BroadSoft's (BSFT) CEO Mike Tessler on Q1 2014 Results - Earnings Call Transcript

May. 5.14 | About: BroadSoft, Inc. (BSFT)

Start Time: 08:40

End Time: 09:33

BroadSoft, Inc. (NASDAQ:BSFT)

Q1 2014 Earnings Conference Call

May 5, 2014 08:30 AM ET

Executives

Michael Tessler - President and CEO

James A. Tholen - CFO

John Kiang - Investor Relations

Analysts

George Notter - Jefferies & Company

Richard Valera - Needham & Company

Simona Jankowski - Goldman Sachs

Dmitry Netis - William Blair & Company

Vijay Bhagwat - Deutsche Bank

Jess Lubert - Wells Fargo Securities

Catharine Trebnick - Dougherty & Company

Mike Latimore - Northland Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the BroadSoft Q1 2014 Earnings Call. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I’d now like to turn the call over to John Kiang. You may begin.

John Kiang

Thank you, Michelle. Good morning, everyone, and thank you for joining us on today's conference call to discuss BroadSoft's results for the first quarter ended March 31, 2014. 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 today -- on today's call are Michael Tessler, BroadSoft's President and Chief Executive Officer; and Jim Tholen, BroadSoft's Chief Financial Officer. This morning, BroadSoft issued a press release discussing its financial results for the first quarter ended March 31, 2014. If you would like a copy of the release, you can access it on our website or the SEC's website.

We’d 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 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, 2013, filed on February 28, 2014, with the SEC.

All information provided in this conference call is as of May 5, 2014. Except as required by law, we undertake no obligations to update publicly any forward-looking statement made on this 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’re 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, noncash amortization expense related to the acquired intangible assets, noncash interest expense on our convertible notes and also noncash tax benefit and expense. Collectively, these items totaled $12.8 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 and EPS, we’re referring to non-GAAP figures. We have provided reconciliations of these non-GAAP measures in our earnings release, which is available in the Investor Relations section of our website located at www.broadsoft.com.

Finally, we define non-GAAP tax rate as the rate calculated by dividing, on an annual basis, our estimated non-GAAP pre-tax income by our anticipated cash taxes.

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

Michael Tessler

Thanks, John. Good morning and thank you for taking the time to discuss our first quarter 2014 results. As you saw from the press release we issued earlier this morning, we delivered revenue of $43.1 million and earnings of $0.07 per share. A little later Jim will provide more details on our financial results and outlook.

In the first quarter, we continue to see significant interest in our BroadCloud capabilities. The objective of BroadCloud is to quicken the market introduction of hosted unified communications for our service provider customers. IDC is forecasting that the unified communications services market will reach 26 billion by 2016 and BroadCloud is designed to help our customers capitalize on this opportunity.

I’m happy to announce that BroadCloud’s unique benefit helped us complete an agreement this quarter with a new Tier 1 service provider for the introduction of their new unified communications offer. Because of the growth and significant interest on our cloud deployment model, I thought I’d spend some time today to describe our strategy in more detail, comment on the progress we’re making, and demonstrate how BroadCloud helps our service provider customers to meet their objectives.

BroadCloud is a fully managed service that delivers our complete range of unified communications, including hosted PBX services, video calling, instant messaging and presence, desktop and file sharing, and all accessible in the growing variety of mobile devices.

We run these services from our cloud infrastructure, which incorporates all the hardware equipment required for the application. We wrap these applications with an end-to-end operations platform of support the full lifecycle of the business customer from initial quote to service activation to supporting the end customer. Our support team completes the number porting, installation and service turn up.

Our operations team monitors all this systems and network performance to ensure a high availability and reliability. The solution also delivers a set of intuitive portals and interfaces for our service provider sales and support organizations and the end users. The objective is to deliver everything the service provider needs to quickly offer a rich and powerful unified communication solution. We work with each custom -- customers to develop tailored offers for their targeted business segment, while they’re small, medium or large enterprises.

From our experience with our BroadCloud customers, their unified communications services can be quickly customized, which allows them to go to market within just a few months.

We continue to work with our customers to adjust the business process to optimize the customer experience, to making sure the ordering and installation process is simple and the ongoing services reliable and scalable. For example, we’ve found that by integrating our packet smart technology into the service delivery process, we can not only ensure that the LAN, WAN is adequate to run the unified communications services, but also that we can quickly identify and diagnose any problems, minimizing customer complaints.

