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BroadSoft (NASDAQ:BSFT)

Q4 2012 Earnings Call

February 27, 2013 5:00 pm ET

Executives

John Kiang

Michael Tessler - Co-Founder, Chief Executive Officer, President and Executive Director

James A. Tholen - Chief Financial Officer, Principal Accounting Officer, Assistant Secretary and Assistant Treasurer

Analysts

Richard Valera - Needham & Company, LLC, Research Division

George C. Notter - Jefferies & Company, Inc., Research Division

Kent Schofield - Goldman Sachs Group Inc., Research Division

Sanjit Singh - Wedbush Securities Inc., Research Division

Dmitry Netis - William Blair & Company L.L.C., Research Division

Operator

Good day, ladies and gentlemen, and welcome to your BroadSoft Q4 2012 Earnings Call. [Operator Instructions] And as a reminder, today's conference is being recorded.

And now, I would like to introduce your host for today, John Kiang.

John Kiang

Thank you, John. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss BroadSoft's results for the fourth quarter and year ended December 31, 2012. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the BroadSoft website at www.broadsoft.com.

With me on today's call are Michael Tessler, BroadSoft's President and Chief Executive Officer; and Jim Tholen, BroadSoft's Chief Financial Officer.

This afternoon, BroadSoft issued a press release discussing its financial results for the fourth quarter and 12-month period ended December 31, 2012. If you would like a copy of the release, you can access it on our website or the SEC's EDGAR website.

We would like to remind you that during the course of this conference call, BroadSoft management may make forward-looking statements, including statements regarding the company's future financial and operating end results, future market conditions, the plans and objectives of management for future operations, and the company's future product offerings. These forward-looking statements are not historical facts, but are rather all based on BroadSoft's current expectations and beliefs, and are based on information currently available to us.

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, but not limited to, those factors contained in the Risk Factors section of the company's Form 10-K for the year ended December 31, 2012, filed today, February 27, 2013, with the SEC.

All information provided in this conference call is as of February 27, 2013. Except as required by law, we undertake no obligation to update publicly any forward-looking statement made on this call to confirm the statements or actual results or changes in our expectations. Also, in light of Regulation FD, we advise you that it is BroadSoft's policy not to comment on our financial guidance other than in public communications.

Please note that when we discuss EPS, we are referring to diluted EPS. In addition, certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude the impact of noncash stock-based compensation and amortization expense related to acquired intangible assets, noncash tax expense and noncash interest expense on our convertible notes. Collectively, these items totaled $8.5 million in the quarter.

Also on this call, when we use the term cost of sales, gross margin, operating expense, operating margin, operating income or net income, we are referring to non-GAAP figures. We have provided reconciliations of these non-GAAP measures in our earnings release, which is available in the Investor Relations section of our website located at www.broadsoft.com. Finally, we define non-GAAP tax rate as the rate calculated by dividing on an annual basis our estimated non-GAAP pretax income by our anticipated cash taxes.

I will now turn the call over to BroadSoft's President and CEO, Michael Tessler. Mike?

Michael Tessler

Good afternoon, and thank you for taking the time to discuss our fourth quarter and full year 2012 results. I'm joining you today from the Mobile World Congress, the largest mobile industry trade show in Barcelona, Spain.

With the global telecommunication industry focused on [indiscernible], I thought I would take a few minutes to highlight some of our results from the region. We're very encouraged by the progress we've made in Europe as seen on the positive sell-through rates of our customers in 2012. This resulted in strong reorders for host of Unified Communications throughout the region in Q4, helping to drive 30% year-over-year revenue growth during the quarter. Along with a number of new service launches by our European operators, we're also pleased that many of our mobile operator customers introduced new fixed-mobile convergence services in the second half of the year. We believe that these fixed-mobile convergence market offers will be a strong business driver in the European market, which we confirm this week at Mobile World Congress.

Looking back, on 2012, we successfully delivered on our strategic plan with the introduction of our UC-One platform, the extension of our product line into mobile operators and the expansion of our cloud business into BroadCloud PBX. The goal of UC-One is to provide our customer a single platform that combines all the critical elements required for them to launch a wide range of Unified Communications solution that meet the needs of the market segments they serve, from micro-businesses to small and medium businesses to large enterprises. And UC-One does all of this in a low total cost of ownership. Recognizing the importance of mobile, we have architected mobility to our solutions and products. We've made integrating with existing mobile networks simple, and a core competency of our platform. We have optimized our clients' cloud and software solutions to enable mobility in all of our services across a wide range of devices. As a result, end users can take advantage of all of our UC-One capabilities with virtually any device anywhere.

