120	)	$	(58,770	)
Balance December 31, 2012	$	161,235		27,913	$	279	$	208,073		$	(3,008	)	$	(44,109	)
Issuance of common stock for exercise of stock options and vesting of RSUs, net of effect of early exercises and withholding tax	(1,113		)	193	2		(1,115		)	—			—
Stock-based compensation expense	19,757			—	—		19,757			—			—
Tax windfall benefits on exercises of stock options	7,949			—	—		7,949			—			—
Foreign currency translation adjustment	(635		)	—	—		—			(635		)	—
Unrealized loss on investments	(105		)	—	—		—			(105		)	—
Net loss	(5,332		)	—	—		—			—			(5,332		)
Balance June 30, 2013	$	181,756		28,106	$	281	$	234,664		$	(3,748	)	$	(49,441	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows



	Six Months Ended June 30,
	2014			2013
	(In thousands)
Cash flows from operating activities:
Net loss	$	(5,787	)	$	(5,332	)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	5,818			3,372
Amortization of software licenses	1,599			1,493
Stock-based compensation expense	17,764			19,757
Provision for doubtful accounts	(3		)	45
Provision for (benefit from) deferred income taxes	25,658			(3,479		)
Excess tax benefit related to share-based compensation	(9,636		)	(7,949		)
Non-cash interest expense on convertible senior notes	2,900			2,706
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	7,137			(399		)
Other current and long-term assets	(39,891		)	(454		)
Accounts payable, accrued expenses and other long-term liabilities	3,850			(1,182		)
Current and long-term deferred revenue	3,130			(183		)
Net cash provided by operating activities	12,539			8,395
Cash flows from investing activities:
Additions to property and equipment	(6,039		)	(1,861		)
Purchases of marketable securities	(52,659		)	(84,062		)
Proceeds from maturities of marketable securities	41,584			60,685
Change in restricted cash	561			—
Net cash used in investing activities	(16,553		)	(25,238		)
Cash flows from financing activities:
Proceeds from the exercise of stock options	232			431
Taxes paid on vesting of RSUs	(5,326		)	(1,546		)
Excess tax benefit related to share-based compensation	9,636			7,949
Net cash provided by financing activities	4,542			6,834
Effect of exchange rate changes on cash and cash equivalents	213			(345		)
Net increase (decrease) in cash and cash equivalents	741			(10,354		)
Cash and cash equivalents, beginning of period	69,866			90,545
Cash and cash equivalents, end of period	$	70,607		$	80,191

The accompanying notes are an integral part of these condensed consolidated financial statements.

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Nature of Business

BroadSoft, Inc. (“BroadSoft” or the “Company”), a Delaware corporation, was formed in 1998. The Company is the leading global provider of software and services that enable mobile, fixed-line and cable service providers to deliver hosted, or cloud-based, Unified Communications and other voice and multimedia services over their Internet protocol, or IP, based networks. The Company’s core communications platform consists of three offerings: BroadWorks, BroadCloud and BroadTouch.

2. Financial Statement Presentation

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts and results of operations of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.

Interim Financial Presentation

The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification for interim financial information and Article 10 of Regulation S-X issued by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the financial position, results of operations, comprehensive income, changes in stockholders’ equity and cash flows. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of results that may be expected for the year ending December 31, 2014 or any other period. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2013 filed with the SEC on February 28, 2014.

We have reclassified certain amounts that relate to the prior period to conform to the current period's presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates.

Recent Accounting Pronouncements

In May 2014, the FASB issued a new accounting standard related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The Company will adopt this standard effective January 1, 2017, as required. The standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is evaluating the impact of adopting this new standard on its financial statements.

3. Investments and Fair Value Disclosures

Investments in Marketable Securities

Marketable securities that the Company does not intend to hold to maturity are classified as available-for-sale, are carried at fair value and are included on the Company’s balance sheet as either short-term or long-term investments depending on their maturity. Investments with original maturities greater than three months that mature less than one year from the consolidated balance sheet date are classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments. Available-for-sale investments are marked-to-market at the end of each reporting period, with unrealized holding gains or losses, which represent temporary changes in the fair value of the investment, reflected in accumulated other comprehensive loss, a separate component of stockholders’ equity. The

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Company’s primary objective when investing excess cash is preservation of principal. The following table summarizes the Company’s investments:



	June 30, 2014
	Contracted Maturity	Carrying Value
		(in thousands)
Money market funds	demand	$	49,518
Total cash equivalents		$	49,518

U.S. agency notes	15 - 261 days	$	30,030
Commercial paper	95 - 158 days	7,990
Corporate bonds	8 - 253 days	48,100
Total short-term investments		$	86,120

U.S. agency notes	367 - 703 days	$	29,067
Corporate bonds	445 - 603 days	12,892
Total long-term investments		$	41,959

The following table summarizes the Company's investments at June 30, 2014 (in thousands):



	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. agency notes	$	59,098	$	14	$	(15	)	$	59,097
Commercial paper	7,990		—		—			7,990
Corporate bonds	60,990		25		(23		)	60,992
Total investments	$	128,078	$	39	$	(38	)	$	128,079

The following table summarizes the Company's investments at December 31, 2013 (in thousands):



	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. agency notes	$	50,533	$	18	$	(11	)	$	50,540
Commercial paper	4,999		—		—			4,999
Corporate bonds	61,448		41		(24		)	61,465
Total investments	$	116,980	$	59	$	(35	)	$	117,004

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Fair Value

The following table summarizes the carrying and fair value of the Company’s financial assets (in thousands):



	June 30, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Cash equivalents and certificates of deposit*	$	49,538	$	49,538	$	48,837	$	48,837
Short and long-term investments	128,079		128,079		117,004		117,004
Total assets	$	177,617	$	177,617	$	165,841	$	165,841

* Includes an immaterial amount of restricted cash as of June 30, 2014 and $0.6 million of restricted cash as of December 31, 2013 and excludes $21.1 million and $21.6 million of operating cash balances as of June 30, 2014 and December 31, 2013, respectively.

The carrying amounts of the Company’s other financial instruments, accounts receivable, accounts payable and accrued expenses, approximate their respective fair values due to their short-term nature. (See Note 6 Borrowings for additional information on the fair value of debt.)

The Company uses a three-tier fair value measurement hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The three tiers are defined as follows:


•	Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical instruments and include the Company’s investments in money market funds and certificates of deposit;


•	Level 2. Inputs valued using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable market data and include the Company’s investments and marketable securities in U.S. agency notes, commercial paper and corporate bonds; and


•	Level 3. Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Assets Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. This determination requires significant judgments to be made. There were no transfers between classification levels during the periods. The following tables summarize the values (in thousands):



	June 30, 2014		Level 1		Level 2		Level 3
Money market funds	$	49,518	$	49,518	$	—	$	—
Certificates of deposit	20		20		—		—
Total cash equivalents and certificates of deposit*	49,538		49,538		—		—
U.S. agency notes	59,097		—		59,097		—
Commercial paper	7,990		—		7,990		—
Corporate bonds	60,992		—		60,992		—
Total investments	128,079		—		128,079		—
Total cash equivalents, certificates of deposit and investments	$	177,617	$	49,538	$	128,079	$	—

	December 31, 2013		Level 1		Level 2		Level 3
Money market funds	$	48,256	$	48,256	$	—	$	—
Certificates of deposit	581		581		—		—
Total cash equivalents and certificates of deposit*	48,837		48,837		—		—
U.S. agency notes	50,540		—		50,540		—
Commercial paper	4,999		—		4,999		—
Corporate bonds	61,465		—		61,465		—
Total investments	117,004		—		117,004		—
Total cash equivalents, certificates of deposit and investments	$	165,841	$	48,837	$	117,004	$	—

Assets Measured at Fair Value on a Nonrecurring Basis

The Company measures certain assets, including property and equipment, goodwill and intangible assets, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the six months ended June 30, 2014 and 2013, there were no fair value measurements of assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition.

4. Deferred Revenue

Deferred revenue represents amounts billed to or collected from customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. The current portion of deferred revenue is expected to be recognized as revenue within 12 months from the balance sheet date. Deferred revenue consisted of the following (in thousands):

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	June 30, 2014		December 31, 2013
License software	$	22,365	$	20,149
Subscription and maintenance support	45,874		46,975
Professional services and other	12,553		10,538
Total	$	80,792	$	77,662

Current portion	$	66,884	$	71,258
Non-current portion	13,908		6,404
Total	$	80,792	$	77,662

5. Software Licenses

In 2011, the Company entered into an agreement that provides the Company the right to distribute certain third-party software on an unlimited basis through May 2016 at a total cost of $10.2 million. To the extent billed license revenue over the four-year period exceeds $460 million, the Company would be required to pay additional fees. The $10.2 million is being amortized to cost of revenue over the four-year period beginning in June 2012 (the date when the previous agreement with the same vendor to distribute the software expired), based on the straight line method.

Amortization expense related to this agreement was approximately $0.6 million for each of the three months ended June 30, 2014 and 2013 and $1.3 million for each of the six months ended June 30, 2014 and 2013.

6. Borrowings

Convertible Senior Notes

In June 2011, the Company issued $120.0 million aggregate principal amount of 1.50% convertible senior notes due in 2018 (the “Notes”). The Notes are senior unsecured obligations of the Company, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted.

The Notes may be converted by the holders of Notes at their option on any day prior to the close of business on the scheduled trading day immediately preceding April 1, 2018 only under the following circumstances: (a) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day of that measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such day; (b) during any calendar quarter (and only during such quarter) after the calendar quarter ended June 30, 2012, if the last reported sale price of the common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (c) upon the occurrence of specified corporate events; or (d) if the Company calls the Notes for redemption. The Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, April 1, 2018 through the second scheduled trading day immediately preceding the maturity date.

The initial conversion rate for the Notes is 23.8126 shares of the Company’s common stock per $1,000 principal amount of Notes, equivalent to a conversion price of approximately $41.99 per share of common stock. The conversion price will be subject to adjustment in some events, but will not be adjusted for accrued interest. In addition, if a make-whole fundamental change, as defined in the indenture governing the Notes (the “Indenture”), occurs prior to the maturity date, the Company will in some cases increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of the common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted. While the Notes were not convertible as of June 30, 2014, if the Notes were convertible, no shares would have been distributed upon conversion because the conversion price was above the stock price as of such date.

