BROADSOFT, INC. - FORM 10-Q

BROADSOFT, INC. - FORM 10-Q - August 3, 2015

Attached files

Attached files

BROADSOFT, INC. Reports

file	filename
EX-31.1 - EXHIBIT 31.1 - BROADSOFT, INC.	bsft-2015630xex311.htm
EX-32.1 - EXHIBIT 32.1 - BROADSOFT, INC.	bsft-2015630xex321.htm
EX-32.2 - EXHIBIT 32.2 - BROADSOFT, INC.	bsft-2015630xex322.htm
EX-31.2 - EXHIBIT 31.2 - BROADSOFT, INC.	bsft-2015630xex312.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

________________________________________________________________________

FORM 10-Q

________________________________________________________________________

(Mark One)



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

For the Quarterly Period Ended June 30, 2015



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

Commission file number 001-34777

________________________________________________________________________

BroadSoft, Inc.

(Exact name of registrant as specified in its charter)

________________________________________________________________________



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

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

(301) 977-9440

Registrant’s telephone number, including area code:

(former name, former address and former fiscal year, if changed since last report)

________________________________________________________________________

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

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

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

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

The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, on July 29, 2015, was 29,406,794.

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BroadSoft, Inc.

Table of Contents



	Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014	3
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014	4
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014	5
Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2015 and 2014	6
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014	7
Notes to Unaudited Condensed Consolidated Financial Statements	8
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	40
ITEM 4. Controls and Procedures	41
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	43
ITEM 1A. Risk Factors	43
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
ITEM 3. Defaults Upon Senior Securities	43
ITEM 4. Mine Safety Disclosures	43
ITEM 5. Other Information	43
ITEM 6. Exhibits	44
SIGNATURES	45

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PART I. Financial Information


ITEM 1.	Financial Statements

BroadSoft, Inc.

Unaudited Condensed Consolidated Balance Sheets



	June 30, 2015			December 31, 2014
	(In thousands, except share and per share data)
Assets:
Current assets:
Cash and cash equivalents	$	78,675		$	101,543
Short-term investments	71,830			68,923
Accounts receivable, net of allowance for doubtful accounts of $85 and $286 at June 30, 2015 and December 31, 2014, respectively	91,295			81,794
Deferred tax assets, current	17,759			14,302
Other current assets	14,212			12,678
Total current assets	273,771			279,240
Long-term assets:
Property and equipment, net	18,085			14,363
Long-term investments	56,642			52,030
Intangible assets, net	21,961			15,568
Goodwill	70,113			65,303
Deferred tax assets	15,250			10,495
Other long-term assets	15,774			8,296
Total long-term assets	197,825			166,055
Total assets	$	471,596		$	445,295
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable and accrued expenses	$	27,858		$	21,222
Deferred revenue, current	86,319			87,423
Total current liabilities	114,177			108,645
Convertible senior notes	99,962			97,049
Deferred revenue	21,407			14,033
Other long-term liabilities	5,451			5,319
Total liabilities	240,997			225,046
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized at June 30, 2015 and December 31, 2014; no shares issued and outstanding at June 30, 2015 and December 31, 2014	—			—
Common stock, par value $0.01 per share; 100,000,000 shares authorized at June 30, 2015 and December 31, 2014; 29,390,362 and 28,943,336 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively	294			290
Additional paid-in capital	302,069			279,642
Accumulated other comprehensive loss	(9,662		)	(7,712		)
Accumulated deficit	(62,102		)	(51,971		)
Total stockholders’ equity	230,599			220,249
Total liabilities and stockholders’ equity	$	471,596		$	445,295

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

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Operations



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(In thousands, except per share data)
Revenue:
License software	$	30,091		$	25,649		$	53,027		$	42,791
Subscription and maintenance support	27,026			21,958			52,435			43,084
Professional services and other	7,367			4,877			14,693			10,527
Total revenue	64,484			52,484			120,155			96,402
Cost of revenue:
License software	3,020			2,529			5,642			4,651
Subscription and maintenance support	10,533			8,606			19,320			16,052
Professional services and other	7,643			3,726			12,046			7,215
Total cost of revenue	21,196			14,861			37,008			27,918
Gross profit	43,288			37,623			83,147			68,484
Operating expenses:
Sales and marketing	23,415			17,146			40,683			35,002
Research and development	17,267			12,227			30,935			25,552
General and administrative	11,875			7,777			20,679			16,682
Total operating expenses	52,557			37,150			92,297			77,236
Income (loss) from operations	(9,269		)	473			(9,150		)	(8,752		)
Other expense:
Interest expense, net	1,745			1,796			3,520			3,568
Other, net	(484		)	(206		)	1,223			(169		)
Total other expense, net	1,261			1,590			4,743			3,399
Loss before income taxes	(10,530		)	(1,117		)	(13,893		)	(12,151		)
Benefit from income taxes	(2,405		)	(2,782		)	(3,762		)	(6,364		)
Net income (loss)	$	(8,125	)	$	1,665		$	(10,131	)	$	(5,787	)
Net income (loss) per common share:
Basic	$	(0.28	)	$	0.06		$	(0.35	)	$	(0.20	)
Diluted	$	(0.28	)	$	0.06		$	(0.35	)	$	(0.20	)
Weighted average common shares outstanding:
Basic	29,230			28,617			29,111			28,518
Diluted	29,230			29,725			29,111			28,518
Stock-based compensation expense included above:
Cost of revenue	$	3,322		$	851		$	4,163		$	2,042
Sales and marketing	6,666			2,565			8,804			5,979
Research and development	5,068			2,304			6,891			5,510
General and administrative	3,131			1,662			4,372			4,233

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

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(In thousands)
Net income (loss)	$	(8,125	)	$	1,665		$	(10,131	)	$	(5,787	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	2,380			148			(1,993		)	428
Unrealized gain (loss) on investments	(131		)	(37		)	43			(23		)
Total other comprehensive income (loss), net of tax	2,249			111			(1,950		)	405
Comprehensive income (loss)	$	(5,876	)	$	1,776		$	(12,081	)	$	(5,382	)

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

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except per share data)



	Total Stockholders’ Equity			Common Stock Par Value $0.01 Per Share			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit
	Total Stockholders’ Equity			Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit
Balance December 31, 2014	$	220,249		28,943	$	290	$	279,642		$	(7,712	)	$	(51,971	)
Issuance of common stock for exercise of stock options and vesting of RSUs, net of effect of withholding tax	(2,244		)	447	4		(2,248		)	—			—
Stock-based compensation expense	24,609			—	—		24,609			—			—
Tax windfall benefits on exercises of stock options	66			—	—		66			—			—
Foreign currency translation adjustment	(1,993		)	—	—		—			(1,993		)	—
Unrealized gain on investments	43			—	—		—			43			—
Net loss	(10,131		)	—	—		—			—			(10,131		)
Balance June 30, 2015	$	230,599		29,390	$	294	$	302,069		$	(9,662	)	$	(62,102	)
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 early exercises and withholding tax	(5,094		)	367	4		(5,098		)	—			—
Stock-based compensation expense	17,169			—	—		17,169			—			—
Tax windfall benefits on exercises of stock options	8,924			—	—		8,924			—			—
Foreign currency translation adjustment	428			—	—		—			428			—
Unrealized loss on investments	(23		)	—	—		—			(23		)	—
Net loss	(5,787		)	—	—		—			—			(5,787		)
Balance June 30, 2014	$	216,128		28,672	$	287	$	275,731		$	(1,120	)	$	(58,770	)

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

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BroadSoft, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows



	Six Months Ended June 30,
	2015			2014
	(In thousands)
Cash flows from operating activities:
Net loss	$	(10,131	)	$	(5,787	)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	7,581			5,818
Amortization of software licenses	1,743			1,599
Stock-based compensation expense	24,230			17,764
Provision for doubtful accounts	7			(3		)
Provision for (benefit from) deferred income taxes	(6,253		)	25,658
Excess tax benefit related to share-based compensation	(355		)	(9,636		)
Non-cash interest expense on convertible senior notes	3,116			2,900
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(7,296		)	7,137
Other current and long-term assets	(10,622		)	(39,891		)
Accounts payable, accrued expenses and other long-term liabilities	5,901			3,850
Current and long-term deferred revenue	5,771			3,130
Net cash provided by operating activities	13,692			12,539
Cash flows from investing activities:
Additions to property and equipment	(8,570		)	(6,039		)
Payments for acquisitions, net of cash acquired	(17,733		)	—
Purchases of marketable securities	(87,828		)	(52,659		)
Proceeds from sale of marketable securities	43,672			—
Proceeds from maturities of marketable securities	36,637			41,584
Change in restricted cash	—			561
Net cash used in investing activities	(33,822		)	(16,553		)
Cash flows from financing activities:
Proceeds from the exercise of stock options	2,523			232
Taxes paid on vesting of RSUs	(4,767		)	(5,326		)
Excess tax benefit related to share-based compensation	355			9,636
Net cash provided by (used in) financing activities	(1,889		)	4,542
Effect of exchange rate changes on cash and cash equivalents	(849		)	213
Net increase (decrease) in cash and cash equivalents	(22,868		)	741
Cash and cash equivalents, beginning of period	101,543			69,866
Cash and cash equivalents, end of period	$	78,675		$	70,607

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

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Nature of Business

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

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 (loss), changes in stockholders’ equity and cash flows. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015 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, 2014 filed with the SEC on February 25, 2015.

