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BroadSoft (NASDAQ:BSFT)

Q1 2013 Earnings Call

May 06, 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

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

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

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

Richard Valera - Needham & Company, LLC, Research Division

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Vijay Bhagavath - Deutsche Bank AG, Research Division

Natarajan Subrahmanyan - The Juda Group, Research Division

Sanjit Singh - Wedbush Securities Inc., Research Division

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Operator

Good day, ladies and gentlemen, and thank you for your patience. You've joined the BroadSoft Q1 2013 Earnings Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Director of IR, Mr. John Kiang. Sir, you may begin.

John Kiang

Thank you, Latif. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss BroadSoft's results for the first quarter ended March 31, 2013. 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 first quarter ended March 31, 2013. If you would like a copy of the release, you can access it on our website or the SEC's 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 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 rather are 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 on February 27, 2013, with the SEC.

All information provided in this conference call is as of May 6, 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 that 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 $7.5 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 a reconciliation 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 time to discuss our first quarter 2013 results. I'm pleased to report that we had a solid start to 2013, with good momentum worldwide especially in our Hosted Unified Communications business. Much of this was a result of strong real activity from our existing customers. This demand was driven in part by our investment in our go-to-market practice. As a reminder, this practice was a collaborative effort with our customers. Our go-to-market team, leveraging their extensive sales and marketing experience and the telecommunications industry, works closely with our customers to drive the success and rapid sales growth of their hosted offers. Since this practice is a key element of our 2013 strategy, I thought it'd be helpful to provide more details on it.

The first critical component of a successful Unified Communications solution is a market offer that is designed with the services and features that meet the communications needs of a specific target audience. We work together with our customers to construct successful market offers that not only consider the employee size of the enterprise, but also the industry it serves. Thanks to this focus, many of our customers are successfully selling into vertical segments, including the education, government and health care sectors.

The second investment area this year in our go-to-market team is the addition of sales enablement specialists. We embed these specialists with our customer sales teams during the introduction of a unified communication service to help reinforce key value propositions and to consult on our RFPs. And finally, we work with our customers to ensure the quick and cost-effective fulfillment of their services from land assessment, configuration delivery of IP phones to service activation. Our go-to-market team engaged with various stages during a customer's new service development process. An example of one of our new service launch engagements comes from one of our large U.S. customers. Initially, we collaborated with this customer product management team to define an offer for the small business market segment. We then supported the customer by incorporating powerful benefit statements, service demonstration script and objection handling positioning into new service training materials. We also supported the in-person training of their national sales organization. With our help, this customer exceeded

[Audio Gap]

the sales forecast for the first year of this new service. This customer was so appreciative of our support that we are invited to help them with their expansion into the midmarket.

This is one example of the positive results we're seeing from these types of customer engagements, and we believe our growing investments at our go-to-market practice will only further accelerate the adoption of our customer's Hosted Unified Communication solutions.

Additionally, through our go-to-market teams' sales efforts, we have seen that our customers are receiving an increasing number of RFPs from medium to large enterprises to Unified Communications that are focused around mobility. [indiscernible] solutions have increased the productivity of employees while reducing their overall communications expenses. Through our UC-One platform, our customers extend the benefits of the cloud, enabling enterprises to manage a single subscription for each of its employees. So for example, you just can start an instant messaging chat on your laptop, will do a voice call on their smartphone while outcrossing from their enterprise Wi-Fi to a mobile providers network without any disruption in the conversation. By enabling these types of fixed mobile conversion offers, we are powering the new mobile enterprise with capabilities that are not available with the traditional PBX solutions.

Now let me take a moment to provide an update on one of our other strategic objectives, our BroadCloud PBX offering. As a reminder, BroadCloud PBX is where we host our software and our data center on behalf of service provider customers. We're very encouraged about the significant interest on this offer. Many of our customers immediately recognized the accelerated time-to-market benefit this model provides and have actively engaged with us to determine how they can best leverage our cloud. One of the biggest challenges service providers face with taking a new service to market is the required IT development associated with new product introduction. With our cloud delivery platform, we have fully operationalized the end-to-end business process for providing Hosted Unified Communication services, from generating quotes to processing complete orders to monthly billing. Additionally, BroadCloud PBX supports an over-the-top or bring your own broadband service offer. By separating services from connectivity, our cloud platform enables the business to self-install the Unified Communication services. With this type of offer, the service activation is reduced from an average of 90 days to 5 days, which significantly accelerates time to revenue.

So to summarize, I'm very pleased with our start to 2013. We had solid financial results in the first quarter. We made good progress against our strategic objectives. Let me now hand the call over to Jim, who will go through the financial results in more detail and provide our outlook for the second quarter. Afterwards, I'll be happy to answer any questions. Jim?

James A. Tholen

Thanks, Mike. I'd like to start by providing some of the key financial highlights of the quarter. Total revenue was $39.6 million, up 3% from a year ago. Cost of license revenue was $20.8 million, down 2% year-over-year. Subscription and maintenance support revenue of $15.2 million was up 23% year-over-year. Professional services and other revenue of $3.6 million is down 24% year-over-year. Billing, which we define as revenue plus the change in deferred revenue, was $38.1 million, up 16% year-over-year. Software billings growth was 20% year-over-year.