Our customers have seen great success using this business process to deliver unified communications services as an over the top solution, that is they deliver the unified communication service independent of the broadband provider. By disassociating the broadband connectivity from the services, service delivery can often be completed within as little as 10 days of ordering the service, including porting numbers, shipping and installing phones on the site.

We’ve seen the speed of delivery is our competitive advantage against traditional enterprise communication equipment deployments. One market segment benefiting from this is large enterprises that have many small sites which have seen their new UC services rapidly and effectively deployed to all locations. A rich and complete unified communications suite along with a fully managed service has allowed our BroadCloud customers to very quickly go to market and to start to scale their deployments.

Our customers are taking advantage of BroadCloud range from Tier 1 providers to CLECs to small specialty providers, all with a range of needs and approaches to the market. BroadCloud offers our customers an alternative to building their own network and when its fully operationalized service positioning, reduces their investment into back office IT development, which can delay new service introduction by months or even years.

BroadCloud delivers a turnkey solution that minimizes our customers internal development investment, maximize the scalability, speed time to market for new services, and therefore accelerates time to revenue for our service provider customers. Some of our customers are opting to leverage BroadCloud to quickly introduce their unified communications services to market, while also completing their internal system deployment.

By leveraging BroadCloud, service providers can meet the needs of their business customers for unified communications now by simultaneously completing their internal product development to deploy our software in the networks. Other customers are selecting BroadCloud as their permanent unified communication solution from the start.

Our product strategy offers our customers flexibility for delivering our unified communication services. They can choose between software cloud and can move between these deployment models over time. This is clearly competitive advantage that we have against others. Because of the extensive interest on our BroadCloud product, we continue to invest in this area of our business.

BroadCloud is fully operationalized in North America and we made strategic acquisitions in 2013 to expedite our expansion throughout Europe. Our European activity has scaled quickly this year, starting with our announcement of BT Wholesale as our first European customer. Later this month, we’re hosting our first European BroadCloud Summit, in London where customers and prospects will experience first hand the benefit of our solution.

While we’ve talked about BroadCloud strategy today, remember the larger portion of our business continues to be our BroadWorks software product. Accelerating sell-through of our customers existing market offers and their expansion into new market segments drives our BroadWorks growth. We saw positive moment in both of these areas in the first quarter with good sell-through results in Europe and new market launches like Telecom Italia’s announcement of their new service for the mid to large enterprise market segments in Italy.

So to summarize, I’m pleased with our start to 2014, given the good progress we’ve made against our 2014 strategic objectives. Let me now hand the call over to Jim who will go through our 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. Let me provide the financial highlights for the quarter before I go into more detail regarding our Q1 results and our guidance for Q2 and the full-year 2014.

For Q1, total revenue was $43.9 million, up 11%, from the year-ago quarter. Billings, which we defined as revenue plus a change in deferred revenue were $40.3 million, up 6% year-over-year. From a product perspective, our cloud SaaS business was our most significant growth driver in our geographical basis, Europe and Asia Pac had strong quarters.

We had one customer that had accounted for greater than 10% of revenue in the quarter, non-GAAP EPS was $0.07. We generated a very strong $14.08 million in operating cash flow. While you will see cash flow from operations reported in our Q as $6.8 million, which was driven by a noncash adjustment to cash flow related to GAAP tax. The $14.8 million is much more reflective of the cash generation we achieved in the quarter.

I think the big headline in the quarter is we’ve started to recognize revenue from the large deal we first discussed in Q3 2012. As you may recall, at that time we had signed a deal with a major international service provider for a single large enterprise deployment. This project involves BroadWorks software, BroadCloud, professional services, maintenance and support and the delivery of complementary third-party equipment.

Revenue recognized from this project in Q1 was $5.1 million, of which about half was software and the rest flowed through our other revenue line items. We now expect revenue from this project to be a bit over $18 million in 2014. This was somewhat higher than we had -- than our previous guidance on the deal. The delta is attributable to the very complex revenue recognition around the project and our great current greater certainty regarding all the timing ins and outs. For Q2, this project should be approximately $4.5 million revenue with, again, about half in software.