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 Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 ("ASU 2009-14"), which supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for the Company in first quarter of fiscal 2018, with early adoption to fiscal year 2017 permitted. The standard allows entities to apply either of two adoption methods: (i) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. The Company is evaluating the impact of adopting this new standard on its financial statements and the method of adoption.

In April 2015, the FASB issued Accounting Standards Updated 2015-03, Interest-Imputation of Interest ("ASU 2015-03"), which provides updated guidance for accounting for debt issuance costs. The update is intended to simplify and standardize the presentation of debt issuance costs. The guidance requires that the Company present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The Company will adopt this accounting guidance in the first quarter of fiscal year 2016, applied on a retrospective basis. The adoption will result in a corresponding reduction to the deferred interest asset balances and the convertible senior notes liability balance on the balance sheet for all period presented.

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BroadSoft, Inc.

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



	June 30, 2015
	Contracted Maturity	Carrying Value
		(in thousands)
Money market funds	demand	$	59,752
Total cash equivalents		$	59,752

U.S. agency notes	58 - 338 days	$	27,512
Corporate bonds	31 - 321 days	44,318
Total short-term investments		$	71,830

U.S. agency notes	366 - 1020 days	$	27,711
Corporate bonds	371 - 846 days	28,931
Total long-term investments		$	56,642

The following table summarizes the Company's investments at June 30, 2015 (in thousands):



	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. agency notes	$	55,194	$	36	$	(7	)	$	55,223
Corporate bonds	73,337		6		(94		)	73,249
Total investments	$	128,531	$	42	$	(101	)	$	128,472

The following table summarizes the Company's investments at December 31, 2014 (in thousands):



	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. agency notes	$	51,270	$	13	$	(26	)	$	51,257
Corporate bonds	69,786		4		(94		)	69,696
Total investments	$	121,056	$	17	$	(120	)	$	120,953

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Fair Value

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



	June 30, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Cash equivalents and certificates of deposit*	$	59,768	$	59,768	$	56,864	$	56,864
Short and long-term investments	128,472		128,472		120,953		120,953
Total assets	$	188,240	$	188,240	$	177,817	$	177,817

* Includes an immaterial amount of restricted cash as of June 30, 2015 and December 31, 2014 and excludes $18.9 million and $44.7 million of operating cash balances as of June 30, 2015 and December 31, 2014, 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 8 Borrowings for additional information on the fair value of debt.)

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


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


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


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

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Assets Measured at Fair Value on a Recurring Basis

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



	June 30, 2015		Level 1		Level 2		Level 3
Money market funds	$	59,752	$	59,752	$	—	$	—
Certificates of deposit	16		16		—		—
Total cash equivalents and certificates of deposit*	59,768		59,768		—		—
U.S. agency notes	55,223		—		55,223		—
Corporate bonds	73,249		—		73,249		—
Total investments	128,472		—		128,472		—
Total cash equivalents, certificates of deposit and investments	$	188,240	$	59,768	$	128,472	$	—

	December 31, 2014		Level 1		Level 2		Level 3
Money market funds	$	56,847	$	56,847	$	—	$	—
Certificates of deposit	17		17		—		—
Total cash equivalents and certificates of deposit*	56,864		56,864		—		—
U.S. agency notes	51,257		—		51,257		—
Corporate bonds	69,696		—		69,696		—
Total investments	120,953		—		120,953		—
Total cash equivalents, certificates of deposit and investments	$	177,817	$	56,864	$	120,953	$	—

Assets Measured at Fair Value on a Nonrecurring Basis

The Company measures certain assets, including property and equipment, goodwill and intangible assets, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the six months ended June 30, 2015 and 2014, there were no fair value measurements of assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition.

4. Acquisitions

mPortal, Inc.

On June 3, 2015, the Company completed its acquisition of all of the stock of mPortal, Inc. ("mPortal"), a professional services company. The acquisition enables the Company to offer its customers the ability to deliver customizable UC experiences to a wide range of business end users. The total consideration paid for mPortal was $14.8 million. The Company funded the acquisition with $14.3 million of cash on hand and $0.5 million of restricted stock units. The Company incurred $0.7 million of transaction costs for financial advisory and legal services related to the acquisition that are included in general and administrative expenses as incurred, in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2015.

The condensed consolidated financial statements include the results of mPortal from the date of acquisition. The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date.

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes the fair value of the assets acquired and liabilities assumed at the acquisition date of June 3, 2015 (in thousands):



Cash and cash equivalents	$	2,748
Accounts receivable	1,920
Other current assets	293
Deferred tax asset	2,503
Property and equipment	15
Customer relationships	5,600
Goodwill	2,398
Accounts payable and accrued expenses	(677		)
Total consideration	$	14,800

Customer relationships represent the fair value of the underlying relationships and agreements with mPortal customers. The customer relationships intangible is being amortized on a straight-line basis over a period of eight years, which in general reflects the cash flows generated.

The excess of purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired of $2.4 million was recorded as goodwill. The goodwill balance is attributable to the assembled workforce and the synergies expected as a result of the acquisition. In accordance with U.S. GAAP, goodwill associated with this acquisition will not be amortized but will be tested for impairment on an annual basis. Goodwill associated with this acquisition is not deductible for tax purposes.

Pro Forma Financial Information for Acquisition of mPortal (unaudited)

mPortal contributed revenue of $0.7 million and a net loss of $0.4 million for the period from the date of acquisition to June 30, 2015.

The unaudited pro forma statement of operations data below gives effect to the acquisition of mPortal as if it had occurred on January 1, 2014. The following data includes adjustments for amortization of intangible assets and acquisition costs. This pro forma data is presented for information purposes only and does not purport to be indicative of the results of future operations or of the results that would have occurred had the acquisition taken place on January 1, 2014.



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
	(In thousands, except per share data)
Revenue	$	66,713		$	55,966	$	125,602		$	102,619
Net income (loss)	(7,241		)	1,595		(9,189		)	(6,279		)
Net income (loss) per share:
Basic	$	(0.25	)	$	0.06	$	(0.32	)	$	(0.22	)
Diluted	$	(0.25	)	$	0.05	$	(0.32	)	$	(0.22	)

5. Goodwill

The following table provides a summary of the changes in the carrying amounts of goodwill (in thousands):



Balance as of December 31, 2014	$	65,303
Increase in goodwill related to acquisitions	5,721
Other	(911		)
Balance as of June 30, 2015	$	70,113

The increase in “goodwill related to acquisitions” consists of $3.3 million of goodwill related to the acquisition of a hosted voice over IP (VoIP) OSS provider in January 2015 and $2.4 million of goodwill related to the acquisition of mPortal in June

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

2015. Any change in the goodwill amounts resulting from foreign currency translations are presented as “Other” in the above table.

6. 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):



	June 30, 2015		December 31, 2014
License software	$	32,582	$	26,495
Subscription and maintenance support	53,951		52,764
Professional services and other	21,193		22,197
Total	$	107,726	$	101,456

Current portion	$	86,319	$	87,423
Non-current portion	21,407		14,033
Total	$	107,726	$	101,456

7. Software Licenses

The Company has entered into an agreement with a third-party that provides the Company the right to distribute its software on an unlimited basis through May 2016. In June 2015, the Company amended this agreement to extend the term of the agreement from May 2016 to December 2020.

For the period from June 2012 to May 2016, the Company has a fixed cost of $10.2 million, which is being amortized to cost of revenue over the four-year period beginning in June 2012, based on the straight line method.

For the period from June 2016 to December 2020, the Company will have a fixed cost of $17.3 million, and to the extent billed license software revenue over the extended term exceeds $850 million, the Company would be required to pay additional fees. The $17.3 million will be amortized to cost of revenue over the extended term beginning June 2016 (the expiration date of the previous agreement), based on the straight line method.

Amortization expense related to this agreement was approximately $0.6 million for each of the three months ended June 30, 2015 and 2014 and $1.3 million for each of the six months ended June 30, 2015 and 2014.