During our meeting this week, one thing we heard over and over was that mobile operators are looking for ways to better serve their higher-margin enterprise customers, and are looking at how to bring a range of Unified Communications solution to this segment. Mobile operators are at various stages of their migration to all IP networks and we've had the opportunity to explain to many of them how our solutions allow them to produce high-value Unified Communications services independent of their current network. While utilizing our service control function, they can introduce 6 mobile convergence Unified Communications offers on their existing 2G, 3G network before they can record voice on their IP networks. This is important because by enabling mobile operators to enter the Unified Communications market today, we believe Unified Communications could be one of the first voice value-add applications delivered over LTE. As a result, carriers have been able to ship the initial target market segments served by LTE for consumers and enterprise. This focus on the enterprise market with its higher average revenue per user will enable mobile-converged operators to both quickly monetize their LTE network investments. A really good example of how Unified Communications is becoming an important mobile offering comes from one of our Northern European service providers. This service provider has seen customers transition away from fixed-line deployments, and move their complete Unified Communications experience to mobile. In particular, 1 customer in education vertical migrated 500 lines from a combination of fixed number and mobile subscription to a mobile-only solution. This is something that we've historically seen in smaller businesses, but it is clearly now moving up market.

A second example of mobile Unified Communications that moves fixed and mobile together comes from a Western European customer that is marketing to the medium enterprise segment, including businesses with a few hundred feet at multiple sites. The offer includes both fixed IP phones and mobile phones so its end users never miss a call, as they can answer on either device. The service also includes integrated messaging, so users have a single voice mail for both mobile and desktop phones. This fixed and mobile integration creates a value proposition to business owners worldwide, that has the ability to increase productivity and reduce cost and complexity all at the same time. They just buy one subscription for any employee and then allow the employee to creatively use between tax phone, soft line or mobile phone, and the billing is all consolidated. As you can see from our earnings press release, we had a strong fourth quarter and a strong 2012. We're very happy with growth rates. Our customers are having with their Unified Communications offers, which are designed around our UC-One platform.

Now I would like to share with you some of the key elements of our 2013 strategy. First, we plan to focus on rolling out our UC-One platform for our customers globally. Our goal is to move our customers from a voice-centric offer to a full, hosted Unified Communications offer. And our cloud delivery model provides the ability for operators to roll out a fully branded [indiscernible] Unified Communication experience quickly without the expense of integrating these new services into their networks and operational environments. The reaction from service providers using this delivery model has been very encouraging. In 2013, we'll also expand our go-to-market activities, as we are going to market practical to collaborative effort with our customers to ensure the success with their Unified Communications offer. In addition to helping them define their offer, we're helping to ramp the sale of their Unified Communications services with sales enablement strategy and customer fulfillment school. We also have collaborative marketing programs designed to assist service provider to upsell new Unified Communications services to their existing customer base. Additionally, we plan to exploit our mobile capabilities to enable mobile and converged operators to introduce mobile-focused Unified Communications offers that help with the transformation to voice over LTE for both consumers and enterprises.

Another important part of our 2013 strategy is to make sure that we have the best teams to take advantage of market opportunities, and that the team is aligned with the long-term strategic and operating goal of the company. An important component to that is to ensure that our employee compensation is correct in structure, so we engage an outside, independent consultant to benchmark us against peer companies. Its profit resulted in our Board of Directors approving a broad-based equity grant for our employees, and timed in structure of these annual grant to a once every 2-year grant for management, while senior management will not get another grant for the next 2 years. I believe this equity grant better positions to create a strong sense of ownership for all employees. We are extremely appreciative of our board's confidence in our entire team through their support of our 2013 equity program.

We continue to be very encouraged by the market opportunity that lies ahead of us as we are sure to provide our customers aggressively expand their offers to improve value-added Unified Communications services. The most recent forecast from ICF makes a 5-year comp out and annual revenue growth rate of 20% for vendors of Unified Communications solutions. It's personally rewarding for me to see the vision of Unified Communications becoming a reality. Investment in employees [ph], coupled with our strategic investments in our UC-One platform, we intend to transform the way businesses and consumers communicate, and secure our leadership position in the industry.

