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BroadSoft (NASDAQ:BSFT)

Q3 2013 Earnings Call

November 04, 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

Simona Jankowski - Goldman Sachs Group Inc., Research Division

George C. Notter - Jefferies LLC, Research Division

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

Richard Valera - Needham & Company, LLC, Research Division

Paul Silverstein - Cowen and Company, LLC, Research Division

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Vijay Bhagavath - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to your BroadSoft Q3 2013 Earnings Call. [Operator Instructions] And as a reminder, today's conference is being recorded.

And now, I would like to turn the call over to your host, John Kiang, Director of Investor Relations.

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 third quarter ended September 30, 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 third quarter ended September 30, 2013. If you would like a copy of the release, you can access it on our website or on the SEC's website.

We would like to remind you that during the course of this conference call, BroadSoft's 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 these events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause the 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 November 4, 2013. Except as required by law, we undertake no obligation to update publicly any forward-looking statement made on the call to conform the statement to 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 benefit and expense and noncash interest expense on our convertible notes. Collectively, these items totaled $12.5 million in the quarter.

Also on this call, when we use the terms cost of sales, gross margin, operating expense, operating margin, operating income, net income, or EPS, 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 divided 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 third quarter 2013 results. As you saw from the press release we issued this -- earlier this afternoon, for the third quarter, we had revenue of $42.9 million and EPS of $0.29. Our expectations at the beginning of the quarter were for stronger Q3 results and guidance for Q4. And while they're not what we had planned for, we don't believe there's been any change in our markets' long-term dynamics or in our competitive position. A little later, Jim will provide you with more detail about our results and the factors impacting those results and our guidance for 2013, as well as some initial thoughts on our outlook for 2014.

I want to focus my time on this call to talk about our key strategic initiatives and product enhancements that we feel will further extend our leadership in the market for cloud-based unified communications. Two weeks ago, we hosted our 11th and largest annual users' conference, BroadSoft Connections, where almost 1,000 individuals from 45 countries joined us in San Diego, California for 3 days. This year, we put the power of UC-One in the hands of all our attendees with -- by providing them with a BroadTouch Business Communicator client on their device of choice: mobile phone, tablet or laptop. By utilizing UC-One, our attendees improved their networking by using instant messaging and voice and video calling to connect with colleagues from other companies, scheduled time to meet with partners from our ecosystem and connect with BroadSoft employees.

At the event, we also announced significant enhancements to our UC-One solution. The first is BroadWorks Collaborate, which is our new server product that enables our customers to offer UC-One components like Instant Messaging & Presence and desktop sharing through servers deployed within their networks.

Our strategy is clear with this new product. We're offering additional flexibility in how our customers can acquire our comprehensive Unified Communications services. Customers can use our cloud or they can now leverage BroadWorks and install our software, and they can seamlessly transition from one approach to the other.

Second, we enhanced our video capabilities to enable instant group calling, call bridging and multiparty conferencing. These new capabilities would enable our customers to meet the growing demand by enterprises for video calling and high-definition videoconferencing, an area that is seeing significant growth.

The final BroadWorks enhancement we announced is our support for WebRTC, our global standard for integrating voice and video with the web browsers. BroadWorks will provide gateway functionality between web browsers and voice networks, transcribing voice and video from WebRTC-enabled browsers to any SIP endpoint. With this new functionality, BroadWorks' subscribers can now extend the benefits of Unified Communications outside of the enterprise to their customers and partners and reach the millions of users who have WebRTC-enabled browsers, all while having a secure interface between the public Internet and a managed voice network.

At the event, we also demonstrated our newest mobility capabilities. As bring-your-own-device adoption continues to permeate the workforce, our BroadTouch user interface clients enable service providers to support a dual persona environment on either a personal or enterprise-provided device. Employees can separate their business and personal voice and unified communications services, including contacts, call logs and chat sessions on a single device. Through BroadTouch Business Communicator, we are satisfying the desire by employees for a single device for all their communication services while supporting the enterprising need to maintain control of proprietary data.

I was also excited to announce the availability of our new BroadSoft Xtended Dialer for Chrome. We worked closely with Google on this project. This browser extension brings together the elements of Google's Chrome for Business with UC-One and provides users access to their BroadWorks features. From within the Chrome browser, users can search and click the call for Google or BroadWorks directory contacts, click to call any phone number or webpage or web-based application, access call history information, manage their account and much more. With our new Xtended Dialer for Chrome, our customers can capitalize on the growing adoption of Chrome by enterprises while delivering a unique and compelling productivity enhancing capability to their unified communications solution. This seamless user experience across the 2 environments results in a rich and comprehensive business solution for enterprises. We are very pleased that Google joined us with BroadSoft Connections to discuss how our service providers and bundle our UC-One elements with Google's products and to demonstrate the benefits of our Chrome extension.