Holders of the Notes may require the Company to repurchase some or all of the Notes for cash, subject to certain exceptions, upon a fundamental change, as defined in the Indenture, at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest up to but excluding the relevant repurchase date.

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Company may not redeem the Notes prior to July 1, 2015. Beginning July 1, 2015, the Company may redeem for cash all or part of the Notes (except for the Notes that the Company is required to repurchase as described above) if the last reported sale price of the common stock exceeds 140% of the applicable conversion price for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day immediately prior to the date of the redemption notice. The redemption price will equal the sum of 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, plus a “make-whole premium” payment. The Company must make the make-whole premium payments on all Notes called for redemption prior to the maturity date, including Notes converted after the date the Company delivered the notice of redemption.

The Company has separately accounted for the liability and equity components of the convertible debt instrument by allocating the gross proceeds from the issuance of the Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. This interest rate, estimated at 8%, was used to compute the initial fair value of the liability component of $79.4 million. The excess of the gross proceeds received from the issuance of the Notes over the initial amount allocated to the liability component, of $40.6 million, was allocated to the embedded conversion option, or equity component. This excess is reported as a debt discount and subsequently amortized as interest expense, using the interest method, through July 2018, the maturity date of the Notes. Offering costs, consisting of the initial purchasers’ discount and offering expenses payable by the Company, were $4.3 million. These offering costs were allocated to the liability component and the equity component based on the relative valuations of such components. As a result, $2.9 million of the offering costs were classified as debt issuance costs and recorded on the balance sheet in other assets. The remaining $1.4 million of offering costs were allocated to the equity component.

The fair value of the Notes as of June 30, 2014 and December 31, 2013 was $121.7 million and $123.2 million, respectively. The carrying amount of the equity component of the Notes was $25.8 million at June 30, 2014. The unamortized offering costs classified as debt issuance costs at June 30, 2014 were $1.6 million which is being amortized as interest expense through the July 2018 maturity date of the Notes.

The following table shows the amounts recorded within the Company’s financial statements with respect to the Notes (in thousands):



	June 30, 2014			December 31, 2013
Convertible debt principal	$	120,000		$	120,000
Unamortized debt discount	(25,754		)	(28,451		)
Net carrying amount of convertible debt	$	94,246		$	91,549

The following table presents the interest expense recognized related to the Notes (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Contractual interest expense	$	450	$	450	$	900	$	900
Amortization of debt issuance costs	101		102		203		203
Accretion of debt discount	1,366		1,265		2,697		2,503
Net interest expense	$	1,917	$	1,817	$	3,800	$	3,606

Fair value for the Company’s borrowings is estimated using quoted market prices of the Notes at June 30, 2014, quoted market prices for similar instruments and by observable market data. The Company believes its creditworthiness and the financial market in which it operates has not materially changed since entering into the arrangements. If measured at fair value in the financial statements, long-term debt (including the current portion) would be classified as Level 2 in the fair value hierarchy.

The aggregate maturities of borrowings as of June 30, 2014 were as follows (in thousands):



2014 - 2017	$	—
2018 and thereafter	120,000
	$	120,000

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Installment Loans

In connection with the acquisition of Movial Applications Oy in October 2011, the Company assumed five installment loans with Tekes, the Finnish Funding Agency for Technology and Innovation, which loans were repaid in full by the Company during the three months ended September 30, 2013.

7. Stock-based Compensation

Equity Incentive Plans

In 1999, the Company adopted the 1999 Stock Incentive Plan (the “1999 Plan”). The 1999 Plan provided for the grant of incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights. The 1999 Plan terminated in June 2009 whereby no new options or awards are permitted to be granted. In April 2009, the Company adopted the 2009 Equity Incentive Plan. This plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units (“RSUs”) and stock appreciation rights. In June 2010, in connection with the Company’s initial public offering (“IPO”), the 2009 Equity Incentive Plan was amended and restated to provide for, among other things, annual increases in the share reserve (as amended and restated, the “2009 Plan”).

The term of stock-based grants is up to ten years, except that certain stock-based grants during fiscal years 2006 through 2009 have a term of five years. The requisite vesting period for grants made under the 2009 Plan is typically four years. On each of January 1, 2013 and 2014, 1,250,000 shares were added to the 2009 Plan. At June 30, 2014, the Company had 1,497,267 shares of common stock available for issuance under the 2009 Plan.

Stock-based compensation expense recognized by the Company was as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Stock options	$	1,882	$	2,033	$	3,878	$	4,443
Restricted stock units	4,764		7,730		11,881		13,172
Performance stock units	736		1,450		2,005		2,142
Total recognized stock-based compensation expense	$	7,382	$	11,213	$	17,764	$	19,757

Stock Options

The following table presents summary information related to stock options:



	Number of Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
						(in thousands)
Balance, December 31, 2013	1,746,069		$	28.09
Granted	113,400		26.31
Exercised	(28,965	)	8.22
Canceled, expired or forfeited	(45,843	)	34.77
Balance, June 30, 2014	1,784,661		$	28.13	7.70	$9,053

Vested at June 30, 2014	850,627		$	22.06	6.61	$8,594

Exercisable at June 30, 2014	850,627		$	22.06	6.61	$8,594

During the six months ended June 30, 2014 and 2013, the Company granted stock options with a weighted-average grant date fair value of $14.18 and $19.48, respectively. For the six months ended June 30, 2014 and 2013, the intrinsic value of stock options exercised was $0.6 million and $2.8 million, respectively, and cash received from stock options exercised was $0.2 million and $0.4 million, respectively.

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

At June 30, 2014, unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options was $6.8 million, which is scheduled to be recognized over a weighted average period of 1.26 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at June 30, 2014, stock-based compensation expense will be different from expectations.

Restricted Stock Units

The following table presents a summary of activity for RSUs (excluding RSUs that are subject to performance-based vesting conditions (“PSUs”)):



	Number of RSUs		Weighted Average Grant Date Fair Value
Balance, December 31, 2013	1,791,833		$	33.16
Granted	17,568		26.74
Vested	(519,223	)	32.64
Forfeited	(26,462	)	31.90
Balance, June 30, 2014	1,263,716		$	33.31

The RSUs generally vest over three or four years from the vesting commencement date and on vesting the holder receives one share of common stock for each RSU.

At June 30, 2014, unrecognized stock-based compensation expense related to unvested RSUs was $14.6 million, which is scheduled to be recognized over a weighted average period of 1.27 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at June 30, 2014, stock-based compensation expense will be different from expectations.

Performance Stock Units

The following table presents a summary of activity for PSUs:



	Number of PSUs	Weighted Average Grant Date Fair Value
Balance, December 31, 2013	382,500	$	28.72
Granted	—	—
Vested	—	—
Forfeited	—	—
Balance, June 30, 2014	382,500	$	28.72

During the three months ended March 31, 2013, the Company granted 382,500 PSUs to certain officers, which vest over four years, subject to the satisfaction of performance conditions based upon the trading price of the Company's common stock. To date, the trading price of the Company's common stock has not met any of the thresholds necessary to satisfy any of the performance conditions of these awards.

At June 30, 2014, unrecognized stock-based compensation expense related to unvested PSUs was $2.6 million, which is scheduled to be recognized over a weighted average period of 1.38 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at June 30, 2014, stock-based compensation expense will be different from expectations.

Tax Benefits

Upon adoption of the FASB’s guidance on stock-based compensation, the Company elected the alternative transition method (short cut method) provided for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows related to the tax effect of employee stock-based compensation awards that are

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

outstanding upon adoption. As of June 30, 2014, the balance of the Company’s APIC pool related to tax windfall benefits from stock option exercises was $16.2 million.

The Company applies a with-and-without approach in determining its intra-period allocation of tax expense or benefit attributable to stock-based compensation deductions. Tax deductions in excess of previously recorded benefits (windfalls) included in net operating loss carryforwards but not reflected in deferred tax assets were $38.5 million and $63.6 million at June 30, 2014 and December 31, 2013, respectively.

8. Commitments and Contingencies

In the normal course of business, the Company enters into contracts and agreements that may contain representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made in the future, but have not yet been made. The Company has not paid any material claims related to indemnification obligations to date.

In accordance with its bylaws and certain agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date under these indemnification obligations.

In addition, the Company is involved in litigation incidental to the conduct of its business. The Company is not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible to have a material adverse effect on its financial position, results of operations or cash flows.

9. Taxes

The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate for each of its legal entities in accordance with the accounting guidance for income taxes. Where the Company has entities with losses and does not expect to realize the tax benefits in the foreseeable future, those entities are excluded from the effective tax calculation. Non-recurring and discrete items that impact tax expense are recorded in the period incurred.

The effective tax rate was 52.4% and 43.5% for the six months ended June 30, 2014 and 2013, respectively. The provision for income taxes differs from the computed U.S. statutory rate due primarily to the discrete release of the valuation allowance related to certain foreign operations, partially offset by a discrete expense related to the restructuring of our UK operations. The Company had a benefit from income taxes of $2.8 million and $1.0 million for the three months ended June 30, 2014 and 2013, respectively, and $6.4 million and $4.1 million for the six months ended June 30, 2014 and 2013, respectively.

The Company has not recorded a deferred tax liability for undistributed earnings of $4.5 million of certain foreign subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed, the Company would be subject to federal income and foreign withholding taxes. Determination of an unrecognized deferred income tax liability with respect to such earnings is not practicable.

As a result of the Company instituting certain tax planning actions, the Company evaluated its position and determined that there was no longer a need for a valuation allowance related to a foreign jurisdiction. Accordingly, the Company recorded a discrete tax benefit of $1.7 million for the three and six months ended June 30, 2014 related to the estimated deferred tax asset expected to be remaining at December 31, 2014.

10. Income per share data

Basic income per common share is computed based on the weighted average number of outstanding shares of common stock. Diluted income per common share adjusts the basic weighted average common shares outstanding for the potential dilution that could occur if stock options, RSUs and convertible securities were exercised or converted into common stock.