Let me now hand the call over to Jim who will go through our financial results, and our outlook for the first quarter and full-year 2013. Afterwards, I'll be happy to answer any questions. Jim?

James A. Tholen

Thanks, Mike. Before I dive into our Q4 and 2012 results, I want to start to with just a few comments about our new revenue classifications.

As of Q4 2012 and for our 2012 reported results, we are moving to 3 separate top line and gross margin categories from the 2 we had shown historically. Our goal is to provide additional granularity and transparency into some of the key drivers of our business. The software license category remains largely unchanged from before. This is our largest revenue contributor today and we expect to see continued strong growth in this category.

The second line item is now subscription and maintenance support, and it is a combination of our maintenance and BroadCloud revenue streams, and represents our true recurring revenue businesses. As such, we believe that it should show more consistent growth on a relative basis.

The last category is professional services and other, of which the vast majority of the revenue is professional service-related. Historically, there has been some quarter-to-quarter variability due both to variability inherent in professional services and to revenue recognition. We expect we could experience such variability on a go-forward basis as well.

We have posted an exhibit in the IR section of our website that provides our historical results since Q1 2011 with revenue and GAAP and non-GAAP gross profit broken out under our new reporting structure.

Now on to the results for the fourth quarter. Total revenue was $45.8 million, up 13% from 1 year ago. Software license revenue was $24.4 million, down 4% year-over-year, also a very strong Q4 2011. In our new subscription and maintenance support category, revenue of $16.7 million was up 33% year-over-year. This growth was driven by a combination of overall maintenance revenue growth as well as the impact of the Adaption acquisition. Professional services and other revenue of $4.7 million was up 83% year-over-year. The magnitude of this growth was primarily driven by revenue recognized from deferred revenue.

Billing, which we define as revenue plus the change in deferred revenue, were a record $52.9 million, up 11% year-over-year. On a geographic basis, we saw strong year-over-year growth in EMEA and solid growth in the U.S. Orders from existing customers contributed 92% of total software billings. Tier 1 customers represented 29% of total software billings. Non-GAAP earnings per share was $0.47. Cash flow from operations was a very strong $12.7 million.

Now on to the cost side for Q4. Our gross margin was a strong 85% with software license gross margin at 94%; subscription and maintenance support at 79%; and professional services and other at 53%. Software license cost of sales was $1.4 million, down over $300,000 from the third quarter. I expect license cost of sales to be roughly in the $1.9 million to $2 million range for Q1 2013. Operating expenses $24.8 million, up 7% year-over-year. We achieved operating income of $14 million in Q4 resulting in an operating margin of 31%.

On a non-GAAP basis, our tax rate was 2%, and EPS was $0.40 on net income of $13.4 million. For the full year 2012, revenue was $164.8 million, representing annual growth of 19%. Billings of $168.9 million grew 24%. Overall, we saw a continued strong revenue growth in our Hosted Unified Communications and consumer offerings. From a geographic perspective, we saw very strong growth in EMEA, which was gratifying, and strong order growth worldwide. In North America, sales to cable MSOs were a particular highlight. Non-GAAP EPS was $1.44, and we generated over $30 million of operating cash flow in 2012. Another thing to note, professional services was down 8% year-over-year. While over the last several years, professional services billings have grown, revenue recognition ruled drove a down-year revenue-wise.

On the balance sheet, net to cash, cash equivalent and investments were $193.7 million at quarter end, driven by $12.7 million in cash from operations. Accounts receivable were $49 million, up $7.4 million sequentially, an increase typical of a Q4. Deferred revenue was $61.1 million, up $7.1 million sequentially.

Now I would like to provide guidance for the first quarter and full year 2013. For Q1 2013, we expected to deliver revenue in the $37 million to $40 million range. We also expect non-GAAP diluted EPS of $0.02 to $0.12 per share. For the full year 2013, we expect revenue in the $181 million to $189 million range. Non-GAAP diluted EPS is expected to be in the $1.10 to $1.35 per share range.

I think it's important to spend some time to dive into our full year 2013 guidance and provide you with some additional detail that should help you in your modeling. First, on the revenue side, we expect continued solid revenue growth in our enterprise Unified Communications software, SIP trunking and our subscription and maintenance support businesses in 2013. This will be driven by the market trends to IP and Hosted Communications, our strong competitive position in the market, as well as expected growth in our cloud businesses. 2 factors, professional services and consumer, however, will impact our overall growth rate. We expect that our professional services revenue will be down approximately 20% year-over-year. It is important to emphasize that our PS billings continue to grow, although at a rate lower than the overall billings growth. The decline in PS revenue then is primarily the result of timing issues. Both 2011 and 2012 benefited from some large projects and revenue coming off the balance sheet, and in 2013, this is less likely to occur. I would expect to see professional services revenue growth in 2014 and beyond.

