|
BROADSOFT, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Company Overview
We are the leading global provider of software and services that enable mobile,
fixed-line and cable service providers to deliver hosted, or cloud-based,
Unified Communications and other voice and multimedia services over their
Internet protocol, or IP, based networks. Our core communications platform
consists of three offerings: BroadWorks, BroadCloud and BroadTouch.
We began selling BroadWorks in 2001. Over 520 service providers in more than 69
countries have purchased and/or are delivering services utilizing our software,
including 19 of the top 25 telecommunications service providers globally, as
measured by revenue for the year ended December 31, 2011. We sell our products
to service providers both directly and indirectly through distribution partners,
such as telecommunications equipment vendors, VARs and other distributors.
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.
In 2013, we expect to continue addressing what we see as the trend towards
cloud-based and hosted communications. We are increasing our strategic
investments in research and development of existing and new products, including
client software and cloud-based services, as well as in sales and marketing
headcount to support our product offerings and increase our go-to-market
efforts. We increased our hiring in 2012, and expect to continue to grow in
2013. We plan to continue investment in BroadCloud PBX, our cloud-based PBX
offering, which permits our service providers to offer BroadWorks features and
functions through a service offering hosted and managed by us, reducing cost and
increasing speed and ease of use for end-users. 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 faster and drive our
revenue growth.
We believe that in 2013, converged and mobile operators will continue to seek UC
solutions to deliver to their enterprise customer base. Our UC-One platform,
which we introduced in October 2012, seeks to address this evolution and allows
service providers and operators to rapidly and efficiently deliver a UC
experience regardless of end user device and whether or not the end user has
fixed line or wireless access. Recognizing the importance of mobile, we have
architected mobility into our solutions and products and have made integrating
with existing mobile networks simple and a core competency of our platform. We
have optimized our client, cloud and software solutions to enable mobility in
all of our services, across a wide range of devices.
We expect that our enterprise-based applications will grow more quickly than our
consumer applications during 2013. This is driven by both increasing market
acceptance of hosted Unified Communications, as well as a transition by service
providers in their investment in consumer IP networks from their fixed line
offerings to LTE. We believe that we have the opportunity for renewed growth in
our consumer business once service providers begin to deploy VoLTE, which we
believe could begin in 2014.
Management also analyzes trends of billings from existing customers relative to
billings from new customers as we believe billings are a key indicator of growth
and performance of our business and reflect the level of selling activity in any
particular time frame. During 2012, we saw continued growth in revenue and
billings from our existing customer base, driven by both the growth of existing
BroadWorks-based applications, deployment of new BroadWorks applications and the
adoption of BroadCloud PBX. Growth from the acquisition of new customers was
lower in 2012 and we expect this trend to continue in 2013. We have increasingly
focused our selling efforts on our existing customers by, for example,
increasing our go-to-market assistance to such service providers to help them
accelerate the growth of their UC offerings.
40--------------------------------------------------------------------------------
Table of Contents
Key Financial Highlights
Some of our key GAAP financial highlights for the year ended December 31, 2012
include:
• Total revenue increased by 19%, or $26.8 million, to $164.8 million, compared to $138.1 million for 2011;
• Gross profit increased to $132.4 million, or 80% of revenue, compared to
$113.1 million, or 82% of revenue for 2011;
• Income from operations decreased to $25.4 million, or 15% of total
revenue, compared to $27.4 million, or 20% of total revenue, for 2011;
• Net income decreased to $12.1 million, compared to $32.3 million for 2011;
• Net income per diluted share decreased to $0.43 per share from $1.15 per
share for 2011;
• Revenue plus net change in deferred revenue increased by 24% to $168.9
million, compared to $135.9 million for 2011;
• Deferred revenue increased $4.0 million, compared to a decrease of $2.1 million for 2011; and
• Cash provided by operating activities was $30.6 million, compared to $28.6
million for 2011.
Some of our key non-GAAP financial highlights for the year ended December 31,
2012 include:
• Non-GAAP gross profit increased to $136.8 million or 83% of revenue,
compared to $115.3 million, or 84% of revenue in 2011;
• Non-GAAP income from operations increased to $43.1 million, or 26% of
total revenue, compared to $35.9 million, or 26% of total revenue, in
2011;
• Non-GAAP net income increased to $40.9 million, compared to $34.5 million
in 2011; and
• Non-GAAP net income per diluted share increased to $1.44 per common share,
compared to $1.23 per common share in 2011.
For a discussion of these non-GAAP financial measures and a reconciliation of
GAAP and non-GAAP financial results, please refer to "Non-GAAP Financial
Measures" included elsewhere in this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Components of Operating Results
Revenue
We derive our revenue primarily from the sale of license software, subscription
and maintenance support, and professional services. We recognize revenue when
all revenue recognition criteria have been met in accordance with revenue
recognition guidance. This guidance provides that revenue should be recognized
when persuasive evidence of an arrangement exists, delivery has occurred, the
price is fixed or determinable and collection is probable.
Our total revenue consists of the following:
License software. We derive license software revenue from the sale of perpetual
software licenses. We price our software based on the types of features and
applications provided and on the number of subscriber licenses sold. These
factors impact the average selling price of our licenses and the comparability
of average selling prices. Our license software revenue may vary significantly
from quarter to quarter or from year to year as a result of long sales and
deployment cycles, variations in customer ordering practices and the
41--------------------------------------------------------------------------------
Table of Contents
application of management's judgment in applying complex revenue recognition
rules. Our deferred license software revenue balance consists of software orders
that do not meet all the criteria for revenue recognition. We are unable to
predict the proportion of orders that will meet all the criteria for revenue
recognition relative to those orders that will not meet all such criteria and,
as a result, we cannot forecast whether recognized license software revenue and
deferred license software revenue will continue to increase or decrease in a
given period. As of December 31, 2012, our deferred license software revenue
balance was $18.4 million, the current portion of which was $10.8 million.
Subscription and maintenance support. Subscription and maintenance support
revenue includes recurring revenue from annual maintenance support contracts for
our software licenses and, to a much lesser extent, from subscriptions related
to our delivery of BroadCloud services.
Our annual maintenance support contracts provide for software updates, upgrades
and technical support. Our typical warranty on licensed software is 90 days and,
during this period, our customers are entitled to receive maintenance and
support without the purchase of a maintenance contract. After the expiration of
the warranty period, our customers must purchase an annual maintenance contract
to continue receiving ongoing software maintenance and customer support.
Under our BroadCloud subscriptions, we are paid a recurring fee 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 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 December 31, 2012, our deferred subscription and
maintenance support revenue balance was $35.9 million, the current portion of
which was $31.7 million.
Professional services and other. Professional services and other revenue
primarily includes revenue from professional service engagements consisting of
implementation, training and consulting services. Our professional services and
other deferred revenue balance consists of orders that do not meet all the
criteria for revenue recognition. As of December 31, 2012, our deferred
professional services and other revenue balance was $6.9 million, the current
portion of which was $6.8 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 technology,
personnel-related expenses, and royalties paid to third parties whose
technology or products are sold as part of BroadWorks. A significant
amount of these royalty payments are for the underlying embedded data base
technology within BroadWorks for which we currently incur a fixed expense
and/or pay a fixed fee per quarter, which increased beginning in June 2012
as a result of a third-party license agreement executed in 2011. Such
costs are expensed ratably over the time period of the contract.
• Cost of subscription and maintenance support revenue. Cost of subscription
and maintenance support revenue consists primarily of personnel-related
expenses and other direct costs associated with the support, maintenance
and implementation of our software licenses, including maintenance and
support expenses due to our use of third party software, amortization of
acquired technology and operating and depreciation expenses associated
with the delivery of BroadCloud services. 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 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
42
--------------------------------------------------------------------------------
Table of Contents
our professional services. 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.
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 support 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 the royalty payments
to our embedded database provider and amortization of acquired technology.
If license software revenue increases, these fixed payments will decline
as a percentage of revenue. If license software revenue declines, these
fixed payments will increase as a percentage of revenue.