So with that context, let me give you a bit more color on our Q1 revenue and billings. Software license revenue was $17.1 million, down 18% year-over-year. Software license billings were $15.8 million, down 13% year-over-year. North America was the primary driver of the revenue decline. It was down across software product lines and customer tiers, following a very strong Q4.

We had several of some of our more significant North American customers place meaningful orders in Q4 and expect that many will again -- do so again in Q2. So Q1 ended up being just a top North American quarter, which pulled down overall software revenue. You will see from our guidance that we expect Q2 to be a stronger quarter for revenue and for billings.

Our overall positive view for the year driven primarily by hosted UC software and SaaS, remains unchanged and as you will hear from me later in more detail, we’re maintaining our full-year revenue guidance. Our subscription and maintenance support revenue, which includes our cloud SaaS business, was up 39% year-over-year to $21.1 million. Maintenance support revenue was up 20% year-over-year. Cloud SaaS revenue of $5.6 million grew150% year-over-year and represented about 13% of total Q1 revenue, of which a bit over $800,000 was from our finocom acquisition.

Total subscription and maintenance billings was $21.1 million, up 27% from a year-ago. Professional services and other revenue of $5.7 million was up 57% from a year-ago period. Certainly, a chunk of this growth was from the large deal I discussed earlier, both professional services and about 1 million from the delivery of the third-party equipment I mentioned earlier.

As you know reselling third-party hardware is not a particularly normal practice for us. We agreed to do so in this case to accommodate our various strategic carrier customer for this project, and as you would expect, we made sure we achieved reasonable margins in doing so. Professional services and other billings of $3.4 million were up 4% from the year-ago quarter.

Now moving onto cost and margins. In Q1, we had gross margin of 76% versus 80% in a year-ago quarter and consistent with our guidance. The primary driver of this was the lower gross margin in our subscription and maintenance support business of 74% versus 77% in the year-ago quarter. This in turn was due primarily to greater investment in our cloud business in both the U.S and internationally of both people and infrastructure, including a full quarter’s worth of expense related to our finocom acquisition.

Software gross margin remained at 90% plus and our professional services and other gross margin of 43% was up from 31% the year-ago period. For Q2, 2014, I’d expect overall cost of sales to increase modestly from Q1 levels.

Operating expenses in the quarter totaled $30.9 million and operating margin was 6%. For Q2, 2014 we expect operating expense to be up less than $1 million over Q1. So given our guidance for Q2, we’d expect to see margin expansion in Q2 over Q1. On the balance sheet, cash, cash equivalents, and investments totaled $196.2 million at the end of the first quarter. Accounts receivable of $53.4 million, were down $13.2 million from Q4, driven by normal seasonal cash collection on strong Q4 billings. Deferred revenue of $74.1 million was down $3.6 million from Q4, also in line with normal seasonal patterns.

Now, I'd like to spend some time talking about our Q2, 2014 and full year 2014 outlook. As you've seen in our press release, we expect Q2 revenue to be in the range of $48 million to $52 million and non-GAAP EPS to be in the range of $0.17 to $0.31. For the full-year 2014, we’re maintaining our guidance of revenue in the range of $206 million to $212 million and non-GAAP EPS in the range of $1.26 to $1.46.

As you see in our results, as we’ve got it previously, we’re making a number of investments today in sales, sell-through and BroadCloud that we believe will result in positive returns both later this year and in 2015 and beyond. As we’ve mentioned before, we have a significant focus on helping our service provider customers improve their rate to sell-through.

We also have invested significant effort in winning large cloud, VoLTE and other strategic hosted UC deal opportunities and are pleased with our progress in this regard. As you can see from our Q2 guide, the investments that we’re making are fairly front end loaded into this year and so we do expect to see operating leverage throughout the year.

Finally, I want to invite all of you to attend our upcoming Analyst Day which is planned for Thursday June 5th in the Hotel Monaco in Washington, D.C. The event will start at 11:00 a.m. that day and will feature presentations by Mike Tessler; Scott Hoffpauir, our CTO; and me. You can register through the events and presentation section of the IR page of our Web site. We hope to see all of you there.

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, can you please open the call?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from George Notter of Jefferies. Your line is open.