On a geographic basis, we saw strong software billings growth in all major geographies. Orders from existing customers contributed 96% of total software billings. Non-GAAP EPS is $0.18, which was above our guidance as a result of revenue at the high end of our guidance and lower-than-expected expenses. Net cash, cash equivalents and investments increased $11.1 million from December 31, 2012, to $204.8 million. While cash flow from operations was reported at $4.9 million, this amount reflects a reduction of $8.4 million due to the tax accounting treatment for NOL due to the stock option grant. Absent this GAAP noncash adjustment, cash flow from operations would have been a strong $13.1 million.

In the cash flow statement of our 10-Q, you can see the balancing accounting transaction of a positive $8.4 million under cash flows from financing activities.

From a product perspective, we had a very strong Unified Communications quarter. The strength in our Hosted business was across all geographies. The drivers for this strength included continued strong growth from our overall IT-centric offering as well as a greater contribution from mobility-centric and UC Solutions. While our SIP trunking business is down a bit, we believe our customer SIP trunking business to their end customers continue to grow and so we believe we should see our SIP trunking software pick up as the year progresses. Our consumer business is down as we had suggested previously. We believe that Unified Communications will continue to drive our top line growth in 2013.

For our maintenance and subscription support business, you will see we were up from last quarter's Q1 but down sequentially from Q4 2012. The sequential decline was really driven by some one-time revenue recognition events in Q4. For the rest of the year, I think you should expect to see sequential and year-over-year growth perhaps -- but perhaps more modestly in years past. Part of this is again due to some revenue recognition complexity associated with a couple of orders in 2012 for which we had to book much of the revenue into MNS.

In our professional services business, revenue was relatively in line with our expectation. We continue to expect professional services revenue to trail 2012 levels, but we also expect professional services billings in 2013 to exceed revenue so we continue to execute on several long-term projects that we expect will be recognized as revenue in 2014.

Now I'd like to provide a little more detail on the cost side. Our gross margin was 80%, with software license gross margin at 90%, subscription and maintenance support gross margin at 77% and professional services and other gross margin at 31%.

We came in a bit lighter on cost of sales for all 3 revenue categories relative to guidance. For next quarter, for software gross margins, I expect Q2 2013 to be especially flat with the Q1 level of $2 million. For subscription and maintenance support, we expect to see 2 to 3 points of additional pressure in gross margin in Q2 as we continue to invest in the cloud business.

For professional services, we are happy to see margins solidly in the double digits for Q1 and believe we will be able to maintain an overall double-digit margin for the full year 2013.

Operating expense was $26.1 million, up 15% year-over-year. This level of operating expense was lower than we had forecasted as our investment ramp in R&D and sales go-to-market lagged our ambitions. We continue to -- we achieved operating income of $5.6 million in Q1, resulting in an operating margin of 14%.

On the balance sheet, net cash, cash equivalent and investments were $204.8 million at quarter end. Accounts receivable were $42.1 million, down $6.9 million sequentially. Deferred revenue was $59.6 million, down $1.6 million sequentially, both of which are normal seasonal changes for Q1. You will note that the large $8 million plus order that had previously been held in long-term deferred revenue has moved to short term. Our best estimate at this point is that we will recognize revenue on it in Q1 2014, and as such, it continues to be excluded from our 2013 guidance.

Now I would like to provide guidance for the second quarter and full year 2013. For Q2 2013, we expect to deliver revenue in the $40 million to $44 million range. We also expect non-GAAP diluted EPS of $0.15 to $0.25 per share. For the full year 2013, we continue to expect revenue in the $181 million to $189 million range. Non-GAAP diluted EPS is still expected to be in the range of $1.10 to $1.35 per share. We exceeded our expectations for EPS for Q1, but we're leaving our full year EPS guidance unchanged. As Mike talked about earlier in his remarks, the reaction of potential customers to our BroadCloud PBX offering has been even more positive than we expected. As a result, we're contemplating accelerating our investment in BroadCloud PBX, particularly to increase the rate at which we can bring on new customers in 2013. We think the additional investment, including helping -- our ability to bring up our new cloud customers faster would have directly positive growth implications for 2014 and beyond. We're still in the early planning processes and expect to provide more details on our Q2 earnings call.

For our non-GAAP tax rate, we currently anticipate a 2% rate for 2013 and 2014. For 2015, we anticipate a 20% or lower rate on our non-GAAP pretax income.

Finally, in terms of shares outstanding, I want to clarify some guidance we've given previously. Our estimate for Q2 share count is about 28.7 million shares, and our full year 2013 number should be approximately 29.1 million shares.

Let me close by saying that we're pleased with our Q1 results, particularly with our strong overall cash generation and our double-digit billings growth rate. The strong growth in our enterprise applications business reflects what we believe is an inexorable move to the cloud from on-premise-based solutions. As a result, we continue to believe our underlying market has long-term growth rates in excess of 20% and that we will continue to maintain or expand our market share. With that, I'll turn the call back over to Mike.