• Impact of deferred revenue. If any revenue recognition criteria have not
been met, the applicable revenue derived from the arrangement is deferred,
including license software, subscription and maintenance support, and
professional services and other revenue, until all elements of revenue
recognition criteria have been met. However, the cost of revenue, including the costs of license software, subscription and maintenance
support and professional services and other, is typically expensed in the
period in which it is incurred. Therefore, if relatively more revenue is
deferred in a particular period, gross margin would decline in that
period. Because the ability to recognize revenue on orders depends largely
on the terms of the sale arrangement, and because we are not able to
predict the proportion of orders that will not meet all the criteria for
revenue recognition, we cannot forecast whether any historical trends in
gross margin will continue.
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. The (decrease) increase in deferred revenue illustrates how the balance
in deferred revenue has changed over a period of time.
Revenue plus the net change in deferred revenue is as follows (in thousands):
Year ended December 31,
2012 2011 2010
Beginning of period deferred revenue balance $ 57,136 $ 59,264 $ 40,047
End of period deferred revenue balance 61,149 57,136 59,264
Increase (decrease) in deferred revenue 4,013 (2,128 ) 19,217
Revenue 164,842 138,064 95,623
Revenue plus net change in deferred revenue 168,855 135,936 114,840
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 to 611
employees at December 31, 2012 from 487 employees at December 31, 2011, and we
expect to continue to hire new employees to support our anticipated growth.
43--------------------------------------------------------------------------------
Table of Contents
Sales and marketing expenses. Sales and marketing expenses consist primarily of
salaries and personnel costs for our sales and marketing employees, including
stock-based compensation, commissions and bonuses. Additional expenses include
marketing programs, consulting, travel and other related overhead. We expect our
sales and marketing expenses to increase in the foreseeable future as we further
increase the number of our sales and marketing professionals and expand our
marketing activities. Over the long term, we expect sales and marketing expenses
to grow but to decrease as a percentage of total revenue as sales grow.
Research and development expenses. Research and development expenses consist
primarily of salaries and personnel costs for development employees, including
stock-based compensation and bonuses. Additional expenses include costs related
to development, quality assurance and testing of new software and enhancement of
existing software, consulting, travel and other related overhead. We engage
third-party international and domestic consulting firms for various research and
development efforts, such as software development, documentation, quality
assurance and software support. We intend to continue to invest in our research
and development efforts, including by hiring additional development personnel
and by using outside consulting firms for various research and development
efforts. We believe continuing to invest in research and development efforts is
essential to maintaining our competitive position. We expect research and
development expenses to increase in the foreseeable future, but over the
long-term to decrease as a percentage of total revenue as sales grow. In 2012,
research and development grew as a percentage of revenue compared with 2011, and
we expect that, in 2013, research and development expenses will again increase
as a percentage of total revenue.
General and administrative expenses. General and administrative expenses consist
primarily of salary and personnel costs for administration, finance and
accounting, legal, information systems and human resources employees, including
stock-based compensation and bonuses. Additional expenses include consulting and
professional fees, travel, insurance and other corporate expenses. We expect
general and administrative expenses to increase in the foreseeable future, but
over the long-term to decrease as a percentage of total revenue as sales grow.
Stock-Based Compensation
We include stock-based compensation as part of cost of revenue and operating
expenses in connection with the grant of stock options and other equity awards
to our directors, employees and consultants. Generally, stock-based compensation
has been the fastest growing component of our employee-related expenses, and we
expect this trend to continue. 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 over the requisite service period, which is the vesting
period, of the award. For 2012, 2011 and 2010, we recorded stock-based
compensation expense of $15.0 million, $7.2 million and $3.0 million,
respectively.
Of the stock-based compensation expense recorded for 2010, $0.4 million related
to the vesting of restricted stock units, or RSUs, covering an aggregate of
172,492 shares that were subject to a performance-based vesting condition and
that vested in full upon the completion of the IPO.
Based on stock options and other equity awards outstanding as of December 31,
2012, we expect to recognize future expense related to the non-vested portions
of such options and other equity awards in the amount of $19.2 million over a
weighted average period of approximately 1.37 years.
Other Expense (Income), Net
Other expense (income), net consists primarily of interest income, interest
expense and, for periods prior to the IPO, the change in the fair value of the
preferred stock warrants. Interest income represents interest received on our
cash and cash equivalents and restricted cash. Interest expense consists
primarily of the interest related to the 1.50% convertible senior notes due in
2018, or Notes, and our installment bank loan with Bank of America
44--------------------------------------------------------------------------------
Table of Contents
Leasing and Capital, LLC, or Bank of America, and, for 2010, interest accrued on
outstanding borrowings under the ORIX Loan.
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 year ended December 31, 2012, we
have net operating loss carryforwards to utilize in the U.S. For the year ended
December 31, 2011, we paid alternative minimum tax in the U.S. due to the
taxable income generated in the period.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reported period. In
accordance with GAAP, we base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements appearing elsewhere in this Annual Report
on Form 10-K, we believe the following accounting policies are critical to the
process of making significant judgments and estimates in the preparation of our
consolidated financial statements.
Revenue Recognition
We derive our revenue from: (a) the sale of (i) software licenses and related
maintenance for those licenses (ii) professional services; and (b) subscription
and usage fees related to our cloud offerings.
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the arrangement fee is
fixed or determinable and collectability of the related receivable is probable.
In making judgments regarding revenue recognition, we analyze various factors,
including the nature and terms of the specific transaction, the creditworthiness
of our customers, our historical experience, accuracy of prior estimates and
overall market and economic conditions. Moreover, in connection with the sale of
a number of products and services under a single contractual arrangement (a
multiple element arrangement), we make judgments as to whether there is
sufficient vendor specific objective evidence ("VSOE") to enable the allocation
of fair value among the various elements in software arrangements that contain
multiple elements and as to relative selling prices for multiple element
arrangements that do not contain software elements. In determining relative
selling prices for products and services, we consider, among other things, our
use of discounts from list prices, prices we charge for similar offerings and
our historical pricing practices. Changes in judgments related to these items,
or deterioration in market or economic conditions, could materially impact the
timing and amount of revenue recognized.
License Software Revenue
We sell software licenses to service providers through our direct sales force
and indirectly through distribution partners.
For direct sales, we generally consider a purchase order or executed sales
quote, when combined with a master license agreement, to constitute evidence of
an arrangement. In the case of sales through distribution partners, we
45--------------------------------------------------------------------------------
Table of Contents
generally consider a purchase order or executed sales quote, when combined with
a reseller or similar agreement with the distribution partner, and evidence of
the distribution partner's customer, to constitute evidence of an arrangement.
For sales through distribution partners for which we are not able to ascertain
proof of the distribution partner's customer, we defer revenue until we are able
to do so.
We consider delivery to have occurred when the customer is given electronic
access to the licensed software and a license key for the software has been
delivered or made available. Instances in which all ordered software features
are not delivered are considered to be partial deliveries. Since we cannot
determine VSOE of an undelivered software feature in the case of a partial
delivery, we defer revenue recognition on all elements of such order until
delivery for all ordered software features is complete.
Acceptance of our licensed software generally occurs upon delivery. From time to
time, we have agreed with certain customers to a specific set of acceptance
criteria. In such cases, we defer revenue until these acceptance criteria have
been met.
Our sales generally consist of multiple elements: software licenses; maintenance
support; and professional services. We calculate the amount of revenue allocated
to the software license by determining the fair value of the undelivered
elements, which often are maintenance support and professional services, and
subtracting it from the total order amount. We establish VSOE of the fair value
of the maintenance support based on the renewal price as stated in the agreement
and as charged in the first optional renewal period under the arrangement. Our
VSOE for professional services is determined based on an analysis of our
historical daily rates when these professional services are sold separately from
the software license.
The warranty period for our licensed software is generally 90 days. During this
period, the customer receives technical support and has the right to unspecified
product upgrades on an if-and-when available basis. For these periods, we defer
a portion of the license fee and recognize it ratably over the warranty period.