8. 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

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

change, as defined in the indenture governing the Notes (the “Indenture”), occurs prior to the maturity date, the Company will in some cases increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of the common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted. While the Notes were not convertible as of June 30, 2015, if the Notes were convertible, no shares would have been distributed upon conversion because the conversion price was above the stock price as of such date.

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

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

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

The fair value of the Notes as of June 30, 2015 and December 31, 2014 was $127.6 million and $125.1 million, respectively. The carrying amount of the equity component of the Notes was $20.0 million at June 30, 2015. The unamortized offering costs classified as debt issuance costs at June 30, 2015 were $1.2 million which is being amortized as interest expense through the July 2018 maturity date of the Notes.

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



	June 30, 2015			December 31, 2014
Convertible debt principal	$	120,000		$	120,000
Unamortized debt discount	(20,038		)	(22,951		)
Net carrying amount of convertible debt	$	99,962		$	97,049

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Contractual interest expense	$	450	$	450	$	900	$	900
Amortization of debt issuance costs	101		101		203		203
Accretion of debt discount	1,475		1,366		2,913		2,697
Net interest expense	$	2,026	$	1,917	$	4,016	$	3,800

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Fair value for the Company’s borrowings is estimated using quoted market prices of the Notes at June 30, 2015, 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.

The aggregate maturities of borrowings as of June 30, 2015 were as follows (in thousands):



2015 - 2017	$	—
2018 and thereafter	120,000
	$	120,000

9. 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. For grants made under the 2009 Plan prior to January 1, 2015, the requisite vesting period was typically four years and for grants made subsequent to January 1, 2015, the requisite vesting period is typically three years. On each of January 1, 2014 and 2015, 1,250,000 shares were added to the 2009 Plan. At June 30, 2015, the Company had 1,192,194 shares of common stock available for issuance under the 2009 Plan.

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Stock options	$	1,841	$	1,882	$	3,141	$	3,878
Restricted stock units	15,360		4,764		19,199		11,881
Performance stock units	986		736		1,890		2,005
Total recognized stock-based compensation expense	$	18,187	$	7,382	$	24,230	$	17,764

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, 2014	1,678,996		$	26.73
Granted	304,000		31.04
Exercised	(169,643	)	14.87
Forfeited	(62,519	)	30.77
Expired	(23,629	)	32.49
Balance, June 30, 2015	1,727,205		$	28.37	7.44	$13,267

Vested at June 30, 2015	900,480		$	27.05	6.21	$8,789

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

During the six months ended June 30, 2015 and 2014, the Company granted stock options with a weighted-average grant date fair value of $15.24 and $14.18, respectively. For the six months ended June 30, 2015 and 2014, the intrinsic value of stock options exercised was $3.5 million and $0.6 million, respectively, and cash received from stock options exercised was $2.5 million and $0.2 million, respectively.

At June 30, 2015, unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested stock options was $6.1 million, which is scheduled to be recognized over a weighted average period of 1.19 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at June 30, 2015, 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, 2014	1,029,787		$	32.06
Granted	1,415,992		34.03
Vested	(420,545	)	33.87
Forfeited	(34,633	)	33.21
Balance, June 30, 2015	1,990,601		$	33.07

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

At June 30, 2015, unrecognized stock-based compensation expense related to unvested RSUs was $34.7 million, which is scheduled to be recognized over a weighted average period of 1.24 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at June 30, 2015, 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, 2014	557,588		$	26.88
Granted	—		—
Vested	—		—
Forfeited	(7,500	)	27.19
Balance, June 30, 2015	550,088		$	26.87

The PSUs generally vest over three or four years from the vesting commencement date, subject to the satisfaction of certain performance conditions, and on vesting the holder receives one share of common stock for each PSU.

At June 30, 2015, unrecognized stock-based compensation expense related to unvested PSUs was $2.6 million, which is scheduled to be recognized over a weighted average period of 1.05 years. To the extent the actual forfeiture rate is different than what the Company has anticipated at June 30, 2015, 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

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 June 30, 2015, the balance of the Company’s APIC pool related to tax windfall benefits from stock option exercises was $10.2 million.

The Company applies a with-and-without approach in determining its intra-period allocation of tax expense or benefit attributable to stock-based compensation deductions. Tax deductions in excess of previously recorded benefits (windfalls) included in net operating loss carryforwards but not reflected in deferred tax assets were $52.5 million and $49.9 million at June 30, 2015 and December 31, 2014, respectively.

10. 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.

11. 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 27.6% and 52.4% for the six months ended June 30, 2015 and 2014, respectively. For the period ended June 30, 2015 the provision for income taxes differs from the computed U.S. statutory rate primarily due to the increase in nondeductible expenses related to stock compensation, and losses from certain foreign jurisdictions that are not benefited due to a full valuation allowance. For the six months ended June 30, 2014, 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 benefit from income taxes of $2.4 million and $2.8 million for the three months ended June 30, 2015 and 2014, respectively, and a benefit from income taxes of $3.8 million and $6.4 million for the six months ended June 30, 2015 and 2014, respectively.

The Company has not recorded a deferred tax liability for undistributed earnings of $8.8 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.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets in each relevant jurisdiction. The Company provides a valuation allowance against deferred tax assets if, based upon the weight of available evidence, we do not believe it is “more-likely-than-not” that some or all of the deferred tax assets will be realized. Realization of deferred tax assets in any jurisdictions depends on various factors, including the expectation of future profitability in that jurisdiction.

The Company has recognized a deferred tax asset of $23.0 million in the United States as of December 31, 2014, which included $1.4 million of research and development tax credit carryforwards. In addition, the Company excluded $18.9 million on a tax effected basis of U.S. tax carryforwards from the calculation and presentation of the deferred tax asset presented above, as these represent excess stock option deductions and other tax attributes that do not reduce taxes payable in the U.S. These attributes are scheduled to expire between 2019 and 2034.

Realization of the US deferred tax asset is dependent on generating sufficient taxable income prior to expiration of these US loss carryforwards. During 2013 and 2014, the Company experienced losses in its US jurisdiction, driven largely by significant stock option expense recorded in those years. This trend in the US, however, is not expected to continue in the near term, and,

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although realization is not assured, management believes it is more-likely-than-not that the results of US operations will generate sufficient taxable income to support the realization of the existing deferred tax asset and any excess stock option deduction carryforwards prior to the expiration of those losses. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

12. Income (loss) per share data

Basic income (loss) per common share is computed based on the weighted average number of outstanding shares of common stock. Diluted income (loss) 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 June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
	(In thousands, except per share data)
Net income (loss)	$	(8,125	)	$	1,665	$	(10,131	)	$	(5,787	)
Weighted average basic common shares outstanding	29,230			28,617		29,111			28,518
Dilutive effect of stock-based awards	N/A			1,108		N/A			N/A
Weighted average diluted common shares outstanding	29,230			29,725		29,111			28,518
Net income (loss) per share:
Basic	$	(0.28	)	$	0.06	$	(0.35	)	$	(0.20	)
Diluted	$	(0.28	)	$	0.06	$	(0.35	)	$	(0.20	)

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

Due to the cash settlement feature of the principal amount of the Notes, the Company only includes the impact of the premium feature in the diluted earnings per common share calculation when the average stock price exceeds the conversion price of the Notes, which did not occur for the three and six months ended June 30, 2015 and 2014.

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 1,268,212 shares for the three months ended June 30, 2015 and into 1,175,613 and 1,284,598 shares for the six months ended June 30, 2015 and 2014, 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 810,329 and 1,333,772 shares for the three months ended June 30, 2015 and 2014, respectively, and into 911,029 and 1,298,513 shares for the six months ended June 30, 2015 and 2014, 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.

13. 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.

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BroadSoft, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Revenue:
United States	$	41,183	$	25,064	$	70,888	$	44,068
EMEA	15,965		12,159		31,569		25,426
APAC	3,701		11,518		9,666		20,508
Other	3,635		3,743		8,032		6,400
Total Revenue	$	64,484	$	52,484	$	120,155	$	96,402



	June 30, 2015		December 31, 2014
Long-Lived Assets, net
United States	$	27,906	$	19,049
EMEA	4,485		2,206
APAC	643		379
Other	377		397
Total Long-Lived Assets, net	$	33,411	$	22,031

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission, or SEC, on February 25, 2015.

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 the 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 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, 2014 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, converged (mobile and fixed-line) and cable telecommunications service providers to deliver hosted, cloud-based Unified Communications, or UC, over their internet protocol, or IP, based networks, including over carrier's emerging voice over LTE, or VoLTE, 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. Hosted UC can be delivered through service providers using their own IP-based networks, as well as over the public internet (also known as "over the top" or OTT). 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.

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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 700 service providers in more than 80 countries are delivering services utilizing our software. We believe service providers have deployed over 10 million UC subscriber lines worldwide using our software.