George Notter - Jefferies & Company

Hi. Thanks very much. I wanted to dig in a little bit more on BroadCloud. Can you guys talk a bit about the breadth of adoption on BroadCloud you’re getting; perhaps you can give us a number of service providers that have a BroadCloud implementation. It feels like a mix of BroadCloud maybe is growing a bit faster than you had anticipated, I would love your perspective there, 13% of revenues is the bigger number than we were thinking. And then also can you talk a little bit about how that maybe adjusted your views on the top line of the business obviously there is cannibalization effect, I would imagine around BroadWorks versus BroadCloud. So how do you kind of see that in the numbers right now? Thanks.

Michael Tessler

So George let me -- I will take the overview and then Jim wants to comments on some of the numbers. So first of all, I think it’s useful to kind of talk about the main targets for BroadCloud. As I mentioned in the script, first of all, the availability has been focused in North America to start and through the back half of 2013 we started to make BroadCloud available in Europe, in select market. So there is a geographic focus to BroadCloud as we actually have to build up infrastructure and some support capabilities for the BroadCloud offering.

The second thing I’d say is that, more of the focus has been at the larger Tier 1 accounts. What we have witnessed is that the complexity of introducing unified communications into the very large carriers, IT systems and their OSS/BSS and getting the business process right is quite complex and so the interest is definitely at the higher end in terms of the Tier 1 capability. So we’re not quoting the number of operators, but you can imagine that the operators that we’re focused on primarily is at the top end of the -- kind of Tier 1 incumbents or larger operators. And then we have some activity at the other end, I think of the spectrum which are specialty folks that are looking to get into the business or smaller operators that don’t have the infrastructure to build out.

But I’d say that the numbers are not that important, it’s more about the size of the sales channel of the operators that we’re in fact focused on and primarily with the goals, again as I mentioned in the script is really kind of accelerating the time to market. Sometimes accelerating it knowing that they will in fact move to a software model. So I think the second question around, how does that impact software sales versus cloud, I think we don’t really see it as a cannibalization, sometimes its going to be a flow from cloud to software for that was going to stay in cloud and I think that’s the way we see it. We don’t really think of -- the market is so big and where it has slow penetration rate that we don’t really consider it a cannibalizing effect. I don’t know if you have any comments on the …

James A. Tholen

Yes, I mean -- I think George that we’re -- we’ve been really pleased at results on cloud and that -- and my only comment on software is, well it was down in Q1, its in the context of a really strong Q4 and I think we have healthy expectations, you can see in the guide in Q2. So like Mike said, our view is one of our real competitive advantages is we can accommodate a carrier in however they want to go to market either through cloud or through software and a hosted seat sold or serviced is a good seat to us and we’re quite happy that we think of it as kind of holistic in terms of the Unified UC business.

George Notter - Jefferies & Company

Got it. Great. Thanks very much guys.

Operator

Our next question comes from Rich Valera of Needham & Company. Your line is open.

Richard Valera - Needham & Company

Thank you. Good morning. Mike, I wonder if you can touch on the other parts of the business, specifically SIP trunking and consumer, kind of how they did in the first quarter and how you’re thinking about them for the year as a whole.

Michael Tessler

I’d say that the rest of the -- those two items that you mentioned, SIP trunking is an important part of the business as I think we’ve mentioned in the past, has been a much bigger focus in North America than it has been another markets, we certainly are seeing pick up in Europe on SIP trunking as generally the kind of a whole European [ph] [feeder], it’s kind of picking up on hosted UC, SIP trunking all the elements are much more active in the market. We’re seeing more competitive situations between the carriers, which are forcing them to move more aggressively with SIP trunking and new service offers around unified communications. So I think we’re going to see SIP trunking continue to grow. As I said in the past, it’s been a North American story, I think its starting to spread quite strong to Europe and so I think we’re going to see some growth through the year around SIP trunking in Europe. On the consumer side, I think we guided and Jim gave on guidance in terms of consumer, I think it continues to be especially on the fixed side, obviously a market that’s going to be fairly small for us, there is very little activity going on. I think we got it that down quite a bit and I think anything around consumer, around mobile and voice over LTE is still going to be a fairly conservative in ’14 and we’re still looking at that as being kind of growth in ’15.