The following table presents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation. In the table below, net income (loss) represents the numerator and weighted average common shares outstanding represent the denominator:

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014			2013
	(In thousands, except per share data)
Net income (loss)	$	1,665	$	(3,015	)	$	(5,787	)	$	(5,332	)
Weighted average basic common shares outstanding	28,617		28,055			28,518			28,015
Dilutive effect of stock-based awards	1,108		N/A			N/A			N/A
Weighted average diluted common shares outstanding	29,725		28,055			28,518			28,015
Net income (loss) per share:
Basic	$	0.06	$	(0.11	)	$	(0.20	)	$	(0.19	)
Diluted	$	0.06	$	(0.11	)	$	(0.20	)	$	(0.19	)

N/A - Not applicable because the effect was anti-dilutive given the Company's losses during the period.

Due to the cash settlement feature of the principal amount of the Notes, we only include the impact of the premium feature in the diluted earnings per common share calculation when the average stock price exceeds the conversion price of the Notes, which did not occur for the three and six months ended June 30, 2014 and 2013.

The weighted average number of shares outstanding used in the computation of diluted loss per share does not include the effect of stock-based awards convertible into 687,324 shares for the three months ended June 30, 2013 and into 1,284,598 and 707,106 shares for the six months ended June 30, 2014 and 2013, respectively, as the effect would have been anti-dilutive given the Company’s losses for these periods.

The weighted average number of shares outstanding used in the computation of diluted loss per share also does not include the effect of certain additional stock-based awards convertible into 1,333,772 and 885,513 shares for the three months ended June 30, 2014 and 2013, respectively, and into 1,298,513 and 852,236 shares for the six months ended June 30, 2014 and 2013, respectively, as their effect would have been anti-dilutive because their exercise prices exceeded the average market price of the Company's common stock during these periods.

11. Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its chief executive officer (the “CEO”). The CEO reviews financial information presented on a consolidated basis, along with information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. Discrete information on a geographic basis, except for revenue, is not provided below the consolidated level to the CEO. The Company has concluded that it operates in one segment and has provided the required enterprise-wide disclosures.

Revenue by geographic area is based on the location of the end-user carrier. The following tables present revenue and long-lived assets, net, by geographic area (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Revenue:
United States	$	25,064	$	26,920	$	44,068	$	49,976
EMEA	12,159		8,552		25,426		18,656
APAC	11,518		5,533		20,508		10,319
Other	3,743		3,004		6,400		4,683
Total Revenue	$	52,484	$	44,009	$	96,402	$	83,634

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



	June 30, 2014		December 31, 2013
Long-Lived Assets, net
United States	$	24,496	$	17,179
EMEA	2,592		763
APAC	380		381
Other	490		488
Total Long-Lived Assets, net	$	27,958	$	18,811

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ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission, or SEC, on February 28, 2014.

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or other similar expressions. Forward-looking statements in this Quarterly Report on Form 10-Q may include statements about:


•	our dependence on the success of BroadWorks;


•	any potential loss of or reductions in orders from certain significant customers;


•	our dependence on our service provider customers to sell services using our applications;


•	claims that we infringe intellectual property rights of others;


•	our ability to protect our intellectual property;


•	competitive factors, including, but not limited to, industry consolidation, entry of new competitors into our market, and new product and marketing initiatives by our competitors;


•	our ability to predict our revenue, operating results and gross margin accurately;


•	the length and unpredictability of our sales cycles;


•	our ability to expand our product offerings;


•	our international operations;


•	our significant reliance on distribution partners in international markets;


•	our ability to sell our products in certain markets;


•	our ability to manage our growth, including our increased headcount;


•	the attraction and retention of qualified employees and key personnel;


•	the interoperability of our products with service provider networks;


•	our ability to realize the benefits of our recent acquisitions and the successful integration of the personnel, technologies, and customers from such acquisitions;


•	the quality of our products and services, including any undetected errors or bugs in our software; and


•	our ability to maintain proper and effective internal controls.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including those factors we discuss in the “Risk Factors” sections of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and in our other filings with the SEC. You should read these factors and the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. These risks are not exhaustive. Although we believe the expectations reflected in the forward-looking statements are based on reasonable assumptions, we can give no assurance we will attain these expectations or that any deviations will not be material. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.

Overview

We are the leading global provider of software and services that enable mobile, fixed-line and cable service providers to deliver hosted, or cloud-based, Unified Communications, or UC, and other voice and multimedia services over their Internet protocol, or IP, based networks. We enable carriers to offer these UC services across their broadband and wireless networks to a broad range of smartphones, tablets, laptops and other end-user devices. We believe we are well positioned to enable service providers to capitalize on their IP-based network investments by efficiently and cost-effectively offering a broad suite of services to their end-users. Our service provider customers include 19 of the top 25 telecommunications service providers globally, as measured by revenue in the year ended December 31, 2012. Our core communications platform consists of three offerings:

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BroadWorks

Our BroadWorks software enables our service provider customers to provide enterprises and consumers with a range of hosted communications offerings, such as hosted UC (also referred to as hosted IP Centrex or hosted PBX), including voice and video calling, voice and video mail, call center and audio conferencing, collaboration and messaging, as well as 4G or LTE and SIP Trunking offerings. BroadWorks performs a critical network function by serving as the software element that delivers and coordinates call control, voice, video and messaging communications through a service provider’s IP-based network. BroadSoft recently introduced its BroadSoft Collaborate offerings that enable the delivery of UC services such as instant messaging and presence, or IM&P, and desktop sharing as additional BroadWorks software elements. We have significantly expanded the video calling and video conferencing capabilities of our offerings.

BroadWorks, which we generally license on a perpetual license basis to service providers, is installed on industry-standard servers, typically located in service providers’ data centers. BroadWorks interoperates with service providers’ core networks, accesses other networks for interworking with end-users’ communications devices and connects to service providers’ support and billing systems. Since our inception, most of our revenue has come from license and maintenance and support fees for BroadWorks software.

BroadCloud

BroadCloud services are offerings hosted and managed by us, and resold by service providers under their brand. The key objectives of providing these services from our own BroadCloud service delivery network include expediting our service provider customers’ time to market and enabling our service provider customers to access our BroadWorks and UC capabilities on a software as a service, or SaaS, basis.

Our BroadCloud PBX service enables our service provider customers to provide BroadWorks-based hosted PBX offerings, accessed through our BroadCloud service delivery network, to their enterprise customers. We also provide certain UC offerings such as web collaboration and IM&P on a cloud basis. Additionally, we offer our BroadCloud PBX and web collaboration services directly to enterprises. Typically, we are paid a monthly recurring fee for providing BroadCloud services. We believe there is a growing acceptance by service providers of cloud-type service offerings and that our BroadCloud offerings enable us to expand our revenue opportunities with our customers.

BroadTouch

BroadTouch client communications applications allow service providers to put the power of voice, video and our other UC services in the hands of the end-user across a broad array of smartphone, tablet, laptop and other end-user devices.

With our UC-One offering, a set of bundled UC services that combines the power of BroadWorks, BroadTouch and BroadCloud enabled Unified Communications into a seamless and consistent end-user experience, service providers can offer their customers the ability to communicate using one familiar user interface from any of the user’s devices, simplifying access to a fully integrated UC experience including voice, video, messaging, conferencing and collaboration. Our UC-One offerings are optimized for a range of broadband, WiFi and 3G, 4G and mobile networks.

Company

We were incorporated in Delaware in 1998 and we began selling BroadWorks in 2001. We sell our products to service providers both directly and indirectly through distribution partners, such as telecommunications equipment vendors, value-added resellers, or VARs, and other distributors.

Industry

We believe telecommunications service providers are replacing their legacy circuit switched networks as they migrate to IP-based networks and are making these transitions for several reasons, including a desire to offer enhanced UC services in addition to traditional voice services. These service providers are facing significant challenges to their traditional business models, including declining revenues in their legacy businesses, rapidly evolving customer communications demands and the need to generate returns on their increasing investments in IP-based networks. Historically, service providers derived much of their revenue from providing reliable voice and high-speed data access. However, these legacy services have been increasingly commoditized as technological and regulatory changes have brought increased competition and lower prices. At the same time, enterprises and consumers have started to seek new and enhanced cloud-based communications services, which can provide service providers with opportunities to counter falling legacy revenues and increase subscriber growth. Service providers are using both their existing IP-based networks and third-party cloud-based platforms to deliver these services to their customers.

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We believe that, as service providers look to rapidly introduce new UC services through their own networks, they need products like those provided by us that are capable of coordinating delivery of a large and rapidly increasing number of applications, operating across heterogeneous network elements and devices, ensuring high levels of reliability and quality and efficiently scaling as more subscribers are added.

Our Strategy

Our goal is to strengthen our position as the leading global provider of IP communications application servers by enabling service providers to increase revenue opportunities by delivering feature-rich services to their enterprise and consumer subscribers. Key elements of our strategy include:


•	Extend our technology leadership and product depth and breadth. We intend to continue to provide an industry-leading solution through our focus on product innovation and substantial investment in research and development for new features, applications and services.


•	Expand our BroadCloud PBX and UC offerings. We intend to accelerate UC adoption and our service provider customers’ time to market by promoting and expanding our BroadCloud PBX and UC offerings. BroadCloud enables our service providers to offer BroadWorks features and functions through a service offering hosted and/or managed by us.


•	Provide UC-One bundled offerings. We intend to continue to provide prepackaged integrated elements of BroadWorks, BroadCloud and BroadTouch with the goal of better enabling new and existing customers to drive adoption of their hosted UC offerings.


•	Drive revenue growth by:


▪	Assisting our current service provider customers to sell more of their currently-deployed BroadWorks, BroadCloud and BroadTouch offerings. We support our service provider customers by regularly offering enhanced and new features to their current applications, as well as providing tools and training to help them market their services to subscribers.

▪

Selling new applications and features to our current service provider customers. Although our initial engagement with a service provider may be for a single initiative or business unit, once a service provider deploys services using our core applications communications platform, we believe we are well-positioned to sell additional applications and features to that service provider, as software (BroadWorks and BroadTouch) and/or through our BroadCloud services delivery platform. These BroadSoft service offerings can be tied together with service provider-branded BroadTouch mobile smartphone, tablet, and personal computer clients.