Michael Tessler

Well, thanks, Jim. Jim and I are now happy to answer any questions. Operator, can you please open the call?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from George Notter of Jefferies.

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

I guess I wanted to ask -- I think you mentioned in a monologue that you're seeing more and more RFPs from enterprises that are oriented around extending UC and PBX functionality into the mobility environment. Can you talk a little bit more about that? And I guess this kind of ties into your discussion of enterprise VoLTE. I didn't hear you guys really referenced VoLTE on this conference call here, so maybe you can give us an update on VoLTE and then talk about the enterprise angle there and how you're addressing that. And also, I'd love any kind of update on timing there would be great, too.

Michael Tessler

George, so let me -- I think there are a lot of questions. I'll try to knock them off. I think the first thing here is let me talk a little bit about the enterprise RFP activity that we're seeing. I think generally, what's quite interesting is that enterprises of varied sizes are looking at solutions where they can really collapse their, if you like, PBX extensions and their mobile subscriptions into a single like service. So think about most businesses as -- every employee has a PBX extension or hosted extension, and then most or many employees are given mobile phones, tablets, et cetera. And what we're seeing is the desire to really change the landscape and really drive mobility as the kind of the first capability. That is, I want to basically give all employees the ability to have complete mobility, be able to make calls, make video calls, text message, all the UC capabilities from any device anywhere. And so with that, we really have to drive the service to be more tied to the mobility side of the network versus traditional fixed line or PBX side of the business. So really, the desire by enterprise was that I want to buy one subscription when I want to able to choose for each employee, either get a mobile phone, they get a hard phone, they get a soft phone. But I want to collapse to a single subscription. I want to save money by being able to go to a single subscription, but I also want to get the productivity enhancements that I get by freeing my employees, being able to work from anywhere on any device. So that's kind of the demand side of what we're seeing from enterprise customers. I think we've talked about a number of operators launching some of these FMC capability in small and in the lower end of the media market. In Europe, we're starting to see, as I said in my remarks, a lot more RFPs coming in from medium and large enterprises, really trying to redefine their enterprise communications requirement. So pretty encouraging trend that we're seeing from the end users. I think from a -- and obviously, the interesting part is these requirements really are not required or do not really require Voice over LTE or LTE deployment. Our solution, our UC-One solution can be driven on 2G, 3G networks through our integration with those networks or can obviously run on the Voice over on the LTE side or Voice over LTE side. So I think this shift to -- in demand really doesn't require the -- any kind of deployment of Voice over LTE. On the -- I think the second question, I think of your list in terms of comments on Voice over LTE, I think the market continues to be the same as we've talked about in the past in terms of timing. We see some activity for us in terms of early revenue end of this year, but we're really looking at 2014 as the time when we'll start to see some more activity. And we do believe and many other discussions we're having with mobile operators around the world is that they may in fact start on the enterprise side and on the consumer side where obviously, we have a much stronger market position.

Operator

Our next question comes from Brent Bracelin of Pacific Crest Securities.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

So for Mike and Jim, I'll start with Mike here. Relative to the investments in go-to-market, I know last year you had some success with a couple of large carriers that you put some investments into. What's the status on kind of sales, training, promotional materials, how many of the top-tier operators do you actually have now formally as part of that program? Are you halfway penetrated? Give us an update on the investment go-to-market by number of top operators that are actually not part of that program.

Michael Tessler

Wow. That's a hard -- that's hard to answer, Brent. Let me explain to you why it's challenged. I think you can look at our go-to-market activities in 3 -- come from activity based, come from 3 different categories. One category is where we are producing materials, collateral, training materials, best practice documents and this is something we've done for a long time. And I would say almost every single carrier will dip into the richness that we have when they're producing a new service offering. We have checklists, we have a lot and lot of different materials that are available to our customers when they are designing, training, rolling out a solution. So that would probably be fairly high penetration. The second category of activity is what I call program. This is where our team, along with the carrier, might be working on lead generation, might be working on sales stimulation, might be working on very specific programs, sales training. That is probably in the 15 to 100 category of activity -- no, customers that have used some element of that program category. And then the last -- again, focusing on different types of activities, the last category, which is the -- what I mentioned in my script, in terms of sales enablement specialists, that's a much smaller set, probably around half a dozen carriers are currently using our folks that are embedded side-by-side, working with our team and the carriers team on deal flow on an everyday basis. So that's kind of to give you a quick overview of different activities and different utilization, if you like, by our customers.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

That's helpful. Obviously, you just wanted to track the progress as we go and you make these investments this year. Jim, shifting gears to you, obviously, license down 2% year-over-year. I know you expected it to be down year-over-year on drag on consumer. As you look at kind of the enterprise component of that, did that still show growth? And within kind of enterprise, what did it looked like between kind of SIP trunking versus the hosted UC?