We're also very pleased to have several large enterprise customers join us at the event, describe how they are rolling out BroadSoft-based Unified Communications services from a variety of our service provider customers. On one panel, we had presenters from the American Red Cross, and Telstra's public sector representative shared the benefits of a hosted solution and some of the unique requirements they have, from supporting highly distributed workforces, legacy migration and the ability for their employees to work from anywhere, any time.

It was great to show how many carriers are successfully moving their hosted unified communication solutions to the largest and most demanding enterprise customers.

Now let me provide an update on our BroadCloud strategy. As I mentioned on previous calls, we will continue to invest in our BroadCloud infrastructure. In August, we announced we were building upon the successful adoption of BroadCloud PBX service in the United States by expanding the service to the United Kingdom and the rest of Europe with the acquisition of HIPCOM.

BroadCloud PBX is designed to enable our service provider customers to introduce new solutions or augment existing ones to our fully managed service that includes our BroadWorks services, cloud network infrastructure and an end-to-end operations platform for generating quotes, processing orders and billing.

BroadCloud PBX has demonstrated a faster time-to-market, and therefore, has accelerated time-to-revenue for our service provider customers' unified communications services.

HIPCOM has been providing a BroadSoft-based cloud service in the U.K. market for many years, and we will leverage its extensive cloud communications experience for the expansion of BroadCloud PBX service to Europe.

Now we'd like to provide an update on our Voice over LTE business. As you may have seen in a recent press release, SaskTel, the leading service communications provider in Saskatchewan, has selected BroadWorks for both their fixed and mobile IP networks. SaskTel was looking for a single-application server to provide both consumer and enterprise Voice over LTE services. We were selected for our extensive IMS experience, our broad range of Unified Communications services and platform flexibility and scalability. With our leading position in unified communications over mobile networks, we believe we are very well positioned in carriers that are looking for a single telephony application server for both consumer and business segments.

In the third quarter, we also finalized a contract with a converged operator who will be using our application server for delivering Voice over LTE to their enterprise customers. Again, we believe we are uniquely positioned to help mobile operators expand their Voice over LTE services into their enterprise segment and believe that enterprise Voice over LTE could be an important market entry strategy for our mobile operators.

We continue to see very good sell-through momentum for mobile operators that have deployed our technology on their existing 3G networks, offering very compelling fixed-mobile convergence solutions. We see more carriers looking at this approach for adding new services to their existing mobile enterprise subscribers and then transitioning them to Voice over LTE when they are ready.

As we begin to scale the business, we're also expanding the senior management team. I am pleased to have announced a new member to the senior executive team last month. Andrew Wyatt has joined as Vice President of Strategy. Andrew will lead the development of our product strategy, manage our global business development and oversee marketing. Andrew brings a depth of software experience to BroadSoft, having created and executed successful solution-selling and business development strategies in the telecommunications and enterprise application space. I believe his experience will serve us well as he further drives strategies for our UC-One platform and executes on its mission of transforming the way enterprises communicate.

So to summarize, we continue to innovate on behalf of our customers, include leveraging new technologies to ensure that we can meet the growing demand for Mobile Unified Communications by their enterprise customers. We are pleased by the interest on our BroadCloud PBX capabilities globally, and we are excited by our position with mobile operators and to have completed our first 2 Voice over LTE agreements.

Let me now hand the call over to Jim, who will go through our results. Afterwards, I will be happy to answer any questions. Jim?

James A. Tholen

Thanks, Mike. Let me provide the financial highlights for the third quarter before I go into more detail regarding our Q3 business and our Q4 and full year guidance.

Total revenue was $42.9 million, up 7% from a year ago. Software license revenue was $21.5 million, flat year-over-year. Subscription and maintenance support revenue was $17.7 million, up 15% year-over-year. Professional services and other revenue was $3.7 million, up 14% year-over-year.

Billings, which we define as revenue plus the change in deferred revenue, were $39.6 million, down 13% year-over-year relative to a tough comp for last year as during Q3 2012, we had booked 2 long-term deferred orders of about $10 million.

On a revenue basis, EMEA and APAC were the growth drivers. On an order perspective, North America was our strongest growth region in the quarter.

Orders from existing customers contributed 93% of total software billings. Non-GAAP EPS was $0.29. Cash flow from operations was $13.9 million.

I'd like to provide a little bit of narrative regarding our Q3 results. While we did come in within our guided revenue and EPS ranges for the quarter, our ambitions were certainly greater at the start of the quarter. Our guidance is a probability best estimate of business we expect to close in a given quarter. As we progressed through Q3, we felt good about our ability to come in at least at the mid to high end of guidance. The third month of any quarter is our largest revenue month, and this is definitely true in Q3. And I'd note that as we progressed through September, we didn't see the pace of customer billings activity that we would normally expect.