▪

Continuing to acquire new customers. Our customers are located around the world and include 19 of the top 25 telecommunications service providers globally. We believe we are well positioned to grow by adding customers in regions where we already have a strong presence, by expanding our geographic footprint and by penetrating more deeply into some types of service provider customers, such as additional cable and mobile service providers.


▪	Pursuing selected acquisitions and collaborations that complement our strategy. We intend to continue to pursue acquisitions and collaborations where we believe they are strategic to strengthen our industry leadership position, expand our geographic presence or allow us to offer new or complementary products or services.

Executive Summary

Our management team monitors and analyzes a number of key industry trends and performance indicators to manage our business and evaluate our financial and operating performance.

During 2014, we believe the trend towards cloud-based and hosted communications by service providers and others will continue as service providers further seek speed and flexibility for the delivery of communications services. Our goal is to provide our service provider customers with the service and software offerings they need to effectively address this market opportunity and their end-user customer needs. As a result, during the remainder of 2014, we will continue our strategic investments in research and development of existing and new products, including client software, mobility and cloud-based services, as well as in headcount to support our product offerings and increase our go-to-market efforts.

BroadCloud PBX, our cloud-based PBX offering, is a particularly key area of investment focus for us. We believe that many of our service provider customers are interested in accessing the capabilities of our BroadWorks features and functions through a

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service offering hosted and managed by us, reducing cost and increasing speed and ease of use for end-users. During the remainder of 2014, we expect that we will continue to invest in, and expand the availability of, BroadCloud PBX in the United States, United Kingdom and Germany. We believe that delivering innovative solutions to our existing customer base to meet their growing cloud-based needs will help service providers get to market more quickly and drive our revenue growth.

We believe converged and mobile operators desire UC solutions to deliver to their enterprise customer base to grow enterprise revenue, reduce churn and raise average revenue per user. Our UC-One functionality, which is either delivered via a cloud-based platform managed by us or via server software that resides within the service provider’s network, seeks to address this evolution and allows service providers and operators to rapidly and efficiently deliver a UC experience regardless of end-user device and whether or not the end-user has fixed line or wireless access.

Recognizing the importance of mobile applications and the growing desire by end-users for seamless communications wherever they are, across a wide range of devices, we have architected mobility into our solutions and products and have made integrating with existing mobile networks simple and a core competency of our platform. We have optimized our client, cloud and software solutions to enable mobility in all of our services, across a wide range of personal and/or business devices.

During the remainder of 2014, we expect our UC and SIP Trunking solutions to continue to experience strong growth, while our consumer fixed line broadband applications are expected to see a decline in sales. We believe our UC solutions growth is largely driven by increased market acceptance of hosted Unified Communications offerings and our SIP Trunking offerings growth from the move by service provider customers to IP-based trunks.

We also believe that the migration of wireless networks to voice over LTE, or VoLTE, could drive significant growth for us over the next several years and that we are well-positioned to meet carrier demand for VoLTE-based UC and consumer solutions, especially with regard to our UC offerings for VoLTE. While we announced several VoLTE customer wins in late 2013 and early 2014 and expect to execute additional agreements during 2014 to support VoLTE offerings by our service provider customers, we think the revenue impact for these opportunities in 2014 will be modest.

Key Financial Highlights

Some of our key GAAP financial highlights for the quarter ended June 30, 2014 include:


•	Total revenue increased by $8.5 million or 19%, to $52.5 million, compared to $44.0 million for the quarter ended June 30, 2013;


•	Gross profit was $37.6 million, or 72% of revenue, compared to $34.2 million, or 78% of revenue, for the quarter ended June 30, 2013;


•	Income from operations was $0.5 million, compared to loss from operations of $2.3 million for the quarter ended June 30, 2013;


•	Net income was $1.7 million, compared to net loss of $3.0 million for the quarter ended June 30, 2013;


•	Net income per diluted share was $0.06 per common share compared to net loss per diluted share of $0.11 per common share for the quarter ended June 30, 2013;


•	Revenue plus net change in deferred revenue increased by 30% to $59.2 million, compared to $45.4 million for the quarter ended June 30, 2013;


•	Deferred revenue increased by $6.7 million, compared to $1.4 million for the quarter ended June 30, 2013; and


•	Cash provided by operating activities was $5.7 million, compared to $3.5 million for the quarter ended June 30, 2013.

Some of our key non-GAAP financial highlights for the quarter ended June 30, 2014 include:


•	Non-GAAP gross profit increased to $39.9 million, or 76% of revenue, compared to $36.3 million, or 82% of revenue, for the quarter ended June 30, 2013;


•	Non-GAAP operating income decreased to $9.2 million, or 18% of revenue, compared to $9.7 million, or 22% of revenue, for the quarter ended June 30, 2013;


•	Non-GAAP net income decreased to $8.9 million, or 17% of revenue, compared to $9.2 million, or 21% of revenue, for the quarter ended June 30, 2013; and


•	Non-GAAP net income per diluted share decreased to $0.31 per common share, compared to $0.32 per common share for the quarter ended June 30, 2013.

For a discussion of these non-GAAP financial measures and a reconciliation of GAAP and non-GAAP financial results, please refer to “Non-GAAP Financial Measures” included elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Components of Operating Results

Revenue

We derive our revenue primarily from the sale of license software, subscription and maintenance support and professional services and other. We recognize revenue when all revenue recognition criteria have been met in accordance with revenue recognition guidance. This guidance provides that revenue should be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

Our total revenue consists of the following:

License software. We derive license software revenue from the sale of perpetual software licenses. We generally price our software based on the types of features and applications provided and on the number of subscriber licenses sold. These factors impact the average selling price of our licenses and the comparability of average selling prices. Our license software revenue may vary significantly from quarter to quarter or from year to year as a result of long sales and deployment cycles, variations in customer ordering practices and the application of management’s judgment in applying complex revenue recognition rules. Our deferred license software revenue balance consists of software orders that do not meet all the criteria for revenue recognition. We are unable to predict the proportion of orders that will meet all the criteria for revenue recognition relative to those orders that will not meet all such criteria and, as a result, we cannot forecast whether recognized license software revenue and deferred license software revenue will continue to increase or decrease in a given period. As of June 30, 2014, our deferred license software revenue balance was $22.4 million, the current portion of which was $16.8 million.

Subscription and maintenance support. Subscription and maintenance support revenue includes recurring revenue from annual maintenance support contracts for our software licenses and from subscriptions related to our delivery of BroadCloud services.

Our annual maintenance support contracts provide for software updates, upgrades and technical support. Our typical warranty on licensed software is 90 days and, during this period, our customers are entitled to receive maintenance and support without the purchase of a maintenance contract. After the expiration of the warranty period, our customers must purchase an annual maintenance contract to continue receiving ongoing software maintenance and customer support.

Under our BroadCloud subscriptions, we are paid a recurring fee typically calculated based on the number of seats and type of services purchased or a usage fee based on the actual number of transactions. The recurring fee is typically billed monthly or annually in advance based on the terms of the arrangement and the usage fee is billed one month in arrears.

Our deferred subscription and maintenance support revenue balance consists of maintenance support and subscription orders that do not meet all the criteria for revenue recognition. As of June 30, 2014, our deferred subscription and maintenance support revenue balance was $45.9 million, the current portion of which was $39.2 million.

Professional services and other. Professional services and other revenue primarily includes revenue from professional service engagements consisting of implementation, training and consulting services. Our professional services and other deferred revenue balance consists of orders that do not meet all the criteria for revenue recognition. As of June 30, 2014, our deferred professional services and other revenue balance was $12.6 million, the current portion of which was $10.9 million.

Cost of Revenue

Our total cost of revenue consists of the following:

•

Cost of license software revenue. A majority of the cost of license software revenue consists of amortization of acquired technology, personnel-related expenses and royalties paid to third parties whose technology or products are sold as part of BroadWorks. A significant amount of the royalty fees are for the underlying embedded data base technology within BroadWorks for which we currently incur a fixed expense per quarter. Personnel-related expenses include salaries, benefits, bonuses, reimbursement of expenses and stock-based compensation. Such costs are expensed in the period in which they are incurred.

•

Cost of subscription and maintenance support revenue. Cost of subscription and maintenance support revenue consists primarily of personnel-related expenses and other direct costs associated with the support and maintenance of our software licenses and BroadCloud services, including maintenance and support expenses due to our use of third party software, amortization of acquired technology and operating and depreciation expenses associated with the delivery of BroadCloud services.

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•	Cost of professional services and other revenue. Cost of professional services and other revenue consists primarily of personnel-related expenses and other direct costs associated with the delivery of our professional services.

Gross Profit

Gross profit is the calculation of total revenue minus cost of revenue. Our gross profit as a percentage of revenue, or gross margin, has been and will continue to be affected by a variety of factors, including:


•	Mix of license software, subscription and maintenance support and professional services and other revenue. We generate higher gross margins on license software revenue compared to subscription and maintenance support or professional services and other revenue.

•

Growth or decline of license software revenue. A significant portion of cost of license software revenue is fixed and is expensed in the period in which it is incurred. This cost consists primarily of royalty fees to our embedded database provider and amortization of acquired technology. If license software revenue increases, these fixed fees will decline as a percentage of revenue. If license software revenue declines, these fixed fees will increase as a percentage of revenue.

•

Impact of deferred revenue. If any revenue recognition criteria have not been met, the applicable revenue derived from the arrangement is deferred, including license software, subscription and maintenance support, and professional services and other revenue, until all elements of revenue recognition criteria have been met. However, the cost of revenue, including the costs of license software, subscription and maintenance support and professional services and other, is typically expensed in the period in which it is incurred. Therefore, if relatively more revenue is deferred in a particular period, gross margin would decline in that period. Because the ability to recognize revenue on orders depends largely on the terms of the sale arrangement, and because we are not able to predict the proportion of orders that will not meet all the criteria for revenue recognition, we cannot forecast whether any historical trends in gross margin will continue.