James A. Tholen

Yes. So Brent, quick answer is yes. Hosted definitely showed growth. As we mentioned in the script, software license billings was actually up 20%. And we do that as a sort of a better indicator of selling or ordering activity within the quarter. And the highlight there was the hosted business. As you noted, consumer as was expected was down. And as I noted in the script, SIP trunking was down a bit. And we have pretty good indications that outbound from our carrier customers to the marketplace continues to grow. And so our expectation is that we'll see a pickup from the software sales side and SIP trunking later in the year. But the headlines are software billings growth, 20%, and definitely led by the Hosted business.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Great, fair enough. And then my last question is on BroadCloud. Any update there obviously, you indicated your accelerated kind of time to market. It sounds like a healthy amount of interest there. You're considering making additional investments. What percentage of revenue is BroadCloud today, and what's your best guess will that BroadCloud be as a percentage of revenue as you think about kind of exiting 2014?

Michael Tessler

Oh, 2014. Okay. So we were in the 5 to 6-ish range in the quarter. I think you're right. I mean, we're very bullish on this business and the opportunity. I think we said before we thought we'd be in the 8 to 9-ish range exiting '13. We really haven't guided to '14, but my expectation is you certainly would see similar trajectories where it will continue to increase absolutely and definitely as the percentage of revenue.

Operator

Our next question comes from Simona Jankowski of Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

I want to touch on a couple of follow-up questions on BroadCloud. Can you just characterize a little bit for us the type of customer activity you're seeing there? And obviously, the initial major customer with Verizon and then you had talked about expanding your reach into more maybe the Tier 2 and 3 segment and also from over some of the VARs or system integrators. So if you can just give us some flavor there, that would be helpful.

Michael Tessler

First of all, it's Mike. I think the activity today actually is kind of following actually both ends of this -- that spectrum that you described well. So we have a number of additional Tier 1s in the pipeline. I think we're making really good progress and that's why we're pretty encouraged. And we're also seeing a number of, let me say, modern traditional service provider type customers, borrowers and resellers coming to the table. I think what's interesting, I think what we've seen with the Tier 1 accounts, especially with our experience with Verizon, Dimension and others that we're now in dialogue with, is that they're really struggling with the cost and the complexity and the time required to integrate of this fairly complex Unified Communications service into their service offering. And that's their driver towards going to a BroadCloud strategy. On the other side, I think when you're dealing with resellers and VARs, et cetera, a lot of those folks do not have the expertise to run a 7/24 service. And so I think they're leaning towards -- moving towards BroadCloud for maybe different reasons, but we're getting interest from both ends of that spectrum. So that's actually pretty -- we're encouraged. The fact that both segments that we were targeting are -- have actually -- the activity has been pretty brisk with the market dialogues and moving down the pipeline to closing some of those deals.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Okay. And then just to put that in context, I think initially, we kind of viewed BroadCloud as expanding your TAM into more of the, maybe the small sized end customer, the small enterprise. So if you see some of this Tier 1s looking at BroadCloud, would that be as a parallel offering for them also attacking that low end of the market, maybe going up against the 8x8s of the world, or would they be doing it more as a supplement or a substitute to the BroadWorks-based solution?

Michael Tessler

Well, clearly, we have a lot of activity, and you noticed that. Clearly with -- in my remarks, a lot of the carrier discussions we're having today at Tier 1 is trying to attack and develop kind of an over-the-top strategy against some of this -- some of the over-the-top players. And clearly, that's a big part of the interest that we've been able to capture with our BroadCloud in the Tier 1. So we certainly see that as kind of additive to the TAM, not subtracting to it in -- from the activity we've seen so far.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Okay. So is there any change to the view then of how much overlap there is between BroadCloud and BroadWorks? Are you seeing more now or is it still kind of what you saw initially which was quite minimal?

Michael Tessler

I -- we don't see that there's a lot of overlap. I think the other thing to think about -- the other way that we look at it is the kinds of -- most of these customers that we're engaged with, the trade-off has been that because of the time to market, the cost, they probably would not have moved. We would not have launched service. We're really opening up the TAM for spaces where the cost of actually developing the service was too high. So I think the actual size of the market is getting bigger for us, and there's not that much overlap or not -- no change in our perception of the overlap between BroadCloud in our software business.

Operator

Our next question comes from Dmitry Netis of William Blair.

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

Quick -- a couple of questions. As I look at your guidance here, you had a nice Q1. Q2 was slightly muted to what consensus was, and then you reaffirmed the full year. And so if I look at the second half, it's certainly pretty aggressive ramp there on the second half. You've got 13 -- 14%, 15% sort of sequential ramp in September in December, and then on a year-over-year basis, it's closer to 19%, 20%. So I wanted to pick your brain there and see what you're expecting to see in the second half if it gives you confidence that either -- that full year outlook is reaffirmed or -- yes, or you can do better than that?

