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EX-32.1 - EXHIBIT 32.1 - BROADSOFT, INC.bsft-2014930xex321.htm
EX-31.2 - EXHIBIT 31.2 - BROADSOFT, INC.bsft-2014930xex312.htm

 
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 September 30, 2014
or
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):
Large accelerated filer
 
x
 
Accelerated filer
 
o
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
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 November 3, 2014, was 28,806,884.
 



BroadSoft, Inc.
Table of Contents
 
 
Page No.
PART I. FINANCIAL INFORMATION
 
 
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
 
SIGNATURES

 

2


PART I. Financial Information
ITEM 1.
Financial Statements

BroadSoft, Inc.
Unaudited Condensed Consolidated Balance Sheets 
 
September 30,
2014
 
December 31,
2013
 
(In thousands, except share
and per share data)
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
83,459

 
$
69,866

Short-term investments
73,124

 
93,664

Accounts receivable, net of allowance for doubtful accounts of $178 and $128 at September 30, 2014 and December 31, 2013, respectively
60,150

 
66,595

Deferred tax assets, current
1,191

 
4,559

Other current assets
67,907

 
12,597

Total current assets
285,831

 
247,281

Long-term assets:
 
 
 
Property and equipment, net
14,826

 
10,110

Long-term investments
50,611

 
23,340

Restricted cash
19

 
581

Intangible assets, net
17,341

 
20,390

Goodwill
66,791

 
65,192

Deferred tax assets
863

 
16,482

Other long-term assets
9,248

 
8,121

Total long-term assets
159,699

 
144,216

Total assets
$
445,530

 
$
391,497

Liabilities and stockholders’ equity:
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
22,617

 
$
14,956

Deferred tax liabilities, current
13,092

 
1

Deferred revenue, current
65,191

 
71,258

Total current liabilities
100,900

 
86,215

Convertible senior notes
95,629

 
91,549

Deferred revenue
17,657

 
6,404

Deferred tax liabilities
13,075

 
3,506

Other long-term liabilities
4,206

 
3,312

Total liabilities
231,467

 
190,986

Commitments and contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized at September 30, 2014 and December 31, 2013; no shares issued and outstanding at September 30, 2014 and December 31, 2013

 

Common stock, par value $0.01 per share; 100,000,000 shares authorized at September 30, 2014 and December 31, 2013; 28,794,606 and 28,305,143 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
288

 
283

Additional paid-in capital
279,160

 
254,736

Accumulated other comprehensive loss
(4,323
)
 
(1,525
)
Accumulated deficit
(61,062
)
 
(52,983
)
Total stockholders’ equity
214,063

 
200,511

Total liabilities and stockholders’ equity
$
445,530

 
$
391,497

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

3


BroadSoft, Inc.
Unaudited Condensed Consolidated Statements of Operations
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
License software
$
25,679

 
$
21,518

 
$
68,470

 
$
67,059

Subscription and maintenance support
24,216

 
17,694

 
67,300

 
49,185

Professional services and other
4,734

 
3,688

 
15,261

 
10,290

Total revenue
54,629

 
42,900

 
151,031

 
126,534

Cost of revenue:
 
 
 
 
 
 
 
License software
2,488

 
2,257

 
7,139

 
6,836

Subscription and maintenance support
8,284

 
5,622

 
24,336

 
15,015

Professional services and other
4,239

 
2,656

 
11,454

 
8,221

Total cost of revenue
15,011

 
10,535

 
42,929

 
30,072

Gross profit
39,618

 
32,365

 
108,102

 
96,462

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
16,198

 
15,117

 
51,200

 
44,382

Research and development
11,654

 
11,858

 
37,206

 
37,161

General and administrative
8,551

 
8,512

 
25,233

 
24,053

Total operating expenses
36,403

 
35,487

 
113,639

 
105,596

Income (loss) from operations
3,215

 
(3,122
)
 
(5,537
)
 
(9,134
)
Other expense:
 
 
 
 
 
 
 
Interest expense, net
1,812

 
1,814

 
5,380

 
5,189

Other, net
907

 
(133
)
 
738

 
(77
)
Total other expense, net
2,719

 
1,681

 
6,118

 
5,112

Income (loss) before income taxes
496

 
(4,803
)
 
(11,655
)
 
(14,246
)
Provision for (benefit from) income taxes
2,788

 
(749
)
 
(3,576
)
 
(4,860
)
Net loss
$
(2,292
)
 
$
(4,054
)
 
$
(8,079
)
 
$
(9,386
)
Net loss per common share:
 
 
 
 
 
 
 
Basic
$
(0.08
)
 
$
(0.14
)
 
$
(0.28
)
 
$
(0.33
)
Diluted
$
(0.08
)
 
$
(0.14
)
 
$
(0.28
)
 
$
(0.33
)
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
28,722

 
28,160

 
28,587

 
28,063

Diluted
28,722

 
28,160

 
28,587

 
28,063

Stock-based compensation expense included above:
 
 
 
 
 
 
 
Cost of revenue
$
719

 
$
1,290

 
$
2,761

 
$
3,556

Sales and marketing
2,164

 
3,847

 
8,143

 
10,404

Research and development
2,008

 
3,371

 
7,518

 
9,858

General and administrative
1,214

 
2,457

 
5,447

 
6,904


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

4


BroadSoft, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Net loss
$
(2,292
)
 
$
(4,054
)
 
$
(8,079
)
 
$
(9,386
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(3,171
)
 
1,413

 
(2,743
)
 
778

Unrealized gain (loss) on investments
(32
)
 
108

 
(55
)
 
3

Total other comprehensive income (loss), net of tax
(3,203
)
 
1,521

 
(2,798
)
 
781

Comprehensive loss
$
(5,495
)
 
$
(2,533
)
 
$
(10,877
)
 
$
(8,605
)

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

5


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
 
Shares
 
Amount
 
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
(6,341
)
 
490

 
5

 
(6,346
)
 

 

Stock-based compensation expense
23,040

 

 

 
23,040

 

 

Tax windfall benefits on exercises of stock options
7,730

 

 

 
7,730

 

 

Foreign currency translation adjustment
(2,743
)
 

 

 

 
(2,743
)
 

Unrealized loss on investments
(55
)
 

 

 

 
(55
)
 

Net loss
(8,079
)
 

 

 

 

 
(8,079
)
Balance September 30, 2014
$
214,063

 
28,795

 
$
288

 
$
279,160

 
$
(4,323
)
 
$
(61,062
)
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
(1,183
)
 
316

 
3

 
(1,186
)
 

 

Stock-based compensation expense
30,722

 

 

 
30,722

 

 

Tax windfall benefits on exercises of stock options
6,592

 

 

 
6,592

 

 

Foreign currency translation adjustment
778

 

 

 

 
778

 

Unrealized gain on investments
3

 

 

 

 
3

 

Net loss
(9,386
)
 

 

 

 

 
(9,386
)
Balance September 30, 2013
$
188,761

 
28,229

 
$
282

 
$
244,201

 
$
(2,227
)
 
$
(53,495
)

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

6


BroadSoft, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(8,079
)
 
$
(9,386
)
Adjustment to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,132

 
5,495

Amortization of software licenses
2,471

 
2,240

Stock-based compensation expense
23,869

 
30,722

Provision for doubtful accounts
100

 
125

Provision for (benefit from) deferred income taxes
48,939

 
(4,827
)
Excess tax benefit related to share-based compensation
(7,817
)
 
(6,592
)
Non-cash interest expense on convertible senior notes
4,385

 
4,088

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
7,012

 
4,847

Other current and long-term assets
(59,211
)
 