On the enterprise side, trunking had a good quarter, continuing the upward momentum of Q2. Hosted Unified Communication billings declined in Q3 on a year-over-year basis against a particularly tough comp, though, on a year-over-year basis, the comparison is significantly better.

In Q3, we did see some signs of service providers carefully monitoring CapEx budgets, and this occurred across regions inside the service provider. Some orders were downsized to more just-in-time purchases and some were pushed out. This pattern appears to be continuing into Q4. Our outlook for Q4 is also being impacted by consumer, where the pipeline looks particularly soft. While we've talked about our reduced expectations on consumer for several quarters already, we now see service providers further accelerating their move away from residential fixed broadband investments.

Although we do seem to be experiencing some softness in demand, we do not believe we are seeing a change in the competitive environment. More importantly, our data suggests that our service provider customers are seeing strong end customer demand for their BroadSoft-based unified communication offerings. So we do think the fundamentals remain solid.

I'd like to note another business model evolution for us. We had discussed over the last couple of years that we had become more turns business-oriented. That is, we had less license revenue running through the balance sheet. While that remains true for most of our business, as we have had the opportunity to work on larger and larger deals, we are again seeing significant selling activities not yet reflected immediately in terms of top line growth. These deals are both large Unified Communications opportunities, as well as Voice over LTE deals.

These larger deals, which we would categorize as at least mid-7-figure revenue opportunities over a several-year period, certainly represent great business for us and they highlight the increasing importance of unified communications to the server provider community -- service provider community. The flip side of these deals is that given their size, their complexity is higher and the sales cycle and time-to-revenue are longer. For example, Mike talked about some signed Voice over LTE wins, and I'd note that in Q4, we were -- we are unlikely to see any revenue contribution and also only a relatively small billings contribution relative to what will be the ultimate revenue potential of these software deals.

Moving to other parts of our business. Our subscription and maintenance services revenue, which includes our cloud business, was up 15% year-over-year. Cloud revenue was about 8% of the total in the quarter, inclusive of our HIPCOM acquisition, which added about $900,000 in gross revenue for a partial quarter contribution. Note that the net impact of HIPCOM on our income statement is largely in line with our previous guidance on the acquisition given the impact of foregone software and maintenance revenue from HIPCOM, which previously had been a customer of ours.

We see continued momentum in our Cloud PBX business in the U.S. with Verizon VCE and other carriers and see significant opportunity going forward as we expand that business in North America and Europe.

Professional services revenue of $3.7 million was up 14% over the year-ago period. Gross margin in the quarter was 81%, down from 83.5% in Q3 of last year. While software license gross margin remained in our very normal 92% range, we saw a decline in subscription and support margin from our continued investment in our cloud business and in professional services margin given a higher cost base.

In addition, overall company gross margin was also modestly impact by the revenue mix in the quarter. For Q4, I'd expect gross margin to improve relative to Q3, which is a pretty normal pattern for us as Q4 revenue is expected to grow faster than cost of sales.

Operating expenses in the quarter totaled $25.7 million, resulting in an operating margin of 21%. I'd note that we had $830,000 in expenses, fees and taxes related to M&A activity in the quarter that were included in our non-GAAP results, and that was a bit higher than we'd anticipated when we provided guidance. For Q4, we expect non-GAAP operating expense to be about $28 million.

On the balance sheet, cash, cash equivalents and investments totaled $188.5 million at the end of the third quarter. Accounts receivable of $44.9 million was down $4.4 million sequentially. Deferred revenue of $57.7 million was down $3.3 million from Q2. We used about $28 million in acquisitions during the quarter. And as I mentioned previously, cash flow from operations was a very strong $13.9 million.

Now I'd like to spend some time talking about our revenue outlook for the full year. As you've seen in our press release, we expect Q4 revenue to be in the range of $47 million to $53 million and full year revenue to be in the range of $173.5 million to $179.5 million.

Our expectations for non-GAAP EPS are $0.34 to $0.49 for Q4 and $1.13 to $1.28 for the full year 2013.

As I mentioned earlier, there are a couple of primary drivers for the lowering of guidance versus our previous expectations. A big impact for us is the rapid deceleration of our consumer business, which we now expect to be about 7% of 2013 revenue rather than 10%. In total, about half of the decline in our full year revenue guidance is based on the weakening to consumer outlook.

It also looks like we will see less budget buying than we had anticipated. This is resulting in some deals getting smaller and others potentially getting pushed into 2014. We don't see any real change in the competitive landscape. We do not believe that there are any material deal losses that are driving our revised guidance. In our view, it really is a macro and customer budgetary issue.