We also expect our consumer applications business to be sequentially down in 2013. The consumer market is currently in a transition from a fixed line to a Voice over LTE-centric market. Voice over LTE will be a very large and attractive market opportunity for us, but, as we said historically, we expect it to be a 2014-and-beyond revenue event. In 2012, consumer billings were about 15% of total software billings, and we expect that may be closer to 10% in 2013. As a result, in 2013, we expect that the primary revenue growth driver will be our enterprise-focused Unified Communications offerings, which we believe will continue to see strong demand given all the positive market dynamics we've talked about.

In the longer term, we expect to see a return to revenue growth in both consumer and professional services that will augment our Unified Communications business. I would note lastly that revenue from the large project win we talked about on the Q3 earnings call, and that added nearly $10 million to long-term deferred revenue, is not included within our 2013 guidance. We expect to recognize this revenue in the first half of 2014.

On the cost side, we expect overall gross margin to come in a bit below 2012 levels, but still be at a healthy 80%-plus level. I would expect software margins to remain pretty consistent with 2012, and subscription and maintenance support margins to perhaps be reduced by 4 to 5 points as we continue to invest in our BroadCloud business.

Professional service margins will be impacted by the lower PS revenue as the cost base is fairly fixed in nature. We expect that PS [indiscernible] approximately $2.9 million per quarter, given a ramp-up in headcount for both billings growth and for several projects we expect will become revenue in 2014. Assuming a revenue decline of approximately 20%, this will result in PS gross margin declining to the high single digits in 2013. Over the long run, we would expect on a normalized run rate that PS gross margins would return to a range of 40% plus.

From an operating standpoint, we are planning on growing R&D and sales and marketing at rates a bit above revenue growth, given our long -- our view of the long-term market opportunity. Our product investment priorities are mobile, client and cloud

First, mobile. We are putting significant resources in Voice over LTE and more broadly in our overall mobility solution offerings given the market trend on display at Mobile World Congress, as Mike talked about previously. Second, the client software side. As we see customers migrating from hosted voice solutions to true Unified Communications, the client is becoming increasingly critical as it serves as the nexus for the user experience. We're excited by our UC-One platform, which enables a great user experience in both a mobile and fixed environment. Third, cloud. We are increasing our investment in growing our cloud business. We are excited by the potential of our BroadCloud business generally, and our opportunity with BroadCloud PBX specifically. BroadCloud PBX enables us to target new service provider customers, new types of service providers and even new projects from existing customers. We think that the economics at scale of this business are positive for us and for our service provider customers. We do much more for our customers in a cloud environment. We host and manage the whole solution including the critical back-office, OSS and BSS activity. We believe this model is a win-win for us and for our BroadCloud customers. They generally can get to market faster, lock in longer-term operating margins and do not tie up capital, and we ultimately increase our revenue opportunity at that customer.

Our sales and marketing focus is on sales force expansion as well as the investing in the go-to-market efforts Mike described earlier. For the full year 2013, I would expect operating margins in the 21% to 24% range. Finally, in terms of shares outstanding, I would expect total diluted shares to increase about 1.5 million shares in 2013. As Mike mentioned, we recently instituted a broad-based equity program across the organization. This grants us both a catch up, we believe we are below our peers in equity -- in employee equity ownership, and a pay-forward amount as we transition away from annual grants. So in 2014, we would expect our share count to increase at a below long-term trend line rate.

In summary, we had a strong 2012 with good revenue growth and even stronger billings growth. We believe we are in a great market with tailwinds from market shifts to IP and to the cloud, and still nascent from a penetration perspective. We are investing in growth for the long term while still managing to healthy margins. While we anticipate that our PS and consumer revenue expectations will dampen our overall 2013 revenue and earnings growth, we continue to believe our underlying market of long-term growth rate in excess of 20% and that we will continue to maintain or expand our market share. We are maintaining our long-term model view of 82% to 85% non-GAAP gross margin, and 28% to 30% non-GAAP operating margins.

With that, let me turn the call back over to Mike.