1,173

Accounts payable, accrued expenses and other long-term liabilities
6,496

 
(2,063
)
Current and long-term deferred revenue
4,303

 
(3,503
)
Net cash provided by operating activities
31,600

 
22,319

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(9,011
)
 
(3,775
)
Payments for acquisitions, net of cash acquired
(3,650
)
 
(28,112
)
Purchases of marketable securities
(78,665
)
 
(92,596
)
Proceeds from maturities of marketable securities
71,934

 
86,335

Change in restricted cash
562

 

Net cash used in investing activities
(18,830
)
 
(38,148
)
Cash flows from financing activities:
 
 
 
Proceeds from the exercise of stock options
367

 
1,184

Taxes paid on vesting of RSUs
(6,708
)
 
(2,367
)
Excess tax benefit related to share-based compensation
7,817

 
6,592

Notes payable and bank loans—payments

 
(969
)
Net cash provided by financing activities
1,476

 
4,440

Effect of exchange rate changes on cash and cash equivalents
(653
)
 
(100
)
Net increase (decrease) in cash and cash equivalents
13,593

 
(11,489
)
Cash and cash equivalents, beginning of period
69,866

 
90,545

Cash and cash equivalents, end of period
$
83,459

 
$
79,056


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

7

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.
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 nine months ended September 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

8

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:
    
 
September 30, 2014
 
Contracted Maturity
 
Carrying Value
 
 
 
(in thousands)
Money market funds
demand
 
$
54,008

Total cash equivalents
 
 
$
54,008

 
 
 
 
U.S. agency notes
56 - 332 days
 
$
19,094

Commercial paper
3 - 66 days
 
7,997

Corporate bonds
1 - 353 days
 
46,033

Total short-term investments
 
 
$
73,124

 
 
 
 
U.S. agency notes
507 - 960 days
 
$
35,167

Corporate bonds
378 - 521 days
 
15,444

Total long-term investments
 
 
$
50,611

 
The following table summarizes the Company's investments at September 30, 2014 (in thousands):
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
U.S. agency notes
$
54,271

 
$
17

 
$
(27
)
 
$
54,261

Commercial paper
7,997

 

 

 
7,997

Corporate bonds
61,499

 
18

 
(40
)
 
61,477

Total investments
$
123,767

 
$
35

 
$
(67
)
 
$
123,735


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



9

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):
    
 
September 30, 2014
  
December 31, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets
 
  
 
  
 
  
 
Cash equivalents and certificates of deposit*
$
54,027

   
$
54,027

   
$
48,837

   
$
48,837

Short and long-term investments
123,735

 
123,735

 
117,004

 
117,004

Total assets
$
177,762

   
$
177,762

   
$
165,841

   
$
165,841

* Includes an immaterial amount of restricted cash as of September 30, 2014 and $0.6 million of restricted cash as of December 31, 2013 and excludes $29.5 million and $21.6 million of operating cash balances as of September 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 7 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.

10

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):
 
September 30,
2014
 
Level 1
 
Level 2
 
Level 3
Money market funds
$
54,008

 
$
54,008

 
$

 
$

Certificates of deposit
19

 
19

 

 

Total cash equivalents and certificates of deposit*
54,027

 
54,027

 

 

U.S. agency notes
54,261

 

 
54,261

 

Commercial paper
7,997

 

 
7,997

 

Corporate bonds
61,477

 

 
61,477

 

Total investments
123,735

 

 
123,735

 

Total cash equivalents, certificates of deposit and investments
$
177,762

 
$
54,027

 
$
123,735

 
$

 
 
 
 
 
 
 
 
 
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

 
$

* Includes an immaterial amount of restricted cash as of September 30, 2014 and $0.6 million of restricted cash as of December 31, 2013 and excludes $29.5 million and $21.6 million of operating cash balances as of September 30, 2014 and December 31, 2013, respectively.
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 nine months ended September 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. Goodwill
The following table provides a summary of the changes in the carrying amounts of goodwill (in thousands):
    
Balance as of December 31, 2013
$
65,192

Increase in goodwill related to acquisitions
2,974

Other
(1,375
)
Balance as of September 30, 2014
$
66,791

The increase in “goodwill related to acquisitions” consists of $3.0 million of goodwill related to the acquisition of a software and services provider to the hospitality industry in August 2014. Any change in the goodwill amounts resulting from foreign currency translations are presented as “Other” in the above table.



11


5. 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):    
 
September 30,
2014
 
December 31,
2013
License software
$
24,179

 
$
20,149

Subscription and maintenance support
42,978

 
46,975

Professional services and other
15,691

 
10,538

Total
$
82,848

 
$
77,662

 
 
 
 
Current portion
$
65,191

 
$
71,258

Non-current portion
17,657

 
6,404

Total
$
82,848

 
$
77,662

6. 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 September 30, 2014 and 2013 and $1.9 million for each of the nine months ended September 30, 2014 and 2013.
7. 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 September 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.

12

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements



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.
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 September 30, 2014 and December 31, 2013 was $117.5 million and $123.2 million, respectively. The carrying amount of the equity component of the Notes was $23.9 million at September 30, 2014. The unamortized offering costs classified as debt issuance costs at September 30, 2014 were $1.5 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):
    
 
September 30,
2014
 
December 31, 2013
Convertible debt principal
$
120,000

 
$
120,000

Unamortized debt discount
(24,371
)
 
(28,451
)
Net carrying amount of convertible debt
$
95,629

 
$
91,549


The following table presents the interest expense recognized related to the Notes (in thousands):    
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Contractual interest expense
$
450

 
$
450

 
$
1,350

 
$
1,350

Amortization of debt issuance costs
101

 
101

 
304

 
304

Accretion of debt discount
1,384

 
1,281

 
4,081

 
3,784

Net interest expense
$
1,935

 
$
1,832

 
$
5,735

 
$
5,438

Fair value for the Company’s borrowings is estimated using quoted market prices of the Notes at September 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 have 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.

13

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements



The aggregate maturities of borrowings as of September 30, 2014 were as follows (in thousands):
    
2014 - 2017
 
$

2018 and thereafter
 
120,000

 
 
$
120,000

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.
8. 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 September 30, 2014, the Company had 1,365,820 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Stock options
$
1,568

 
$
2,020

 
$
5,446

 
$
6,463

Restricted stock units
3,676

 
7,534

 
15,557

 
20,706

Performance stock units
861

 
1,411

 
2,866

 
3,553

Total recognized stock-based compensation expense
$
6,105

 
$
10,965

 
$
23,869

 
$
30,722

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
256,900

 
24.98

 
 
 
 
     Exercised
(43,862
)
 
8.33

 
 
 
 
     Canceled, expired or forfeited
(203,438
)
 
36.60

 
 
 
 
Balance, September 30, 2014
1,755,669

 
$
27.14

 
7.17
 
$6,376
 
 
 
 
 
 
 
 
Vested at September 30, 2014
970,553

 
$
23.91

 
5.93
 
$6,314
 
 
 
 
 
 
 
 
Exercisable at September 30, 2014
970,553

 
$
23.91

 
5.93
 
$6,314

14

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements



During the nine months ended September 30, 2014 and 2013, the Company granted stock options with a weighted-average grant date fair value of $13.43 and $18.12, respectively. For the nine months ended September 30, 2014 and 2013, the intrinsic value of stock options exercised was $0.8 million and $4.2 million, respectively, and cash received from stock options exercised was $0.4 million and $1.2 million, respectively.
At September 30, 2014, unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options was $6.3 million, which is scheduled to be recognized over a weighted average period of 1.35 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at September 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
61,568

 
25.00

     Vested
(682,459
)
 
32.93

     Forfeited
(56,675
)
 