James A. Tholen

Rich, its Jim. I just highlight a couple of things that Mike said is, we had a good trunking quarter. Trunking was up year-over-year, and consumer was just a bit over the 5% of revenue that we suggested for the year.

Richard Valera - Needham & Company

And so, just to clarify, you think SIP trunking will grow overall for the year including North America and Europe in the mix?

Michael Tessler

Yes. I think so.

Richard Valera - Needham & Company

Okay, thank you. I just wanted to get your latest thoughts on VoLTE. You didn’t talk much about it on this call, but obviously you’ve had some big wins there. I wondered if you could give us an update on kind of the timing of the rollout. I think last time you said you didn’t really expect much of any revenue this year, but maybe some differed build, I just wanted to revisit that and then any color you could give on potentially other VoLTE opportunities out there in the pipeline? Thank you.

Michael Tessler

Rich, I think our activity around Voice over LTE continues. I think as we’ve talked about in the past, a lot of our focus on Voice over LTE is focused around the business area, the business VoLTE segment and where we have a very, very strong competitive advantage and we think there is lots of interest by the carriers to monetize their investments around the end business customer. So, I think we didn’t announce anything this quarter. That’s probably not very strange considering that most of the VoLTE deals are quite large and lumpy. We still expect the activity to be mostly revenue wise in 2015, picking up in 2015 with some further design wins in 2014. So, maybe we’re on track. Our plan probably the only other comment I would make -- I don’t know if Jim wanted to jump in with some of the -- on the revenue side. The only thing I would say is that, as predicted and as we have been very cautious around Voice over LTE, it continues to slide very slowly into the market. So, we feel good with our projections for design wins in ’14 to add on to the wins we announced in ’13 with sources of revenue pick up in ’15.

Richard Valera - Needham & Company

Okay. That’s helpful. Thanks Mike.

Michael Tessler

Thanks.

Operator

Our next question comes from Simona Jankowski of Goldman Sachs. Your line is open.

Simona Jankowski - Goldman Sachs

Hi, good morning. I wanted to ask you a little bit about your assessment of sell-through from a software perspective. When I look at your license revenue growth especially if I exclude the roughly $2.5 million from the one large deal, it would imply that it was down about 30% year-over-year. And even though I recognize the comments you made about some of the inventory adjustment relative to very strong shipments in Q4, so perhaps there was some digestion in Q1, now that seems to be a very sharp decline. So, if you can just maybe go through how that compares to what you think is happening in the end markets from a sell-through perspective?

James A. Tholen

Sure Simona, yes again the Q1 was -- I mean within guidance it was, was down off of, in particularly in North America off of really strong Q4. And Q2 looks fine. So, I don’t -- I want us to not extrapolate to infinity from kind of one quarter. And part of that is that Q1 looked like a perfectly normal healthy sell-through quarter for us. So, our data on our end customer’s sell-through was absolutely fine.

Simona Jankowski - Goldman Sachs

Any numbers you can put around that Jim in terms of that sell-through?

James A. Tholen

No, I mean we got to be -- that’s not data that we release publicly, but I would -- I mean I’ll just qualitatively it was right in line with historical patterns, and it was healthy and it was fine.

Simona Jankowski - Goldman Sachs

And for the full-year guidance which you left unchanged, you talked about that one deal being now $18 million versus I think the prior expectation had been $15 million. Did anything incrementally weaken to offset that in terms of why you maintained the full-year guidance or should we just interpret that as either conservatism or that visibility is a bit better now?

James A. Tholen

Well look the annual guidance is always a bit of art, a bit of science, and it's all kind of probability weighted view at the portfolio and it's just part of the mix. I don’t think there was any no deal fell out; no fundamental changes. But as we looked at our landscape for the year, certainly it helps that, that we’re going to get a little bit more revenue in the year than we thought, but no more to it than that.

Simona Jankowski - Goldman Sachs

Okay. Thank you very much.

Operator

Our next question comes from Dmitry Netis of William Blair. Your line is open.