UC-One

UC-One, our UC solution, is a communications and collaboration offering that enables telecommunications 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. Our solution can also be deployed across multiple access networks and technologies, including fixed line/fiber, traditional mobile 3G networks as well as VoLTE networks and voice over wifi, or VoWiFi.

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 total 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, software and software-as-a-service, or SaaS, deployment options 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.

SaaS. The second deployment option is our BroadCloud SaaS offering. BroadCloud provides a managed services offering for service providers. In this model, we have implemented UC-One and other BroadWorks 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

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utilizing our BroadCloud offering pay us on a monthly recurring basis based on the total number of subscriber lines the service provider has deployed.

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 and content sharing over broadband and VoLTE networks.

Company

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

Industry

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 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-line 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 were 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.

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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 UC 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:


•	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 adoption of cloud-based unified communications by enterprises will continue and even accelerate over the next several years as enterprises further seek enhanced speed and flexibility for their communications services. We also believe that service providers using our products and services 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 remainder of 2015, we will continue our strategic investments in research and development of existing and new products, such as client and portal software, mobility and cloud-based services, including products acquired in connection with our acquisitions. We continue to invest in our service providers ability to differentiate their UC offerings, as evidenced by our acquisition of mPortal, which increases our ability to help our service provider customers to customize the UC experience. We also expect to continue to invest in our sales and our go-to-market efforts to take advantage of these market opportunities.

We expect revenues from our UC solutions to continue to experience strong growth during the remainder of 2015. We believe our UC solutions growth is largely driven by increased market acceptance of hosted UC offerings. We believe converged and mobile operators desire to deliver UC solutions to their enterprise customer base to grow revenue, reduce subscriber turnover, or churn, and raise average revenue per user. Our UC-One solutions, which are either delivered through our hosted UC offering, BroadCloud, or through our BroadWorks server software that resides within the service provider’s network, enable service providers 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.

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BroadCloud continues to be a particularly important area of investment and marketing focus for us. 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. We believe that service providers choose BroadCloud to speed their time to market and reduce their capital and implementation costs. During the remainder of 2015, we expect to continue to invest in our BroadCloud offering, and to expand its availability to other geographic locations. 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 also believe that many of the largest carriers in the world are embarking on projects to ultimately transform most, if not all, of their legacy circuit switched networks to IP-based networks, driven in part by the movement to migrate their wireless networks to VoLTE. We believe transformation projects by certain of our largest service provider customers could drive significant growth for us over the next several years. We think that we are well-positioned to meet such carrier demand for these transformation projects, especially with regard to our UC and UC for VoLTE offerings. We expect that the revenue impact from these market opportunities will accelerate in 2015, although much of the initial transformational-based revenue will be generated from professional services we perform for our carrier customers, with software revenue often following in subsequent years. We 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 June 30, 2015 include:


•	Total revenue increased by $12.0 million or 23%, to $64.5 million, compared to $52.5 million for the quarter ended June 30, 2014;


•	Gross profit was $43.3 million, or 67% of revenue, compared to $37.6 million, or 72% of revenue, for the quarter ended June 30, 2014;


•	Loss from operations was $9.3 million, compared to income from operations of $0.5 million for the quarter ended June 30, 2014;


•	Net loss was $8.1 million, compared to net income of $1.7 million for the quarter ended June 30, 2014;


•	Net loss per diluted share was $0.28 per common share compared to net income per diluted share of $0.06 for the quarter ended June 30, 2014;


•	Revenue plus net change in deferred revenue increased by 20% to $70.8 million, compared to $59.2 million for the quarter ended June 30, 2014;


•	Deferred revenue increased by $6.4 million, compared to an increase of $6.7 million for the quarter ended June 30, 2014; and


•	Cash provided by operating activities was $9.6 million, compared to $5.7 million for the quarter ended June 30, 2014.

Some of our key non-GAAP financial highlights for the quarter ended June 30, 2015 include:


•	Non-GAAP gross profit increased to $48.1 million, or 75% of revenue, compared to $39.9 million, or 76% of revenue, for the quarter ended June 30, 2014;


•	Non-GAAP income from operations increased to $10.5 million, or 16% of revenue, compared to $9.2 million, or 18% of revenue, for the quarter ended June 30, 2014;


•	Non-GAAP net income increased to $9.7 million, or 15% of revenue, compared to $8.7 million, or 17% of revenue, for the quarter ended June 30, 2014; and


•	Non-GAAP net income per diluted share increased to $0.32 per common share, compared to $0.28 per common share for the quarter ended June 30, 2014.

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

Our total revenue consists of the following:

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License software. We derive license software revenue primarily from the sale of perpetual software licenses. We generally price our software based on the packages 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 with certainty 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, it is difficult to forecast whether recognized license software revenue and deferred license software revenue will continue to increase or decrease in a given period. As of June 30, 2015, our deferred license software revenue balance was $32.6 million, the current portion of which was $22.8 million.

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

Rates for maintenance support, including subsequent renewal rates, are typically established based upon a specific percentage of net license fees as set forth in the arrangement with the customer. Maintenance support revenue is recognized ratably over the maintenance support period, assuming all other revenue recognition criteria have been met. Our annual maintenance support contracts provide for software updates, upgrades and technical support. Our typical warranty on licensed software is 90 days and, during this period, our customers are entitled to receive maintenance and support without the purchase of a maintenance contract. After the expiration of the warranty period, our customers must purchase maintenance support services to continue receiving such support.

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

Our deferred subscription and maintenance support revenue balance consists of maintenance support and subscription orders that do not meet all the criteria for revenue recognition. As of June 30, 2015, our deferred subscription and maintenance support revenue balance was $54.0 million, the current portion of which was $47.7 million.

Professional services and other. Professional services and other revenue primarily includes revenue from professional service engagements consisting of implementation, training, consulting and design and customization services. Our professional services and other deferred revenue balance consists of orders that do not meet all the criteria for revenue recognition. As of June 30, 2015, our deferred professional services and other revenue balance was $21.2 million, the current portion of which was $15.8 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 intangibles, 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 support and maintenance obligations to our customers who have licensed our software and BroadCloud services, including maintenance and support expenses due to our use of third party software, amortization of acquired intangibles 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, including amortization of acquired intangibles.

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Gross Profit

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


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

•

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

•

Impact of deferred revenue. If any revenue recognition criteria have not been met, the applicable revenue derived from the arrangement is deferred, including license software, subscription and maintenance support, and professional services and other revenue, until all elements of revenue recognition criteria have been met. However, the cost of revenue, including the costs of license software, subscription and maintenance support and professional services and other, is typically expensed in the period in which it is incurred. Therefore, if relatively more revenue is deferred in a particular period, gross margin would decline in that period. Because the ability to recognize revenue on orders depends largely on the terms of the sale arrangement and 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, our business combinations resulted in a number of intangibles assets. These intangible assets are amortized over their useful lives, resulting in additional expense impacting gross profit over the applicable period. We may undertake additional strategic transactions in the future that would result in additional intangible amortization expense.

Revenue Plus Net Change in Deferred Revenue

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

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Beginning of period deferred revenue balance	$	101,367	$	74,078	$	101,456	$	77,662
End of period deferred revenue balance	107,726		80,792		107,726		80,792
Increase in deferred revenue	6,359		6,714		6,270		3,130
Revenue	64,484		52,484		120,155		96,402
Revenue plus net change in deferred revenue	$	70,843	$	59,198	$	126,425	$	99,532

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 1,162 employees at June 30, 2015 from 867 employees at December 31, 2014, and we expect to continue hiring additional employees to support our anticipated growth. We expect our operating expenses to increase in 2015 primarily due to increases in headcount and stock-based compensation expense due to an equity grant in April 2015.

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.

Research and development expenses. Research and development expenses consist primarily of salaries and personnel costs for development employees, including stock-based compensation, benefits and bonuses. Additional expenses include costs related

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to development, quality assurance and testing of new software and enhancement of existing software, consulting, travel and other related overhead. We engage third-party international and domestic consulting firms for various research and development efforts, such as software development, documentation, quality assurance and software support. We intend to continue to invest in our research and development efforts, including by hiring additional development personnel and by using third-party 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.

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, benefits and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other administrative expenses.

Stock-Based Compensation

We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant of stock-based awards to our directors, employees and consultants. We apply the fair value method in accordance with authoritative guidance for determining the cost of stock-based compensation. The total cost of the grant is measured based on the estimated fair value of the award at the date of grant. The fair value is then recognized as stock-based compensation expense on a graded basis over the requisite service period, which is the vesting period, of the award. For the three months ended June 30, 2015 and 2014, we recorded stock-based compensation expense of $18.2 million and $7.4 million, respectively and for the six months ended June 30, 2015 and 2014, we recorded stock-based compensation expense of $24.2 million and $17.8 million, respectively.