Given our fairly fixed cost structure in the near term, the lower revenue is a key driver for our lower EPS range. While in the near term, we do see 2013 coming in lower than we had originally guided, we do feel that we enter into 2014 with momentum. We won't specifically guide to 2014 until we report annual results next February, but I do think that there are several revenue drivers that should enable us to see better growth in 2014.

First on the software front, we believe our software-based Unified Communications business will again drive overall growth. Trunking should be strong as well. This will be modestly countered by consumer, where overall, I would expect this to be down again year-over-year.

We're gratified to have been able to announce our first Voice over LTE customer, but I'd note that in 2014, the revenue impact from consumer VoLTE is likely to be modest and we would expect to see consumer fixed broadband to continue to decline. Second, with BroadCloud PBX, we think we will see a real contribution from both the U.S. and Europe. Finally, we expect to see professional services to show year-over-year growth.

With that, I'll turn the call back over to Mike.

Michael Tessler

Thanks, Jim. Jim and I are now happy to answer any questions. Operator, please open the call.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our next from Simona Jankowski from Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

I wanted to touch first on your comments about not seeing any changes in the competitive landscape. And I believe you probably were referring to direct competition within the carrier customers. But to the extent you have visibility, can you comment on the indirect competition that your carrier customers are facing from the over-the-top providers who continue to be showing very strong momentum? Do you think that perhaps a shift at that competitive level might be affecting the results you saw?

Michael Tessler

Simona, it's Mike. I think that overall, we're seeing -- our data suggests that our service provider customers are growing, their growth rate is progressing as we're starting -- as we're obviously seeing a shift in the enterprise communication space from premise to cloud. And whether that's carrier-driven or -- you're absolutely right, there are some several over-the-top providers that are also benefiting from that transition. But I think that generally, we're seeing fairly good sell-through in the carriers in multiple geographies. So I'm -- I don't really think that the over-the-top guys are having a major impact on our service providers. Also note that if you look at the over-the-top providers, they are currently spending tremendous amount of money on customer acquisition while especially our larger incumbent carriers and mobile operators are going to have much better scale in selling to the full range of small, medium and large business. So I don't really think the over-the-top guys are having an impact on our business.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

And related to that, I think you spent a lot of time and effort and investment in the last year to go -- to help your customers go to market and compete more effectively. Is that an area where you're still having to increase investment or do feel like you have helped your key customers get to a level where they can be more competitive?

Michael Tessler

Well, I think it's kind of an ongoing moving target, Simona. I mean, we've invested in some customers. As we bring on new customers or new segments, we'll work with them to get those offers going. So if a carrier has launched a small business segment and now they want to move into the medium segment, again, we'll work with them on productizing that service, helping them get it to market. And so it's kind of an ongoing effort. I also think that, as I mentioned in the script and I've talked about a number of times, we're also seeing a fair number of success in the larger enterprise segment. A lot of people thought that hosted unified communications from carriers would only be in the small segment. But as I mentioned in the script and I've mentioned a number of times, we're seeing large enterprise wins. And in those cases, I do think that we'll have to support our carriers in the selling of those very large enterprise deals as they are usually fairly involved sales process. So I think -- the answer is, I think we're going to continue to put energy in that sell-through efforts, clearly not to the extent that we would have to do if we were obviously selling direct. So it's a highly leverageable channel that we're using.

Operator

And our next question is coming from George Notter from Jefferies.

George C. Notter - Jefferies LLC, Research Division

I wanted to ask about software license sales. I believe you said they were flat year-on-year. But you also suggested that if you look through the carriers into the sell-through, the enterprise of those seat licenses, the sell-through was better. So can you talk about that in more detail? And I'd be curious, if I were able to look through the carriers at the year-on-year growth rate in seat licenses, in terms of their sales into enterprises, what would that year-on-year growth rate look like? I guess I'm just wondering what the utilization is on a sell-through basis?

James A. Tholen

Yes, so then the -- so, one, I think, so let me hit flat software license revenue line. And I think probably have Mike jump in on the sell-through data, which is pretty interesting. The biggest impact on the quarter-over-quarter software license is really the move in consumer. And the -- we'd expected the decline, but I think the magnitude of the decline has -- and the rapidity of the decline has, to be honest, surprised us a bit. And just the carriers are really moving off. And that was a -- going from 15-plus percent of our revenue to less than half of that, it's really masking growth elsewhere. And I think Mike can talk about the kind of the -- from us -- our carriers out in terms of UC.

Michael Tessler

Yes, George, as I mentioned before, I think the data is showing that across the board the operators are having success in selling their -- the unified communication services, that the rate of sell-through is accelerating. And we're seeing that kind of move from the various segments, from very small to small, medium to large. So overall, we're seeing good sell-through data in the U.S. and in Europe. As I also mentioned in the script, we're seeing very strong growth rates on offers that bring fixed mobile convergence solutions together. Those are selling extremely well. Those are primarily -- as I've talked about before, primarily in Europe, we've seen a number of operators exploit a converged offer in the small and medium-size segment quite successfully. So I think that's -- the data suggests that the carriers are doing fairly well in that shift from premise-based PBXs to the cloud. And I guess, the good news is that we're seeing it across the segments from very small, and in some cases, mobile-led all the way to very large enterprises and tens and even hundreds of thousands of subscribers.

