S-1 1 w77389sv1.htm S-1 sv1
As filed with the Securities and Exchange Commission on March 15, 2010
Registration No. 333-      
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BroadSoft, Inc.
(Exact name of registrant as specified in its charter)
         
Delaware   7372   52-2130962
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
220 Perry Parkway
Gaithersburg, Maryland 20877
(301) 977-9440
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Michael Tessler
President and Chief Executive Officer
BroadSoft, Inc.
220 Perry Parkway
 
Gaithersburg, Maryland 20877
(301) 977-9440
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
Copies to:
 
         
Mark D. Spoto, Esq.
Darren K. DeStefano, Esq.
Christina L. Novak, Esq.
Cooley Godward Kronish LLP
One Freedom Square
Reston Town Center
11951 Freedom Drive
Reston, Virginia 20190
(703) 456-8000
  Mary Ellen Seravalli, Esq.
Vice President and General Counsel
BroadSoft, Inc.
220 Perry Parkway
Gaithersburg, Maryland 20877
(301) 977-9440
  Jorge A. del Calvo, Esq.
Craig E. Chason, Esq.
Matthew B. Swartz, Esq.
Pillsbury Winthrop Shaw
Pittman LLP
1650 Tysons Boulevard
Suite 1400
McLean, Virginia 22102
(703) 770-7900
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
CALCULATION OF REGISTRATION FEE
 
                     
      Proposed Maximum
    Amount of
Title of Each Class of
    Aggregate
    Registration
Securities to be Registered     Offering Price(1)(2)     Fee
Common Stock, $0.01 par value per share
    $ 103,500,000       $ 7,380  
                     
 
(1) Estimated solely for the purpose of computing the amount of registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
 
(2) Includes shares the underwriters have the option to purchase.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 


 

The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.
 
 
Subject to Completion. Dated March 15, 2010.
 
          Shares
 
(COMPANY LOGO)
 
Common Stock
 
 
 
 
This is an initial public offering of shares of common stock of BroadSoft, Inc.
 
BroadSoft is offering          of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional           shares. BroadSoft will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.
 
Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $      and $     . We intend to apply to have our common stock listed on The NASDAQ Global Market under the symbol “BSFT.”
 
See “Risk Factors” on page 9 to read about factors you should consider before buying shares of the common stock.
 
 
 
 
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
 
 
                 
    Per Share   Total
 
Initial public offering price
  $           $        
Underwriting discount
  $       $    
Proceeds, before expenses, to BroadSoft
  $       $    
Proceeds, before expenses, to the selling stockholders
  $       $  
 
To the extent that the underwriters sell more than          shares of common stock, the underwriters have the option to purchase up to an additional          shares from selling stockholders at the initial public offering price less the underwriting discount.
 
 
 
 
The underwriters expect to deliver the shares against payment in New York, New York on            , 2010.
 
 
Goldman, Sachs & Co. Jefferies & Company
 
Cowen and Company Needham & Company, LLC
 
 
 
 
 
Prospectus dated          , 2010.


 

The Broadworks Solution Graphic
 


 

 
TABLE OF CONTENTS
 
         
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Industry and Market Data
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    F-1  
 
 
 
 
Through and including          , 2010 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
 
 
 
 
No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.
 


 

 
PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes thereto and the information set forth under the sections “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “BroadSoft,” “company,” “we,” “us” and “our” in this prospectus to refer to BroadSoft, Inc. and, where appropriate, our consolidated subsidiaries.
 