33.98

Balance, September 30, 2014
1,114,267

 
$
32.77


The RSUs generally vest over four years from the vesting commencement date and on vesting the holder receives one share of common stock for each RSU.
At September 30, 2014, unrecognized stock-based compensation expense related to unvested RSUs was $12.5 million, which is scheduled to be recognized over a weighted average period of 1.21 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at September 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
205,088

 
23.72

     Vested

 

     Forfeited
(17,500
)
 
28.75

Balance, September 30, 2014
570,088

 
$
26.92


During the three months ended March 31, 2013, the Company granted an aggregate of 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.
During the three months ended September 30, 2014, the Company granted an aggregate of 205,088 PSUs to certain employees hired in connection with an acquisition. These PSUs vest over a period of three years, subject to the satisfaction of certain financial performance conditions related to the business acquired by the Company.
At September 30, 2014, unrecognized stock-based compensation expense related to unvested PSUs was $5.0 million, which is scheduled to be recognized over a weighted average period of 1.57 years. To the extent the actual forfeiture rate is different than

15

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements



what the Company has anticipated at September 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 outstanding upon adoption. As of September 30, 2014, the balance of the Company’s APIC pool related to tax windfall benefits from stock option exercises was $15.0 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 $39.9 million and $63.6 million at September 30, 2014 and December 31, 2013, respectively.
9. 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.
10. 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 30.7% and 34.1% for the nine months ended September 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 and the discrete benefit of a prior period true-up to the U.S. research and development tax credit, partially offset by a discrete expense related to the restructuring of the Company's UK operations. The Company had a provision for income taxes of $2.8 million and a benefit from income taxes of $0.7 million for the three months ended September 30, 2014 and 2013, respectively, and a benefit from income taxes of $3.6 million and $4.9 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company has not recorded a deferred tax liability for undistributed earnings of $5.7 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 $1.6 million for the nine months ended September 30, 2014 related to the estimated deferred tax asset expected to be remaining at December 31, 2014.


16

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements



11. 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:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Net loss
$
(2,292
)
 
$
(4,054
)
 
$
(8,079
)
 
$
(9,386
)
Weighted average common shares outstanding, basic and diluted
28,722

 
28,160

 
28,587

 
28,063

Net loss per share, basic and diluted
$
(0.08
)
 
$
(0.14
)
 
$
(0.28
)
 
$
(0.33
)
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 nine months ended September 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 1,130,119 and 1,082,008 shares for the three months ended September 30, 2014 and 2013 and into 1,277,844 and 841,701 shares for the nine months ended September 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 1,400,469 and 1,001,839 shares for the three months ended September 30, 2014 and 2013, respectively, and into 1,334,800 and 896,301 shares for the nine months ended September 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.
12. 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
United States
$
28,687

 
$
23,758

 
$
72,755

 
$
73,732

EMEA
11,735

 
10,625

 
37,161

 
29,269

APAC
9,922

 
5,970

 
30,430

 
16,290

Other
4,285

 
2,547

 
10,685

 
7,243

Total Revenue
$
54,629

 
$
42,900

 
$
151,031

 
$
126,534


17

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements



 
 
September 30,
2014
 
December 31, 2013
Long-Lived Assets, net
 
 
 
United States
$
20,394

 
$
17,179

EMEA
2,228

 
763

APAC
378

 
381

Other
465

 
488

Total Long-Lived Assets, net
$
23,465

 
$
18,811



18


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;
our ability to successfully deploy our BroadCloud offering, expand this offering geographically and increase the associated recurring service revenue;
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, cloud-based Unified Communications, or UC, over their internet protocol, or IP, based networks.
Traditionally, many enterprises have utilized premise-based private branch exchanges, or PBX’s, to connect their offices and people to public telephony networks. Hosted UC enables the delivery of PBX features without the need for premise-based equipment. UC functionality can be delivered through service providers using their own IP-based networks, as well as over other networks. In addition to voice telephony, UC offers additional features such as full integration with mobile devices, high definition, or HD, voice and video calling and conferencing, instant messaging and presence, or IM&P, and web collaboration.

19


We believe we are well positioned to enable service providers to capitalize on increasing demand by enterprises for such UC services by enabling them to efficiently and cost-effectively offer a broad suite of services to their end-users. Over 600 service providers in more than 76 countries are delivering services utilizing our software. We believe service providers have deployed over 9 million Unified Communication subscriber lines worldwide using our software.
UC-One
UC-One, our Unified Communications solution, is a communications and collaboration offering that enables mobile, fixed, cable and converged (mobile and fixed line) service providers to offer businesses and other enterprises UC features and functionalities on a hosted basis without the need for traditional premise-based PBX equipment. Our technology is designed to meet service providers’ stringent requirements for service availability, network integration and scale and to address the needs of various business segments, such as micro, small, medium and large enterprises, and vertical market segments such as hospitality, government, education and healthcare.
Our UC-One services include HD voice and video calling, audio conferencing, IM&P, desktop sharing and collaboration and call center capabilities. Because these capabilities can be accessed through desk phones, smartphones, tablets, laptops and PCs, UC-One provides full support for today’s distributed workforce and mobile employees.
The benefits of UC-One to enterprises and end users include:
Solution Breadth and Flexibility. UC-One is scalable and can be used by businesses of varying sizes, from very small businesses of two employees to the largest global enterprises with hundreds of thousands of employees in multiple locations. Capacity can be purchased as and when needed by enterprises in response to business and operational needs.
Multi-location and Ease of Use. Because UC-One is cloud and IP-based, an enterprise can provide uniform communications functionality across its entire organization, enabling a consistent and simplified user experience. It also provides a single console to manage all the communication and collaboration needs for businesses with geographically dispersed offices and mobile workers, greatly streamlining business operations and reducing operational costs.
Enhanced Mobility. Our solution provides the flexibility to work from the office, at home or on the move, with the full range of UC-One services available irrespective of location or end user device.
Business Continuity. Because UC-One is cloud-based, in the event an enterprise has a business interruption issue, the enterprise’s core communications and collaboration services would remain unaffected.
Openness. We have an active ecosystem of development partners who use our open APIs to create complementary offerings designed for specific market segments or industry verticals.
Lower total cost of ownership. We believe that enterprises will experience a lower cost of ownership compared to legacy premise-based solutions. Because it is cloud-based, there are significantly lower capital investment requirements, fewer highly trained personnel required and reduced costs given the inherent flexibility of per-user based costs.
We offer service providers the following two deployment options, software and software-as-a-service, to enable them to offer UC services to their enterprise customers:
Software. BroadWorks is our application server software offering, with the software generally deployed on industry-standard servers located in the service provider’s data centers. With BroadWorks implemented as an application server in its infrastructure, the service provider is responsible for the development and implementation of the overall solution and integration with the service provider’s network, operations, support and billing systems. This deployment model gives the service provider the maximum flexibility to define its UC-One offering. In this model, revenue is derived from perpetual software license and annual maintenance and support fees, as well as associated professional services. Since our inception, the majority of our revenue has been derived from such software licensing.
Software-as-a-Service. The second deployment option is our BroadCloud software-as-a-service, or SaaS, offering. BroadCloud provides a managed services offering for service providers. In this model, we have implemented BroadWorks and UC-One capabilities within our own data centers and provide operations capabilities covering sales and order management, service delivery, device provisioning, customer service and billing. We believe that through BroadCloud, service providers can accelerate their deployments of UC-One services and reduce their capital expenditures and the internal costs of implementing UC services. Generally, service providers utilizing our BroadCloud offering pay us on a monthly recurring basis based on the total number of subscriber lines the service provider has deployed.