George C. Notter - Jefferies LLC, Research Division

What do you think their growth rate would be in sell-through terms, particularly if I just parse off the consumer piece and just look at enterprise? Care to take a guess at what that number would look like?

Michael Tessler

No, I couldn't.

Operator

And we'll take our next question from Dmitry Netis from William Blair.

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

Just wanted to get a better handle on sort of the miss here. So if you look at the $10 million -- or $8 million to $10 million that you came lower than where the Street was projecting for the full year, and you're saying half of that was consumer. So I would guess $4 million, $4 million to $5 million was consumer-related, and then the rest was pushed out to the next year; so just trying to get some clarity around that. And if you could also sort of comment, I know you mentioned turns business is how you run the business now, versus more of a success-based model when you started. Is that continuing? I mean, is why you basically you've missed -- or were you so subjected to the service provider piece here because it's kind of quarterly turns? So I guess I'm trying to reconcile the 2 pieces here. One is, are you more of a turns business today? And then the other is can we see some of that push outs next year, which will add to growth?

James A. Tholen

Yes. So, Dmitry, it's Jim. So a few things. One, if I parse that -- your questions. One, your math's roughly correct; half of the reduction in the guidance was really the decline in consumer. And the other half was really the absence of a more aggressive budget buying that we had expected. And so, it's not lost opportunity or lost demand. I think it will manifest itself in '14. What we're seeing are the carrier -- or what we think we -- what appears to be true is that carrier -- at least from the BroadSoft vantage point is that carriers are ordering a little smaller and will order more frequently. And we just aren't seeing the -- our normal -- the magnitude of our normal Q4 buying. So that's really the 2 dynamics. The piece about the turns business, as we said in the prepared remarks that we are -- most of the business is in quarter order to revenue. But there's a bit of a cycle to it, and we are seeing some -- we're -- things that we're working on, several very large deals, and those things have real sales -- extended sales cycle and extended time-to-revenue. So we'd referenced some of the VoLTE work. There are also several sizable unified communications opportunities that we're highly confident about. But they will take a little while to manifest themselves as revenue. So it's taking lots of focus within the organization, but it doesn't manifest itself in terms of revenue. So that's really what we were kind of laying out in those remarks.

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

Okay. And then that large deal that you had, the $50 million deal, was that still expected to be recognized for revenue in 2014? Are you bringing some of that maybe in Q4? How should we think about that, or is that...?

Michael Tessler

Yes, our current expectations is that it'll be -- that that'll be 2014 revenue, it's -- and it's going to be -- once we get to acceptance, which we expect to be in first half, that it basically goes ratable across the rest of the year.

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

Okay. And then the one last question I have on the rev rec that you had been guiding toward in Q4. You said that you expected big revenue recognition. It sort of still seems that way based on the guidance you just provided. But also, you said that billings would also accelerate in Q4. Is that still the expectation at this point?

James A. Tholen

So I'm not sure the question on rev rec, Dmitry?

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

I think you -- on the prior quarter, you guys were projecting for a huge rev rec quarter in Q4? So, in other words, you had, I guess, a lot of stuff sitting in deferred revenue and then you were hoping to recognize that in the fourth quarter. And with that, you were also expecting acceleration in billings. So, in other words, deferred, what's...

James A. Tholen

Yes, I mean, I think we expected a fairly normal Q4 in terms of bill-book-ship revenue in the quarter. I don't think we were -- we had not guided to -- historically, we'd had some very large off the balance sheet revenue events like Verizon, FiOS, or the -- or Telstra. And that really wasn't part of our expectation for Q4. And we really weren't very specific on billings, other than, as I would expect this year again, Q4 is our largest billing quarter.

Operator

And we'll take our next question from Rich Valera from Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

First, just a quick one on HIPCOM. How much do you expect from HIPCOM in the fourth quarter, Jim?

James A. Tholen

So, the...

Michael Tessler

It's a net $1.1 million?

James A. Tholen

Yes. So Rich, we think the net's going to be $1.1 million to $1.3 million.

Richard Valera - Needham & Company, LLC, Research Division

And how much of a haircut is that from its natural run rate if you didn't have to take any kind of haircuts for deferred or whatever?

James A. Tholen

Yes, I'm not sure where we said that publicly. I mean there's some information in the Q, but most of the revenue did come over for us. So as I said in the prepared remarks, the -- we -- the delta is we were selling them software and maintenance, and so we netted that out when we announced the acquisition.