Our license software revenue is subject to significant fluctuation as a result
of the application of accounting regulations and related interpretations and
policies regarding revenue recognition. We do not believe license revenue to be
the only meaningful measure of our level of sales activity during the periods
reported because of the impact of software license orders for these periods that
were not yet recognized as revenue and therefore were recorded as deferred
license software revenue. Our deferred license software revenue balance consists
of software orders that do not meet all the criteria for revenue recognition. We
are unable to predict the proportion of orders that will meet all the criteria
for revenue recognition relative to those orders that will not meet all such
criteria. As a result, we cannot forecast whether these historical trends in
recognized license software revenue, and corresponding increases in deferred
license revenue, will continue.
Subscription and Maintenance Support Revenue
We typically sell software in combination with maintenance subscriptions.
Maintenance is generally renewable annually at the option of the customer. Rates
for maintenance, 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 period, assuming all other criteria of revenue recognition
have been met.
Under our BroadCloud subscriptions, we are paid a recurring fee calculated based
on the number of seats and type of services purchased or a usage fee based on
actual number of transactions. Typically, the recurring fee is billed monthly or
annually based on the terms of the arrangement and the usage fee is billed one
month in arrears. Revenue is recognized ratably over the contract term beginning
with the date our service is made available to customers.
We enter into arrangements with multiple-deliverables that generally include
subscription and professional services. To treat deliverables in a
multiple-deliverable arrangement as separate units of accounting, the
46--------------------------------------------------------------------------------
Table of Contents
deliverables must have standalone value upon delivery. If the deliverables have
standalone value upon delivery, we account for each deliverable separately.
Subscription services have standalone value as such services are often sold
separately. In determining whether professional services have standalone value,
we consider the following factors for each professional services agreement:
availability of the services from other vendors; the nature of the professional
services; the timing of when the professional services contract was signed in
comparison to the subscription service start date; and the contractual
dependence of the subscription service on the customer's satisfaction with the
professional services work.
Per the accounting guidance, when multiple-deliverables included in an
arrangement are separated into different units of accounting, the arrangement
consideration is allocated to the identified separate units based on a relative
selling price hierarchy. We determine the relative selling price for a
deliverable based on its VSOE, if available, or our best estimate of selling
price, or BESP, if VSOE is not available. We have determined that third-party
evidence is not a practical alternative due to differences in our service
offerings compared to other parties and the availability of relevant third-party
pricing information. The amount of revenue allocated to delivered items is
limited by contingent revenue, if any.
We determined BESP by considering our overall pricing objectives and market
conditions. Significant pricing practices taken into consideration include our
discounting practices, our price lists, our go-to-market strategy, historical
standalone sales and contract prices. As our go-to-market strategies evolve, we
may modify our pricing practices in the future, which could result in changes in
relative selling prices, including both VSOE and BESP.
Professional Services Revenue
Revenue from professional services is typically recognized as services are
performed. Services are not considered essential to the functionality of the
licensed software.
Software Development Costs
Software development costs incurred prior to the establishment of technological
feasibility are expensed as incurred as research and development expense.
Software development costs incurred subsequent to the establishment of
technological feasibility, if any, are capitalized until the software is
available for general release to customers. For each software release, judgment
is required to evaluate when technological feasibility has occurred. We have
determined that technological feasibility has been established at approximately
the same time as our general release of such software to customers. Therefore,
to date, we have not capitalized any software development costs.
Internal-Use Software Development Costs
Costs associated with customized internal-use software systems that have reached
the application development stage are capitalized. Such capitalized costs
include costs directly associated with the development of the applications.
Capitalization of such costs begins when the preliminary project stage is
complete and ceases at the point in which the project is substantially complete
and is ready for its intended purpose.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at realizable value, net of an allowance for
doubtful accounts that is maintained for estimated losses that would result from
the inability of some customers to make payments. The allowance is based on an
analysis of past due amounts and ongoing credit evaluations. Customers are
generally evaluated for creditworthiness through a credit review process at the
time of each order. Our collection experience has been consistent with our
estimates.
Business Combinations
In a business combination, we allocate the purchase price to the acquired
business' identifiable assets and liabilities at their acquisition date fair
values. The excess of the purchase price over the amount allocated to the
identifiable assets and liabilities, if any, is recorded as goodwill. The
excess, if any, of the fair value of the identifiable assets acquired and
liabilities assumed over the consideration transferred is recognized as a gain
within other income in the consolidated statements of operations as of the
acquisition date.
47
--------------------------------------------------------------------------------
Table of Contents
To date, the assets acquired and liabilities assumed in our business
combinations have primarily consisted of acquired working capital and
definite-lived intangible assets. The carrying value of acquired working capital
is assumed to be equal to its fair value, given the short-term nature of these
assets and liabilities. We estimate the fair value of definite-lived intangible
assets acquired using a discounted cash flow approach, which includes an
analysis of the future cash flows expected to be generated by such assets and
the risk associated with achieving such cash flows. The key assumptions used in
the discounted cash flow model include the discount rate that is applied to the
discretely forecasted future cash flows to calculate the present value of those
cash flows and the estimate of future cash flows attributable to the acquired
intangible assets, which include revenue, operating expenses and taxes.
Goodwill
Goodwill represents the excess of: (a) the aggregate of the fair value of
consideration transferred in a business combination, over (b) the fair value of
assets acquired, net of liabilities assumed. Goodwill is not amortized, but is
subject to annual impairment tests as described below.
We test goodwill for impairment annually on December 31, or more frequently if
events or changes in business circumstances indicate the asset might be
impaired. Examples of such events or circumstances include the following:
• a significant adverse change in our business climate;
• unanticipated competition;
• a loss of key personnel;
• a more likely than not expectation that a significant portion ofour
business will be sold; or
• the testing for recoverability of a significant asset group within the
reporting unit.
We first assess qualitative factors to determine if it is more likely than not
that the fair value of a reporting unit is less than its carrying amount as a
basis for determining whether it is necessary to perform the two-step goodwill
impairment test included in GAAP. To the extent our assessment identifies
adverse conditions, goodwill is tested for impairment at the reporting unit
level using a two-step approach. The first step is to compare the fair value of
the reporting unit to the carrying value of the net assets assigned to the
reporting unit. If the fair value of the reporting unit is greater than the
carrying value of the net assets assigned to the reporting unit, the assigned
goodwill is not considered impaired. If the fair value is less than the
reporting unit's carrying value, step two is required to measure the amount of
the impairment, if any. In the second step, the fair value of goodwill is
determined by deducting the fair value of the reporting unit's identifiable
assets and liabilities from the fair value of the reporting unit as a whole, as
if the reporting unit had just been acquired and the purchase price were being
initially allocated. If the carrying value of goodwill exceeds the implied fair
value, an impairment charge would be recorded to operating expenses in the
consolidated statements of operations in the period the determination is made.
We have determined that we have one reporting unit, BroadSoft, Inc., which is
the consolidated entity. Based on the results of our annual goodwill impairment
testing in 2012, 2011 and 2010, our fair value exceeded our book value by a
substantial margin. Therefore, the second step of the impairment test was not
required to be performed and no goodwill impairment was recognized. However,
there can be no assurance that goodwill will not be impaired at any time in the
future.
Intangible Assets
We acquired intangible assets in connection with certain of our business
acquisitions. These assets were recorded at their estimated fair values at the
acquisition date and are amortized over their respective estimated useful lives
48
--------------------------------------------------------------------------------
Table of Contents
using a method of amortization that reflects the pattern in which the economic
benefits of the intangible assets are used. Estimated useful lives are
determined based on our historical use of similar assets and the expectation of
future realization of cash flows attributable to the intangible assets. Changes
in circumstances, such as technological advances or changes to our business
model, could result in the actual useful lives differing from our current
estimates. In those cases where we determine that the useful life of an
intangible asset should be shortened, we amortize the net book value in excess
of the estimated salvage value over its revised remaining useful life. We did
not revise our previously assigned useful life estimates attributed to any of
our intangible assets in 2012, 2011 or 2010.