Based on stock-based awards outstanding as of June 30, 2015, we expect to recognize future expense related to the non-vested portions of such stock-based awards in the amount of $43.4 million over a weighted average period of approximately 1.22 years.

Other Expense, Net

Other expense, net, consists primarily of interest income, interest expense and foreign currency translation 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. Foreign currency translation gains and losses relate to the revaluation of foreign currency denominated trade receivables.

Income Tax Expense

Income tax expense consists of U.S. federal, state and foreign income taxes. We are required to pay income taxes in certain states and foreign jurisdictions. Historically, we have not been required to pay U.S. federal income taxes due to our accumulated net operating losses. For the quarter ended June 30, 2015, we have net operating loss carryforwards to utilize in the U.S.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 ("ASU 2014-09"), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard is effective for the us in first quarter of fiscal 2018, with early adoption to fiscal year 2017 permitted. The standard allows entities to apply either of two methods: (i) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. We are evaluating the impact of adopting this new standard on our financial statements and our method of adoption.

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guidance in the first quarter of fiscal year 2016, applied on a retrospective basis. The adoption will result in a corresponding reduction to the deferred interest asset balances and the Notes liability balance on the balance sheet for all period presented.

Results of Operations

Comparison of the Three Months Ended June 30, 2015 and 2014

Revenue



	Three Months Ended June 30,								Period-to-Period Change
	2015				2014				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Revenue by Type:
License software	$	30,091	47	%	$	25,649	49	%	$	4,442		17	%
Subscription and maintenance support	27,026		42		21,958		42		5,068			23
Professional services and other	7,367		11		4,877		9		2,490			51
Total revenue	$	64,484	100	%	$	52,484	100	%	$	12,000		23	%

Revenue by Geography:
Americas	$	44,818	70	%	$	28,807	55	%	$	16,011		56	%
EMEA	15,965		24		12,159		23		3,806			31
APAC	3,701		6		11,518		22		(7,817		)	(68	)
Total revenue	$	64,484	100	%	$	52,484	100	%	$	12,000		23	%

Total revenue for the three months ended June 30, 2015 increased by 23%, or $12.0 million, to $64.5 million as compared to the same period in 2014. This growth was driven by a 17% increase in license software revenue, a 23% increase in subscription and maintenance support revenue and a 51% increase in professional services and other revenue. Deferred revenue increased by $6.4 million for the three months ended June 30, 2015, compared to an increase of $6.7 million for the same period in 2014.

Americas revenue for the three months ended June 30, 2015 increased by 56%, or $16.0 million, to $44.8 million as compared to the same period in 2014. The increase in Americas revenue for the three months ended June 30, 2015 was due to increases in license software revenue, subscription and maintenance support revenue and professional services and other revenues.

Europe, Middle East and Africa, or EMEA, revenue for the three months ended June 30, 2015 increased 31%, or $3.8 million, to $16.0 million as compared to the same period in 2014. The increase in EMEA revenue for the three months ended June 30, 2015 was primarily due to an increase in license software revenue and an increase in subscription revenue related to our BroadCloud offering.

Asia Pacific, or APAC, revenue for the three months ended June 30, 2015 decreased by 68%, or $7.8 million, to $3.7 million compared to the same period in 2014. The decrease in APAC revenue for the three months ended June 30, 2015 was primarily due to the recognition of revenue in the prior year related to a multi-year project for an APAC service provider customer.

License Software

License software revenue for the three months ended June 30, 2015 increased by 17%, or $4.4 million, to $30.1 million, compared to the same period in 2014. The increase in license software revenue for the three months ended June 30, 2015 reflects an increase in license software revenue in the Americas and EMEA, partially offset by a decrease in license software revenue in APAC. Deferred license software revenue increased by $1.8 million for the three months ended June 30, 2015, compared to an increase of $3.6 million for the same period in 2014.

Subscription and Maintenance Support

Subscription and maintenance support revenue for the three months ended June 30, 2015 increased by 23%, or $5.1 million, to $27.0 million, compared to the same period in 2014. The increase in subscription and maintenance support revenue for the three months ended June 30, 2015 was primarily the result of growth in our subscription revenue associated with our BroadCloud platforms, which included contributions from recent acquisitions. Our BroadCloud subscription revenue for the three months ended June 30, 2015 increased by $2.8 million to $8.5 million, compared to the same period in 2014. Our maintenance support revenue grew as a result of growth in our installed base of customers who purchased maintenance support. Deferred

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subscription and maintenance support revenue increased by $2.7 million for the three months ended June 30, 2015, compared to a decrease of $1.1 million for the same period in 2014.

Professional Services and Other

Professional services and other revenue for the three months ended June 30, 2015 increased by 51%, or $2.5 million, to $7.4 million, compared to the same period in 2014. The increase in professional services and other revenue for the three months ended June 30, 2015 was primarily due to increased professional services activity, including contributions from recent acquisitions, and the timing of revenue recognition. Deferred professional services and other revenue increased by $1.8 million for the three months ended June 30, 2015, compared to an increase of $4.2 million for the same period in 2014.

Cost of Revenue and Gross Profit



	Three Months Ended June 30,									Period-to-Period Change
	2015					2014				Period-to-Period Change
	Amount			Percent of Related Revenue		Amount		Percent of Related Revenue		Amount			Percentage
	(dollars in thousands)
Cost of Revenue:
License software	$	3,020		10	%	$	2,529	10	%	$	491		19	%
Subscription and maintenance support	10,533			39		8,606		39		1,927			22
Professional services and other	7,643			104		3,726		76		3,917			105
Total cost of revenue	$	21,196		33	%	$	14,861	28	%	$	6,335		43	%
Gross Profit:
License software	$	27,071		90	%	$	23,120	90	%	$	3,951		17	%
Subscription and maintenance support	16,493			61		13,352		61		3,141			24
Professional services and other	(276		)	(4	)	1,151		24		(1,427		)	(124	)
Total gross profit	$	43,288		67	%	$	37,623	72	%	$	5,665		15	%

For the three months ended June 30, 2015, our gross margin decreased to 67% of revenue as compared to 72% for the same period in 2014, and our gross profit increased by 15%, or $5.7 million, to $43.3 million. The total gross profit increase was primarily due to growth in revenue relative to cost of revenue.

For the three months ended June 30, 2015, license software gross margin remained approximately unchanged at 90% as compared to the same period in 2014 and license software gross profit increased by 17% to $27.1 million. License software cost of revenue increased by 19%, or $0.5 million, to $3.0 million for the three months ended June 30, 2015, compared to the same period in 2014. The increase in license software cost of revenue was primarily due to a $0.2 million increase in amortization of acquired intangibles and a $0.4 million increase in personnel-related costs, of which $0.4 million related to stock-based compensation expense, partially offset by a $0.2 million decrease in software 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 June 30, 2015, subscription and maintenance support gross margin remained approximately unchanged at 61% as compared to the same period in 2014 and subscription and maintenance support gross profit increased by 24% to $16.5 million. Subscription and maintenance support cost of revenue increased by 22%, or $1.9 million, to $10.5 million for the three months ended June 30, 2015, compared to the same period in 2014. The increase in subscription and maintenance support cost of revenue was related to our continued investment in our BroadCloud offerings. The increase was primarily due to a $1.3 million increase in personnel-related costs, of which $0.9 million related to stock-based compensation expense, and a $0.7 million increase in operational costs associated with hosting the BroadCloud services. 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 June 30, 2015, professional services and other gross margin decreased to (4)% as compared to 24% for the same period in 2014 and professional services and other gross profit decreased by 124% to a gross loss of $0.3 million. Professional services and other cost of revenue increased by 105%, or $3.9 million to $7.6 million for the three months ended June 30, 2015, compared to the same period in 2014. The increase in professional services and other cost of revenue was

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primarily due to a $2.6 million increase in personnel-related costs, of which $1.2 million related to stock-based compensation expense, a $0.5 million increase in hardware expenses, a $0.2 million increase in consulting expenses and a $0.4 million increase in travel 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 June 30,								Period-to-Period Change
	2015				2014				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount		Percentage
	(dollars in thousands)
Sales and marketing	$	23,415	36	%	$	17,146	33	%	$	6,269	37	%
Research and development	17,267		27		12,227		23		5,040		41
General and administrative	11,875		18		7,777		15		4,098		53
Total operating expenses	$	52,557	82	%	$	37,150	71	%	$	15,407	41	%

Sales and Marketing. Sales and marketing expense increased by 37%, or $6.3 million, to $23.4 million for the three months ended June 30, 2015, compared to the same period in 2014. This increase was primarily due to a $5.5 million increase in personnel-related costs, of which $4.1 million related to stock-based compensation expense, a $0.2 million increase in consulting expense and a $0.3 million increase in recruiting and training expenses.