Richard Valera - Needham & Company, LLC, Research Division

Okay. And just wanted to be clear, I think you said in your prepared remarks that essentially, you were on track with BroadCloud expectations, kind of as a percent of revenue exiting the year, backing out the HIPCOM. Is that accurate sort of relative to the last call?

James A. Tholen

Well, no. We said it was about 8%, including HIPCOM, in the quarter.

Richard Valera - Needham & Company, LLC, Research Division

Right, okay. So last quarter, I think you'd kind of toned down the 4Q percentage of revenue as a total for BroadCloud. From 8% to 9%, you kind of took that down a bit, and I'm not sure exactly where, but it sounded like by 1 point or I think you pushed it out basically a quarter, saying maybe you'd hit that run rate in 1Q '14. Can you kind of give us an update on where you are with BroadCloud relative to that? Do you think x-HIPCOM, you would have been on track to hit that stead benchmark in the first quarter?

Michael Tessler

Yes. So I think, yes, I think we said 8% to 9% slipped out to Q1. With HIPCOM, that moves that up in the Q4. Is that -- we'll be in that 9% ZIP code.

Richard Valera - Needham & Company, LLC, Research Division

Okay. And then with respect to next year, I appreciate you don't want to give full year guidance, but sort of saying things will grow is sort of -- you can kind of drive a truck through, that's not really a range. Just wondering if there's any way you could give us any sort of bracket on particularly kind of the license piece of the business. I think we have probably a pretty good trajectory we can come up with for the subscription and maintenance part, professional services, given a little growth, I think that grows modestly off that lower baseline. But in the license software line, any kind of help on that to sort of bracket what kind of growth you're thinking about? I mean, I know historically, you've kind of talked about kind of a high-teens, 20% type of growth rate. I'm just not sure if there's -- wonder if there's anything you can say about the growth rate of that line to help us for next year.

James A. Tholen

Again, I got to be careful because I really don't -- we're not going to guide to '14 until we announce in February. But I do think -- as I said in the remarks, I think, especially because we don't have the -- nearly the headwind impact on consumer in '14 because it's just a much smaller piece. And the UC business continues to be very strong -- or very solid. And trunking's come back; we see a lot of robustness there. So I think the software business should grow reasonably nicely next year, and the cloud business, I think, will grow well above our overall growth. So I don't think we're really in a position to guide on '14 much more than that.

Operator

And we'll take our next question from Paul Silverstein from Cowen and Company.

Paul Silverstein - Cowen and Company, LLC, Research Division

A couple, if I may. First off, with respect to your comments around the hosted Voice over IP weakness, how broad was that weakness? Can you give us a sense for roughly how many customers we're talking about?

James A. Tholen

Well, I don't know if I can characterize it as customers. I mean, I think it was -- first off, the year-to-date numbers for hosted look really pretty -- really healthy. And the -- we had the biggest 6 months in hosted ever for the company in the first half. So we're -- year-to-date, the hosted business looks very, very solid. What we're really seeing is -- we think, is just some cautious end-of-year buying by customers. I mean, we're -- and again, we readily admit, we were a little surprised at it. But it was just, it was less -- it was some deals getting pushed out or just other deals that are just really quite a bit smaller. So we anticipate that reorder rate will actually be higher. But it's definitely impacting us this year.

Paul Silverstein - Cowen and Company, LLC, Research Division

But, Jim, that -- so what you just described, I sense that was fairly -- was broader rather than narrower. It wasn't a function of a handful of customers; it's something more than that?

James A. Tholen

That's right.

Paul Silverstein - Cowen and Company, LLC, Research Division

All right. And secondly, can you talk about in term -- putting aside revenues from current customers, current business, and I know you're already at a significant number of the top 25, but can you talk to us about the number of available opportunities that you're competing for and how that compares to prior periods? I heard your comments earlier with respect to the VoLTE and the unified communications, the large opportunities that you're expecting to come in this coming year. But can you characterize the opportunities that are out there relative to recent -- to other periods and also your win rate?