The estimated useful lives used in computing amortization of intangible assets
are as follows:
Customer relationships 3 - 7 years
Developed technology 4 - 6 years
Non-compete agreement 1 year
Tradenames 2 - 4 years
Impairment of Long-Lived Assets
We review our long-lived assets, including property and equipment and intangible
assets, for impairment whenever events or changes in circumstances indicate the
carrying amount of an asset or an asset group may not be recoverable. Typical
indicators that an asset may be impaired include, but are not limited to:
• a significant adverse change in the extent or manner in which a long-lived
asset is being used or in its physical condition;
• a current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset; or
• a current expectation that, more likely than not, a long-lived asset will
be sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future undiscounted net cash flows expected to
be generated. Assets to be disposed of are recorded at the lower of the carrying
amount or fair value less costs to sell. Recoverability measurement and
estimating of undiscounted cash flows for assets to be held and used is done at
the lowest possible levels for which there are identifiable assets. If such
assets are considered impaired, generally the amount of impairment recognized
would be equal to the amount by which the carrying amount of the assets exceeds
the fair value of the assets, which we would compute using a discounted cash
flow approach. Estimating future cash flows attributable to our long-lived
assets requires significant judgment and projections may vary from cash flows
eventually realized. There were no triggering events to cause us to record an
impairment charge in 2012, 2011 or 2010.
Income Taxes
We use the liability method of accounting for income taxes as set forth in the
authoritative guidance for accounting for income taxes. This method requires an
asset and liability approach for the recognition of deferred tax assets and
liabilities for the expected future tax consequences attributable to temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and their respective tax bases, and for operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured by
applying enacted statutory tax rates applicable to the future years in which
deferred amounts are expected to be settled or realized.
Based upon our cumulative operating results through June 30, 2011 and an
assessment of our expected future results of operations, we determined that
there was significant positive evidence regarding the realization of our
49--------------------------------------------------------------------------------
Table of Contents
U.S. deferred tax assets. After weighing both the positive and negative
evidence, coupled with the continued success in commercializing our core
products and services both inside and outside the U.S., we believe that it is
more likely than not that our U.S. deferred tax assets will be realized. A
portion of the U.S. valuation allowance was released in the period ended
June 30, 2011 based on the amount of U.S. net deferred tax assets then expected
to be remaining as of December 31, 2011. As of December 31, 2011, we reversed
all of the remaining valuation allowance on the U.S. deferred tax assets because
it was more likely than not that those deferred tax assets would be realized.
The release of the U.S. valuation allowance was recorded as a tax benefit on our
consolidated statements of operations for 2011. As of December 31, 2012, we had
a remaining valuation allowance of approximately $5.6 million, which primarily
relates to certain foreign NOLs and tax credits that more likely than not will
not be realized.
We operate in various tax jurisdictions and are subject to audit by various tax
authorities. We recognize and measure benefits for uncertain tax positions using
a two-step approach. The first step is to evaluate the tax position taken or
expected to be taken in a tax return by determining if the weight of available
evidence indicates that it is more likely than not that the tax position will be
sustained upon audit, including resolution of any related appeals or litigation
processes. For tax positions that are more likely than not to be sustained upon
audit, the second step is to measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon settlement. Significant judgment is
required to evaluate uncertain tax positions. Changes in facts and circumstances
could have a material impact on our effective tax rate and results of
operations.
Results of Operations
Comparison of the Years Ended December 31, 2012 and 2011
Revenue
Year ended December 31, Period-to-Period
2012 2011 Change
Percent Percent
of Total of Total
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Revenue by Type:
License software $ 89,750 55 % $ 77,289 56 % $ 12,461 16 %
Subscription and
maintenance support 58,249 35 42,462 31 15,787 37
Professional services and
other 16,843 10 18,313 13 (1,470 ) (8 )
Total revenue $ 164,842 100 % $ 138,064 100 % $ 26,778 19 %
Revenue by Geography:
Americas $ 107,514 65 % $ 87,866 64 % $ 19,648 22 %
EMEA 39,334 24 24,866 18 14,468 58
APAC 17,994 11 25,332 18 (7,338 ) (29 )
Total revenue $ 164,842 100 % $ 138,064 100 % $ 26,778 19 %
Total revenue for 2012 increased by 19%, or $26.8 million, to $164.8 million,
compared to 2011. This growth was driven by a 16% increase in license software
revenue and a 37% increase in subscription and maintenance support revenue,
partially offset by an 8% decrease in professional services and other revenue.
Deferred revenue increased by $4.0 million for 2012, compared to a decrease of
$2.1 million in 2011.
Total revenue from the Americas for 2012 increased by 22%, or $19.6 million, to
$107.5 million compared to 2011. The increase in revenue from the Americas for
2012 was due to growth in software license sales for our hosted UC and consumer
offerings and associated maintenance support revenue. In Europe, Middle East and
50
--------------------------------------------------------------------------------
Table of Contents
Africa, or EMEA, total revenue for 2012 increased by 58%, or $14.5 million, to
$39.3 million compared to 2011. The increase in EMEA revenue in 2012 was
primarily due to growth in software license sales and related maintenance
support, particularly our hosted UC applications, and the recognition of
consumer applications revenue related to an arrangement that had been deferred
in prior periods. In Asia Pacific, or APAC, total revenue for 2012 decreased by
29%, or $7.3 million, to $18.0 million compared to 2011. The decrease in APAC
revenue was mostly due to the recognition of revenue in 2011 on a sizeable order
for our call center application from a large incumbent provider that had been
deferred in prior periods.
License Software
License software revenue for 2012 increased by 16%, or $12.5 million, to $89.8
million. The increase in revenue for 2012 was primarily related to growth in
sales of software licenses. This growth was most significant in license sales
for our hosted UC and consumer applications. Deferred license software revenue
decreased by $2.2 million for 2012, compared to a decrease of $5.0 million in
2011. The decrease in deferred revenue for 2012 was primarily driven by a number
of orders where revenue was deferred in prior periods and was recognized during
2012.
Subscription and Maintenance Support
Subscription and maintenance support revenue for 2012 increased by 37%, or $15.8
million, to $58.2 million, compared to 2011. The increase in subscription and
maintenance support revenue and deferred revenue was the result of growth in our
installed base of customers and licenses and subscription revenue contributions
from certain of our recent acquisitions. Deferred subscription and maintenance
support revenue grew by $6.4 million for 2012, compared to growth of $5.9
million in 2011.
Professional Services and Other
Professional services and other revenue for 2012 decreased by 8%, or $1.5
million, to $16.8 million, compared to 2011. The decrease in professional
services and other revenue for 2012 was due to the recognition of revenue in
2011 for a new call center application that had been deferred in prior periods,
partially offset by growth in demand for our professional services. Deferred
professional services and other revenue had minimal change for 2012, compared to
a decrease of $3.0 million in 2011.
Cost of Revenue and Gross Profit
Year ended December 31, Period-to-Period
2012 2011 Change
Percent Percent
of of
Related Related
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Cost of Revenue:
License software $ 8,643 10 % $ 6,077 8 % $ 2,566 42 %
Subscription and
maintenance support 14,831 25 10,419 25 4,412 42
Professional services and
other 9,012 54 8,478 46 534 6
Total cost of revenue $ 32,486 20 % $ 24,974 18 % $ 7,512 30 %
Gross Profit:
License software $ 81,107 90 % $ 71,212 92 % $ 9,895 14 %
Subscription and
maintenance support 43,418 75 32,043 75 11,375 35
Professional services and
other 7,831 46 9,835 54 (2,004 ) (20 )
Total gross profit $ 132,356 80 % $ 113,090 82 % $ 19,266 17 %
51
--------------------------------------------------------------------------------
Table of Contents
For 2012, our gross margin decreased to 80% as compared to 82% in 2011 and our
gross profit increased by 17%, or $19.3 million, to $132.4 million. We
experienced an increase in both license software revenue gross profit and
subscription and maintenance support gross profit and a decrease in professional
services and other gross profit for 2012. The total gross profit growth is
primarily due to growth in license software and subscription and maintenance
support revenue relative to the respective cost of revenue.