Dmitry Netis - William Blair & Company

Yes, hi guys. I just want to follow up with -- on Simona’s question a little more and it sounds like your -- the big deal was supposed to be correlated, it now looks to be a lot more front-end loaded. I think you’re going to get about $10 million in the first half of this year, and then the rest of it's in the second half. So, Q1 was a little bit light, I just kind of still want to see an answer to the question, what given that the big deal was pretty -- had a strong revenue recognition, was it was like versus your own expectation in Q1, and what gives you confidence that second half of the year, what are you expecting in the second half to give you confidence you’ll achieve the $10 million with the outlook that you provided. What are some of the areas, if you could just pinpoint those it would be really helpful in a business or customers, I mean both will be really helpful. And the second question if you can dive into this Telecom Italia deal and give us a little bit more perspective for what that entails and the revenue contribution we might be seeing from that deal? Thank you very much.

James A. Tholen

Sure, Dmitry. So, first off, it is pretty ratable, the first half of the -- for the big deal $9.6 million of the $18 million. So I think what moves it around just a little bit is the third party hardware we mentioned. Other than that it's a ratable deal. And certainly for Q1, that was part of the guide. So there really wasn’t part’s of Q1 that were particularly noteworthy from a softness standpoint. It was in line with guidance. If anything, I mean I do think North America was probably a touch lighter than we had anticipated. Europe was good, Asia Pacific was good. And it really is in the context of, we did north of $70 million in billings in Q4 which was above our expectations, and that was a big North America quarter. So, I just think it was kind of a tough -- it was a bit of a tweener for North America between a big Q4 and what we think will be a healthy Q2. And for the year we feel good about the year. I mean we’re maintaining guidance. It's that portfolio effect gold kind of probably weighted and that sure it's nice that we think we’re going to be able to get a little bit more rev-rec in the year than we had thought it was possible, the last time we talked to you guys. But beyond that Europe feels good, tone of the business is good, sell-through looks good. I don’t know if Mike you want to talk about that.

Dmitry Netis - William Blair & Company

Where are you putting your assets for the second half, what if some of the customers or areas whether it's SIP trunking, Hosted UC, SaaS, BroadCloud, I mean what is some of the strength that you’ll see in the second half you’re anticipating right now?

James A. Tholen

Sure, so the headlines are Hosted UC, both Software and SaaS. And we continue to both sign major customers and see really good sell-through from the periods of strategic customers in all geographies. And I think that drives the second half and certainly where we’re seeing real acceleration in the Cloud PBX business that will continue to grow nicely quarter-on-quarter. So, again it's across 500 customers worldwide, but like last year I think -- the years have become a little bit more back-end loaded and my expectation is that again this year Q4 is a very healthy quarter.

Dmitry Netis - William Blair & Company

Okay, and Telecom Italia real quick. Thank you.

Michael Tessler

Sure, let me take that Dmitry. So, one of the thing’s, just a little bit of background that we’ve been a supplier of Telecom Italia for a number of years in the small segment. We announced with Telecom Italia a new offering, new market launch in the mid-to-large segment. So, often many people think that most of the seat sales are actually in the sub let’s say 50 range. This offer we launch with Telecom Italia is one of many that we’ve launched in the mid-to-large, so it's in the enterprise segment. We’re pretty excited by the launch. Obviously Italy is, in Europe a pretty large GDP. And in that GDP Telecom Italia has a very strategic place inside the enterprise segment. So, a good customer with good presence inside Italy’s enterprise customers and a very strong solution offer into that segment, so we’re pretty excited. And I think it's just, I don’t think we want to -- Telecom Italia is great, I think it's just an example of so many additional expansion wins that we have in operators where we’ve gone from segment one to segment two to segment three where we start to kind of branch out. And as Jim mentioned we continue to add new properties and new segments and sell-through continues pretty strongly. So, all three of those elements give us confidence in our guidance for the rest of the year.

Dmitry Netis - William Blair & Company

Okay. Thank you, Mike.

Operator

Our next question comes from Brian Modoff of Deutsche Bank. Your line is open.

Vijay Bhagwat - Deutsche Bank

Yes, thanks guys. It's Vijay Bhagwat on behalf of Brian. So, two questions, one is on the quarter. You mentioned some weakness in North America. Any color you can give us in terms of was it relating to one of your big Telecom customers, your cable customers. And then heading into the back half, I would like to understand what might be some projects or used case’s that gives you the conviction especially heading into Q4 where you do have a high bar from a consensus expectations point of view heading into Q4. Thank you.