•

Intangible amortization related to mergers and acquisitions. Over the last several years, we acquired a number of businesses which resulted in the recognition of intangible assets. These intangible assets are amortized over their useful lives, resulting in additional expense impacting gross profit over the applicable period. We may undertake additional strategic transactions in the future that would result in additional intangible amortization expense.

Revenue Plus Net Change in Deferred Revenue

We believe revenue we recognize in a particular period plus the net change in our deferred revenue balance is a key measure of our sales activity for that period.

Revenue plus the net change in deferred revenue is as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Beginning of period deferred revenue balance	$	74,078	$	59,580	$	77,662	$	61,149
End of period deferred revenue balance	80,792		60,966		80,792		60,966
Increase (decrease) in deferred revenue	6,714		1,386		3,130		(183		)
Revenue	52,484		44,009		96,402		83,634
Revenue plus net change in deferred revenue	$	59,198	$	45,395	$	99,532	$	83,451

Operating Expenses

Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and other personnel costs are the most significant component of each of these expense categories. We grew our total headcount to 786 employees at June 30, 2014 from 725 employees at December 31, 2013, and we expect to continue hiring new employees to support our anticipated growth.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and personnel costs for our sales and marketing employees, including stock-based compensation, commissions and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead. We expect our sales and marketing expenses to increase in the

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foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities. In the first six months of 2014, sales and marketing expenses increased as a percentage of revenue compared with the same period in 2013, but we expect that for the remainder of 2014, sales and marketing expenses, as a percentage of total revenue, will be below such percentage in the corresponding period of 2013.

Research and development expenses. Research and development expenses consist primarily of salaries and personnel costs for development employees, including stock-based compensation and bonuses. Additional expenses include costs related to development, quality assurance and testing of new software and enhancement of existing software, consulting, travel and other related overhead. We engage third-party international and domestic consulting firms for various research and development efforts, such as software development, documentation, quality assurance and software support. We intend to continue to invest in our research and development efforts, including by hiring additional development personnel and by using outside consulting firms for various research and development efforts. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position. We expect research and development expenses to increase in the foreseeable future. In the first six months of 2014, research and development expenses decreased as a percentage of revenue compared with the same period in 2013, and we expect that for the remainder of 2014, research and development expenses, as a percentage of total revenue, will continue to be below such percentage in the corresponding period of 2013.

General and administrative expenses. General and administrative expenses consist primarily of salary and personnel costs for administration, finance and accounting, legal, information systems and human resources employees, including stock-based compensation and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other corporate expenses. We expect general and administrative expenses to increase in the foreseeable future. In the first six months of 2014, general and administrative expenses decreased as a percentage of revenue compared with the same period in 2013, and we expect that for the remainder of 2014, general and administrative expenses, as a percentage of total revenue, will be below such percentage in the corresponding period of 2013.

Stock-Based Compensation

We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant of stock options and other equity awards to our directors, employees and consultants. We apply the fair value method in accordance with authoritative guidance for determining the cost of stock-based compensation. The total cost of the grant is measured based on the estimated fair value of the award at the date of grant. The fair value is then recognized as stock-based compensation expense on a graded basis over the requisite service period, which is the vesting period, of the award. For the three months ended June 30, 2014 and 2013, we recorded stock-based compensation expense of $7.4 million and $11.2 million, respectively.

Historically, stock-based compensation has been the fastest growing component of our employee-related expenses. For the three and six months ended June 30, 2014, stock-based compensation expense decreased compared to the same period in 2013, due to the vesting of a tranche of the RSU's granted during the first quarter of 2013. We expect the stock-based compensation to decrease in relation to the comparable period in prior year for the remainder of 2014.

Based on stock options and other equity awards outstanding as of June 30, 2014, we expect to recognize future expense related to the non-vested portions of such options and other equity awards in the amount of $24.0 million over a weighted average period of approximately 1.28 years.

Other Expense (Income), Net

Other expense (income), net consists primarily of interest income and interest expense. Interest income represents interest received on our cash and cash equivalents and restricted cash. Interest expense consists primarily of the interest related to our 1.50% convertible senior notes due in 2018, or the Notes, and interest related to five installment loans with Tekes that were paid in full in September 2013.

Income Tax Expense

Income tax expense consists of U.S. federal, state and foreign income taxes. We are required to pay income taxes in certain states and foreign jurisdictions. Historically, we have not been required to pay U.S. federal income taxes due to our accumulated net operating losses. For the quarter ended June 30, 2014, we have net operating loss carryforwards to utilize in the U.S.

Recent Accounting Pronouncements

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Results of Operations

Comparison of the Three Months Ended June 30, 2014 and 2013

Revenue



	Three Months Ended June 30,								Period-to-Period Change
	2014				2013				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Revenue by Type:
License software	$	25,649	49	%	$	24,699	56	%	$	950		4	%
Subscription and maintenance support	21,958		42		16,306		37		5,652			35
Professional services and other	4,877		9		3,004		7		1,873			62
Total revenue	$	52,484	100	%	$	44,009	100	%	$	8,475		19	%

Revenue by Geography:
Americas	$	28,807	55	%	$	29,924	68	%	$	(1,117	)	(4	)%
EMEA	12,159		23		8,552		19		3,607			42
APAC	11,518		22		5,533		13		5,985			108
Total revenue	$	52,484	100	%	$	44,009	100	%	$	8,475		19	%

Total revenue for the three months ended June 30, 2014 increased by 19%, or $8.5 million, to $52.5 million as compared to the same period in 2013. This growth was driven by a 35% increase in subscription and maintenance support revenue, a 62% increase in professional services and other revenue and a 4% increase in license software revenue. Deferred revenue increased by $6.7 million for the three months ended June 30, 2014, compared to an increase of $1.4 million for the same period in 2013.

Americas revenue for the three months ended June 30, 2014 decreased by 4%, or $1.1 million, to $28.8 million as compared to the same period in 2013. The decrease in Americas revenue for the three months ended June 30, 2014 was primarily due to a decrease in consumer applications software license revenue, partially offset by growth in hosted UC software license sales, subscription and maintenance support and professional services and other revenues.

Europe, Middle East and Africa, or EMEA, revenue for the three months ended June 30, 2014 increased 42%, or $3.6 million, to $12.2 million as compared to the same period in 2013. The increase in EMEA revenue for the three months ended June 30, 2014 was primarily due to an increase in license software, subscription and maintenance support related to our BroadCloud offering and professional services and other revenues. We had strong license software sales for the three months ended June 30, 2014, including a large order that did not meet the criteria for revenue recognition and as a result, the associated revenue was deferred, with revenue recognition anticipated in 2016.

Asia Pacific, or APAC, revenue for the three months ended June 30, 2014 increased by 108%, or $6.0 million, to $11.5 million compared to the same period in 2013. The increase in APAC revenue for the three months ended June 30, 2014 was primarily due to the recognition of $4.3 million of revenue related to a multi-year project for an APAC service provider customer, including revenue from license software, subscription and maintenance support and professional services and other.

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License Software

License software revenue for the three months ended June 30, 2014 increased by 4%, or $1.0 million, to $25.6 million, compared to the same period in 2013. The increase in license software revenue for the three months ended June 30, 2014 reflects an increase in software license revenue in APAC and EMEA, partially offset by a decrease in license software revenue in the Americas. Deferred license software revenue increased by $3.6 million for the three months ended June 30, 2014, compared to an increase of $1.7 million for the same period in 2013.

Subscription and Maintenance Support

Subscription and maintenance support revenue for the three months ended June 30, 2014 increased by 35%, or $5.7 million, to $22.0 million, compared to the same period in 2013. The increase in subscription and maintenance support revenue for the three months ended June 30, 2014 was the result of growth in our subscription revenue associated with our BroadCloud platforms, which included contributions from recent acquisitions and growth in our installed base of customers who purchased maintenance support. Deferred subscription and maintenance support revenue decreased by $1.1 million for the three months ended June 30, 2014, compared to a decrease of $0.9 million for the same period in 2013.

Professional Services and Other

Professional services and other revenue for the three months ended June 30, 2014 increased by 62%, or $1.9 million, to $4.9 million, compared to the same period in 2013. The increase in professional services and other revenue for the three months ended June 30, 2014 was due to the timing of revenue recognition, including revenue related to a multi-year project for an APAC service provider customer that had been deferred in prior quarters. Deferred professional services and other revenue increased by $4.2 million for the three months ended June 30, 2014, compared to an increase of $0.7 million for the same period in 2013.

Cost of Revenue and Gross Profit



	Three Months Ended June 30,								Period-to-Period Change
	2014				2013				Period-to-Period Change
	Amount		Percent of Related Revenue		Amount		Percent of Related Revenue		Amount		Percentage
	(dollars in thousands)
Cost of Revenue:
License software	$	2,529	10	%	$	2,119	9	%	$	410	19	%
Subscription and maintenance support	8,606		39		4,780		29		3,826		80
Professional services and other	3,726		76		2,872		96		854		30
Total cost of revenue	$	14,861	28	%	$	9,771	22	%	$	5,090	52	%
Gross Profit:
License software	$	23,120	90	%	$	22,580	91	%	$	540	2	%
Subscription and maintenance support	13,352		61		11,526		71		1,826		16
Professional services and other	1,151		24		132		4		1,019		772
Total gross profit	$	37,623	72	%	$	34,238	78	%	$	3,385	10	%

For the three months ended June 30, 2014, our gross margin decreased to 72% of revenue as compared to 78% for the same period in 2013, and our gross profit increased by 10%, or $3.4 million, to $37.6 million. The total gross profit increase was primarily due to growth in revenue relative to cost of revenue.

For the three months ended June 30, 2014, license software gross margin decreased to 90% as compared to 91% for the same period in 2013 and license software gross profit increased by 2% to $23.1 million. License software cost of revenue increased by 19%, or $0.4 million, to $2.5 million for the three months ended June 30, 2014, compared to the same period in 2013. The increase was primarily due to a $0.4 million increase in software expense. The increase in license software gross profit was driven by higher revenue growth relative to growth in license software cost of revenue.

For the three months ended June 30, 2014, subscription and maintenance support gross margin decreased to 61% as compared to 71% for the same period in 2013 and subscription and maintenance support gross profit increased by 16% to $13.4 million.