Research and Development. Research and development expense increased by 41%, or $5.0 million, to $17.3 million for the three months ended June 30, 2015, compared to the same period in 2014. This increase was primarily due to a $4.5 million increase in personnel-related costs, of which $2.9 million related to stock-based compensation expense, and a $0.2 million increase in depreciation expense.

General and Administrative. General and administrative expense increased by 53%, or $4.1 million, to $11.9 million for the three months ended June 30, 2015, compared to the same period in 2014. This increase was primarily due to a $2.1 million increase in personnel-related costs, of which $1.4 million related to stock-based compensation expense, and a $1.5 million increase in third-party legal and consulting expenses.

Income (Loss) from Operations

We had loss from operations of $9.3 million for the three months ended June 30, 2015, as compared to income from operations of $0.5 million for the same period in 2014.

Other Expense



	Three Months Ended June 30,										Period-to-Period Change
	2015					2014					Period-to-Period Change
	Amount			Percent of Total Revenue		Amount			Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Interest expense, net	$	1,745		3	%	$	1,796		3	%	$	(51	)	(3	)%
Other, net	(484		)	*		(206		)	*		(278		)	135	%
Total other expense, net	$	1,261		2	%	$	1,590		3	%	$	(329	)	(21	)%



*	Less than 1%

Other expense, net for the three months ended June 30, 2015 decreased by $0.3 million compared to the same period in 2014, primarily due to the increase in foreign currency translation gains related to the revaluation of foreign currency denominated trade receivables.

Benefit from Income Taxes

Benefit from income taxes was $2.4 million for the three months ended June 30, 2015, compared to $2.8 million for the same period in 2014. The decrease in our tax benefit is due primarily to an increase in the estimated nondeductible expenses related

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to stock-based compensation expense and changes in the mix of earnings by jurisdiction. In addition, our results for the three months ended June 30, 2015 do not include benefits from U.S. research and development tax credits, due to the expiration of the statute as of December 31, 2014, or from the one-time benefit resulting from a discrete release of a valuation allowance in certain foreign jurisdictions, which were included in the same period in 2014.

Comparison of the Six Months Ended June 30, 2015 and 2014

Revenue



	Six Months Ended June 30,								Period-to-Period Change
	2015				2014				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Revenue by Type:
License software	$	53,027	44	%	$	42,791	44	%	$	10,236		24	%
Subscription and maintenance support	52,435		44		43,084		45		9,351			22
Professional services and other	14,693		12		10,527		11		4,166			40
Total revenue	$	120,155	100	%	$	96,402	100	%	$	23,753		25	%

Revenue by Geography:
Americas	$	78,920	66	%	$	50,468	52	%	$	28,452		56	%
EMEA	31,569		26		25,426		27		6,143			24
APAC	9,666		8		20,508		21		(10,842		)	(53	)
Total revenue	$	120,155	100	%	$	96,402	100	%	$	23,753		25	%

Total revenue for the six months ended June 30, 2015 increased by 25% or $23.8 million to $120.2 million as compared to the same period in 2014. This growth was driven by a 24% increase in license software revenue, a 22% increase in subscription and maintenance support revenue and a 40% increase in professional services and other revenue. Deferred revenue increased by $6.3 million for the six months ended June 30, 2015, compared to an increase of $3.1 million for the same period in 2014.

Americas revenue for the six months ended June 30, 2015 increased by 56%, or $28.5 million, to $78.9 million as compared to the same period in 2014. The increase in Americas revenue for the six months ended June 30, 2015 was primarily due to an increase in license software revenue, subscription and maintenance support revenue and professional services and other revenues.

EMEA revenue for the six months ended June 30, 2015 increased 24%, or $6.1 million, to $31.6 million as compared to the same period in 2014. The increase in EMEA revenue for the six months ended June 30, 2015 was primarily due to an increase in license software revenue and an increase in subscription revenue related to our BroadCloud offering, partially offset by a decrease in professional services and other revenues.

APAC revenue for the six months ended June 30, 2015 decreased by 53%, or $10.8 million, to $9.7 million compared to the same period in 2014. The decrease in APAC revenue for the six months ended June 30, 2015 was primarily due to the recognition of revenue in the prior year related to a multi-year project for an APAC service provider customer.

License Software

License software revenue for the six months ended June 30, 2015 increased by 24%, or $10.2 million, to $53.0 million, compared to the same period in 2014. The increase in license software revenue for the six months ended June 30, 2015 reflects an increase in license software revenue in the Americas and EMEA, partially offset by a decrease in license software revenue in APAC. Deferred license software revenue increased by $6.1 million for the six months ended June 30, 2015, compared to an increase of $2.2 million for the same period in 2014.

Subscription and Maintenance Support

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Subscription and maintenance support revenue for the six months ended June 30, 2015 increased by 22%, or $9.4 million, to $52.4 million, compared to the same period in 2014. The increase in subscription and maintenance support revenue for the six months ended June 30, 2015 was primarily the result of growth in our subscription revenue associated with our BroadCloud platforms, which included contributions from recent acquisitions. Our BroadCloud subscription revenue for the six months ended June 30, 2015 increased by $5.4 million to $16.7 million, compared to the same period in 2014. Our maintenance support revenue grew as a result of growth in our installed base of customers who purchased maintenance support. Deferred subscription and maintenance support revenue increased by $1.2 million for the six months ended June 30, 2015, compared to a decrease of $1.1 million for the same period in 2014.

Professional Services and Other

Professional services and other revenue for the six months ended June 30, 2015 increased by 40%, or $4.2 million, to $14.7 million, compared to the same period in 2014. The increase in professional services and other revenue for the six months ended June 30, 2015 was primarily due to increased professional services activity, including contributions from recent acquisitions, and the timing of revenue recognition. Deferred professional services and other revenue decreased by $1.0 million for the six months ended June 30, 2015, compared to an increase of $2.0 million for the same period in 2014.

Cost of Revenue and Gross Profit



	Six Months Ended June 30,								Period-to-Period Change
	2015				2014				Period-to-Period Change
	Amount		Percent of Related Revenue		Amount		Percent of Related Revenue		Amount			Percentage
	(dollars in thousands)
Cost of Revenue:
License software	$	5,642	11	%	$	4,651	11	%	$	991		21	%
Subscription and maintenance support	19,320		37		16,052		37		3,268			20
Professional services and other	12,046		82		7,215		69		4,831			67
Total cost of revenue	$	37,008	31	%	$	27,918	29	%	$	9,090		33	%
Gross Profit:
License software	$	47,385	89	%	$	38,140	89	%	$	9,245		24	%
Subscription and maintenance support	33,115		63		27,032		63		6,083			23
Professional services and other	2,647		18		3,312		31		(665		)	(20	)
Total gross profit	$	83,147	69	%	$	68,484	71	%	$	14,663		21	%

For the six months ended June 30, 2015, our gross margin decreased to 69% of revenue as compared to 71% for the same period in 2014, and our gross profit increased by 21%, or $14.7 million, to $83.1 million. The total gross profit increase was primarily due to growth in revenue relative to cost of revenue.

For the six months ended June 30, 2015, license software gross margin remained approximately unchanged at 89% as compared to the same period in 2014 and license software gross profit increased by 24% to $47.4 million. License software cost of revenue increased by 21%, or $1.0 million, to $5.6 million for the six months ended June 30, 2015, compared to the same period in 2014. The increase in license software cost of revenue was primarily due to a $0.4 million increase in amortization of acquired intangibles and a $0.4 million increase in personnel-related costs, of which $0.2 million related to stock-based compensation expense. The increase in license software gross profit was driven by higher revenue growth relative to growth in license software cost of revenue.

For the six months ended June 30, 2015, subscription and maintenance support gross margin remained approximately unchanged at 63% as compared to the same period in 2014 and subscription and maintenance support gross profit increased by 23% to $33.1 million. Subscription and maintenance support cost of revenue increased by 20%, or $3.3 million, to $19.3 million for the six months ended June 30, 2015, compared to the same period in 2014. The increase in subscription and maintenance support cost of revenue was primarily related to our continued investment in our product offerings, primarily our BroadCloud offerings. The increase was primarily due to a $1.6 million increase in personnel-related costs, of which $0.7 million related to stock-based compensation expense, and a $1.6 million increase in operational costs associated with hosting

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the BroadCloud services. 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 six months ended June 30, 2015, professional services and other gross margin decreased to 18% as compared to 31% for the same period in 2014 and professional services and other gross profit decreased by 20% to $2.6 million. Professional services and other cost of revenue increased by 67%, or $4.8 million to $12.0 million for the six months ended June 30, 2015, compared to the same period in 2014. The increase in professional services and other cost of revenue was primarily due to a $3.3 million increase in personnel-related costs, of which $1.2 million related to stock-based compensation expense, a $0.7 million increase in outside consulting expenses and a $0.5 million increase in travel 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



	Six Months Ended June 30,								Period-to-Period Change
	2015				2014				Period-to-Period Change
	Amount		Percent of Total Revenue		Amount		Percent of Total Revenue		Amount		Percentage
	(dollars in thousands)
Sales and marketing	$	40,683	34	%	$	35,002	36	%	$	5,681	16	%
Research and development	30,935		26		25,552		27		5,383		21
General and administrative	20,679		17		16,682		17		3,997		24
Total operating expenses	$	92,297	77	%	$	77,236	80	%	$	15,061	19	%

Sales and Marketing. Sales and marketing expense increased by 16%, or $5.7 million to $40.7 million for the six months ended June 30, 2015, compared to the same period in 2014. The increase was primarily due to a $4.5 million increase in personnel-related costs, of which $2.8 million of stock-based compensation expense, a $0.2 million increase in depreciation expense, a $0.3 million increase in software expenses and a $0.2 million increase in recruiting expenses.