James A. Tholen

So, Vijay it’s, Jim. Like we said in the prepared remarks I mean we -- North America it really was sort of across the landscape in terms of softness especially in Hosted UC, but it really is in the context of the strength we saw in Q4 and that’s true in cable, true with our incumbent, it's true the Tier 2 to the CLECs et cetera. And it's just; it was a pretty robust Q4. Pipelines for Q2 looked strong across those segments. It was just a tough quarter. And then again in the second half, again we see acceleration in the business, we see strength in sell-through, and we have a set of projects that world wide that are in market where we expect to start seeing the reorder rates kick in, some pretty large projects that we expect to be delivered to the market place in the second half to drive revenue. So, I mean there’s always a layering affect but, so it really is a portfolio benefit of 500 customers and accelerated cloud revenue that drives it all.

Vijay Bhagwat - Deutsche Bank

And then one final question if I may, the cable consolidation is going on and some of your peers did mention weakness in their cable revenues so your thoughts on ongoing cable operator consolidation and what would that mean to your business? Thank you.

James A. Tholen

Yes, I’ll talk about it from a pipeline standpoint and Mike will jump into it sort of more broadly. I mean we see, it's the opposite for us. We see real strength in US cable between Comcast, Coax, Charter all customers of ours, all I think quite hummably talking about the strength in their business services side of their business and that’s all good for us. And I think the consolidation in the space right now is actually a positive for us. We have our champions in the market really driving the consolidation. And from a pipeline standpoint it's never been healthier. So, I think cable is a definite segment of strength for us.

Vijay Bhagwat - Deutsche Bank

Okay. Thanks.

Operator

Our next question comes from Jess Lubert of Wells Fargo Securities. Your line is open.

Jess Lubert - Wells Fargo Securities

Hi, guys, couple of questions as well. Maybe just first off following up on the BroadWorks weakness in North America. I was hoping you could provide us some additional details regarding what's given you comp-end sales in billings in the region more improved than Q2, and perhaps you can give us a sense of what you’ve seen here in early April, that’s my first one.

James A. Tholen

Yes, sure. As we said Q1, really software is really driven by North America. Q2 the – quarter-to-date in pipeline looks healthy and it gives us -- that’s really the underpinning for the guidance in Q2 and across region. But North America again across Tier for hosted looks like it’s; Q2 is going to be a fine quarter.

Jess Lubert - Wells Fargo Securities

All right. And then Jim, I was hoping to get to the margin trajectory a bit. It seems like we’re seeing a shift to BroadCloud which I would imagine will continue to create some gross margin pressures through the year. So, I was hoping you could help us understand how you’re thinking about gross margin in 2014, and if we are looking at a down gross margin year, are there actions you’re planning to take from a cost perspective that are giving you confidence that you’ll still be in your EPS range is we’re starting the year a little bit lower than we would have expected.

James A. Tholen

Yes, so I think the year will, my expectation is we’ll finish the year with a gross margin percentage, it starts with an eight and that feels pretty healthy to me. Gross margin dollars are going to go up quite nicely in the year. It's a mix issue and the BroadCloud especially as we’re in kind of early stages here has put a little bit of pressure on gross margins, but I think still healthy. So, I guess the headlines are, we’re going to keep the margin pro forma business in the 80s, the BroadCloud business doesn’t have the same margins as software, but with growth there is scale advantage there and I think that will again drive the margins back up a bit from the 76 we saw in Q1.

Jess Lubert - Wells Fargo Securities

And then last one from me, can you talk about what you’re seeing from a competitive perspective and perhaps more specifically Cisco recently announced a fairly comprehensive cloud agreement with one of your larger international customers with Hosted UC part of the relationship there. So, I would like to understand how you think you’ll be positioned against them going forward and to what degree this might be a risk from either a sales or pricing perspective, I think that would be helpful.

Michael Tessler

Right. So, I think we’ve always seen the Cisco guys at the high-end of the carrier segment with their HCS product. We have seen them announce some bundling and some cloud infrastructure arrangements. I know the customer that you’re talking about. I don’t really see any change in the prospects or the sell-through for that particular account. It's the lead product they’re selling, it's the lead enterprise segment, sell-through continues to be very strong. So, it's a very wide ranging announcement with UC thrown in one of the 30 bullets. So, you take it for what it means.

Jess Lubert - Wells Fargo Securities

Thanks guys.