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Subscription and maintenance support cost of revenue increased by 80%, or $3.8 million, to $8.6 million for the three months ended June 30, 2014, compared to the same period in 2013. The increase in subscription and maintenance services cost of revenue was related to our continued investment in our product offerings, primarily our BroadCloud offerings in EMEA. The increase was due to a $1.4 million increase in personnel-related costs, a $1.3 million increase in operational costs associated with hosting the BroadCloud services and a $0.6 million increase in amortization of acquired intangibles. The increase in subscription and maintenance support gross profit was driven by revenue growth relative to lower growth in subscription and maintenance services cost of revenue.

For the three months ended June 30, 2014, professional services and other gross margin increased to 24% as compared to 4% for the same period in 2013 and professional services and other gross profit increased by 772% to $1.2 million. Professional services and other cost of revenue increased by 30%, or $0.9 million to $3.7 million for the three months ended June 30, 2014, compared to the same period in 2013. The increase in professional services and other cost of revenue was primarily due to a $0.4 million increase in hardware cost and a $0.3 million increase in consulting expense. The increase in professional services and other gross profit was driven by revenue growth relative to lower growth in professional services and other cost of revenue.

Operating Expenses



	Three Months Ended June 30,								Period-to-Period Change
	2014				2013				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Sales and marketing	$	17,146	33	%	$	15,536	35	%	$	1,610		10	%
Research and development	12,227		23		12,935		29		(708		)	(5	)
General and administrative	7,777		15		8,104		19		(327		)	(4	)
Total operating expenses	$	37,150	71	%	$	36,575	83	%	$	575		2	%

Sales and Marketing. Sales and marketing expense increased by 10%, or $1.6 million, to $17.1 million for the three months ended June 30, 2014, compared to the same period in 2013. The increase was due to a $0.4 million increase in personnel-related costs, a $0.5 million increase in travel expenses and a $0.4 million increase in consulting expenses.

Research and Development. Research and development expense decreased by 5%, or $0.7 million, to $12.2 million for the three months ended June 30, 2014, compared to the same period in 2013. This decrease was primarily due to a $1.1 million decrease in personnel-related costs.

General and Administrative. General and administrative expense decreased by 4%, or $0.3 million, to $7.8 million for the three months ended June 30, 2014, compared to the same period in 2013. This decrease was primarily due to a $0.5 million decrease in personnel-related costs.

Income (Loss) from Operations

We had income from operations of $0.5 million for the three months ended June 30, 2014, as compared to a loss from operations of $2.3 million for the same period in 2013.

Other Expense



	Three Months Ended June 30,										Period-to-Period Change
	2014					2013					Period-to-Period Change
	Amount			Percent of Total Revenue		Amount			Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Interest expense, net	$	1,796		3	%	$	1,700		4	%	$	96		6	%
Other, net	(206		)	*		(26		)	*		(180		)	692	%
Total other expense, net	$	1,590		3	%	$	1,674		4	%	$	(84	)	(5	)%



*	Less than 1%

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Other expense, net for the three months ended June 30, 2014 decreased by $0.1 million compared to the same period in 2013.

Benefit From Income Taxes

Benefit from income tax was $2.8 million for the three months ended June 30, 2014, compared to $1.0 million for the same period in 2013. Changes in our taxes are due primarily to the release of a valuation allowance, change in the mix of earnings by jurisdiction and the true-up of certain tax returns and of certain research and development credits.

Comparison of the Six Months Ended June 30, 2014 and 2013

Revenue



	Six Months Ended June 30,								Period-to-Period Change
	2014				2013				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Revenue by Type:
License software	$	42,791	44	%	$	45,541	54	%	$	(2,750	)	(6	)%
Subscription and maintenance support	43,084		45		31,491		38		11,593			37
Professional services and other	10,527		11		6,602		8		3,925			59
Total revenue	$	96,402	100	%	$	83,634	100	%	$	12,768		15	%

Revenue by Geography:
Americas	$	50,468	52	%	$	54,659	65	%	$	(4,191	)	(8	)%
EMEA	25,426		26		18,656		22		6,770			36
APAC	20,508		21		10,319		13		10,189			99
Total revenue	$	96,402	100	%	$	83,634	100	%	$	12,768		15	%

Total revenue for the six months ended June 30, 2014 increased by 15% or $12.8 million to $96.4 million as compared to the same period in 2013. This growth was driven by a 37% increase in subscription and maintenance support revenue and a 59% increase in professional services and other revenue, partially offset by a 6% decrease in license software revenue. Deferred revenue increased by $3.1 million for the six months ended June 30, 2014, compared to a decrease of $0.2 million for the same period in 2013.

Americas revenue for the six months ended June 30, 2014 decreased by 8%, or $4.2 million, to $50.5 million as compared to the same period in 2013. The decrease in Americas revenue for the six months ended June 30, 2014 was primarily due to a decrease in license software revenue due to a decrease in consumer applications software license sales. The decrease in license software revenue was partially offset by growth in subscription and maintenance support revenues.

EMEA revenue for the six months ended June 30, 2014 increased 36%, or $6.8 million, to $25.4 million as compared to the same period in 2013. The increase in EMEA revenue for the six months ended June 30, 2014 was primarily due to an increase in subscription and maintenance support revenues and professional services and other revenues. The increase was partially offset by a decrease in license software revenue due to the deferral of a large order that did not meet the criteria for revenue recognition, with revenue recognition anticipated in 2016.

APAC revenue for the six months ended June 30, 2014 increased by 99%, or $10.2 million, to $20.5 million compared to the same period in 2013. The increase in APAC revenue for the six months ended June 30, 2014 was primarily due to the recognition of $9.4 million of revenue related to a multi-year project for an APAC service provider customer, including revenue from license software, subscription and maintenance support and professional services and other.

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License Software

License software revenue for the six months ended June 30, 2014 decreased by 6%, or $2.8 million, to $42.8 million, compared to the same period in 2013. The decrease in license software revenue for the six months ended June 30, 2014 reflects a decrease in software license revenue in the Americas and EMEA, partially offset by an increase in license software revenue in APAC. Deferred license software revenue increased by $2.2 million for the six months ended June 30, 2014, compared to a decrease of $1.1 million for the same period in 2013.

Subscription and Maintenance Support

Subscription and maintenance support revenue for the six months ended June 30, 2014 increased by 37%, or $11.6 million, to $43.1 million, compared to the same period in 2013. The increase in subscription and maintenance support revenue for the six months ended June 30, 2014 was the result of growth in our subscription revenue associated with our BroadCloud platforms, which included contributions from recent acquisitions and growth in our installed base of customers who purchased maintenance support. Deferred subscription and maintenance support revenue decreased by $1.1 million for the six months ended June 30, 2014, compared to an increase of $0.5 million for the same period in 2013.

Professional Services and Other

Professional services and other revenue for the six months ended June 30, 2014 increased by 59%, or $3.9 million, to $10.5 million, compared to the same period in 2013. The increase in professional services and other revenue for the six months ended June 30, 2014 was due to the timing of revenue recognition, including revenue related to a multi-year project for an APAC service provider customer that had been deferred in prior periods. Deferred professional services and other revenue increased by $2.0 million for the six months ended June 30, 2014, compared to an increase of $0.4 million for the same period in 2013.

Cost of Revenue and Gross Profit



	Six Months Ended June 30,								Period-to-Period Change
	2014				2013				Period-to-Period Change
	Amount		Percent of Related Revenue		Amount		Percent of Related Revenue		Amount			Percentage
	(dollars in thousands)
Cost of Revenue:
License software	$	4,651	11	%	$	4,579	10	%	$	72		2	%
Subscription and maintenance support	16,052		37		9,393		30		6,659			71
Professional services and other	7,215		69		5,565		84		1,650			30
Total cost of revenue	$	27,918	29	%	$	19,537	23	%	$	8,381		43	%
Gross Profit:
License software	$	38,140	89	%	$	40,962	90	%	$	(2,822	)	(7	)%
Subscription and maintenance support	27,032		63		22,098		70		4,934			22
Professional services and other	3,312		31		1,037		16		2,275			219
Total gross profit	$	68,484	71	%	$	64,097	77	%	$	4,387		7	%

For the six months ended June 30, 2014, our gross margin decreased to 71% of revenue as compared to 77% for the same period in 2013, and our gross profit increased by 7%, or $4.4 million, to $68.5 million. The total gross profit increase was primarily due to growth in revenue relative to cost of revenue.

For the six months ended June 30, 2014, license software gross margin decreased to 89% as compared to 90% for the same period in 2013 and license software gross profit decreased by 7% to $38.1 million. License software cost of revenue remained approximately unchanged for the six months ended June 30, 2014, compared to the same period in 2013. The decrease in license software gross profit was driven by the decline in license software revenue.

For the six months ended June 30, 2014, subscription and maintenance support gross margin decreased to 63% as compared to 70% for the same period in 2013 and subscription and maintenance support gross profit increased by 22% to $27.0 million. Subscription and maintenance support cost of revenue increased by 71%, or $6.7 million, to $16.1 million for the six months ended June 30, 2014, compared to the same period in 2013. The increase in subscription and maintenance services cost of

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revenue was related to our continued investment in our product offerings, primarily our BroadCloud offerings in EMEA. The increase was due to a $2.7 million increase in personnel-related costs, a $2.1 million increase in operational costs associated with hosting the BroadCloud services and a $1.2 million increase in amortization of acquired intangibles. The increase in subscription and maintenance support gross profit was driven by revenue growth relative to lower growth in subscription and maintenance services cost of revenue.

For the six months ended June 30, 2014, professional services and other gross margin increased to 31% as compared to 16% for the same period in 2013 and professional services and other gross profit increased by 219% to $3.3 million. Professional services and other cost of revenue increased by 30%, or $1.7 million to $7.2 million for the six months ended June 30, 2014, compared to the same period in 2013. The increase in professional services and other cost of revenue was primarily due to a $1.0 million increase in hardware cost delivered under an order related to a multi-year project for an APAC service provider customer and a $0.3 million increase in outside consulting costs. The increase in professional services and other gross profit was driven by revenue growth relative to lower growth in professional services and other cost of revenue.