Overview
 
We are the leading global provider of software that enables fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol-based, or IP-based, networks. Our software, BroadWorks, enables our service provider customers to provide enterprises and consumers with a range of cloud-based, or hosted, IP multimedia communications, such as hosted IP private branch exchanges, or PBXs, video calling, unified communications, or UC, collaboration and converged mobile and fixed-line services. For the year ended December 31, 2009, Infonetics Research, Inc., or Infonetics, a leading industry research firm, estimated that our global market share of multimedia application server software was approximately 33%. BroadWorks performs a critical network function by serving as the software element that delivers and coordinates voice, video and messaging communications through a service provider’s IP-based network. Service providers use BroadWorks to offer services that generate new revenue, reduce subscriber churn, capitalize on their investments in IP-based networks and help them migrate services from their legacy, circuit-based networks to their IP-based networks. We believe we are well-positioned to enable service providers to capitalize on their IP-based network investments by efficiently and cost-effectively offering a broad suite of services to their end-users.
 
BroadWorks delivers and coordinates the enterprise, consumer, mobile and trunking communications applications that service providers offer through their IP-based networks. BroadWorks is installed on industry-standard servers, typically located in service providers’ data centers. It interoperates with service providers’ core networks, accesses other networks for interworking with end-users’ communications devices and connects to service providers’ support and billing systems.
 
We began selling BroadWorks in 2001. Over 425 service providers, located in more than 65 countries, including 15 of the top 25 telecommunications service providers globally as measured by revenue in the first three quarters of 2009, have purchased our software. We sell our products to service providers both directly and indirectly through distribution partners, such as telecommunications equipment vendors, value-added resellers, or VARs, and other distributors.
 
Industry
 
Telecommunications service providers are facing significant challenges to their traditional business models, including declining revenues in their legacy businesses, rapidly evolving customer communications demands and the need to generate returns on their increasing investments in IP-based networks. Historically, service providers derived much of their revenue from providing reliable voice and high speed data access. However, these legacy services have been increasingly commoditized as technological and regulatory changes have brought increased competition and lower prices. At the same time, enterprises and consumers have started to seek new and enhanced cloud-based communications services, such as hosted voice and multimedia communications, converged mobile and fixed-line services, video calling and collaboration. These new and enhanced services provide service providers with opportunities to counter falling legacy revenues and increase subscriber growth. Service providers are utilizing their existing IP-based networks to deliver these services.


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Although these IP-based networks were originally built to deliver high speed data, they are being configured, through the use of new network software, to efficiently enable the broader, richer services that subscribers increasingly demand.
 
As service providers look to rapidly introduce new services, many of which include multimedia and not merely voice communications, they require network elements that are capable of coordinating delivery of a large and rapidly increasing number of applications, operating across heterogeneous network elements and devices, ensuring high levels of reliability and quality and efficiently scaling as more subscribers are added. It is no longer efficient for the responsibility of application delivery to reside in network elements such as softswitches. These elements are dedicated to other crucial network roles, are not designed to deliver multimedia applications and are typically limited in the number of network elements with which they interact. In addition, because these network elements are generally dispersed throughout a service provider’s network, deploying, scaling and managing these multimedia services is even more difficult.
 
The BroadSoft Solution
 
BroadWorks is installed on industry-standard servers, typically located in service providers’ data centers. It utilizes well-defined interfaces to interoperate with service providers’ core networks, accesses other networks for interworking with end-users’ communications devices and connects to service providers’ support and billing systems for management and charging functions. We believe we are well-positioned to enable service providers to capitalize on their IP-based network investments by efficiently and cost-effectively offering a broad suite of essential and value-added services to their end-users. BroadWorks provides service providers several key advantages when they offer voice and multimedia services on their IP-based networks, including:
 
  •  Rapid delivery of enterprise and consumer multimedia services from a single platform. We believe BroadWorks provides the most extensive set of features and applications available on a single platform for fixed-line, mobile and cable broadband access networks, for both enterprise and consumer applications.
 
  •  Demonstrated carrier adoption globally across many service provider networks. Over 425 service providers in more than 65 countries have purchased our software, including 15 of the top 25 telecommunications service providers globally.
 
  •  Broad interoperability across network equipment vendors, network architectures and devices. BroadWorks interoperates with all significant network architectures (such as IP Multimedia Subsystems, or IMS, and Next Generation Network architectures), access types, infrastructures and protocols and integrates and interoperates with the major network equipment vendors’ core network solutions.
 