Operator

Our next question comes from Catharine Trebnick of Dougherty & Company. Your line is open.

Catharine Trebnick - Dougherty & Company

Thank you, and thanks for taking the question. Mike, could you touch more on the competitive landscape. Particularly after I think Enterprise Connect there was a lot of chatter that perhaps you lost one of your two tier customers to ShoreTel and, I guess I’d like to talk about the mid-range in the lower-end and how comfortable you're feeling with the sell-through with the current customer base you have in your product again, a ShoreTel or a Mitel or even if Cisco goes well in. Thanks.

Michael Tessler

Honestly we really haven't seen any change in the competitive side of the operators that has -- I think we’ve said often, as a focus for carriers selling -- truly selling hosted multi-tentative solutions, it's us and Cisco a little bit at the high-end. Those are really the only two companies really focused. Our some carriers could mean to sell some other brands, some other PBXs certainly but that’s really not -- we have not seen that erode our business, and as Jim and I both mentioned the sell-through results we’re seeing are actually quite strong when you combine the sell-through on software and cloud, we’re seeing really strong progress. So, I don’t think the competitive scenario is changed quite a bit. And frankly I’d say that, the one as kind of blending in the VoLTE conversation as we’re starting to see more mobile operators get very focused on the business customer. We’re seeing a strength emerge as those folks start to really think about unified comps and our ability to basically be kind of a unified communications, application server running in a VoLTE infrastructure, IMS infrastructure that gives us a true competitive advantage against anybody else. So, I would say right now very, very consistent competitive situation and are frankly improving with the emergence of mobile operators and unified comps.

Catharine Trebnick - Dougherty & Company

Okay, thanks and then one housekeeping question, Jim did you give America Asia-Pac in your split out? Thanks. And if not, could I have it again, if you did.

James A. Tholen

So for Q1 -- Catharine?

Michael Tessler

Catharine?

Catharine Trebnick - Dougherty & Company

Yes.

James A. Tholen

So, we didn’t in the prepared remarks obviously it's in the queue, so that in the queue you’ll see that. So of the $43.9 million in revenue, $19 million was U.S., $13.2 million was EMEA, $9 million was APAC and then the rest with other.

Catharine Trebnick - Dougherty & Company

Okay. Thank you very much.

Operator

(Operator Instructions) Our next question comes from Mike Latimore of Northland Capital. Your line is open.

Mike Latimore - Northland Capital Markets

Thanks a lot. Yes on the -- I think you talked about cloud going to software, can you just explain that a little bit more. Do you expect some of your BroadCloud customers to eventually migrate to the software platform over time?

Michael Tessler

Right, so I think what we’re seeing is when we are -- we’re dialoguing with new accounts today especially where we have cloud as an option in the Geo where we’re having those discussions. We’re positioning cloud in software as an option for the carrier customers. So, the proposition is, hey you can start with cloud, you can stay on cloud or if you really have a desire to do a build you can start with cloud and move to a software model. Frankly that choice has proved to being a very, very strong competitive element and that it really enables the carriers to get started quickly and really perfect the art of selling unified communications and provisioning it and supporting it while they decide if they’re going to bring that in-house or not. And so, absolutely we have a couple of carrier customers that have -- that will launch with cloud with the desire to kind of in-build over a number of years. And then again, the other complexity element that you’ll see is that as carriers go from lets say a small segment to a medium to a large, they may start with cloud and then as they perfect the delivery they may move to software. It's too early to tell exactly what the rate of change will be if we need people moving from cloud to software.

Mike Latimore - Northland Capital Markets

Great. And then on the, the new BroadCloud win here, was that already a software customer of yours, the North American or do they allow other UC projects anymore, color there would be helpful.

Michael Tessler

Yes, we’re not identifying the operator at this time.

Mike Latimore - Northland Capital Markets

And then, I guess last the -- what kind of billings growth do you expect for the year now?

James A. Tholen

So, I think we don’t guide specifically on billings but my expectation is there will be a reasonable alignment between billings and revenue growth.

Mike Latimore - Northland Capital Markets

Okay. Thank you.

Operator

I am showing no further questions. Please proceed with any closing remarks.

Michael Tessler

Thank you. Again thank you for being on the call today and for your continued support. We look forward to updating you on our progress in the coming months. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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