Michael Tessler

Sure, yes, Dmitry. Two things. I mean, it's a bottoms up and tops down. I mean, we're -- I think we just broadly look at our business and think that generally, how the year will play out. I'll note that, that suggests that for the year, we do about 55% in the second half. And that's pretty in line historically. So just -- so note that I think pretty in line historically, it supported from our view the kind of customers up. And I do think this year, we'll look a little back-end loaded. So my anticipation is there's -- it's going to be a -- Q4 will be a pretty sizable quarter for us.

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

Got it. And is it just -- you look at your pipeline, you see a lot of Tier 1 activity there. What gives you sort of that back-end loaded -- do you expect to see the back-end loaded quarters because potentially, you got some Tier 1 sort of lining up in the pipeline there? Is that fair to assume or it's just a broad range of activity that you're seeing with VARs and system integrators and maybe Tier 2s and 3s?

Michael Tessler

I -- it's a broad view. I mean I think our business has been very balanced, and it's balanced across kind of the carrier balanced geographically. And we've had a drag with consumers we've talked about. But at this point, it's less of a drag to this -- less of a part of the business. And I think the final piece is the Hosted business is -- we're really seeing this movement away from PBX to Unified Communications. And I mean, you could even just feel it in the market place, feel it on the web, feel it talking to customers. It's becoming almost the de-facto out there that you pursue a hosted solution when you're thinking about a new enterprise telephony. And it's -- I think people feel kind of negative internally if they end up having to stay with the PBX. So I think the whole thing is moving our way, and I think we're seeing that this year.

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

Okay, great. And then on BroadCloud, I just wanted to see if we can expect to get some metrics around that product offering. And I'm looking at maybe potential number of feet, customers and some churn rate and services gross margin in that business. Can we expect you to give us that data at some point? I don't know where you're at, you're now at 5%, 6%, you said of total revenue, but it would be nice to see that at some point.

Michael Tessler

Yes. Look, I think as we go into '14, we'll be more prescriptive. We kind of feel like we're incubating the business right now. We're very excited about its ramp. But I think we're fairly early on as we go into '14 and talk about, as you suggest would be, being a bigger part of the business, I think we'll be able to give you guys more metrics on the business.

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

Okay, very good. And then my last question is really -- has to do with competition. Mike, Jim, both of you, sort of if you could comment maybe, well, either one of you, if you could comment on what are you seeing out there? Has the competitive environment really changed vis-à-vis Microsoft Lync and Cisco and you talked about BroadCloud and the successes that you're seeing there, that still sort of a SMD maybe mid-tier type of offering. Can we expect you to go head-in-head with Cisco and Microsoft Lync in the large enterprise hosted UC environments? What is sort of the competitive environment and how do you position against it?

James A. Tholen

Well, first, Dmitry, I have to do some myth debunking. We can deal with Cisco and Microsoft everyday and beat them. So just -- and then our offerings, one thing that because our carrier customers really enjoy is the fact that our service offering, our UC-One suite, can really go from very small 2-line enterprise, if you like, to the largest enterprise customers. We've talked on calls before about some very large example of multinationals that have adopted our technology obviously through our service provider customers. So I think they characterized our as in the small and medium alone is not correct. I think generally, the competitive landscape has not changed dramatically. We -- just remember strategy-wise, we're laser-focused on the service provider segment. We believe that as these enterprise communication capabilities move from premise to cloud and are very tightly linked with mobility, that the service provider will be the natural delivery agent for these new enterprise capabilities. We've aligned for the -- to the service provider channels. In that particular selling to the service providers and enabling them to provide new Hosted Unified Communications capabilities, we're in a fairly unique position. There's a little bit of competition but not a ton. And primarily, Cisco and Microsoft along with 8 or 10 other companies all compete for the direct enterprise play, primarily with premise solution or some virtualized -- what they call hosted and really virtualized managed solutions, very different cost equation, very different solutions. We have a very unique offer to our service provider customers, but we believe we'll win a lion's share of the enterprise space no matter what size of enterprise, from small to large.

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

Do you see the marketing dollars being allocated fairly between maybe the Cisco's and Microsoft solutions out there, and maybe your solutions? Because while many Tier 1s do offer almost like a triple-play there on the Hosted UC side where they have all 3 different offerings and potentially more, but are you seeing the marketing dollars actually go to BroadSoft versus the other guys out there?

Michael Tessler

I think we're seeing the sales dollars because generally, what happens is many of the SPs, many of the service providers today commission structures all based around margin and margin contribution. And so we're definitely seeing the sales push on their own branded solutions. You're correct. If somebody has a Cisco solution, many times that's being sold when a customer is demanding a branded Cisco solution. But most of our engagements with our carrier customers, the first thing -- the first thing they're selling is a BroadSoft-based solution. And it's simple. Why? They have more control over it, it's their brand, they're making more money selling it. And in many cases, they've got to compete against other -- they've got to compete with other Cisco solutions or other Microsoft solutions and they have really no competitive advantage when selling that against another Cisco VAR or Cisco direct. So I think we're seeing the energy being placed in the BroadSoft-based solution.

Operator

Our next question comes from Rich Valera of Needham & Co.