For 2012, license software gross margin decreased to 90% as compared to 92% in
2011 and license software gross profit increased by 14% to $81.1 million.
License software cost of revenue increased by 42%, or $2.6 million, to $8.6
million for 2012. This increase was primarily due to a $1.0 million increase in
equipment and resold third party software costs and a $0.8 million increase in
personnel-related costs driven by an increase in headcount. The increase in
license software gross profit was driven by revenue growth relative to lower
growth in license software cost of revenue.
For 2012, subscription and maintenance services gross margin remained at 75% as
compared to 2011 and subscription and maintenance services gross profit
increased by 35% to $43.4 million. Subscription and maintenance services cost of
revenue increased by 42%, or $4.4 million, to $14.8 million in 2012 as compared
to 2011. The increase in subscription and maintenance services cost of revenue
was primarily due to an increase of $1.3 million in personnel-related costs
driven by an increase in headcount, a $1.1 million increase in amortization of
acquired intangibles, a $0.4 million increase in consulting fees and a $0.4
million increase in line costs. The increase in subscription and maintenance
services gross profit was driven by revenue growth relative to lower growth in
subscription and maintenance services cost of revenue.
For 2012, professional services and other gross margin decreased to 46% as
compared to 54% in 2011 and professional services and other gross profit
decreased by 20% to $7.8 million. Professional services and other cost of
revenue increased 6%, or $0.5 million, to $9.0 million for 2012. The increase in
professional services cost of revenue was primarily due to an increase in
personnel costs and consulting fees. The decrease in professional services and
other gross margin was driven by the recognition of revenue in 2011 for a new
call center application from a large APAC incumbent provider that had been
deferred in prior periods.
Operating Expenses
Year ended December 31, Period-to-Period
2012 2011 Change
Percent Percent
of Total of Total
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Sales and marketing $ 47,911 29 % $ 38,376 28 % $ 9,535 25 %
Research and development 36,178 22 27,744 20 8,434 30
General and administrative 22,863 14 19,534 14 3,329 17
Total operating expenses $ 106,952 65 % $ 85,654 62 % $ 21,298 25 %
Sales and Marketing. Sales and marketing expense increased by 25%, or $9.5
million, to $47.9 million for 2012. The primary cause of this increase was a
$7.2 million increase in personnel costs, primarily resulting from headcount
growth and higher sales commissions, a $0.7 million increase in outside
consulting fees and a $0.7 million increase in travel expenses.
Research and Development. Research and development expense increased by 30%, or
$8.4 million, to $36.2 million for 2012. This increase was primarily due to an
$8.0 million increase in personnel costs, primarily from an increase in
headcount as we continue to invest in our product offerings, as well as the
impact of the acquisitions we made during 2011 and 2012.
52--------------------------------------------------------------------------------
Table of Contents
General and Administrative. General and administrative expense increased by 17%,
or $3.3 million, to $22.9 million for 2012. This increase was primarily
attributable to a $2.0 million increase in personnel related costs, a $0.7
million increase in equipment and software costs, a $0.6 million increase in bad
debt expense and an increase of $0.3 million in outside consulting fees.
Income from Operations
We had income from operations of $25.4 million for 2012, compared to $27.4
million in 2011.
Other (Income) Expense
Year ended December 31, Period-to-Period
2012 2011 Change
Percent Percent
of Total of Total
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Interest income $ (455 ) * $ (278 ) * $ (177 ) 64 %
Interest expense 6,925 4 % 3,592 3 % 3,333 93 %
Total other expense, net $ 6,470 4 % $ 3,314 3 % $ 3,156 95 %
* Less than 1%
Interest income increased by $0.2 million for 2012. Interest expense increased
by $3.3 million compared to 2011. This increase in interest expense is primarily
related to our Notes issued in June 2011 and a full year's recognition of
interest expense in 2012.
Provision (Benefit from) for Income Taxes
Provision for income taxes was $6.9 million for the year ended December 31,
2012, compared to benefit from income taxes of $8.2 million for the year ended
December 31, 2011. For the year ended December 31, 2012, the tax provision was
positively impacted by $1.9 million due to the recognition of research and
development tax credits relating to prior years. These credits were not recorded
until an acceptance for the credits was established. The benefit from income
taxes for 2011 related primarily to an $8.9 million benefit due to the discrete
release of the U.S. tax valuation allowance, partially offset by foreign taxes.
Comparison of the Years Ended December 31, 2011 and 2010
Revenue
Year ended December 31, Period-to-Period
2011 2010 Change
Percent Percent
of Total of Total
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Revenue by Type:
License software $ 77,289 56 % $ 53,302 56 % $ 23,987 45 %
Subscription and
maintenance support 42,462 31 33,743 35 8,719 26
Professional services and
other 18,313 13 8,578 9 9,735 113
Total revenue $ 138,064 100 % $ 95,623 100 % $ 42,441 44 %
Revenue by Geography:
Americas $ 87,866 64 % $ 57,693 60 % $ 30,173 52 %
EMEA 24,866 18 23,617 25 1,249 5
APAC 25,332 18 14,313 15 11,019 77
Total revenue $ 138,064 100 % $ 95,623 100 % $ 42,441 44 %
53
--------------------------------------------------------------------------------
Table of Contents
Total revenue for 2011 increased by 44%, or $42.4 million, to $138.1 million,
compared to 2010. This growth was driven by a 45% increase in license software
revenue, a 26% increase in subscription and maintenance support and a 113%
increase in professional services and other revenue. The revenue growth was
driven by an increase in sales of our hosted Unified Communications and SIP
Trunking products. Deferred revenue decreased by $2.1 million for 2011, compared
to growth of $19.2 million in 2010. The decrease in deferred revenue was mainly
attributed to a sizeable order where revenue was previously deferred and which
was recognized during 2011.
Total revenue from the Americas for 2011 increased by 52%, or $30.2 million, to
$87.9 million compared to 2010. The increase in revenue from the Americas for
2011 was due to growth in software license sales and associated maintenance
support revenue. In EMEA total revenue for 2011 increased by 5%, or $1.2
million, to $24.9 million compared to 2010. The increase in EMEA revenue in 2011
was due to growth in software license sales and associated maintenance support
revenue. In APAC total revenue for 2011 increased by 77%, or $11.0 million, to
$25.3 million compared to 2010. The increase in APAC revenue was driven by
growth in our Unified Communications offerings, including a sizeable call center
order.
License Software
License software revenue for 2011 increased by 45%, or $24.0 million, to $77.3
million. The increase in revenue for 2011 was primarily related to growth in
sales of software licenses. This growth was most significant in license sales
for our hosted UC and SIP Trunking applications. Deferred license software
revenue decreased by $5.0 million for 2011, compared to growth of $6.1 million
in 2010. The decrease in deferred revenue for 2011 was primarily driven by a
sizeable order where revenue was previously deferred and which was recognized
during 2011.
Subscription and Maintenance Support
Subscription and maintenance support revenue for 2011 increased by 26%, or $8.7
million, to $42.5 million, compared to 2010. Deferred subscription and
maintenance support revenue increased by $5.9 million for 2011, compared to
growth of $8.7 million in 2010. The increase in subscription and maintenance
support revenue was the result of growth in our installed base of customers and
licenses as well as from a sizeable order where revenue was previously deferred
and which was recognized in 2011.
Professional Services and Other
Professional services and other revenue for 2011 increased by 113%, or $9.7
million, to $18.3 million, compared to 2010. Deferred professional services and
other revenue decreased by $3.0 million for 2011, compared to an increase of
$4.5 million in 2010. The increase in professional services and other revenue
was the result of increased demand for our services offerings. The decrease in
deferred revenue was mainly attributed to a sizeable order where revenue was
previously deferred and which was recognized in 2011.