20


Other Products
We also offer to our service provider customers SIP Trunking and Voice over IP, or VoIP, consumer solutions based on our BroadWorks software.
SIP Trunking. Our BroadWorks’ SIP Trunking solution enables service providers to provide IP interconnectivity and additional services to enterprises that already have premise-based PBXs. With SIP Trunking, service providers are able to bundle voice and data over a single converged IP pipe, creating a more economical offering than can be achieved with separate voice and data connections. We believe our solution enables service providers to differentiate their SIP Trunking service offerings and increase revenue by offering enhanced services such as UC, video, mobility, global four-digit dialing and business continuity.
BroadSoft Consumer Applications. Our consumer IP applications allow service providers to offer consumers voice and multimedia telephony services with voice calling, video calling, enhanced messaging, content sharing and web interfaces.
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
Traditionally, many enterprises have used premise-based PBX’s to connect their offices and people to the public telephone network. These PBX offerings were primarily voice communications based. We believe several trends are driving enterprises of all sizes to embrace the change from premise-based to cloud-based delivery of PBX functionality:
The increasing demand by enterprises to move business applications to the cloud for operational savings, flexibility and expanded services;
The demand by enterprises to offer broader communications services such as HD voice and video calling and conferencing and collaboration across their organizations;
The increasingly distributed nature of enterprises’ operations and workforces and the desire to provide fully integrated UC to them;
The proliferation of mobile devices used by employees and other workers; and
The rapid expansion of high quality IP bandwidth, particularly the expansion of wireless bandwidth such as Wi-Fi and voice over LTE, or VoLTE.
We believe that service providers are well-positioned to address these market demands. A number of our service provider customers have made significant investments in their IP-based networks and are already offering standard communications services such as broadband access and fixed and mobile calling plans. Many have a long track record of reliably delivering these business critical services. We believe that as UC solutions are increasingly being offered over fixed and mobile networks, service providers can achieve significant competitive advantages in delivering such services over their networks. Further, we believe service providers have a significant incentive to offer UC services to their enterprise customers as competitive and regulatory pressures have commoditized their historical revenue streams.
In addition, we believe that larger service providers are becoming more focused on implementing transformations of their networks from traditional circuit switched networks to their IP-based broadband networks. As these service providers embark on such projects, they are incorporating application servers like BroadWorks to enable them to offer enhanced business services that they had previously offered over their circuit switched networks. We believe this emerging trend is evident in both fixed line transformations and increasingly in service providers’ investment in their mobile VoLTE networks. We believe this trend is a positive development for us, as service providers both replace services to their business users on their traditional networks and provide new business services.
Our Strategy
Our goal is to strengthen our position as the leading provider of software and services that enable service providers to deliver cloud-based Unified Communications to their enterprise customers. To achieve this goal, our strategy is to deliver an increasingly feature rich set of services to address the needs of a broader spectrum of business customer types. Key elements of our strategy include:

21


Extend our technology leadership and product depth and breadth. We intend to continue to provide industry leading UC solutions through product innovation and substantial investment in research and development for new features, applications and services.
Expand our UC offerings. We intend to accelerate UC adoption and our service provider customers’ time to market by promoting and expanding our UC offerings. Our BroadCloud solution enables our service providers to offer UC features and functions through a service offering that we host and manage. We also intend to expand the geographic availability of our BroadCloud offerings beyond the United States, United Kingdom and Germany.
Broaden demand by enterprises and assist our service provider customers by developing more market segment directed UC offerings. We enable service providers to develop UC offerings targeted towards specific business segments, including small, medium and large enterprises and key vertical markets such as hospitality, government, education and healthcare.
Drive revenue growth by:
Assisting our current service provider customers to sell more of their currently deployed BroadWorks and BroadCloud 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.
Expanding our BroadCloud offering. We believe that service providers will increasingly find that using our BroadCloud offering to deliver UC solutions to their customers will accelerate their time to market and product introduction cycles.
Continuing to acquire new customers. Our customers are located around the world and include many of the top telecommunications services providers globally. We believe we are well positioned to continue to acquire new customers, particularly with the addition of our BroadCloud offering and our focus on developing UC solutions based on enterprise size and vertical market segments.
Pursuing selected acquisitions and collaborations that complement our strategy. We intend to continue to pursue acquisitions and collaborations that we believe 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.
We believe the trend towards adaption of cloud-based unified communications by enterprises will continue and even accelerate over the next several years as such enterprises further seek enhanced speed and flexibility for their communications services. We also believe that service providers are strongly positioned to take advantage of this demand. 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 fourth quarter 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. In addition, we expect our research and development and professional services expenses to increase during the fourth quarter and in 2015 to support several large customer projects we expect to deliver in 2015 and 2016.
BroadCloud, our hosted UC offering, is a particularly important 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 service offering hosted and managed by us, reducing cost and increasing speed and ease of use for end-users. During the fourth quarter of 2014, we expect that we will continue to invest in, and expand the availability of, BroadCloud 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 our

22


BroadCloud offering 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.
During the fourth quarter 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 UC offerings and our SIP Trunking offerings growth is driven by the move by service provider customers to IP-based trunks.
We also believe that the migration of wireless networks to 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 from these opportunities in 2014 will be modest. We believe that many of the largest carriers in the world are, with their investment in VoLTE, embarking on transforming their entire legacy networks to IP-based telephony. We believe we will be the application server for business applications for several of these service providers and, accordingly, expect to increase our investment in research and development and professional services resources.
Key Financial Highlights
Some of our key GAAP financial highlights for the quarter ended September 30, 2014 include:
Total revenue increased by $11.7 million or 27%, to $54.6 million, compared to $42.9 million for the quarter ended September 30, 2013;
Gross profit was $39.6 million, or 73% of revenue, compared to $32.4 million, or 75% of revenue, for the quarter ended September 30, 2013;
Income from operations was $3.2 million, compared to loss from operations of $3.1 million for the quarter ended September 30, 2013;
Net loss was $2.3 million, compared to $4.1 million for the quarter ended September 30, 2013;
Net loss per diluted share was $0.08 per common share compared to $0.14 for the quarter ended September 30, 2013;
Revenue plus net change in deferred revenue increased by 43% to $56.7 million, compared to $39.6 million for the quarter ended September 30, 2013;
Deferred revenue increased by $2.1 million, compared to a decrease of $3.3 million for the quarter ended September 30, 2013; and
Cash provided by operating activities was $19.1 million, compared to $13.9 million for the quarter ended September 30, 2013.
Some of our key non-GAAP financial highlights for the quarter ended September 30, 2014 include:
Non-GAAP gross profit increased to $41.7 million, or 76% of revenue, compared to $34.7 million, or 81% of revenue, for the quarter ended September 30, 2013;
Non-GAAP operating income increased to $10.7 million, or 20% of revenue, compared to $8.9 million, or 21% of revenue, for the quarter ended September 30, 2013;
Non-GAAP net income increased to $10.1 million, or 19% of revenue, compared to $8.3 million, or 19% of revenue, for the quarter ended September 30, 2013; and
Non-GAAP net income per diluted share increased to $0.34 per common share, compared to $0.28 per common share for the quarter ended September 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.
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.