Michael Tessler

Paul, it's Mike. Yes, that's a tough question. I think the way to look at it is, when you look at the top 25, I think we've described a number of times, there's probably a couple of more opportunities on that. I think a bigger set of opportunities that we're normally engaged with is going -- as I described, kind of going across the service providers and winning more of those slots, if you like, or more of those segments and as the service providers procure. So in the unified comms space, let's take an example, many service providers procured SIP trunking solutions, which, if you look at the U.S. market, for example, which is the most mature, we have a lion's share of those implementations. If you look at unified comms, there's usually, let's say, 2, 3, maybe 4 different service segments, a very small, a medium, a large, et cetera. And again, where -- we sometimes compete or sometimes just really plan rollouts with those carriers. And then probably the latest set of engagements at the existing accounts is who's going to be the provider of Voice over LTE. And as I mentioned in my remarks, both for consumer and for enterprise Voice over LTE. So I think you look at those as being additional procurement opportunities for us. And normally, the way -- our entry strategy, since we're extremely strong in the unified comms side and the business services side, is we always -- our entry strategy in every account is always to be focused on the business services side and then look at consumer as almost somewhat of a complementary business to that. And an example of -- SaskTel, for example, that I can easily announce or I could talk about, they were really looking at a single-application server for both consumer and enterprise and leveraging the fact that we have a very strong differentiated unified communication strategy on the enterprise side. We are in a very strong position to win that deal. So I think generally, I don't think we looked at that many of -- how many more of those top 25 we can add, but really how do we grow our strategic relationship in the accounts we already are playing in and how do we broaden our positioning in that account.

Operator

We'll take our next question from Catharine Trebnick from Northland Securities.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

First, before we get into my question, can we please do Mobile World Congress when you report Q4 after Mobile World Congress?

Michael Tessler

Catharine, it's even harder on me than it is you.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

I know. Last year, I had 3 companies. Okay, I'm sure no one's appreciated it. All right, a quick question. You had talked at your beginning remarks on Google and the relationship. One of the things that was interesting in our -- talking to a lot of the partners that you have is how well you're doing with the integration of BroadWorks and Google Apps. And could you -- is there a way that you can talk about the traction you're getting, and maybe that would help under -- get a better understanding of the demand for the enterprise is up but maybe the budgets aren't there. So could you provide more color on that?

Michael Tessler

Sure. I think that -- just so I'd add to the remarks I made in the script. I think the way to look at the work we're doing with Google is to enable the service providers to have a very complete unified communications solution. So when you look at this initiative that Google's launched, Chrome for Business, the elements inside of that, which are particularly interesting for the business community, is all of the applications like Gmail and Google Apps, with all of the enterprise controls and security that enterprises like, so you get basically all the productivity or desktop capabilities from the Google side. And then what we're doing is we're providing let's call it the real-time communication side, voice, video, the PBX functions, the videoconferencing, all of those capabilities side-by-side to those Google applications. And then the integration we've done really makes those 2 stacks, if you like, work well together from an end user perspective, so that you can easily, from a Chrome browser, take advantage of the BroadWorks richness right from within the Chrome browser. So really the -- and that's one of the things that the Google team ad connections spoke with many of our customers is how to, in fact, deliver, if you like, the Chrome for Business message and capabilities side-by-side with the BroadSoft, UC-One capabilities.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Okay. And then quick question on VoLTE. The other thing is could possibly any of your, even -- do you necessarily have to sell your BroadWorks, BroadCloud to a carrier and then they use it either for a consumer or enterprise? Is there opportunities out there where some of these alternative carriers might want to partner up with the carriers and say, "Here's another avenue into the enterprise such that you have BYOD, videoconferencing, instant messaging, et cetera." And do you have any opportunities in your funnel that would have that type of construct?

Michael Tessler

Well, I think a lot of the operators we have -- I'm not totally sure, Catharine, so let me try. I mean, a lot of the operators we have in our existing customers are in the funnel aren't traditional, large IRM or IMS-based carriers. They can be building kind of over-the-top solutions to compete with those carriers. I don't know of any of them that is looking to partner with some that has an IMS network to provide the core infrastructure. But you certainly don't need a full-blown IMS network to deliver UC or UC-One capabilities.

Operator

And our next question is coming from Jeff Latier [ph] from Wells Fargo.

Unknown Analyst

A couple of questions. I wanted to first follow up on the outlook, as despite the Q3 shortfall, it seems like you're still guiding for a strong sequential uptick in Q4. So I'd be curious to understand how much visibility you have into the current quarter. What's giving you confidence in such a strong sequential recovery? Despite some of your comments highlighting what still appears to be an uncertain carrier spending environment, it sounds like some of the order shrink you're seeing is a little bit longer term in nature. So that's my first question.

Michael Tessler

Well, yes -- no, I mean I think we -- I'd characterize our visibility as reasonable, normal. We do our forecasting carrier by carrier bottoms up. And so I think we -- like we do when we -- generally, in guiding within a quarter, we're comfortable with the guidance. And I think it doesn't -- it looks pretty normal from my perspective for Q4.

Unknown Analyst

And did you do anything different from a close rate assumption perspective or just with respect to some of the underlying factors driving the outlook to take a slightly more conservative view, given some of the uncertainties coming into the quarter?

Michael Tessler

No. Not really. But I mean, part of this is, and part of the color we're providing is that the -- the pipeline we're expecting to close, we're not seeing some of the size of deals that we would have expected from a kind of end-of-year buying perspective. So I'd say that we really haven't fundamentally changed how we manage quarters, look at quarters, do the bottoms up. And I think it's from that process that we -- it really became reasonably clear to us that we were going to be a little -- we're going to be lower than we had originally guided.