Michael Tessler

Thanks, Jim. Jim and I are now happy to answer any questions. Operator, would you please open the call up for questions?

Question-and-Answer Session

Operator

[Operator Instructions] So we will take our first question from Rich Valera from Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

First, just wanted to understand your comments on the consumer business declining, and you seem to sort of tie that to VOLTE, but, as I understood it, most of your consumer customers today are either MSOs or telco, fios-types [ph]. So I'm just wondering, is there actually any tie-in between the 2, or is it just a timing issue that you expect VOLTE to ramp but it's pretty much independent of the decline in consumer?

James A. Tholen

Yes. Rich, it's Jim. Yes, I mean, what we've said is effectively for us, there's a bit of a pause. The wire line business carriers are starting to move their investment from the wire line business as they really emphasize wireless. And so this is effectively a transition year. So we'll see less wire line business and we're really not going to see VOLTE business until 2014 and beyond.

Richard Valera - Needham & Company, LLC, Research Division

Okay, that's helpful. And then you mentioned you're gonna bump up your spending with collaborative marketing efforts with your customers, so sort of spending there faster than revenue growth. What was it that drove that? Is it something you're seeing that your customers aren't doing in getting to market? What makes you feel that, that's the -- it's the right thing to do now that you've seen the market?

Michael Tessler

Rich, this is Mike. I think what we've seen is, in 2012, we did a number of projects in what we call the general go-to-market, and that could be sales enablement, it could be training, it could be collateral and so we saw a really positive return in those investments. So when we help the operators with our very vast experience, it's really one of the things that we realized in 2012, we have this vast experience check on what mobile and fixed operators are doing well. Sometimes not so well. And we were really sharing that experience through the -- our go-to-market practice. And through those experiments, we started to see, hey we helped your software in this particular go-to-market activity, we saw the sell-through rates accelerate, and so as we started building the 2013 plan, we really saw that we could impact positively the sell-through rates by accelerating some spending on the go-to-market category. And I think -- and generally, the expenses fall into a few categories. There's program dollars, helping them with funding some program. There is collateral creation, where we think that they're missing some pieces of collateral training videos, you know, all kinds of things like that. And then we've also up-staffed the specialist that could go in, and might help either with the kind of programmatic definition of the offers, or, in fact, actually kind of overlay some sales specialist on particular deals. And like I said, in each of those 3 areas, we saw some really positive results in '12, and we were able to accelerate the sell-through rates, and so we decided when we build '13 that it's important to really kind of put more investment in that area.

Richard Valera - Needham & Company, LLC, Research Division

Great, that's helpful. And just 1 more if I could with respect to sort of applications on LTE. It sounds like you're pretty enthusiastic about the prospects, which sort of you see over LTE being sort of maybe your killer enterprise app. Has that changed your focus at all on the kind of consumer VoLTE market? Just want to understand sort of how you're seeing those 2 and any update on your expectations for material revenue from LTE apps in general?

Michael Tessler

Yes, I think this -- to answer your question, I think that the feedback we've received from the operators, mobile operators around kind of Voice over LTE timing, and the complexity and scale issues they have around consumers, the competitive issues around consumers, consumer-mobile business, a lot of them have started to kind of think about the kind of higher margin and better opportunity at serving their enterprise customers. I think that one of our core strengths in approaching mobile operators with Voice over LTE has always been that we have a solution spend from very basic consumers all the way up to very sophisticated Unified Communications. It truly is one of our very strong competitive advantages. So it doesn't really change our strategy. I think we're just, I guess, feeling good that mobile operators are looking at enterprise customer perhaps a lead in the Voice over LTE space, and I think that, that's kind of 2 elements, one of them is customers are willing to pay for the higher Unified Communication capabilities, they'll be using more sophisticated devices, and generally the scale of the OSS and IT infrastructure work around the business customers are smaller than kind of mass scale consumer transformation. So we're seeing it as a really good leading point. And a point that I think, some of you have followed us for quite some time, and business services we were really the lead in a lot of IMS deployments 5 years ago in the fixed market, and that really drove a tremendous amount of our growth in the IMS deployments globally. I think we're starting to see mobile operators kind of think about the same strategies, and that's been, kind of confirms the space and volume discussions we've had here in Barcelona.

Operator

We'll take our next question from George Notter from Jefferies.