23


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 September 30, 2014, our deferred license software revenue balance was $24.2 million, the current portion of which was $17.4 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 applicable 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 September 30, 2014, our deferred subscription and maintenance support revenue balance was $43.0 million, the current portion of which was $36.2 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 September 30, 2014, our deferred professional services and other revenue balance was $15.7 million, the current portion of which was $11.6 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.
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:

24


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. 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Beginning of period deferred revenue balance
$
80,792

 
$
60,966

 
$
77,662

 
$
61,149

End of period deferred revenue balance
82,848

 
57,686

 
82,848

 
57,686

Increase (decrease) in deferred revenue
2,056

 
(3,280
)
 
5,186

 
(3,463
)
Revenue
54,629

 
42,900

 
151,031

 
126,534

Revenue plus net change in deferred revenue
$
56,685

 
$
39,620

 
$
156,217

 
$
123,071

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 837 employees at September 30, 2014 from 725 employees at December 31, 2013, and we expect to continue hiring additional 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 foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities. In the first nine months of 2014, sales and marketing expenses decreased as a percentage of revenue compared with the same period in 2013, and we expect that for the fourth quarter of 2014, sales and marketing expenses, as a percentage of total revenue, will continue to 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

25


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 nine 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 fourth quarter 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 nine 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 fourth quarter 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 September 30, 2014 and 2013, we recorded stock-based compensation expense of $6.1 million and $11.0 million, respectively.
Historically, stock-based compensation has been the fastest growing component of our employee-related expenses. For the three and nine months ended September 30, 2014, stock-based compensation expense decreased compared to the same period in 2013, primarily due to the vesting during the first quarter of 2014 of a tranche of the RSU's granted in 2013. We expect the stock-based compensation to decrease in relation to the comparable period in prior year for the fourth quarter of 2014.
Based on stock options and other equity awards outstanding as of September 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 $22.9 million over a weighted average period of approximately 1.33 years.
Other Expense (Income), Net
Other expense (income), net consists primarily of interest income, interest expense and foreign currency transaction gains and losses. 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 September 30, 2014, we have net operating loss carryforwards to utilize in the U.S.
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 our financial statements.


26


Results of Operations
Comparison of the Three Months Ended September 30, 2014 and 2013
Revenue
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue by Type:
 
 
 
 
 
 
 
 
 
 
 
   License software
$
25,679

 
47
%
 
$
21,518

 
50
%
 
$
4,161

 
19
%
   Subscription and maintenance support
24,216

 
44

 
17,694

 
41

 
6,522

 
37

   Professional services and other
4,734

 
9

 
3,688

 
9

 
1,046

 
28

Total revenue
$
54,629

 
100
%
 
$
42,900

 
100
%
 
$
11,729

 
27
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue by Geography:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
32,972

 
60
%
 
$
26,305

 
61
%
 
$
6,667

 
25
%
EMEA
11,735

 
22

 
10,625

 
25

 
1,110

 
10

APAC
9,922

 
18

 
5,970

 
14

 
3,952

 
66

Total revenue
$
54,629

 
100
%
 
$
42,900

 
100
%
 
$
11,729

 
27
%
Total revenue for the three months ended September 30, 2014 increased by 27%, or $11.7 million, to $54.6 million as compared to the same period in 2013. This growth was driven by a 19% increase in license software revenue, a 37% increase in subscription and maintenance support revenue and a 28% increase in professional services and other revenue. Deferred revenue increased by $2.1 million for the three months ended September 30, 2014, compared to a decrease of $3.3 million for the same period in 2013.
Americas revenue for the three months ended September 30, 2014 increased by 25%, or $6.7 million, to $33.0 million as compared to the same period in 2013. The increase in Americas revenue for the three months ended September 30, 2014 was primarily due to growth in hosted UC software license sales and subscription and maintenance support revenue, partially offset by a decrease in professional services and other revenues.
Europe, Middle East and Africa, or EMEA, revenue for the three months ended September 30, 2014 increased 10%, or $1.1 million, to $11.7 million as compared to the same period in 2013. The increase in EMEA revenue for the three months ended September 30, 2014 was primarily due to an increase in subscription revenue related to our BroadCloud offering, partially offset by a decrease in license software and professional services and other revenues.
Asia Pacific, or APAC, revenue for the three months ended September 30, 2014 increased by 66%, or $4.0 million, to $9.9 million compared to the same period in 2013. The increase in APAC revenue for the three months ended September 30, 2014 was primarily due to the recognition of $4.8 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.
License Software
License software revenue for the three months ended September 30, 2014 increased by 19%, or $4.2 million, to $25.7 million, compared to the same period in 2013. The increase in license software revenue for the three months ended September 30, 2014 reflects an increase in software license revenue in the Americas and APAC, partially offset by a decrease in license software revenue in EMEA. Deferred license software revenue increased by $1.8 million for the three months ended September 30, 2014, compared to a decrease of $2.7 million for the same period in 2013.
Subscription and Maintenance Support
Subscription and maintenance support revenue for the three months ended September 30, 2014 increased by 37%, or $6.5 million, to $24.2 million, compared to the same period in 2013. The increase in subscription and maintenance support revenue for the three months ended September 30, 2014 was the result of growth in our subscription revenue associated with our

27


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 $2.9 million for the three months ended September 30, 2014, compared to a decrease of $2.7 million for the same period in 2013.
Professional Services and Other
Professional services and other revenue for the three months ended September 30, 2014 increased by 28%, or $1.0 million, to $4.7 million, compared to the same period in 2013. The increase in professional services and other revenue for the three months ended September 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 $3.1 million for the three months ended September 30, 2014, compared to an increase of $2.1 million for the same period in 2013.
Cost of Revenue and Gross Profit
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Related Revenue
 
Amount
 
Percent of Related Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Cost of Revenue:
 
 
 
 
 
 
 
 
 
 
 
License software
$
2,488

 
10
%
 
$
2,257

 
10
%
 
$
231

 
10
 %
Subscription and maintenance support
8,284

 
34

 
5,622

 
32

 
2,662

 
47

Professional services and other
4,239

 
90

 
2,656

 
72

 
1,583

 
60

Total cost of revenue
$
15,011

 
27
%
 
$
10,535

 
25
%
 
$
4,476

 
42
 %
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
License software
$
23,191

 
90
%
 
$
19,261

 
90
%
 
$
3,930

 
20
 %
Subscription and maintenance support
15,932

 
66

 
12,072

 
68

 
3,860

 
32

Professional services and other
495

 
10

 
1,032

 
28

 
(537
)
 
(52
)
Total gross profit
$
39,618

 
73
%
 
$
32,365

 
75
%
 
$
7,253

 
22
 %
For the three months ended September 30, 2014, our gross margin decreased to 73% of revenue as compared to 75% for the same period in 2013, and our gross profit increased by 22%, or $7.3 million, to $39.6 million. The total gross profit increase was primarily due to growth in revenue relative to cost of revenue.
For the three months ended September 30, 2014, license software gross margin remained approximately unchanged at 90% as compared to the same period in 2013 and license software gross profit increased by 20% to $23.2 million. License software cost of revenue increased by 10%, or $0.2 million, to $2.5 million for the three months ended September 30, 2014, compared to the same period in 2013. The increase was primarily due to a $0.2 million increase in software expense and a $0.2 million increase in personnel-related costs, partially offset by a $0.2 million decrease in royalty expenses. 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 September 30, 2014, subscription and maintenance support gross margin decreased to 66% as compared to 68% for the same period in 2013 and subscription and maintenance support gross profit increased by 32% to $15.9 million. Subscription and maintenance support cost of revenue increased by 47%, or $2.7 million, to $8.3 million for the three months ended September 30, 2014, compared to the same period in 2013. The increase in subscription and maintenance support cost of revenue was related to our continued investment in our product offerings, primarily our BroadCloud offerings in the Americas and EMEA. The increase was primarily due to a $0.8 million increase in personnel-related costs, a $1.5 million increase in operational costs associated with hosting the BroadCloud services and a $0.3 million increase in amortization of acquired intangibles. The increase in subscription and maintenance support gross profit was driven by higher revenue growth relative to growth in subscription and maintenance services cost of revenue.
For the three months ended September 30, 2014, professional services and other gross margin decreased to 10% as compared to 28% for the same period in 2013 and professional services and other gross profit decreased by 52% to $0.5 million. Professional services and other cost of revenue increased by 60%, or $1.6 million to $4.2 million for the three months ended