54--------------------------------------------------------------------------------
Table of Contents
Cost of Revenue and Gross Profit
Year ended December 31, Period-to-Period
2011 2010 Change
Percent Percent
of of
Related Related
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Cost of Revenue:
License software $ 6,077 8 % $ 5,341 10 % $ 736 14 %
Subscription and
maintenance support 10,419 25 7,691 23 2,728 35
Professional services and
other 8,478 46 7,010 82 1,468 21
Total cost of revenue $ 24,974 18 % $ 20,042 21 % $ 4,932 25 %
Gross Profit:
License software $ 71,212 92 % $ 47,961 90 % $ 23,251 48 %
Subscription and
maintenance support 32,043 75 26,052 77 5,991 23
Professional services and
other 9,835 54 1,568 18 8,267 527
Total gross profit $ 113,090 82 % $ 75,581 79 % $ 37,509 50 %
For 2011, our gross margin increased to 82% as compared to 79% in 2010 and our
gross profit increased by 50%, or $37.5 million, to $113.1 million. This
increase in gross profit resulted from growth in each of license software
revenue, subscription and maintenance support revenue and professional services
and other revenue, in each case relative to the respective cost of revenue.
For 2011, license software gross margin increased to 92% as compared to 90% in
2010 and license software gross profit increased by 48% to $71.2 million.
License software cost of revenue increased by 14%, or $0.7 million, to $6.1
million for 2011. This increase was primarily due to a $0.6 million increase in
personnel-related costs driven by an increase in headcount. The increase in
license software gross profit and gross margin was driven by revenue growth
relative to lower growth in license software cost of revenue. A substantial
portion of license software cost of sales is fixed expense and therefore does
not increase with revenue growth.
For 2011, subscription and maintenance support gross margin decreased to 75% as
compared to 77% in 2010 and subscription and maintenance support gross profit
increased by 23% to $32.0 million. Subscription and maintenance support cost of
revenue increased by 35%, or $2.7 million, to $10.4 million in 2011 as compared
to 2010. The increase in subscription and maintenance support cost of revenue
was primarily due to an increase in personnel and consulting fees allocated to
cost of revenue due to an increase in the number of research and development
employees and consultants working directly on specific features for certain
customers and an increase in services personnel.
For 2011, professional services and other gross margin increased to 54% as
compared to 18% in 2010 and professional services and other gross profit
increased by 527% to $9.8 million. Professional services and other cost of
revenue increased by 21%, or $1.5 million, to $8.5 million in 2011 as compared
to 2010. The increase in professional services and other costs of revenue was
primarily due to an increase in personnel and consulting fees. The increase in
professional service and other gross profit and gross margin was driven by
revenue growth relative to lower growth in professional services and other cost
of revenue. This was due to higher utilization of professional services
resources and a sizeable order for which revenue was previously deferred and
which was recognized in 2011.
55--------------------------------------------------------------------------------
Table of Contents
Operating Expenses
Year ended December 31, Period-to-Period
2011 2010 Change
Percent Percent
of Total of Total
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Sales and marketing $ 38,376 28 % $ 31,818 33 % $ 6,558 21 %
Research and development 27,744 20 19,616 21 8,128 41
General and administrative 19,534 14 14,103 15 5,431 39
Total operating expenses $ 85,654 62 % $ 65,537 69 % $ 20,117 31 %
Sales and Marketing. Sales and marketing expense increased by 21%, or $6.6
million, to $38.4 million for 2011. The primary driver of this increase was a
$4.3 million increase in personnel costs that was driven by headcount growth and
higher sales commissions and a $0.7 million increase in travel expenses.
Research and Development. Research and development expense increased by 41%, or
$8.1 million, to $27.7 million for 2011. This increase was primarily due to a
$5.4 million increase in personnel costs, primarily from an increase in
headcount, and a $1.0 million increase in outside consulting fees.
General and Administrative. General and administrative expense increased by 39%,
or $5.4 million, to $19.5 million for 2011. This increase was primarily
attributable to a $3.1 million increase in personnel related costs and a $1.4
million increase in professional services fees. A significant portion of these
increases were attributable to expenses related to being a public company,
including fees associated with implementation, testing and auditing associated
with our first internal controls audit under the Sarbanes-Oxley Act of 2002, and
acquisition-related expenses.
Income from Operations
We had income from operations of $27.4 million for 2011, compared to $10.0
million in 2010. The increase in income from operations for 2011 was a result of
the $37.5 million increase in gross profit, partially offset by a $20.1 million
increase in total operating expenses described above.
Other (Income) Expense
Year ended December 31, Period-to-Period
2011 2010 Change
Percent Percent
of Total of Total
Amount Revenue Amount Revenue Amount Percentage
(dollars in thousands)
Interest income $ (278 ) * $ (52 ) * $ (226 ) 435 %
Interest expense 3,592 3 % 757 1 % 2,835 375
Other expense - * 174 * (174 ) NM
Total other expense, net $ 3,314 3 % $ 879 1 % $ 2,435 277 %
* Less than 1%
NM - Not meaningful
56
--------------------------------------------------------------------------------
Table of Contents
Interest income for 2011 was relatively unchanged as compared to 2010. Interest
expense increased by $2.8 million compared to 2010. This increase in interest
expense is primarily related to our Notes issued in June 2011, offset by a
decrease attributable to the voluntary early repayment of the ORIX Loan in June
2010. Other expense for 2011 was similarly relatively unchanged as compared to
2010. We do not anticipate incurring significant other (income) expense in
future years.
(Benefit from) Provision for Income Taxes
Benefit from income taxes was $8.2 million for the year ended December 31, 2011,
compared to provision for income taxes of $1.2 million for the year ended
December 31, 2010. The benefit from income taxes related primarily to an $8.9
million benefit due to the discrete release of the U.S. tax valuation allowance,
partially offset by foreign taxes.
Liquidity and Capital Resources
Resources
Since the beginning of 2009, we have funded our operations principally with cash
provided by operating activities, which has resulted primarily from growth in
net income and deferred revenue. Cash flow from operations was $30.6 million,
$28.6 million and $19.4 million for the years ended December 31, 2012, 2011 and
2010, respectively. In June 2010, we completed our IPO through which we raised
net proceeds of $40.0 million. In December 2010, we completed our follow-on
offering through which we raised net proceeds of $9.9 million. In June 2011, we
completed an offering of our Notes with net proceeds from the offering of
approximately $115.7 million.
Cash and Cash Equivalents, Accounts Receivable and Working Capital
The following table presents a summary of our cash and cash equivalents,
accounts receivable, working capital and cash flows as of the dates and for the
periods indicated (in thousands).
December 31, December 31,
2012 2011
Cash and cash equivalents $ 90,545 $ 94,072
Accounts receivable, net 48,980 47,048
Working capital 161,519 180,010
Year ended December 31,
2012 2011 2010
Cash (used in) provided by: Operating activities $ 30,598 $ 28,575 $ 19,386
Investing activities (34,153 ) (99,136 ) (24,274 )
Financing activities (121 ) 117,431 29,203
Our cash and cash equivalents at December 31, 2012 were held for working capital
and other general corporate purposes and were invested primarily in demand
deposit accounts or money market funds. We do not enter into investments for
trading or speculative purposes. Restricted cash, which totaled $0.6 million at
December 31, 2012 and is not included in cash and cash equivalents, consisted
primarily of certificates of deposit that secure letters of credit related to
operating leases for office space.
Operating Activities
For the year ended December 31, 2012, net cash provided by operating activities
was $30.6 million, compared to $28.6 million for 2011. Cash provided by
operating activities during 2012 was primarily a result of net income of $12.1
million, aggregate non-cash expenses of $34.6 million (including stock-based
compensation expense of $15.0 million, depreciation and amortization of $5.2
million, non-cash interest on convertible debt of $5.1
57--------------------------------------------------------------------------------
Table of Contents
million, provision for deferred income taxes of $5.1 million, and amortization
of software licenses of $2.9 million) and a $4.0 million increase in deferred
revenue. These amounts were partially offset by a $16.4 increase in other assets
(which includes our up-front payment of a $6.5 million fee in connection with
our recently executed third party licensing agreement), a $2.6 million increase
in accounts receivable and a $1.1 million decrease in accounts payable, accrued
expenses and other long-term liabilities.