Richard Valera - Needham & Company, LLC, Research Division

Jim, on the potential BroadCloud investment, wonder if you could give us any color on what you'll be looking at over the next quarter to decide if you're going to make this incremental investment, whether it's any specific customer developments, market developments? Any color there would be helpful.

James A. Tholen

Sure, yes. I think it's exactly that, Rich, is there's some, especially pretty sizable carriers, Tier 1 in the pipeline. And while we have a anticipated time frame with bringing them up, I think with some little bit more operating flexibility from an expense standpoint, we're thinking that it would be advantageous. We'd certainly get the 2014 run rate up higher, getting them on sooner and in the market sooner. So it would be some infrastructure investment and -- but mostly around implementation, branding and the cost of just bringing a major carrier on.

Richard Valera - Needham & Company, LLC, Research Division

Pretty much focused likely on potential Tier 1s at getting them to -- getting them up to speed and up to run rate quicker?

James A. Tholen

Yes, I mean, I think as Mike said, it -- there's a bit of -- there's a spectrum of demand here but the cost tend to be -- the upfront cost do tend to be highest with the Tier 1s, and we try with the smaller carriers to be a very standardized offering. And so yes, that -- it would be more focused on the Tier 1 opportunity.

Richard Valera - Needham & Company, LLC, Research Division

Great. And then with the SIP trunking, you mentioned it's down a little bit year-over-year in the first quarter that you're expecting to pick up. Can you give us any sense of the magnitude of the pickup that's baked into the guidance right now? Just qualitatively or otherwise how much we're expecting that to maybe grow overall for the year?

James A. Tholen

I'd say -- I'll give -- the qualitative answer is modestly. We're going to stay a little cautious till we really see SIP trunking demand firm up. Some of the external indicators were positive, but we're -- the guidance is really driven on the Hosted business.

Richard Valera - Needham & Company, LLC, Research Division

Great. And then could you just repeat your comments on the tax rate, Jim?

James A. Tholen

Sure. The non-GAAP tax rate, 2%; 2013 and 2014, 20% or less relative to non-GAAP pretax in '15 and beyond.

Operator

Our next question comes from Catharine Trebnick of Northland Securities.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Two quick ones. One, could you clarify the revenue run rate you said you had for BroadCloud? Did I write that down correctly, $4 million to $5 million in Q1?

James A. Tholen

No, it's 5 to 6-ish percent.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Oh, 5% to 6%. And at the end of the year, you -- it would be 6% to 9%?

James A. Tholen

I think we said 8% to 9%.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

All right, that's why I asked. I had it written down wrong. All right. And then, Mike, this is for you. At the beginning of the call, you talked about fixed mobile convergence in the enterprise. And then speaking with all the carriers, I'm wondering if you could clarify one thing. When you sell your licenses in for these fixed mobile convergence, is it one license just for an IP phone or is it across for the tablets and the smartphones, et cetera? I'm just trying to get a handle on that.

Michael Tessler

I think that -- so let me talk about feature functionality. The feature functionality is to have a single subscription for a customer -- an end user customer, and then that end user customer can choose which types of devices their employees would use. The commercial model that we use with our carriers varies, and we don't usually share that. So I think just separate the commercial model from the actual feature functionality.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Okay. That would help. And then I -- that was actually -- oh, the third one is on the value-added resellers. Have you signed any value-added resellers to -- for the BroadCloud service at this time?

Michael Tessler

We have, and -- but we have not announced anything yet.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Okay. More than one?

James A. Tholen

I'm not a numbers -- I don't -- I'm not going to give you the numbers.

Operator

Our next question comes from Brian Modoff of Deutsche Bank.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Vijay Bhagavath calling on behalf of Brian. A few questions. One is in terms of your conviction on the second half. Is there any project activity or visibility you have in the second half that going to lead you to reiterate here into your full-year guide value of guided Q2 below expectations? Any thoughts there?

Michael Tessler

I'm sorry, Vijay, it sounded like it was a full year, but then Q2...

Richard Valera - Needham & Company, LLC, Research Division

Yes, there's a certain conviction and visibility that's kind of implied in your full year guide. And then on your Q2 guide, you've guided Q2 below expectations. So just trying to understand the thinking behind the full year -- reiterating the full-year guidance. In terms of what type of visibility you have in the second half? What project activity you see in the second half that's driving the conviction behind the full-year guide?

Michael Tessler

I mean, we feel good about the year. We feel good about Q2. I think it's -- I view it as kind of in line with cap to the end of the year. I mean, you know us. We're -- we try to be pretty transparent in our guidance, and it's a bottoms-up process. And so -- and our view Q2 as -- we're forecasting it to be certainly at or up off of Q1, and then I think we see growth continuing to drive through the business.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Yes. And then the second question is on voice-over LTE. How do you feel about VoLTE as the next phase growth driver for your business heading into 2014?