Operating Expenses



	Six Months Ended June 30,								Period-to-Period Change
	2014				2013				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount		Percentage
	(dollars in thousands)
Sales and marketing	$	35,002	36	%	$	29,265	35	%	$	5,737	20	%
Research and development	25,552		27		25,303		30		249		1
General and administrative	16,682		17		15,541		19		1,141		7
Total operating expenses	$	77,236	80	%	$	70,109	84	%	$	7,127	10	%

Sales and Marketing. Sales and marketing expense increased by 20%, or $5.7 million to $35.0 million for the six months ended June 30, 2014, compared to the same period in 2013. The increase was due to a $3.2 million increase in personnel-related costs, a $1.0 million increase in travel expenses and a $0.7 million increase in consulting expenses.

Research and Development. Research and development expense increased by 1%, or $0.2 million, to $25.6 million for the six months ended June 30, 2014, compared to the same period in 2013. This increase was primarily due to a $0.3 million increase in equipment and software expenses.

General and Administrative. General and administrative expense increased by 7%, or $1.1 million, to $16.7 million for the six months ended June 30, 2014, compared to the same period in 2013. This increase was primarily due to a $0.7 million increase in personnel-related costs.

Loss from Operations

We had a loss from operations of $8.8 million for the six months ended June 30, 2014, as compared to $6.0 million for the same period in 2013.

Other Expense



	Six Months Ended June 30,									Period-to-Period Change
	2014					2013				Period-to-Period Change
	Amount			Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Interest expense, net	$	3,568		4	%	$	3,375	4	%	$	193		6	%
Other, net	(169		)	*		56		*		(225		)	(402	)%
Total other expense, net	$	3,399		4	%	$	3,431	4	%	$	(32	)	(1	)%



*	Less than 1%

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Other expense, net for the six months ended June 30, 2014 remained approximately unchanged compared to the same period in 2013.

Benefit From Income Taxes

Benefit from income tax was $6.4 million for the six months ended June 30, 2014, compared to $4.1 million for the same period in 2013. Changes in our taxes are due primarily to the release of a valuation allowance, change in the mix of earnings by jurisdiction and the true-up of certain tax returns and of certain research and development credits.

Liquidity and Capital Resources

Resources

Since the beginning of 2009, we have funded our operations principally with cash provided by operating activities, which has resulted primarily from growth in net income and deferred revenue.

Cash and Cash Equivalents, Accounts Receivable and Working Capital

The following tables present a summary of our cash and cash equivalents, accounts receivable, working capital and cash flows for the periods indicated (in thousands).



	June 30, 2014		December 31, 2013
Cash and cash equivalents	$	70,607	$	69,866
Accounts receivable, net	59,461		66,595
Working capital	175,065		161,066



	Six Months Ended June 30,
	2014			2013
Cash provided by (used in):
Operating activities	$	12,539		$	8,395
Investing activities	(16,553		)	(25,238		)
Financing activities	4,542			6,834

Our cash and cash equivalents at June 30, 2014 were held for working capital and other general corporate purposes and were invested primarily in demand deposit accounts or money market funds. We do not enter into investments for trading or speculative purposes. Restricted cash, which was immaterial at June 30, 2014, is not included in cash and cash equivalents.

Operating Activities

For the six months ended June 30, 2014, net cash provided by operating activities was $12.5 million, compared to $8.4 million for the same period in 2013. The increase was primarily due to a $28.2 million increase from the aggregate changes in non-cash items, offset by a $23.6 million decrease from the net change in other current and long-term assets and liabilities and by an increase in net loss of $0.5 million. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, tax windfall benefits from stock option exercises, non-cash interest on convertible debt and amortization of software licenses.

Investing Activities

Our investing activities have consisted primarily of net investment in marketable securities, business acquisitions and capital expenditures for property and equipment. For the six months ended June 30, 2014, net cash used in investing activities was $16.6 million, compared to $25.2 million for the same period in 2013. This decrease was attributable to a $12.3 million decrease in net purchases of marketable securities, partially offset by a $4.2 million increase in capital expenditures for property and equipment, compared to the same period in 2013.

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Financing Activities

For the six months ended June 30, 2014, net cash provided by financing activities was $4.5 million, compared to $6.8 million for the same period in 2013. Net cash provided by financing activities primarily consisted of the tax windfall benefits from stock options exercised of $9.6 million, partially offset by taxes paid on the vesting of restricted stock units of $5.3 million.

Borrowings and Credit Facilities

Convertible Senior Notes

In June 2011, we issued $120.0 million aggregate principal amount of the Notes, with net proceeds of approximately $116 million. The Notes are our senior unsecured obligations, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted.

The initial conversion rate for the Notes is approximately $41.99 per share. The conversion price is subject to adjustment in some events, but will not be adjusted for accrued interest. Upon conversion, we will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted. See Note 6, Borrowings, contained elsewhere in this Quarterly Report on Form 10-Q for additional details about the Notes.

Tekes

In connection with our acquisition of Movial Applications Oy in October 2011, we assumed five installment loans with Tekes, the Finnish Funding Agency for Technology and Innovation, which we repaid in September 2013.

Operating and Capital Expenditure Requirements

We believe that the cash generated from operations, our current cash, cash equivalents and short-term and long-term investment balances and interest income we earn on these balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to grow as we increase headcount, expand our business activities, grow our customer base and implement and enhance our information technology and enterprise resource planning system. As sales grow, we expect our accounts receivable balance to increase. Any such increase in accounts receivable may not be completely offset by increases in accounts payable and accrued expenses, which would likely result in greater working capital requirements.

If our available cash resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or convertible debt securities or enter into a credit facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.

Contractual Obligations

We have contractual obligations for non-cancelable office space, notes payable and other short-term and long-term liabilities. The following table discloses aggregate information about our contractual obligations as of June 30, 2014 and periods in which payments are due (in thousands):



	Payments Due by Year
	Total		Remainder of 2014		2015 - 2016		2017 - 2018		After 2018
Convertible Senior Notes, including interest *	$	127,200	$	900	$	3,600	$	122,700	$	—
Operating lease obligations	17,616		1,682		6,071		5,262		4,601
Total	$	144,816	$	2,582	$	9,671	$	127,962	$	4,601



*	Contractual interest obligations related to the Notes totaled $7.2 million at June 30, 2014, including $0.9 million, $3.6 million and $2.7 million due in the remainder of 2014 and years 2015-2016 and 2017-2018, respectively.

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As of June 30, 2014, we had unrecognized tax benefits of $4.7 million. We do not expect to recognize any of these benefits in 2014. Furthermore, we are not able to provide a reliable estimate of the timing of future payments relating to these unrecognized benefits.

Non-GAAP Financial Measures

In addition to our GAAP operating results, we use certain non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of certain non-cash expenses, such as stock-based compensation expense, amortization of acquired intangibles expense, non-cash interest expense on our convertible notes and non-cash tax benefit or expense included in our tax provision, so management and investors can compare our core business operating results over multiple periods. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for revenue recognized in accordance with U.S. GAAP. In addition, other companies, including companies in our industry, may calculate such measures differently, which reduces its usefulness as a comparative measure. We believe that these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude certain expenses.

The presentation of non-GAAP net income, non-GAAP net income per share, non-GAAP gross profit, non-GAAP operating income and other non-GAAP financial measures in this Quarterly Report on Form 10-Q is not meant to be a substitute for “net income,” “net income per share,” “gross profit,” “income from operations” or other financial measures presented in accordance with GAAP, but rather should be evaluated in conjunction with such data. Our definition of “non-GAAP net income,” “non-GAAP net income per share,” “non-GAAP gross profit,” “non-GAAP operating income” and other non-GAAP financial measures may differ from similarly titled non-GAAP measures used by other companies and may differ from period to period. In reporting non-GAAP measures in the future, we may make other adjustments for expenses and gains we do not consider reflective of core operating performance in a particular period and may modify “non-GAAP net income,” “non-GAAP net income per share,” “non-GAAP gross profit,” “non-GAAP operating income” and such other non-GAAP measures by excluding these expenses and gains.

Non-GAAP gross profit, license software gross profit, subscription and maintenance support gross profit and professional services and other gross profit. We define non-GAAP gross profit as gross profit plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP gross profit to be a useful metric for management and our investors because it excludes the effect of certain non-cash expenses so management and investors can compare our sales margins over multiple periods.

Non-GAAP operating income. We define non-GAAP operating income as income from operations plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP operating income to be a useful metric for management and investors because it excludes the effect of certain non-cash expenses so management and investors can compare our core business operating results over multiple periods.

Non-GAAP operating expenses, sales and marketing expense, research and development expense and general and administrative expense. We define non-GAAP operating expenses as operating expense plus stock-based compensation expense allocated to sales and marketing, research and development and general and administrative expenses. Similarly, we define non-GAAP sales and marketing, research and development and general and administrative expenses as the relevant GAAP measure plus stock-based compensation expense allocated to the particular expense item.