For the year ended December 31, 2011, operating activities provided $28.6
million in net cash compared to $19.4 million in 2010. This was primarily as a
result of a net income of $32.3 million and non-cash items such as depreciation
and amortization of $3.1 million, amortization of software licenses of $1.8
million and stock-based compensation expense of $7.2 million, partially offset
by an increase in accounts receivable of $6.0 million.
For the year ended December 31, 2010, operating activities provided $19.4
million in net cash compared to $10.4 million in 2009. This was primarily as a
result of a net income of $8.0 million, a $19.2 million increase in deferred
revenue, which was attributable primarily to increased sales of our software and
non-cash items such as depreciation and amortization of $2.3 million,
amortization of software licenses of $1.8 million and stock-based compensation
expense of $3.0 million, partially offset by an increase in accounts receivable
of $15.0 million.
Investing Activities
Our investing activities have consisted primarily of purchases of marketable
securities and property and equipment and the acquisitions of businesses.
For the year ended December 31, 2012, net cash used in investing activities was
$34.2 million, compared to $99.1 million for 2011. This decrease was primarily
attributable to a $73.6 million decrease in net purchases of marketable
securities, offset by an $8.4 million increase in cash used for acquisitions.
In 2011, net cash used in investing activities was $99.1 million, compared to
$24.3 million for 2010. This increase was attributed to an increase of $118.6
million in marketable securities purchased with additional excess cash, and a
$14.6 million increase in cash used for acquisitions, partially offset by
proceeds from the sale and maturity of marketable securities of $58.2 million.
For the year ended December 31, 2010, net cash used in investing activities was
$24.3 million, compared to net cash provided of $0.7 million for 2009. This
increase was attributed to $18.7 million in marketable securities purchased with
excess cash and a $1.9 million increase in purchases of property and equipment,
$0.5 million of which was for leasehold improvements and equipment for new
office space.
Financing Activities
In 2012, net cash used in financing activities was $0.1 million, compared to net
cash provided by financing activities of $117.4 million for 2011. The change is
primarily the result of our receipt of $115.7 million of cash upon the issuance
of the Notes during 2011, a $1.5 million decrease in proceeds from stock option
exercises compared to 2011 and a $1.6 million increase in cash paid for taxes on
the vesting of restricted stock units compared to 2011.
In 2011, net cash provided by financing activities was $117.4 million, compared
to $29.2 million in 2010. The principal source of cash generated from financing
activities was related to the issuance of the Notes, which generated $115.7
million, net of issuance costs. Additionally in 2011, proceeds from common stock
issued upon the exercise of stock options increased by $3.2 million compared to
2010.
For the year ended December 31, 2010, net cash provided by financing activities
was $29.2 million, compared to cash used of $2.7 million in 2009. This amount
consisted primarily of the net proceeds of our IPO of $40.0 million and net
proceeds of our follow-on offering of $9.9 million, partially offset by
repayment of the ORIX
58
--------------------------------------------------------------------------------
Table of Contents
Loan and other loan balances in the aggregate of $16.7 million and the $4.3
million payment for the redemption and subsequent cancellation of all
outstanding shares of our Series A redeemable preferred stock.
Borrowings and Credit Facilities
Convertible Senior Notes
In June 2011, we issued $120.0 million aggregate principal amount of our Notes.
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 will be 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.
Conversion Prior to April 1, 2018:
Note holders may convert their Notes at their option prior to April 1, 2018 only
if any of the following occur:
• if, for ten consecutive trading days, the trading price per Note is less
than 98% of the product of the last reported sale price of the common
stock and the applicable conversion rate of the Notes on such day, then
the Notes may be converted at any time during the five business days
following such ten day period;
• if the closing price of our common stock exceeds 130% of the conversion
price of the Notes for at least 20 of the final 30 trading days of a
calendar quarter, then the Notes may be converted at any time during the
following calendar quarter;
• upon the occurrence of certain corporate events specified in the indenture governing the Notes, or the Indenture; or
• if we call the Notes for redemption.
Conversion on or After April 1, 2018:
The Notes will be convertible, regardless of the foregoing circumstances, at any
time on or after April 1, 2018 through the second scheduled trading day
immediately preceding the maturity date.
Redemption by Holders:
Holders of the Notes may require us 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 the principal amount of the Notes
being repurchased, plus any accrued and unpaid interest up to but excluding the
relevant repurchase date. In addition, if a make-whole fundamental change, as
defined in the Indenture, occurs prior to the maturity date, we 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.
Redemption by BroadSoft:
We may not redeem the Notes prior to July 1, 2015. Beginning July 1, 2015, we
may redeem for cash all or part of the Notes (except for the Notes that we are
required to repurchase as described above) if the last reported sale price of
our common stock exceeds 140% of the applicable conversion price of the Notes
for at least 20 of the final 30 trading days ending on the trading day
immediately prior to the date of the redemption notice. The redemption price of
any Notes we call for redemption prior to the maturity date will equal the sum
of the
59
--------------------------------------------------------------------------------
Table of Contents
principal amount of the Notes to be redeemed, plus accrued and unpaid interest,
plus a "make-whole premium" payment.
Tekes Loan
In connection with our acquisition of Movial Applications Oy in October 2011, we
assumed five installment loans with Tekes-the Finnish Funding Agency for
Technology and Innovation in the aggregate principal amount of $1.0 million. The
terms of the loans are governed by the Finnish Act on State Lending and State
Guarantees, Government Decree on Research, Development and Innovation Funding.
The loans are for funding approved research and development projects, repayment
terms are determined on a per project basis, and the interest rate on each loan
is variable, which is currently three percent. We expect to repay these loans in
full during 2013, subject to completing a statutory audit in Finland.
Operating and Capital Expenditure Requirements
We believe the cash generated from operations, our current cash, cash
equivalents and short-term and long-term investment balances and interest income
we earn on these balances will be sufficient to meet our anticipated cash
requirements through at least the next 12 months. In the future, we expect our
operating and capital expenditures to grow as we increase headcount, expand our
business activities, grow our customer base and implement and enhance our
information technology and enterprise resource planning system. As sales grow,
we expect our accounts receivable balance to increase. Any such increase in
accounts receivable may not be completely offset by increases in accounts
payable and accrued expenses, which would likely result in greater working
capital requirements.
If our available cash resources are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or convertible debt
securities or enter into a credit facility. The sale of equity and convertible
debt securities may result in dilution to our stockholders and those securities
may have rights senior to those of our common shares. If we raise additional
funds through the issuance of convertible debt securities, these securities
could contain covenants that would restrict our operations. We may require
additional capital beyond our currently anticipated amounts. Additional capital
may not be available on reasonable terms, or at all.
Contractual Obligations
We have contractual obligations for non-cancelable office space, notes payable
and other short-term and long-term liabilities. The following table discloses
aggregate information about our contractual obligations as of December 31, 2012
and periods in which payments are due (in thousands):
Payments Due by Year
Total 2013 2014 - 2015 2016 - 2017 After 2017
Convertible Senior Notes,
including interest * $ 130,800 $ 1,800 $ 3,600 $ 3,600 $ 121,800
Tekes Loan 969 $ 555 $ 263 $ 76 $ 75
Operating lease obligations 12,702 2,255 4,156 4,003 2,288
Equipment leases 104 74 30 - -
Total $ 144,575 $ 4,684 $ 8,049 $ 7,679 $ 124,163
* Contractual interest obligations related to our Notes totaled $10.8 million at
December 31, 2012, including $1.8 million, $3.6 million, $3.6 million and $1.8
million due in years 2013, 2014-2015, 2016-2017 and after 2017, respectively.
As of December 31, 2012, we had unrecognized tax benefits of $0.8 million, which
did not include any interest or penalties. We do not expect to recognize any of
these benefits in 2013. Furthermore, we are not able to provide a reliable
estimate of the timing of future payments relating to these unrecognized
benefits.
60
--------------------------------------------------------------------------------
Table of Contents
Off-Balance Sheet Arrangements
As of December 31, 2012, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
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 Notes and non-cash 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 GAAP. In addition, other companies, including companies in our industry,
may calculate such measures differently, which reduces its usefulness as a
comparative measure. We believe that these non-GAAP measures reflect our ongoing
business in a manner that allows for meaningful period-to-period comparisons and
analysis of trends in our business, as they exclude certain expenses.