28


September 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 personnel-related costs, a $0.6 million increase in consulting expenses and a $0.6 million increase in hardware expenses. The decrease in professional services and other gross profit was driven by lower revenue growth relative to growth in professional services and other cost of revenue.
Operating Expenses
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Sales and marketing
$
16,198

 
30
%
 
$
15,117

 
35
%
 
$
1,081

 
7
 %
Research and development
11,654

 
21

 
11,858

 
28

 
(204
)
 
(2
)
General and administrative
8,551

 
16

 
8,512

 
20

 
39

 

Total operating expenses
$
36,403

 
67
%
 
$
35,487

 
83
%
 
$
916

 
3
 %
Sales and Marketing. Sales and marketing expense increased by 7%, or $1.1 million, to $16.2 million for the three months ended September 30, 2014, compared to the same period in 2013. The increase was primarily due to a $0.5 million increase in personnel-related costs, a $0.2 million increase in travel expenses and a $0.2 million increase in marketing expenses.
Research and Development. Research and development expense decreased by 2%, or $0.2 million, to $11.7 million for the three months ended September 30, 2014, compared to the same period in 2013. This decrease was primarily due to a $0.5 million decrease in personnel-related costs.
General and Administrative. General and administrative expense remained approximately unchanged for the three months ended September 30, 2014, compared to the same period in 2013.
Income (Loss) from Operations
We had income from operations of $3.2 million for the three months ended September 30, 2014, as compared to a loss from operations of $3.1 million for the same period in 2013.
Other Expense
 
Three Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Interest expense, net
$
1,812

 
3
%
 
$
1,814

 
4
%
 
$
(2
)
 
 %
Other, net
907

 
2
%
 
(133
)
 
*

 
1,040

 
(782
)%
Total other expense, net
$
2,719

 
5
%
 
$
1,681

 
4
%
 
$
1,038

 
62
 %
*
Less than 1%
Other expense, net for the three months ended September 30, 2014 increased by $1.0 million compared to the same period in 2013, primarily due to foreign currency transaction losses.
Provision for (Benefit from) Income Taxes
Provision for income taxes was $2.8 million for the three months ended September 30, 2014, compared to benefit from income taxes of $0.7 million for the same period in 2013. Changes in our taxes are due primarily to discrete benefit recorded in the period related to the additional research and development tax credits claimed from prior years as well as changes in the mix of earnings in the jurisdictions in which we operate.

29


Comparison of the Nine Months Ended September 30, 2014 and 2013
Revenue
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue by Type:
 
 
 
 
 
 
 
 
 
 
 
   License software
$
68,470

 
45
%
 
$
67,059

 
53
%
 
$
1,411

 
2
%
   Subscription and maintenance support
67,300

 
45

 
49,185

 
39

 
18,115

 
37

   Professional services and other
15,261

 
10

 
10,290

 
8

 
4,971

 
48

Total revenue
$
151,031

 
100
%
 
$
126,534

 
100
%
 
$
24,497

 
19
%
 
 
 
 
 
 
 
 
 
 
 
 
Revenue by Geography:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
83,440

 
55
%
 
$
80,975

 
64
%
 
$
2,465

 
3
%
EMEA
37,161

 
25

 
29,269

 
23

 
7,892

 
27

APAC
30,430

 
20

 
16,290

 
13

 
14,140

 
87

Total revenue
$
151,031

 
100
%
 
$
126,534

 
100
%
 
$
24,497

 
19
%
Total revenue for the nine months ended September 30, 2014 increased by 19% or $24.5 million to $151.0 million as compared to the same period in 2013. This growth was driven by a 2% increase in license software revenue, a 37% increase in subscription and maintenance support revenue and a 48% increase in professional services and other revenue. Deferred revenue increased by $5.2 million for the nine months ended September 30, 2014, compared to a decrease of $3.5 million for the same period in 2013.
Americas revenue for the nine months ended September 30, 2014 increased by 3%, or $2.5 million, to $83.4 million as compared to the same period in 2013. The increase in Americas revenue for the nine months ended September 30, 2014 was primarily due to growth in subscription and maintenance support revenues, partially offset by a decrease in license software revenue due to a decrease in consumer applications software license sales and a decrease in professional service and other revenue due to the deferral of a large professional services order that did not meet the criteria for revenue recognition.
EMEA revenue for the nine months ended September 30, 2014 increased 27%, or $7.9 million, to $37.2 million as compared to the same period in 2013. The increase in EMEA revenue for the nine months ended September 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 nine months ended September 30, 2014 increased by 87%, or $14.1 million, to $30.4 million compared to the same period in 2013. The increase in APAC revenue for the nine months ended September 30, 2014 was primarily due to the recognition of $14.2 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.
License Software
License software revenue for the nine months ended September 30, 2014 increased by 2%, or $1.4 million, to $68.5 million, compared to the same period in 2013. The increase in license software revenue for the nine months ended September 30, 2014 reflects an increase in license software revenue in APAC partially offset by a decrease in software license revenue in the Americas and EMEA. Deferred license software revenue increased by $4.0 million for the nine months ended September 30, 2014, compared to a decrease of $3.9 million for the same period in 2013.
Subscription and Maintenance Support
Subscription and maintenance support revenue for the nine months ended September 30, 2014 increased by 37%, or $18.1 million, to $67.3 million, compared to the same period in 2013. The increase in subscription and maintenance support revenue

30


for the nine months ended September 30, 2014 was the result of growth in our subscription revenue associated with our BroadCloud offering, 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 $4.0 million for the nine months ended September 30, 2014, compared to a decrease of $2.1 million for the same period in 2013.
Professional Services and Other
Professional services and other revenue for the nine months ended September 30, 2014 increased by 48%, or $5.0 million, to $15.3 million, compared to the same period in 2013. The increase in professional services and other revenue for the nine months ended September 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 $5.2 million for the nine months ended September 30, 2014, compared to an increase of $2.5 million for the same period in 2013.
Cost of Revenue and Gross Profit
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Related Revenue
 
Amount
 
Percent of Related Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Cost of Revenue:
 
 
 
 
 
 
 
 
 
 
 
License software
$
7,139

 
10
%
 
$
6,836

 
10
%
 
$
303

 
4
%
Subscription and maintenance support
24,336

 
36

 
15,015

 
31

 
9,321

 
62

Professional services and other
11,454

 
75

 
8,221

 
80

 
3,233

 
39

Total cost of revenue
$
42,929

 
28
%
 
$
30,072

 
24
%
 
$
12,857

 
43
%
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
License software
$
61,331

 
90
%
 
$
60,223

 
90
%
 
$
1,108

 
2
%
Subscription and maintenance support
42,964

 
64

 
34,170

 
69

 
8,794

 
26

Professional services and other
3,807

 
25

 
2,069

 
20

 
1,738

 
84

Total gross profit
$
108,102

 
72
%
 
$
96,462

 
76
%
 
$
11,640

 
12
%
For the nine months ended September 30, 2014, our gross margin decreased to 72% of revenue as compared to 76% for the same period in 2013, and our gross profit increased by 12%, or $11.6 million, to $108.1 million. The total gross profit increase was primarily due to growth in revenue relative to cost of revenue.
For the nine months ended September 30, 2014, license software gross margin remained approximately unchanged at 90% as compared to the same period in 2013 and license software gross profit increased by 2% to $61.3 million. License software cost of revenue increased by 4%, or $0.3 million, to $7.1 million for the nine months ended September 30, 2014, compared to the same period in 2013. The increase was primarily due to a $0.8 million increase in software expenses, partially offset by a $0.6 million decrease in royalty expenses. The increase in license software gross profit was driven by higher revenue growth relative to growth in license software cost of revenue.
For the nine months ended September 30, 2014, subscription and maintenance support gross margin decreased to 64% as compared to 69% for the same period in 2013 and subscription and maintenance support gross profit increased by 26% to $43.0 million. Subscription and maintenance support cost of revenue increased by 62%, or $9.3 million, to $24.3 million for the nine months ended September 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 offering in EMEA. The increase was primarily due to a $3.5 million increase in personnel-related costs, a $3.6 million increase in operational costs associated with hosting the BroadCloud services and a $1.5 million increase in amortization of acquired intangibles. The increase in subscription and maintenance support gross profit was driven by higher revenue growth relative to growth in subscription and maintenance services cost of revenue.
For the nine months ended September 30, 2014, professional services and other gross margin increased to 25% as compared to 20% for the same period in 2013 and professional services and other gross profit increased by 84% to $3.8 million. Professional