Unknown Analyst

Okay. And then I wanted to follow up on an earlier question regarding the competitive environment and specifically some of your comments that you believe that the competitive backdrop hasn't really changed. And I wanted to dig into it, maybe a little bit more from a systems vendor perspective. It seems like Cisco's pretty focused on the opportunity. Some of the smaller vendors seem to be seeing fairly healthy results this quarter and going into Q4. So would love to just better understand what's giving you confidence that the competitive environment hasn't changed and that we can feel good about your win rates going into Q4 and into 2014?

Michael Tessler

Yes, sure. I think that when we look at the core competitive strength, which is our Unified Communication solutions, we continue to see growth. We continue to see new customer activity. And I have to say, we often are -- which is very different in kind of consumer infrastructure business, we see a lot of that actually run through and get -- and us get selected without formal RFP processes because people do understand that we're -- we have a very strong leadership position in the unified comms space. And when I say unified comms, I mean all the way from very small solo type, all the way up to the largest large enterprise segment. We don't see a lot of change in the competitive dynamics into the carriers and in that arena. And as we've mentioned before, we continue to look at consumer as the complementary strategy in those accounts where it makes sense in the examples that I gave. Sometimes, we will be side-by-side, like in the second VoLTE announcement that I made where someone else is likely to provide consumer, we're providing enterprise VoLTE capabilities; whereas in the first, which in SaskTel, we're providing both. So I think we have a very -- as I mentioned before, we always lead into the accounts, in the business segment side, on enterprise services where we have very, very strong competitive positioning and then try to look at other capabilities as kind of complementary add-ons.

Unknown Analyst

And are you seeing any change in environments, like Verizon, which are using both you and Cisco?

Michael Tessler

Absolutely not. I mean, I think we're -- as I mentioned before, we continue to have very, very strong sell-through momentum in the carriers. We see the Cisco solutions being used in very unique and only really when enterprises are demanding a full end-to-end Cisco solution. And if you talk to a number of our carriers that are in the larger enterprise segment, I think the message would be that the -- we're seeing very strong sales momentum in the large enterprise segment using our solution.

Operator

And our next question is coming from Brian Modoff from Deutsche Bank.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Vijay Bhagavath on behalf of Brian. So yes, question to you -- question for you on business Voice over LTE. Any qualitative color or thoughts, any reads from your telco carriers heading into next year? How do you see the business VoLTE opportunity panning out next year?

Michael Tessler

I mean I think -- as I mentioned, I think we're in a number of engagements with carriers. And in many cases, we are starting to see those carriers look and discuss how enterprise Voice over LTE solutions could actually lead the market over consumer since they would normally be packaged and actually be new revenue streams versus most of the consumer Voice over LTE seen as kind of transformative in cost savings. So we're engaged with a number of those discussions. More and more of the operators are realizing a larger -- sorry, the larger operators are realizing that they'll have to look at, at least a multivendor strategy, maybe one for consumer and one for enterprise, as the requirements around enterprise Voice over LTE are quite different than the consumer capabilities. And we feel very, very strong in the enterprise segment where we have extremely -- with lots of differentiated capabilities. We've been in that market for a long time. We have good scalability of that solution. And in addition, we can bridge across from both VoLTE to fixed line and also to 3G. So the fact that we can actually leverage across those various networks into a converged offering for the business services customers is a very, very strong competitive positioning.

Vijay Bhagavath - Deutsche Bank AG, Research Division

And just a quick follow-on is on Cisco HCS. I mean, you mentioned no kind of meaningful changes in your competitive environment. Are you seeing Cisco HCS win any deal versus BroadSoft, and that impact any near-term deals or that's not really an impact?

Michael Tessler

I can't really -- I'm probably more aware of deals that we've won away from Cisco HCS. And as I mentioned before, I think in the discussions we have with most of the operators that have deployed HCS, they really see that as a very kind of unique solution, if you like, or solution that really requires kind of an end-to-end Cisco deployment. So that it is -- it's not kind of a mass market opportunity. And so I think if an enterprise comes in and wants a complete end-to-end Cisco solution, that may be where HCS plays. We're seeing much broader interest in the BroadWorks-based services in -- across the board. Since most enterprises are going to have some heterogeneous environment, extremely difficult to go end-to-end. Cisco, we think, we have a much bigger addressable market than the HCS Solutions.

Operator

Thank you. And I'm showing no further questions in the queue. I'd like to turn the conference back to your host for any concluding remarks.

Michael Tessler

Thanks again, everybody, for being on the call today. And thank you for your continued support. We look forward to updating you on the progress in the coming months. Goodnight, everybody.

Operator

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

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