Non-GAAP net income and net income per share. We define non-GAAP net income as net income plus stock-based compensation expense, amortization expense for acquired intangible assets, non-cash interest expense on our Notes, and non-cash tax expense included in the GAAP tax provision. We define non-GAAP income per share as non-GAAP net income divided by the weighted average shares outstanding.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands)
Non-GAAP cost of revenue:
GAAP license cost of revenue	$	2,529		$	2,119		$	4,651		$	4,579
(percent of related revenue)	10		%	9		%	11		%	10		%
Less:
Stock-based compensation expense	157			321			414			554
Amortization of acquired intangible assets	226			210			452			422
Non-GAAP license cost of revenue	$	2,146		$	1,588		$	3,785		$	3,603
(percent of related revenue)	8		%	6		%	9		%	8		%


GAAP subscription and maintenance support cost of revenue	$	8,606		$	4,780		$	16,052		$	9,393
(percent of related revenue)	39		%	29		%	37		%	30		%
Less:
Stock-based compensation expense	521			653			1,210			1,197
Amortization of acquired intangible assets	1,164			587			2,348			1,175
Non-GAAP subscription and maintenance support cost of revenue	$	6,921		$	3,540		$	12,494		$	7,021
(percent of related revenue)	32		%	22		%	29		%	22		%


GAAP professional services and other cost of revenue	$	3,726		$	2,872		$	7,215		$	5,565
(percent of related revenue)	76		%	96		%	69		%	84		%
Less:
Stock-based compensation expense	173			295			418			515
Non-GAAP professional services and other cost of revenue	$	3,553		$	2,577		$	6,797		$	5,050
(percent of related revenue)	73		%	86		%	65		%	76		%

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	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands)
Non-GAAP gross profit:
GAAP gross profit	$	37,623		$	34,238		$	68,484		$	64,097
(percent of total revenue)	72		%	78		%	71		%	77		%
Plus:
Stock-based compensation expense	851			1,269			2,042			2,266
Amortization of acquired intangible assets	1,390			798			2,800			1,596
Non-GAAP gross profit	$	39,864		$	36,305		$	73,326		$	67,959
(percent of total revenue)	76		%	82		%	76		%	81		%


GAAP license gross profit	$	23,120		$	22,580		$	38,140		$	40,962
(percent of related revenue)	90		%	91		%	89		%	90		%
Plus:
Stock-based compensation expense	157			321			414			554
Amortization of acquired intangible assets	226			210			452			422
Non-GAAP license gross profit	$	23,503		$	23,111		$	39,006		$	41,938
(percent of related revenue)	92		%	94		%	91		%	92		%


GAAP subscription and maintenance support gross profit	$	13,352		$	11,526		$	27,032		$	22,098
(percent of related revenue)	61		%	71		%	63		%	70		%
Plus:
Stock-based compensation expense	521			653			1,210			1,197
Amortization of acquired intangible assets	1,164			588			2,348			1,175
Non-GAAP subscription and maintenance support gross profit	$	15,037		$	12,767		$	30,590		$	24,470
(percent of related revenue)	68		%	78		%	71		%	78		%


GAAP professional services and other gross profit	$	1,151		$	132		$	3,312		$	1,037
(percent of related revenue)	24		%	4		%	31		%	16		%
Plus:
Stock-based compensation expense	173			295			418			515
Non-GAAP professional services and other gross profit	$	1,324		$	427		$	3,730		$	1,552
(percent of related revenue)	27		%	14		%	35		%	24		%

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	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands)
Non-GAAP income from operations:
GAAP income (loss) from operations	$	473		$	(2,337	)	$	(8,752	)	$	(6,012	)
(percent of total revenue)	1		%	(5		)%	(9		)%	(7		)%
Plus:
Stock-based compensation expense	7,382			11,213			17,764			19,757
Amortization of acquired intangible assets	1,390			798			2,800			1,596
Non-GAAP income from operations	$	9,245		$	9,674		$	11,812		$	15,341
(percent of total revenue)	18		%	22		%	12		%	18		%


GAAP operating expense	$	37,150		$	36,575		$	77,236		$	70,109
(percent of total revenue)	71		%	83		%	80		%	84		%
Less:
Stock-based compensation expense	6,531			9,944			15,722			17,491
Non-GAAP operating expense	$	30,619		$	26,631		$	61,514		$	52,618
(percent of total revenue)	58		%	61		%	64		%	63		%


GAAP sales and marketing expense	$	17,146		$	15,536		$	35,002		$	29,265
(percent of total revenue)	33		%	35		%	36		%	35		%
Less:
Stock-based compensation expense	2,565			3,799			5,979			6,557
Non-GAAP sales and marketing expense	$	14,581		$	11,737		$	29,023		$	22,708
(percent of total revenue)	28		%	27		%	30		%	27		%


GAAP research and development expense	$	12,227		$	12,935		$	25,552		$	25,303
(percent of total revenue)	23		%	29		%	27		%	30		%
Less:
Stock-based compensation expense	2,304			3,609			5,510			6,487
Non-GAAP research and development expense	$	9,923		$	9,326		$	20,042		$	18,816
(percent of total revenue)	19		%	21		%	21		%	22		%


GAAP general and administrative expense	$	7,777		$	8,104		$	16,682		$	15,541
(percent of total revenue)	15		%	18		%	17		%	19		%
Less:
Stock-based compensation expense	1,662			2,536			4,233			4,447
Non-GAAP general and administrative expense	$	6,115		$	5,568		$	12,449		$	11,094
(percent of total revenue)	12		%	13		%	13		%	13		%

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	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands, except per share data)
Non-GAAP net income and income per share:
GAAP net income (loss)	$	1,665		$	(3,015	)	$	(5,787	)	$	(5,332	)
(percent of total revenue)	3		%	(7		)%	(6		)%	(6		)%
Adjusted for:
Stock-based compensation expense	7,382			11,213			17,764			19,757
Amortization of acquired intangible assets	1,390			798			2,800			1,596
Non-cash interest expense on our notes	1,467			1,367			2,900			2,706
Non-cash tax benefit	(2,964		)	(1,183		)	(6,590		)	(4,403		)
Non-GAAP net income	$	8,940		$	9,180		$	11,087		$	14,324
(percent of total revenue)	17		%	21		%	12		%	17		%


GAAP net income (loss) per basic common share	$	0.06		$	(0.11	)	$	(0.20	)	$	(0.19	)
Adjusted for:
Stock-based compensation expense	0.26			0.40			0.62			0.70
Amortization of acquired intangible assets	0.05			0.03			0.10			0.06
Non-cash interest expense on our notes	0.05			0.05			0.10			0.10
Non-cash tax benefit	(0.10		)	(0.04		)	(0.23		)	(0.16		)
Non-GAAP net income per basic common share	$	0.32		$	0.33		$	0.39		$	0.51


GAAP net income (loss) per diluted common share	$	0.06		$	(0.11	)	$	(0.20	)	$	(0.19	)
Adjusted for:
Stock-based compensation expense	0.25			0.39			0.60			0.69
Amortization of acquired intangible assets	0.05			0.03			0.09			0.06
Non-cash interest expense on our notes	0.05			0.05			0.10			0.09
Non-cash tax benefit	(0.10		)	(0.04		)	(0.22		)	(0.15		)
Non-GAAP net income per diluted common share	$	0.31		$	0.32		$	0.37		$	0.50

Off-Balance Sheet Arrangements

As of June 30, 2014, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into interest rate or exchange rate hedging arrangements to manage the risks described below.

Interest Rate Risk

The interest rate is fixed on all our outstanding loan balances; consequently, we do not have exposure to risks due to increases in the variable rates tied to indexes. We maintain a short-term investment portfolio consisting mainly of highly liquid short-term money market funds, which we consider to be cash equivalents. Our restricted cash consists primarily of certificates of deposit that secure letters of credit related to operating leases for office space. These securities and investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. At June 30, 2014, we had long-term debt of $120.0 million associated with our Notes, which are fixed rate instruments. We would not expect a 10% change in interest rates to have a material impact on our results of operations.

Foreign Currency Exchange Risk

Most of our sales contracts are currently denominated in U.S. Dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue, although with international operations, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and if our exposure increases, adverse movement in foreign currency exchange rates could have a material adverse impact on our financial results. Historically, our primary exposures have been related to non-U.S. dollar denominated operating expenses in Canada, Europe and the APAC region. As a result, our results of operations would generally be adversely affected by a decline in the value of the U.S. dollar relative to these foreign currencies. However, we believe this exposure is not material at this time. As we continue to grow our international operations, our exposure to foreign currency risk could become more significant. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

Fluctuations in foreign currencies impact the amount of total assets and liabilities that we report for our foreign subsidiaries upon the translation of these amounts into U.S. Dollars. In particular, the amount of cash and cash equivalents that we report in U.S. Dollars would be impacted by a significant fluctuation in foreign currency exchange rates. Based on our cash and cash equivalent balances held in foreign currencies at June 30, 2014, if overall foreign currency exchange rates in comparison to the U.S. Dollar uniformly weakened by 10%, the amount of cash and cash equivalents we would report in U.S. Dollars would decrease by approximately $1.3 million, assuming constant foreign currency cash and cash equivalents balances, although the actual effects may differ materially from this hypothetical analysis.

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ITEM 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2014, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION


ITEM 1.	Legal Proceedings

From time to time, we are a defendant in litigation arising out of the ordinary course of business. Although it is difficult to predict the ultimate outcomes of these cases, we are not a party to any material, pending legal proceeding, nor are we aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our common stock are adverse to us or have a material interest adverse to us.


ITEM 1A.	Risk Factors

There have been no material changes in risk factors from those disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which was filed with the Securities and Exchange Commission, or SEC, on February 28, 2014.


ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds

None.


ITEM 3.	Defaults Upon Senior Securities

None.


ITEM 4.	Mine Safety Disclosures

None.


ITEM 5.	Other Information

None.

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ITEM 6.	Exhibits



Exhibit Number		Description of Document

3.1		Amended and Restated Certificate of Incorporation. (1)

3.2		Second Amended and Restated Bylaws. (2)

4.1		Indenture, dated as of June 20, 2011, by and between the Company and Wells Fargo Bank, N.A., as Trustee. (3)

4.2		Form of Note representing the Company’s 1.50% Convertible Senior Notes due 2018. (3)

31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL		Instance Document

101.SCH XBRL		Taxonomy Extension Schema

101.CAL XBRL		Taxonomy Extension Calculation Linkbase

101.DEF XBRL		Taxonomy Extension Definition Linkbase

101.LAB XBRL		Taxonomy Extension Label Linkbase

101.PRE XBRL		Taxonomy Extension Presentation Linkbase

___________________


(1)	Previously filed as an exhibit to the registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on June 25, 2010 and incorporated herein by reference.


(2)	Filed as Exhibit 3.1 to the registrant's Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on November 20, 2013 and incorporated herein by reference.


(3)	Previously filed as an exhibit to the registrant’s Current Report on Form 8-K (File No. 1-34777) filed with the Securities and Exchange Commission on June 21, 2011 and incorporated by reference herein.

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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 thereunto duly authorized.



	BROADSOFT, INC.

	By:		/s/ James A. Tholen
			James A. Tholen Chief Financial Officer (Principal Financial and Accounting Officer and duly authorized signatory)

Date: August 4, 2014

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