31


services and other cost of revenue increased by 39%, or $3.2 million to $11.5 million for the nine months ended September 30, 2014, compared to the same period in 2013. The increase in professional services and other cost of revenue was primarily due to a $1.7 million increase in hardware cost delivered under an order related to a multi-year project for an APAC service provider customer, a $0.8 million increase in outside consulting expenses and a $0.5 million increase in personnel-related costs. The increase in professional services and other gross profit was driven by higher revenue growth relative to growth in professional services and other cost of revenue.
Operating Expenses
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Sales and marketing
$
51,200

 
34
%
 
$
44,382

 
35
%
 
$
6,818

 
15
%
Research and development
37,206

 
25

 
37,161

 
29

 
45

 

General and administrative
25,233

 
17

 
24,053

 
19

 
1,180

 
5

Total operating expenses
$
113,639

 
75
%
 
$
105,596

 
83
%
 
$
8,043

 
8
%
Sales and Marketing. Sales and marketing expense increased by 15%, or $6.8 million to $51.2 million for the nine months ended September 30, 2014, compared to the same period in 2013. The increase was primarily due to a $3.7 million increase in personnel-related costs, a $1.2 million increase in travel expenses and a $0.7 million increase in consulting expenses.
Research and Development. Research and development expense remained approximately unchanged at $37.2 million for the nine months ended September 30, 2014, compared to the same period in 2013.
General and Administrative. General and administrative expense increased by 5%, or $1.2 million, to $25.2 million for the nine months ended September 30, 2014, compared to the same period in 2013. This increase was primarily due to a $1.2 million increase in third party accounting and legal expenses.
Loss from Operations
We had a loss from operations of $5.5 million for the nine months ended September 30, 2014, as compared to $9.1 million for the same period in 2013.
Other Expense
 
Nine Months Ended September 30,
 
Period-to-Period Change
 
2014
 
2013
 
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percent of Total Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Interest expense, net
$
5,380

 
4
%
 
$
5,189

 
4
%
 
$
191

 
4
 %
Other, net
738

 
*

 
(77
)
 
*

 
815

 
(1,058
)%
Total other expense, net
$
6,118

 
4
%
 
$
5,112

 
4
%
 
$
1,006

 
20
 %
*
Less than 1%
Other expense, net for the nine months ended September 30, 2014 increased by approximately $0.6 million compared to the same period in 2013, primarily due to foreign currency transaction losses.
Benefit From Income Taxes
Benefit from income tax was $3.6 million for the nine months ended September 30, 2014, compared to $4.9 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.

32


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 revenue 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).
    
 
September 30,
2014
 
December 31,
2013
Cash and cash equivalents
$
83,459

 
$
69,866

Accounts receivable, net
60,150

 
66,595

Working capital
184,931

 
161,066

    
 
Nine Months Ended 
 September 30,
 
2014
 
2013
Cash provided by (used in):
 
 
 
Operating activities
$
31,600

 
$
22,319

Investing activities
(18,830
)
 
(38,148
)
Financing activities
1,476

 
4,440

Our cash and cash equivalents at September 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 September 30, 2014, is not included in cash and cash equivalents.
Operating Activities
For the nine months ended September 30, 2014, net cash provided by operating activities was $31.6 million, compared to $22.3 million for the same period in 2013. The increase was primarily due to the aggregate change in non-cash items of $49.8 million and a decrease in net loss of $1.3 million, partially offset by a $41.9 million decrease from the net change in other current and long-term assets and liabilities. 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. The change in the tax related balances are primarily due to the application of interim period tax accounting guidance given the Company’s loss for the nine months ended September 30, 2014 and full-year forecast.
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 nine months ended September 30, 2014, net cash used in investing activities was $18.8 million, compared to $38.1 million for the same period in 2013. This decrease was attributable to a $24.5 million decrease in payments for acquisitions, partially offset by a $0.5 million increase in net purchases of marketable securities and a $5.2 million increase in capital expenditures for property and equipment, compared to the same period in 2013.
Financing Activities
For the nine months ended September 30, 2014, net cash provided by financing activities was $1.5 million, compared to $4.4 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 $7.8 million, partially offset by taxes paid on the vesting of restricted stock units of $6.7 million.


33


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 September 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
16,866

 
831

 
6,172

 
5,262

 
4,601

Total
$
144,066

 
$
1,731

 
$
9,772

 
$
127,962

 
$
4,601

*
Contractual interest obligations related to the Notes totaled $7.2 million at September 30, 2014, including $0.9 million, $3.6 million and $2.7 million due in the years 2014, 2015-2016 and 2017-2018, respectively.
As of September 30, 2014, we had unrecognized tax benefits of $5.7 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.


34


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 cost of revenue, 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,” “cost of revenue,” “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 cost of revenue, license software cost of revenue, subscription and maintenance cost of revenue and professional services and other cost of revenue. We define non-GAAP cost of revenue as a cost of revenue less stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP cost of revenue 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 cost of revenue over multiple periods.
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 income from operations. 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, foreign currency transaction gains and losses 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.

35


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Non-GAAP cost of revenue:
 
 
 
 
 
 
 
GAAP license cost of revenue
$
2,488

 
$
2,257

 
$
7,139

 
$
6,836

(percent of related revenue)
10
%
 
10
%
 
10
%
 
10
%
Less:
 
 
 
 
 
 
 
Stock-based compensation expense
114

 
279

 
528

 
833

Amortization of acquired intangible assets
223

 
207

 
675

 
628

Non-GAAP license cost of revenue
$
2,151

 
$
1,771

 
$
5,936

 
$
5,375

(percent of related revenue)
8
%
 
8
%
 
9
%
 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP subscription and maintenance support cost of revenue
$
8,284

 
$
5,622

 
$
24,336

 
$
15,015

(percent of related revenue)
34
%
 
32
%
 
36
%
 
31
%
Less:
 
 
 
 
 
 
 
Stock-based compensation expense
469

 
717

 
1,679

 
1,914

Amortization of acquired intangible assets
1,132

 
842

 
3,479

 
2,017

Non-GAAP subscription and maintenance support cost of revenue
$
6,683

 
$
4,063

 
$
19,178

 
$
11,084

(percent of related revenue)
28
%
 
23
%
 
28
%
 
23
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP professional services and other cost of revenue
$
4,239

 
$
2,656

 
$
11,454

 
$
8,221

(percent of related revenue)
90
%
 
72
%
 
75
%
 
80
%
Less:
 
 
 
 
 
 
 
Stock-based compensation expense
136

 
294

 
554

 
809

Non-GAAP professional services and other cost of revenue
$
4,103

 
$
2,362

 
$
10,900

 
$
7,412

(percent of related revenue)
87
%
 
64
%
 
71
%
 
72
%


36


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Non-GAAP gross profit:
 
 
 
 
 
 
 
GAAP gross profit
$
39,618

 
$
32,365

 
$
108,102

 
$
96,462

(percent of total revenue)
73
%
 
75
%
 
72
%
 
76
%
Plus:
 