James A. Tholen

Yes, as Mike said, I mean I think there are 2 parts to it. The enterprise piece and the consumer piece. And the thing on the enterprise, its broader than VoLTE. It's mobility in general. And we're really seeing that across the board, highlighted in several projects in Europe where mobile Centrex or really mobile-only Centrix, we're seeing those rollouts with a lot -- especially where there's really good broadband and wireless. And it really pre-stages VoLTE, and it transitions right into VoLTE. So we're really giving a path to carriers to roll those kind of mobility-oriented enterprise product -- projects out earlier than VoLTE but take advantage of VoLTE. I mean to be honest, in a VoLTE world, we question where our PBX should be in that model full stop. And then the consumers, I think we've been fairly consistent in saying is -- back half '13, I think there'll be some wins in orders but it's really a '14, '15, '16 kind of rollout for us. So we continue to think that we're well placed, especially with the converged carriers that are focused on applications and focused on offering enterprising end consumer.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Okay. And the final question is on how do you view Oracle moving forward, now that they have acquired Acme Packet? And take a look -- I mean, I understand you had a good working relationship with Acme Packet prior to the acquisition. But now that it's a part of Oracle, how do you view your business relationship with Oracle? Do you -- will you continue to work with Acme? Will you work with the broader Oracle portfolio? What are your thoughts there?

Michael Tessler

Well, I mean -- we don't expect any change in the working relationship. We have a very strong relationship with Acme, and we continue -- through the acquisition and today, we continue to have a very strong relationship there embedded in many of our customers' networks and we expect them to continue to be embedded in our customers' networks. So what I really say the change in the working relationship we have with Acme, we already worked with a number of other Oracle components. So generally, I don't see any change in our relationship with Oracle or with the Acme component of Oracle.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Yes. And then one final question is on competition. Who do you run into mostly on the hosted -- enterprise hosted web space? Is it mostly Cisco? I'd like to get your thoughts in terms of what's your competition in the enterprise hosted web space?

Michael Tessler

Well, as I said before, I think in the -- I think our carriers selling into the enterprise see all the enterprise players: Cisco, Microsoft and others, Avaya, et cetera. Into the -- really enabling the service provider to build their own cloud service, their own Hosted Unified Service. We don't see much competition there. Probably as someone else mentioned before, we see a little bit of Cisco at the high end, but that's about it in terms of competitors who are offering solutions that help the carriers enable -- help the carriers to build their own service offerings. And frankly, really, the only company that's really allowing the service provider to build their own brand of service, not just reselling their components by hosting it in the carriers network. So pretty good competitive situation right now for us in the carrier marketplace.

Operator

Our next question comes from Subaru Subrahmanyan of Juda Group.

Natarajan Subrahmanyan - The Juda Group, Research Division

I had 2 questions. First, could you just quantify for us, bigger picture, the different segments, the percentage of revenue, especially with the recent -- the climates in SIP trunking and consumer becoming less meaningful? And the other question I had was existing customers were a large part of software billings, more than normal. Can you talk about the dynamic in terms of new customer win timing?

James A. Tholen

Yes. So I'll -- this is Jim. I'll cover the second first. The -- we are seeing more revenue coming from existing customers, and I think that's a couple of things that's -- it's one, somewhat premeditated on our part with over 500 customers worldwide and 19 of the Top 25. We have very fertile opportunities within those carriers for their growth and new applications within those carriers, and I think as evidenced by our increasing concentration on go-to-market and sell-through. The second piece is -- to be honest, I do think that a somewhat constrained carrier CapEx market is probably in some new carrier acquisition. So we don't think we're losing new deals. We don't think that we're losing market share with new opportunities. I think there are fewer of them. And the final piece is that it's just law of large numbers. For us, the initial order for a new application tends to be fairly low. And so as we've gotten bigger and our -- as our sort of the predominance of our market share, especially in hosted worldwide, that we have more and more carriers then run rate, it's just math that has that new customer percentage lower. I guess I'd give you this, the -- we talked about on the split the consumer going from 15 to 10. And I think for the -- we're not only going to break it out for the quarter, but for the year, that's our expectation. So that said that you have 90 in overall enterprise, and I think you can expect that we -- it's really going from 85 to 90 for the year for enterprise, and that's 65/20, probably going to 70 or somewhere between 70 and 75, and somewhere between 15 and 20 for SIP.

Natarajan Subrahmanyan - The Juda Group, Research Division

Understood. And is there any way to quantify the mobile contribution as a percentage of revenues? And the BroadCloud question was Verizon being the big customer so far, have you seen a change in the mix from a Verizon perspective of BroadWorks licenses versus large revenues, meaning have BroadWorks licenses continued to grow at the rate they were earlier?

James A. Tholen

Sorry, what was the first question?

Natarajan Subrahmanyan - The Juda Group, Research Division

Is there any way to quantify the mobile contribution to revenues?

James A. Tholen

Yes, that's hard because it's really not a separate offering. It's really part of the overall hosted, whether it's client addition, it's FMC, fixed mobile convergence, it's more mobile set -- more mobile flavor to Centrex offering. So it's not a -- we view it as a key benefit for our carriers going forward and a key driver of growth, but not -- it's not a separate thing. And then in terms of Verizon, I guess what -- I don't want to get too specific on one customer, but the VCE, we're very excited about. But we considered it's -- continue to see good ordering activity from Verizon overall.