Research and Development. Research and development expense increased by 21%, or $5.4 million to $30.9 million for the six months ended June 30, 2015, compared to the same period in 2014. This increase was primarily due to a $4.0 million increase in personnel-related costs, of which $1.6 million related to stock-based compensation expense, a $0.4 million increase in depreciation expense, a $0.3 million increase in equipment and software expenses and a $0.2 million increase in consulting expenses.

General and Administrative. General and administrative expense increased by 24%, or $4.0 million, to $20.7 million for the six months ended June 30, 2015, compared to the same period in 2014. This increase was primarily due to a $1.1 million increase in personnel-related costs, of which $0.1 million related to stock-based compensation expense, a $2.3 million increase in third party legal and consulting expenses and a $0.2 million increase depreciation expense.

Loss from Operations

We had a loss from operations of $9.2 million for the six months ended June 30, 2015, as compared to $8.8 million for the same period in 2014.

Other Expense



	Six Months Ended June 30,									Period-to-Period Change
	2015				2014					Period-to-Period Change
	Amount		Percent of Total Revenue		Amount			Percent of Total Revenue		Amount			Percentage
	(dollars in thousands)
Interest expense, net	$	3,520	3	%	$	3,568		4	%	$	(48	)	(1	)%
Other, net	1,223		1	%	(169		)	*		1,392			(824	)%
Total other expense, net	$	4,743	4	%	$	3,399		4	%	$	1,344		40	%

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*	Less than 1%

Other expense, net for the six months ended June 30, 2015 increased by approximately $1.3 million compared to the same period in 2014, primarily due to foreign currency translation losses related to the revaluation of foreign currency denominated trade receivables.

Benefit From Income Taxes

Benefit from income tax was $3.8 million for the six months ended June 30, 2015, compared to $6.4 million for the same period in 2014. The decrease in our tax benefit is due primarily to an increase in the estimated nondeductible expenses related to stock-based compensation expense and changes in the mix of earnings by jurisdiction. In addition, our results for the six months ended June 30, 2015 do not include benefits from U.S. research and development tax credits, due to the expiration of the statute as of December 31, 2014, or from the one-time benefit resulting from a discrete release of a valuation allowance in certain foreign jurisdictions, which were included in the same period in 2014.

Liquidity and Capital Resources

Resources

Since the beginning of 2009, we have funded our operations principally with cash provided by operating activities.

Cash and Cash Equivalents, Accounts Receivable and Working Capital

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



	June 30, 2015		December 31, 2014
Cash and cash equivalents	$	78,675	$	101,543
Accounts receivable, net	91,295		81,794
Working capital	159,594		170,595



	Six Months Ended June 30,
	2015			2014
Cash provided by (used in):
Operating activities	$	13,692		$	12,539
Investing activities	(33,822		)	(16,553		)
Financing activities	(1,889		)	4,542

Our cash and cash equivalents at June 30, 2015 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 is not included in cash and cash equivalents.

Operating Activities

For the six months ended June 30, 2015, net cash provided by operating activities was $13.7 million, compared to $12.5 million for the same period in 2014. The increase was primarily due to the $19.5 million increase from the net change in other current and long-term assets and liabilities, partially offset by the $14.0 million decrease due to the aggregate change in non-cash items and an increase in net loss of $4.3 million. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, tax windfall benefits from stock option exercises, non-cash interest on convertible debt and amortization of software licenses.

Investing Activities

Our investing activities have consisted primarily of net investment in marketable securities, business acquisitions and capital expenditures for property and equipment. For the six months ended June 30, 2015, net cash used in investing activities was

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$33.8 million, compared to $16.6 million for the same period in 2014. This increase was attributable to a $17.7 million increase in payments for acquisitions and a $2.5 million increase in capital expenditures for property and equipment, partially offset by a $3.6 million decrease in net purchases of marketable securities, compared to the same period in 2014.

Financing Activities

For the six months ended June 30, 2015, net cash used in financing activities was $1.9 million, compared to net cash provided by financing activities of $4.5 million for the same period in 2014. Net cash used in financing activities primarily consisted of taxes paid on the vesting of restricted stock units of $4.8 million, partially offset by proceeds from the exercise of stock options of $2.5 million and the tax windfall benefits from stock options exercised of $0.4 million.

Borrowings and Credit Facilities

Convertible Senior Notes

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

The initial conversion rate for the Notes is approximately $41.99 per share. The conversion price is subject to adjustment in some events, but will not be adjusted for accrued interest. Upon conversion, we will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted. See Note 8, Borrowings, contained elsewhere in this Quarterly Report on Form 10-Q for additional details about the Notes.

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, through organic growth and acquisitions, as we increase headcount, expand our business activities, grow our customer base and implement and enhance our information technology and enterprise resource planning system. As sales grow, we expect our accounts receivable balance to increase. Any such increase in accounts receivable may not be completely offset by increases in accounts payable and accrued expenses, which would likely result in greater working capital requirements.

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

Contractual Obligations

We have contractual obligations for non-cancelable office space, notes payable and other short-term and long-term liabilities. The following table discloses aggregate information about our contractual obligations as of June 30, 2015 and periods in which payments are due (in thousands):



	Payments Due by Year
	Total		Remainder of 2015		2016 - 2017		2018 - 2019		After 2019
Convertible Senior Notes, including interest *	$	125,400	$	900	$	3,600	$	120,900	$	—
Operating lease obligations	23,453		2,441		9,071		6,451		5,490
Total	$	148,853	$	3,341	$	12,671	$	127,351	$	5,490



*	Contractual interest obligations related to the Notes totaled $5.4 million at June 30, 2015, including $0.9 million, $3.6 million and $0.9 million due in the years 2015, 2016-2017 and 2018-2019, respectively.

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As of June 30, 2015, we had unrecognized tax benefits of $2.5 million. We do not expect to recognize any of these benefits in 2015. Furthermore, we are not able to provide a reliable estimate of the timing of future payments relating to these unrecognized benefits.

Non-GAAP Financial Measures

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

The presentation of non-GAAP net income, non-GAAP net income per share, non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP income from operations 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 income from operations” 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 income from operations” 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 income from operations as income from operations plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP income from operations 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 less 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 less 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.

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	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)
Non-GAAP cost of revenue:
GAAP license cost of revenue	$	3,020		$	2,529		$	5,642		$	4,651
(percent of related revenue)	10		%	10		%	11		%	11		%
Less:
Stock-based compensation expense	525			157			639			414
Amortization of acquired intangible assets	419			226			868			452
Non-GAAP license cost of revenue	$	2,076		$	2,146		$	4,135		$	3,785
(percent of related revenue)	7		%	8		%	8		%	9		%


GAAP subscription and maintenance support cost of revenue	$	10,533		$	8,606		$	19,320		$	16,052
(percent of related revenue)	39		%	39		%	37		%	37		%
Less:
Stock-based compensation expense	1,420			521			1,870			1,210
Amortization of acquired intangible assets	1,056			1,164			2,111			2,348
Non-GAAP subscription and maintenance support cost of revenue	$	8,057		$	6,921		$	15,339		$	12,494
(percent of related revenue)	30		%	32		%	29		%	29		%


GAAP professional services and other cost of revenue	$	7,643		$	3,726		$	12,046		$	7,215
(percent of related revenue)	104		%	76		%	82		%	69		%
Less:
Stock-based compensation expense	1,377			173			1,654			418
Amortization of acquired intangible assets	58			—			58			—
Non-GAAP professional services and other cost of revenue	$	6,208		$	3,553		$	10,334		$	6,797
(percent of related revenue)	84		%	73		%	70		%	65		%