George C. Notter - Jefferies & Company, Inc., Research Division

I wanted to ask about the guidance for 2013 and specifically the professional services piece. I think if I heard you right, you were talking about lumpiness in prior years, 2011, 2012. I guess, contributing to the year-on-year comparison, I think you said down 20%. But can you give us any more kind of math around that? How big were the lumps that you experienced in 2011, 2012, and then why does that then translate to a down 20% number in 2013? Any more flavor there would be great.

James A. Tholen

Yes, George, I'd say on a billings basis, you would have seen sort of, reasonably consistent growth and the billings and revenue number in '13 are pretty similar. So that will give you a sense of the magnitude of stuff that came in off the balance sheet in '11 and '12 on PS. And you may remember that in '11, as an example, we had the large Telstra order in Q3 of '11 that -- and that was both a very significant subscription and maintenance and a significant PS revenue event, although billing would have preceded it. And so we had a couple of those fairly large, not that size in '12 that impacted professional services. So I think it'll be -- it's more normalized in '13 to be honest. The key point from my perspective is underlying growth. For us, PS, the underlying growth continues to grow but at a rate lower than overall revenue growth, and it's just -- we use PS not as a standalone business but as helping us help our customers grow BroadSoft, implement BroadSoft and grow BroadWorks faster so and that continues afoot.

George C. Notter - Jefferies & Company, Inc., Research Division

Got it, okay. And then the consumer page, I think I heard what you said about more the priorities in spending being focused on enterprise applications rather than wire line applications for consumer, but how does that then kind of translate into your guidance? I can't remember precisely what you said about the consumer piece this coming year, but do you have a funnel or a pipeline that you're leaning on for that forecast? Is there some other kind of math you're using to help understand the rate of that decline in that business for 2013?

James A. Tholen

Sure, yes. And so a few things: One, we look at burn rates with our current customers; and two, we forecast obviously with less precision new opportunities. So I think 2 things are going on the -- our consumer broadband or wire line space: One, that we continue to see our current consumer customers reorder, but we're seeing that at slowing rates; two is we're not seeing a lot of new wire line deployments or opportunities. And so that's why we think it's going to move from round numbers, 15% of software activity to under 10%. And what's really going on is, I think that's a marketplace reality, that while people continue to grow where they are already in the market on wire line, it's a diminished focus as they're really focusing on their wireless roll-outs, and specifically Voice over LTE. So this is a bit of a transition year and we forecasted it that way. So I guess specifically, we actually do it on a customer-by-customer basis in looking at the funnel for the year, and expect it will be down reasonably significantly. Longer term, we think it's a great business to be in because the magnitude of VoLTE is significant.

Operator

And our next question is from Simona Jankowski from Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

This is Kent Schofield for Simona. I was wondering if you could talk a little bit about the enterprise opportunity in terms of what you saw in the December quarter. You gave us some geographic comparison, but if you could dig in a little deeper there. And as you look into '13, with your current outlook, are you expecting to maintain share, gain share? What's the outlook there?

James A. Tholen

Sure, yes. I'd say, look, the Unified Communications business is our flagship, continue to be our flagship. It grew above, it grew faster than overall revenues, and we expect that to be true in '13 as well. And on that basis, our expectation is that I mean we have pretty substantial market share already, but we certainly expect to, at a minimum, maintain share in the enterprise Unified Communications business. And just for semantics sake, when we talk about enterprise, we're still talking about selling to the service providers, but it's providing them enterprise applications. So, yes, it's, 1, it's growing quite nicely. It's growing above overall growth and we expect to maintain or expand market share. And we saw nice growth, really worldwide, very good order activity. As Mike talked about from Barcelona, the European business was actually gratifyingly strong this year. We really saw Europe come back really across the continent and very much so on the Unified Communications front.

Kent Schofield - Goldman Sachs Group Inc., Research Division

And on the expense side, should we be looking for kind of the most growth, it sounds like, on the sales and marketing side of your business, or are you looking for kind of outsize growth in R&D as well?

James A. Tholen

Yes, those are the 2 areas of growth, probably a little bit more on the R&D front, but those are really the 2 areas. Between Mike's and my remarks on the R&D front, focused on mobile client and cloud, and on the sales side, it's really adding selling power, but I think in a very complementary way, helping our carrier customers drive growth, which then, from a success base capital mark -- model has them coming back and ordering more software from us.

Operator

And I'm showing 1 more question coming from Sanjit Singh from Wedbush Securities.