The presentation of non-GAAP net income, non-GAAP net income per share, non-GAAP
gross profit, non-GAAP operating income and other non-GAAP financial measures in
this Annual Report on Form 10-K is not meant to be a substitute for "net
income," "net income per share," "gross profit," "income from operations" or
other financial measures presented in accordance with GAAP, but rather should be
evaluated in conjunction with such data. Our definition of "non-GAAP net
income," "non-GAAP net income per share," "non-GAAP gross profit," "non-GAAP
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 net income and net income per share. We define non-GAAP net income as
net income plus stock-based compensation expense, amortization expense for
acquired intangible assets, non-cash interest expense on our Notes, and non-cash
tax expense included in the GAAP tax provision. We define non-GAAP income per
share as non-GAAP net income divided by the weighted average shares outstanding.
Non-GAAP gross profit, license gross profit, maintenance and services gross
profit and professional services and other gross profit. We define non-GAAP
gross profit as gross profit plus stock-based compensation expense and
amortization expense for acquired intangible assets. We consider non-GAAP gross
profit to be a useful metric for management and our investors because it
excludes the effect of certain non-cash expenses so management and investors can
compare our sales margins over multiple periods.
Non-GAAP operating income. We define non-GAAP operating income as income from
operations plus stock-based compensation expense and amortization expense for
acquired intangible assets. We consider non-GAAP operating income to be a useful
metric for management and investors because it excludes the effect of certain
non-cash expenses so management and investors can compare our core business
operating results over multiple periods.
Non-GAAP operating expenses, sales and marketing expense, research and
development expense and general and administrative expense. We define non-GAAP
operating expenses as operating expense plus stock-based compensation expense
allocated to sales and marketing, research and development and general and
administrative expenses. Similarly, we define non-GAAP sales and marketing,
research
61
--------------------------------------------------------------------------------
Table of Contents
and development and general and administrative expenses as the relevant GAAP
measure plus stock-based compensation expense allocated to the particular
expense item.
Years Ended
December 31,
2012 2011 2010
(In thousands)
Non-GAAP gross profit:
GAAP gross profit $ 132,356 $ 113,090 $ 75,581
(percent of total revenue) 80 % 82 % 79 %
Plus:
Stock-based compensation expense 1,831 916 210
Amortization of acquired intangible assets 2,660 1,295
794
Non-GAAP gross profit $ 136,847 $ 115,301 $ 76,585
(percent of total revenue) 83 % 84 % 80 %
Years Ended
December 31,
2012 2011 2010
(In thousands)
GAAP license gross profit $ 81,107 $ 71,212 $ 47,961 (percent of related revenue) 90 % 92 % 90 %
Plus:
Stock-based compensation expense 553 331 89
Amortization of acquired intangible assets 938 704 675
Non-GAAP license gross profit $ 82,598 $ 72,247 $ 48,725
(percent of related revenue) 92 % 93 % 91 %
Years Ended
December 31,
2012 2011 2010
(In thousands)
GAAP subscription and maintenance support
gross profit $ 43,418 $ 32,043 $ 26,052
(percent of related revenue) 75 % 75 % 77 %
Plus:
Stock-based compensation expense 839 334 81
Amortization of acquired intangible assets 1,722 591 119
Non-GAAP subscription and maintenance support
gross profit $ 45,979 $ 32,968 $ 26,252
(percent of related revenue) 79 % 78 % 78 %
Years Ended
December 31,
2012 2011 2010
(In thousands)
GAAP professional services and other gross
profit $ 7,831 $ 9,835 $ 1,568
(percent of related revenue) 46 % 54 % 18 %
Plus:
Stock-based compensation expense 439 251 40
Non-GAAP professional services and other
gross profit $ 8,270 $ 10,086 $ 1,608
(percent of related revenue) 49 % 55 % 19 %
62
--------------------------------------------------------------------------------
Table of Contents
Years Ended
December 31,
2012 2011 2010
(In thousands) Non-GAAP income from operations:
GAAP income from operations $ 25,404 $ 27,436 $ 10,044
(percent of total revenue) 15 % 20 % 11 %
Plus:
Stock-based compensation expense 15,022 7,201 3,008
Amortization of acquired intangible assets 2,660 1,295
794
Non-GAAP income from operations $ 43,086 $ 35,932 $ 13,846
(percent of total revenue) 26 % 26 % 14 %
Years Ended
December 31,
2012 2011 2010
(In thousands)
GAAP operating expense $ 106,952 $ 85,654 $65,537
Less:
Stock-based compensation expense 13,191 6,285 2,798
Non-GAAP operating expense $ 93,761 $ 79,369 $ 62,739
(as percent of total revenue) 57 % 57 % 66 %
Years Ended
December 31,
2012 2011 2010
(In thousands) GAAP sales and marketing expense $ 47,911 $ 38,376 $ 31,818
Less:
Stock-based compensation expense 5,609 1,984 882
Non-GAAP sales and marketing expense $ 42,302 $ 36,392 $ 30,936
(as percent of total revenue) 26 % 26 % 32 %
Years Ended
December 31,
2012 2011 2010
(In thousands) GAAP research and development expense $ 36,178 $ 27,744 $ 19,616
Less:
Stock-based compensation expense 4,498 1,901 638
Non-GAAP research and development expense $ 31,680 $ 25,843 $ 18,978
(as percent of total revenue) 19 % 19 % 20 %
Years Ended
December 31,
2012 2011 2010
(In thousands) GAAP general and administrative expense $ 22,863 $ 19,534
$ 14,103
Less:
Stock-based compensation expense 3,084 2,400 1,278
Non-GAAP general and administrative expense $ 19,779 $ 17,134
$ 12,825
(as percent of total revenue) 12 % 12 % 13 %
63
--------------------------------------------------------------------------------
Table of Contents
Years Ended
December 31,
2012 2011 2010
(In thousands)
Non-GAAP net income and income per share:
GAAP net income $ 12,076 $ 32,297 $ 7,992
Adjusted for:
Stock-based compensation expense 15,022 7,201 3,008
Amortization of acquired intangible assets 2,660 1,295 794
Non-cash interest expense on our notes 5,120 2,561 -
Non-cash tax provision (benefit) 6,023 (8,879 ) 1,093
Non-GAAP net income $ 40,901 $ 34,475 $ 12,887
Years Ended
December 31,
2012 2011 2010
(In thousands)
GAAP net income per basic common share $ 0.44 $ 1.21 $ 0.49
Adjusted for:
Adjustment for preferred stock conversion (1) - - (0.13 )
Stock-based compensation expense 0.54 0.27 0.13
Amortization of acquired intangible assets 0.10 0.05 0.04
Non-cash interest expense on our notes 0.18 0.10 -
Non-cash tax provision (benefit) 0.22 (0.33 ) 0.05
Non-GAAP net income per basic common share $ 1.48 $ 1.30 $ 0.58
Years Ended
December 31,
2012 2011 2010
(In thousands)
GAAP net income per diluted common share $ 0.43 $ 1.15 $ 0.32
Adjusted for:
Stock-based compensation expense 0.53 0.26 0.12
Amortization of acquired intangible assets 0.09 0.05 0.04
Non-cash interest expense on our notes 0.18 0.09 -
Non-cash tax provision (benefit) 0.21 (0.32 ) 0.04
Non-GAAP net income per diluted common share $ 1.44 $ 1.23 $ 0.52
(1) For purposes of the calculation of non-GAAP net income per basic common
shares for the year ended December 31, 2010, GAAP weighted-average shares
outstanding was adjusted as if the conversion of all shares of redeemable
convertible preferred stock into common stock occurred at the beginning of
the period.
[ Back To TMCnet.com's Homepage ]
|
Call Center/CRM
IP Communications 
Info Tech 
Mobile 
Conferencing 
Green 
Satellite 
Robotics 
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
IoT EVOLUTION MAGAZINE