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	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)
Non-GAAP gross profit:
GAAP gross profit	$	43,288		$	37,623		$	83,147		$	68,484
(percent of total revenue)	67		%	72		%	69		%	71		%
Plus:
Stock-based compensation expense	3,322			851			4,163			2,042
Amortization of acquired intangible assets	1,533			1,390			3,037			2,800
Non-GAAP gross profit	$	48,143		$	39,864		$	90,347		$	73,326
(percent of total revenue)	75		%	76		%	75		%	76		%


GAAP license gross profit	$	27,071		$	23,120		$	47,385		$	38,140
(percent of related revenue)	90		%	90		%	89		%	89		%
Plus:
Stock-based compensation expense	525			157			639			414
Amortization of acquired intangible assets	419			226			868			452
Non-GAAP license gross profit	$	28,015		$	23,503		$	48,892		$	39,006
(percent of related revenue)	93		%	92		%	92		%	91		%


GAAP subscription and maintenance support gross profit	$	16,493		$	13,352		$	33,115		$	27,032
(percent of related revenue)	61		%	61		%	63		%	63		%
Plus:
Stock-based compensation expense	1,420			521			1,870			1,210
Amortization of acquired intangible assets	1,056			1,164			2,111			2,348
Non-GAAP subscription and maintenance support gross profit	$	18,969		$	15,037		$	37,096		$	30,590
(percent of related revenue)	70		%	68		%	71		%	71		%


GAAP professional services and other gross profit (loss)	$	(276	)	$	1,151		$	2,647		$	3,312
(percent of related revenue)	(4		)%	24		%	18		%	31		%
Plus:
Stock-based compensation expense	1,377			173			1,654			418
Amortization of acquired intangible assets	58			—			58			—
Non-GAAP professional services and other gross profit	$	1,159		$	1,324		$	4,359		$	3,730
(percent of related revenue)	16		%	27		%	30		%	35		%

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	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)
Non-GAAP income from operations:
GAAP income (loss) from operations	$	(9,269	)	$	473		$	(9,150	)	$	(8,752	)
(percent of total revenue)	(14		)%	1		%	(8		)%	(9		)%
Plus:
Stock-based compensation expense	18,187			7,382			24,230			17,764
Amortization of acquired intangible assets	1,533			1,390			3,037			2,800
Non-GAAP income from operations	$	10,451		$	9,245		$	18,117		$	11,812
(percent of total revenue)	16		%	18		%	15		%	12		%


GAAP operating expense	$	52,557		$	37,150		$	92,297		$	77,236
(percent of total revenue)	82		%	71		%	77		%	80		%
Less:
Stock-based compensation expense	14,865			6,531			20,067			15,722
Non-GAAP operating expense	$	37,692		$	30,619		$	72,230		$	61,514
(percent of total revenue)	58		%	58		%	60		%	64		%


GAAP sales and marketing expense	$	23,415		$	17,146		$	40,683		$	35,002
(percent of total revenue)	36		%	33		%	34		%	36		%
Less:
Stock-based compensation expense	6,666			2,565			8,804			5,979
Non-GAAP sales and marketing expense	$	16,749		$	14,581		$	31,879		$	29,023
(percent of total revenue)	26		%	28		%	27		%	30		%


GAAP research and development expense	$	17,267		$	12,227		$	30,935		$	25,552
(percent of total revenue)	27		%	23		%	26		%	27		%
Less:
Stock-based compensation expense	5,068			2,304			6,891			5,510
Non-GAAP research and development expense	$	12,199		$	9,923		$	24,044		$	20,042
(percent of total revenue)	19		%	19		%	20		%	21		%


GAAP general and administrative expense	$	11,875		$	7,777		$	20,679		$	16,682
(percent of total revenue)	18		%	15		%	17		%	17		%
Less:
Stock-based compensation expense	3,131			1,662			4,372			4,233
Non-GAAP general and administrative expense	$	8,744		$	6,115		$	16,307		$	12,449
(percent of total revenue)	14		%	12		%	14		%	13		%

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	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands, except per share data)
Non-GAAP net income and income per share:
GAAP net income (loss)	$	(8,125	)	$	1,665		$	(10,131	)	$	(5,787	)
(percent of total revenue)	(13		)%	3		%	(8		)%	(6		)%
Adjusted for:
Stock-based compensation expense	18,187			7,382			24,230			17,764
Amortization of acquired intangible assets	1,533			1,390			3,037			2,800
Non-cash interest expense on our notes	1,576			1,467			3,116			2,900
Foreign currency transaction losses (gains)	(484		)	(206		)	1,223			(169		)
Non-cash tax provision (benefit)	(2,962		)	(2,960		)	(4,471		)	(6,587		)
Non-GAAP net income	$	9,725		$	8,738		$	17,004		$	10,921
(percent of total revenue)	15		%	17		%	14		%	11		%


GAAP net income (loss) per basic common share	$	(0.28	)	$	0.06		$	(0.35	)	$	(0.20	)
Adjusted for:
Stock-based compensation expense	0.62			0.26			0.83			0.62
Amortization of acquired intangible assets	0.05			0.05			0.10			0.10
Non-cash interest expense on our notes	0.05			0.05			0.11			0.10
Foreign currency transaction losses (gains)	(0.02		)	(0.01		)	0.04			(0.01		)
Non-cash tax provision (benefit)	(0.10		)	(0.10		)	(0.15		)	(0.23		)
Non-GAAP net income per basic common share	$	0.33		$	0.29		$	0.58		$	0.38


GAAP net income (loss) per diluted common share	$	(0.28	)	$	0.06		$	(0.35	)	$	(0.20	)
Adjusted for:
Stock-based compensation expense	0.60			0.24			0.80			0.60
Amortization of acquired intangible assets	0.05			0.05			0.10			0.09
Non-cash interest expense on our notes	0.05			0.05			0.10			0.11
Foreign currency transaction losses (gains)	(0.02		)	(0.01		)	0.04			(0.01		)
Non-cash tax provision (benefit)	(0.10		)	(0.10		)	(0.15		)	(0.22		)
Non-GAAP net income per diluted common share	$	0.32		$	0.28		$	0.56		$	0.37

Off-Balance Sheet Arrangements

As of June 30, 2015, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

The interest rate is fixed on all our outstanding loan balances; consequently, we do not have exposure to risks due to increases in the variable rates tied to indexes. We maintain a short-term investment portfolio consisting mainly of highly liquid short-term money market funds, which we consider to be cash equivalents. Our restricted cash consists primarily of certificates of deposit that secure letters of credit related to operating leases for office space. These securities and investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. At June 30, 2015, 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

Our results of operations and cash flows are subject to fluctuations because of changes in foreign currency exchange rates, particularly changes in exchange rates between the U.S. dollar and the Euro and British Pound, the currencies of countries where we currently have our most significant international operations. On a historical basis, invoicing has largely been denominated in U.S. dollars; however, we expect an increasing proportion of our future business to be conducted in currencies other than U.S. dollars. Our expenses are generally denominated in the currencies of the countries in which our operations are located, with our most significant operations at present located in the United States, the United Kingdom, Germany and Canada. 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 will likely become more significant. We do not currently engage in currency hedging activities to limit the risk of exchange rate fluctuations.

Fluctuations in foreign currencies impact the amount of total assets and liabilities that we report for our foreign subsidiaries upon the translation of these amounts into U.S. Dollars. In particular, the amount of cash and cash equivalents that we report in U.S. Dollars would be impacted by a significant fluctuation in foreign currency exchange rates. Based on our cash and cash equivalent balances held in foreign currencies at June 30, 2015, 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 $1.5 million, assuming constant foreign currency cash and cash equivalents balances, although the actual effects may differ materially from this hypothetical analysis.

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ITEM 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

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

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PART II: OTHER INFORMATION


ITEM 1.	Legal Proceedings

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


ITEM 1A.	Risk Factors

There have been no material changes in risk factors from those disclosed in Part 1, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which was filed with the Securities and Exchange Commission, or SEC, on February 25, 2015.


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

None.


ITEM 3.	Defaults Upon Senior Securities

None.


ITEM 4.	Mine Safety Disclosures

None.


ITEM 5.	Other Information

None.

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ITEM 6.	Exhibits



Exhibit Number		Description of Document

3.1		Amended and Restated Certificate of Incorporation. (1)

3.2		Second Amended and Restated Bylaws. (2)

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

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

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

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

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

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

101.INS XBRL		Instance Document

101.SCH XBRL		Taxonomy Extension Schema

101.CAL XBRL		Taxonomy Extension Calculation Linkbase

101.DEF XBRL		Taxonomy Extension Definition Linkbase

101.LAB XBRL		Taxonomy Extension Label Linkbase

101.PRE XBRL		Taxonomy Extension Presentation Linkbase

___________________


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


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


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

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SIGNATURE

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



	BROADSOFT, INC.

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

Date: August 3, 2015

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