Sanjit Singh - Wedbush Securities Inc., Research Division

Just to touch on the competitive environment again, I think Cisco on their call announced some pretty good traction with their hosted communications offering. I wonder if you could give an update on Cisco. And then secondly, on regarding the consumer opportunity in 2014, do you expect Voice over LTE to have a meaningful impact on the business? I guess my question is, we're going to have a transition year in 2013, should we expect a material bump up in 2014. I guess I'm trying to get a sense of longer-term growth rates?

James A. Tholen

All right. I guess 2 things. 1, on the competitive side with Cisco, again, they're making noise in the marketplace. We really don't see, from a service provider perspective, success in the marketplace with their Cisco-based solution. I think it's a very much of an enterprise-oriented solution that they're trying to make more service provider friendly and it's still a tough equation. So we feel like we're quite well-positioned, certainly at the small and medium level, enterprise level, but increasingly at the large enterprise as well. And then in terms of VoLTE, I think we'll see revenue activity in '14. I think it will be most pronounced. We see a lot of order activities, that's our expectation. It will be more pronounced from a revenue standpoint in '15 and beyond.

Sanjit Singh - Wedbush Securities Inc., Research Division

If I could add just 1 follow-up, was there any 10% customers in the quarter and from a macro, from a spending environment, you didn't really talk about any weakness in the spending environment per se. How would you describe the current CapEx spending environment from your advantage point?

James A. Tholen

Yes, so -- we did not have a 10% customer, and I'd say, we're, I mean mostly our perspective on CapEx, and this is not a meta comment, but just a BroadSoft comment, it continues to feel very normal. We probably saw a little bit less budget-buying in Q4 than we had the prior Q4. Having said that, billings were very solid. And I think, I do think -- we see a lot of discipline with our carrier customers on not buying in advance -- significantly in advance of sales, which we actually don't mind, it enables us to manage the business a little bit better. So I'd say, generally, it continues to be a reasonable investment environment for us, and I wouldn't say a substantive change.

Operator

And I'm showing 1 more question coming from Dmitry Netis from William Blair.

Dmitry Netis - William Blair & Company L.L.C., Research Division

Okay. Sorry, guys, I'm calling from Europe as well. And I apologize I dropped -- in advance, I dropped off so if some of these questions were asked I apologize for asking them again. I have a couple of questions here. On the deals that slipped last quarter, have most of or all of these deals closed in Q4, can you comment?

James A. Tholen

Yes, I would just say there were 2 that we've pointed to: The pipeline deal did close in Q4, the deal on the balance sheet did not, and actually is not in our Q1 guidance. My expectation is that it will be early Q2.

Dmitry Netis - William Blair & Company L.L.C., Research Division

Okay. So you do expect still that you didn't -- you haven't lost that deal, I mean, it's still sort of a rap-rack [ph] issue right, I mean it's not just sitting on your balance sheet?

James A. Tholen

Yes, yes, yes. Definitely, it's just -- it's an acceptance process on a new application.

Dmitry Netis - William Blair & Company L.L.C., Research Division

Can you comment why it's taking a little bit of a while here to close? Is it something you need to deliver? Is it solely have to do with the customer?

James A. Tholen

I'd only have to say that it's all fine. It's just it's taken us a little bit longer to get it over the line than normal but, no, nothing of a particular concern.

Dmitry Netis - William Blair & Company L.L.C., Research Division

Okay. Okay, Jim, that's helpful. And then on the long-term deal that you've announced last quarter, I think you had mentioned that you will give some color on that deal, potentially even mention the customer. Are you able to give more color this time?

James A. Tholen

Yes -- no, unfortunately, other than that it's not in the '13 guidance. We're not quite able to yet, and I hope to the next time we report. So, yes, we really can't yet.

Dmitry Netis - William Blair & Company L.L.C., Research Division

Okay. All right. And then on BroadCloud, I was just wondering, can you give us a little bit of -- can you give us -- can you help us understand how much to model sort of for BroadCloud for 2013, and maybe even 2014, I don't expect you to go that far, but at least for 2013, how -- what percentage of revenue do you expect BroadCloud to be?

James A. Tholen

Yes, so it's -- we kind of exit this year in the, call it 3% to 5% of revenue range. And we expect to exit next year in the 9-ish, 9% to 10%. So it's a pretty good growth year-over-year. 5% to 9% would be a reasonable assumption.