 
 
 
 
 
 
Stock-based compensation expense
719

 
1,290

 
2,761

 
3,556

Amortization of acquired intangible assets
1,355

 
1,049

 
4,155

 
2,645

Non-GAAP gross profit
$
41,692

 
$
34,704

 
$
115,018

 
$
102,663

(percent of total revenue)
76
%
 
81
%
 
76
%
 
81
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP license gross profit
$
23,191

 
$
19,261

 
$
61,331

 
$
60,223

(percent of related revenue)
90
%
 
90
%
 
90
%
 
90
%
Plus:
 
 
 
 
 
 
 
Stock-based compensation expense
114

 
279

 
528

 
833

Amortization of acquired intangible assets
223

 
207

 
675

 
628

Non-GAAP license gross profit
$
23,528

 
$
19,747

 
$
62,534

 
$
61,684

(percent of related revenue)
92
%
 
92
%
 
91
%
 
92
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP subscription and maintenance support gross profit
$
15,932

 
$
12,072

 
$
42,964

 
$
34,170

(percent of related revenue)
66
%
 
68
%
 
64
%
 
69
%
Plus:
 
 
 
 
 
 
 
Stock-based compensation expense
469

 
717

 
1,679

 
1,914

Amortization of acquired intangible assets
1,132

 
842

 
3,480

 
2,017

Non-GAAP subscription and maintenance support gross profit
$
17,533

 
$
13,631

 
$
48,123

 
$
38,101

(percent of related revenue)
72
%
 
77
%
 
72
%
 
77
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP professional services and other gross profit
$
495

 
$
1,032

 
$
3,807

 
$
2,069

(percent of related revenue)
10
%
 
28
%
 
25
%
 
20
%
Plus:
 
 
 
 
 
 
 
Stock-based compensation expense
136

 
294

 
554

 
809

Non-GAAP professional services and other gross profit
$
631

 
$
1,326

 
$
4,361

 
$
2,878

(percent of related revenue)
13
%
 
36
%
 
29
%
 
28
%


37


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Non-GAAP income from operations:
 
 
 
 
 
 
 
GAAP income (loss) from operations
$
3,215

 
$
(3,122
)
 
$
(5,537
)
 
$
(9,134
)
(percent of total revenue)
6
%
 
(7
)%
 
(4
)%
 
(7
)%
Plus:
 
 
 
 
 
 
 
Stock-based compensation expense
6,105

 
10,965

 
23,869

 
30,722

Amortization of acquired intangible assets
1,355

 
1,049

 
4,155

 
2,645

Non-GAAP income from operations
$
10,675

 
$
8,892

 
$
22,487

 
$
24,233

(percent of total revenue)
20
%
 
21
 %
 
15
 %
 
19
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP operating expense
$
36,403

 
$
35,487

 
$
113,639

 
$
105,596

(percent of total revenue)
67
%
 
83
 %
 
75
 %
 
83
 %
Less:
 
 
 
 
 
 
 
Stock-based compensation expense
5,386

 
9,675

 
21,108

 
27,166

Non-GAAP operating expense
$
31,017

 
$
25,812

 
$
92,531

 
$
78,430

(percent of total revenue)
57
%
 
60
 %
 
61
 %
 
62
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP sales and marketing expense
$
16,198

 
$
15,117

 
$
51,200

 
$
44,382

(percent of total revenue)
30
%
 
35
 %
 
34
 %
 
35
 %
Less:
 
 
 
 
 
 
 
Stock-based compensation expense
2,164

 
3,847

 
8,143

 
10,404

Non-GAAP sales and marketing expense
$
14,034

 
$
11,270

 
$
43,057

 
$
33,978

(percent of total revenue)
26
%
 
26
 %
 
29
 %
 
27
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP research and development expense
$
11,654

 
$
11,858

 
$
37,206

 
$
37,161

(percent of total revenue)
21
%
 
28
 %
 
25
 %
 
29
 %
Less:
 
 
 
 
 
 
 
Stock-based compensation expense
2,008

 
3,371

 
7,518

 
9,858

Non-GAAP research and development expense
$
9,646

 
$
8,487

 
$
29,688

 
$
27,303

(percent of total revenue)
18
%
 
20
 %
 
20
 %
 
22
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP general and administrative expense
$
8,551

 
$
8,512

 
$
25,233

 
$
24,053

(percent of total revenue)
16
%
 
20
 %
 
17
 %
 
19
 %
Less:
 
 
 
 
 
 
 
Stock-based compensation expense
1,214

 
2,457

 
5,447

 
6,904

Non-GAAP general and administrative expense
$
7,337

 
$
6,055

 
$
19,786

 
$
17,149

(percent of total revenue)
13
%
 
14
 %
 
13
 %
 
14
 %


38


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share data)
Non-GAAP net income and income per share:
 
 
 
 
 
 
 
GAAP net loss
$
(2,292
)
 
$
(4,054
)
 
$
(8,079
)
 
$
(9,386
)
(percent of total revenue)
(4
)%
 
(9
)%
 
(5
)%
 
(7
)%
Adjusted for:
 
 
 
 
 
 
 
Stock-based compensation expense
6,105

 
10,965

 
23,869

 
30,722

Amortization of acquired intangible assets
1,355

 
1,049

 
4,155

 
2,645

Non-cash interest expense on our notes
1,485

 
1,382

 
4,385

 
4,088

Foreign currency transaction losses (gains)
907

 
(133
)
 
738

 
(77
)
Non-cash tax provision (benefit)
2,581

 
(918
)
 
(4,006
)
 
(5,323
)
Non-GAAP net income
$
10,141

 
$
8,291

 
$
21,062

 
$
22,669

(percent of total revenue)
19
 %
 
19
 %
 
14
 %
 
18
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net loss per basic common share
$
(0.08
)
 
$
(0.14
)
 
$
(0.28
)
 
$
(0.33
)
Adjusted for:
 
 
 
 
 
 
 
Stock-based compensation expense
0.21

 
0.39

 
0.83

 
1.09

Amortization of acquired intangible assets
0.05

 
0.04

 
0.15

 
0.09

Non-cash interest expense on our notes
0.05

 
0.05

 
0.15

 
0.14

Foreign currency transaction losses (gains)
0.03

 

 
0.03

 

Non-cash tax provision (benefit)
0.09

 
(0.03
)
 
(0.14
)
 
(0.19
)
Non-GAAP net income per basic common share
$
0.35

 
$
0.29

 
$
0.74

 
$
0.81

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net loss per diluted common share
$
(0.08
)
 
$
(0.14
)
 
$
(0.28
)
 
$
(0.33
)
Adjusted for:
 
 
 
 
 
 
 
Stock-based compensation expense
0.20

 
0.37

 
0.80

 
1.06

Amortization of acquired intangible assets
0.05

 
0.04

 
0.14

 
0.09

Non-cash interest expense on our notes
0.05

 
0.05

 
0.15

 
0.15

Foreign currency transaction losses (gains)
0.03

 

 
0.02

 

Non-cash tax provision (benefit)
0.09

 
(0.03
)
 
(0.13
)
 
(0.18
)
Non-GAAP net income per diluted common share
$
0.34

 
$
0.28

 
$
0.71

 
$
0.78


Off-Balance Sheet Arrangements
As of September 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.



39


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 September 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 September 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 $1.6 million, assuming constant foreign currency cash and cash equivalents balances, although the actual effects may differ materially from this hypothetical analysis.



40


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 September 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 September 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.


41


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.

42


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)
 
 
 
10.1
 
BroadSoft, Inc. Non-Employee Director Compensation Policy
 
 
 
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.



43


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: November 5, 2014

44