Operator

Our next question comes from Sanjit Singh of Wedbush Securities.

Sanjit Singh - Wedbush Securities Inc., Research Division

Just a couple of questions on the -- first, on the gross margins, Jim, given the back half of ramp in revenue and also increasing contribution in BroadCloud, how should we think about gross margins? Does it return back to the level that we saw last year, that kind of low 80% to 83% call it, or is there something different that we should think about on the gross margin side?

James A. Tholen

Yes, I think you will see gross margins pick up in second half. The costs are relatively fixed, so with more revenue, you got to -- we would see -- you'd definitely see growth there even with the BroadCloud investment.

Sanjit Singh - Wedbush Securities Inc., Research Division

Okay, great. And, Michael, the single subscription strategy that you talked about in your script, is there a particular area, geography or market that's seeing most traction there? And then a quick corollary to that is we call the system VARs and resellers. They always seem to get traction with the hosted IP side, but the UC features were always a little bit of a challenge. Is there anything changing in that dynamic where you're seeing increased adoption rates from some of the more UC-related features?

Michael Tessler

Okay. So let me try to tackle the first part. I think we're generally seeing a little bit -- there's kind of a regional split where -- let's say, single subscription.

[Audio Gap]

Fixed mobile convergence offers are starting -- are already in the market or developing in the market. Clearly, those operators that have both fixed and mobile assets converged operators are definitely higher on the list. We're seeing a little bit faster adoption in Europe, faster adoption in Nordics. So if you want to really home in on Europe, some parts of Asia, we are likely to see some of that and maybe Latin America. And I think some structural changes here in the U.S. we'll start to kind of see some of that happening here. So it depends a little bit of operator -- the nature of the operator was in a mobile-only operator, converged operator and a little bit on the geography side. So I'd say the first early adopter is Europe, lots of people kind of looking at that and really sizing up the change in end user behavior and end user demand. And I think we're going to see a fairly fast rollout in other geos. And I forgot your second question, sorry. There's a lot of it.

Sanjit Singh - Wedbush Securities Inc., Research Division

Yes, no worries. Do you see feature adoption?

Michael Tessler

Yes, I think, generally, I think what we're starting to see is that the expectation by the end users is slowly shifting from a voice world to a full UC suite. I think generally, the industry is pushing that. So I think generally, we are seeing an adoption, a move from kind of voice-only, let me call it PBX and PBX replacement to really kind of a full Unified Communications productivity tool. But if you're absolutely right, there's some lag in end user pickup. In many cases, it happens to be that the cost of that are -- that some of the suppliers are charging for these add-ons are prohibitively high. Whereas we're seeing much more bundling in the host -- in our hosted space of kind of bringing all these components together into a pretty rich Unified Communications solution. So clearly, pricing could impact the adoption of some of the Unified Communications add-ons.

Sanjit Singh - Wedbush Securities Inc., Research Division

I appreciate that, Michael. But, Jim, last question, the OpEx came in a little bit below. Was that just the function of just not being able to hire as many people as you would like or was that more of a strategic decision?

James A. Tholen

It was the former.

Operator

Our final question comes from Tavis McCourt of Raymond James.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

One on a 10% customer list for the quarter, if there was any. And then a clarification, you mentioned earlier, 20% growth. And I wasn't sure if that was referring to order growth from your carrier customers or is that a measurement of sell-through or sellout of licenses from your carrier customers?

Michael Tessler

Well, yes, so there was not a 10% customer in the quarter. And the 20% was really a long-term view of our opportunity in the marketplace, not specific to orders or -- oh, I'm sorry. Sorry, the 20% on software billing was quarter -- Q1 over Q1 if you do the revenue plus change in deferred math on software licenses, that's where you get the 20%.

Tavis C. McCourt - Raymond James & Associates, Inc., Research Division

Got you. And then a lot of talk on concentration on Tier 1 customers and that's clearly what's the game plan going into this year. I was wondering what you're seeing in terms of the Tier 2 and 3 customers. Are you seeing evidence that their growth is slowing? Is it Tier 1s are getting more aggressive or does it still look like a greenfield opportunity?

Michael Tessler

I think it's fairly consistent -- we're seeing growth in all segments. I think as Jim was describing in his comments, this is a pretty huge shift from PBX from to an enterprise deployment to cloud. And I don't think our guys run into our -- I don't think out service providers, they don't run into each other as much as they run into a lot of the opportunity to convert customers from a legacy technology to hosted. And so I -- we're not seeing any slowdown or changes in the growth rates across the various tiers.

Operator

And at this time, I'd like to turn the call over to President and CEO Mike Tessler for any closing remarks.

Michael Tessler

Yes, thank you and thanks for being with us on the call today and for your continued support. We look forward to updating you on our progress in the coming months. Thank you, and good night.

Operator

Thank you, sir, and thank you, ladies and gentlemen for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.

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