Dmitry Netis - William Blair & Company L.L.C., Research Division

5% to 9% is what we should model. Okay, great. And then -- exiting 2013, got it, okay. Okay, and then obviously, you announced Verizon there, is that your main contributor to growth for BroadCloud, or are you working any other deals of significant size to the extent you can disclose or talk about?

James A. Tholen

Yes. So we've mentioned 2 launch customers, and I'd say we're seeing nice growth from both, one of which is, as you mentioned, Dmitry, Verizon. And I would -- the preponderance of the BroadCloud PBX revenue will be from those 2 launch customers, but we are working -- we sign more, we're working a series of more, and so I think there's a lot of opportunity, but it's monthly recurring so it will take a little while to build.

Dmitry Netis - William Blair & Company L.L.C., Research Division

Okay, great, great. And maybe just 2 questions for Mike if I can. So, Mike, on VoLTE's side and I hate to go back to the same thing over and over again. I'm sure there's been a lot of questions on this already. But what we're seeing here in Barcelona, there's been quite a bit of traction from other vendors, other messaging vendors, telephony voice application server vendors are closing deals as architectural decisions are being made as we speak. And certainly, they've been announcing some of the early operator wins and we haven't seen much from you guys. So is it still -- why haven't we seen some of those deals coming from BroadSoft? And I know you're comfortable that 2014 is going to be your year for VoLTE, but aren't -- shouldn't you be talking about them now as architecture deals or decisions are being made? So that's 1. And then, Mike, if you could just comment on kind of what your thought process around this Oracle-Acme acquisition. That would be really helpful. As far as what's the implication for BroadSoft, how does it affect you?

Michael Tessler

All right, Dmitry. Those are 2 simple questions I guess. First of all, we've been pretty consistent, Dmitry, we know, we're not like to comment on what I call so-called wins or design things or -- I'll comment when we have closed deals and put cash from the bank. But I think that, kind of, we're having very strong traction with our Voice over LTE solution. I think from the work we've done with mobile operators around the world, we've received really positive feedback on our solution, and the operators have really liked the fact that, as I mentioned before, that as a vendor, we are really the only vendor that can bring a wide range of solutions from very basic consumer to [indiscernible] to small business to larger business. A lot of signal application server running on the same IMS cores they might have deployed. So a very strong interest for having a simple -- single vendor in the application layer. The only feedback we've received is they really like the fact that our software has been optimized. We've really, obviously, always been a sale software only company, that we've been optimizing software for all the virtualization environments, and we're getting lots of good feedback. They like the fact that they can run our software in many of their preferred cloud infrastructure. We have in our solution combined many of the elements that people have the separate elements in terms of the application layer and media resource function. We brought all of that together, creating a solution that has a lot less complexity and lower TCO, and those operators -- obviously, operators are very focused on that in the consumer transfer information world. And finally, one of the things that we're really getting lots of good feedback on the work we've done with mobile operators, is that because our solution is based on a proven platform that's been around for a long time, we not only have to have a base of standardized features that are kind of the standard guise that just speced out [ph], but that we really have the kind of the value added advanced features that carriers will need to create really interesting market offers. So I think with all of that, we feel we're really strong about our position in the marketplace. We're not -- I think announced same thing before, that we really wanted to contract them, is extremely dangerous. I think from a timing perspective we've been very consistent and believe that we'll see some early business in the end of 2013 with some revenue in '14 but it will become meaningful for us, and really an indication of market timing in 2015. So I think we feel pretty strong about our position. We have great technology. We're getting great feedback on our competitive advantages and we look forward to kind of updating you on progress when we have things close the books, and a real business close. On the second question that you asked on Acme, obviously, big industry news of Acme being acquired by Oracle. From our understanding in the public record of what has been announced, it really feels like the Oracle folks have decided to acquire Acme with a very strong focus on the service provider business, clearly that is a business that they're very aligned with Acme on, and very focused. It does not appear at this point to be a kind of change of strategies. Oracle's a good partner of ours already, Acme has been a great partner of ours for many years. We don't see any real change in the -- our business relationship with the Acme team as they become part of Oracle.

Operator

I'm showing no further questions. I'd like to turn the conference back to your hosts.

Michael Tessler

So thanks, everybody, for being on the call today. And I apologize once again for all of you that are staying up late with me in Barcelona. And thanks for your continued support and look forward to updating you with our progress in the coming month. And thanks again. Have a good night.

Operator

Ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.

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