  •  Extensive technology and device partner ecosystem. BroadWorks interoperates with more than 450 devices, including approximately 250 customer premises-based equipment, or CPE, devices, such as IP phones, computer-based soft-phones, conferencing devices, IP gateways, mobile phones and consumer electronics.
 
  •  Scalable architecture and carrier-grade reliability. Our applications are designed to scale to support hundreds of millions of subscribers with a carrier-grade level of reliability.
 
  •  Leadership in emerging standards and requirements. We are actively involved in the development of the IMS, session initiation protocol, or SIP, and multimedia telephony, or MMTel, standards, as well as several other standards that we expect to shape our market in the future. BroadWorks is the application server supporting what we believe to be the world’s largest IMS deployment, based on the number of subscribers. Furthermore, as of December 31, 2009, we have shipped over 7.8 million IMS voice over IP subscriber lines. These lines represent 48% of the 16.8 million total lines we have shipped.


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Our Strategy
 
Our goal is to strengthen our position as the leading global provider of multimedia application servers by enabling service providers to increase revenue opportunities by delivering feature-rich services to their enterprise and consumer subscribers and to leverage their investment in their IP-based networks. Key elements of our strategy include:
 
  •  Extend our technology leadership and product depth and breadth. We intend to provide an industry-leading solution through continued focus on product innovation and substantial investment in research and development for new features, applications and services.
 
  •  Drive revenue growth by:
 
  •  Assisting our current service provider customers to sell more of their currently-deployed BroadWorks services. We support our service provider customers by regularly offering enhanced and new features to their current applications as well as providing tools and training to help them market their services to subscribers.
 
  •  Selling new applications and features to our current service provider customers. Although our initial engagement with a service provider may be for a single initiative or business unit, once BroadWorks is implemented by a service provider, we believe we are well-positioned to sell additional applications and features to that service provider.
 
  •  Continuing to acquire new customers. Our customers are located around the world and include 15 of the top 25 telecommunications service providers globally. We believe we are well positioned to grow by adding customers in regions where we already have a strong presence, by expanding our geographic footprint and by penetrating more deeply into some types of service provider customers, such as additional cable and mobile service providers.
 
  •  Pursue selected acquisitions and collaborations that complement our strategy. We intend to continue to pursue acquisitions and collaborations where we believe they are strategic to strengthen our leadership position.
 
Risk Factors
 
Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” beginning on page 9. You should consider carefully such risks before deciding to invest in our common stock. These risks include, among others:
 
  •  We are substantially dependent upon the commercial success of one product, BroadWorks.
 
  •  Infringement claims are common in our industry and third parties, including competitors, could assert infringement claims against us.
 
  •  We are generally obligated to indemnify our customers for certain expenses and liabilities resulting from intellectual property infringement claims relating to our software.
 
  •  Our success depends in large part on service providers’ continued deployment of, and investment in, their IP-based networks.
 
  •  We have incurred losses in the past and may incur further losses in the future and our revenue may not grow or may decline.
 
  •  Our revenue, operating results and gross margin can fluctuate significantly and unpredictably from quarter to quarter and from year to year and we expect they will continue to do so, which could cause the trading price of our stock to decline.
 
  •  Lengthy and unpredictable sales cycles may force us to either assume unfavorable pricing or payment terms and conditions or to abandon a sale altogether.


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  •  Our products must interoperate with many different networks, software applications and hardware products and this interoperability will depend on the continued prevalence of open standards.
 
  •  We depend largely on the continued services of our co-founders, Michael Tessler, our President and Chief Executive Officer, and Scott Hoffpauir, our Chief Technology Officer.
 
  •  We face intense competition in our markets, especially from larger, better-known companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
 
Our Corporate Information
 
We were incorporated on November 17, 1998 in Delaware. Our principal executive office is located at 220 Perry Parkway, Gaithersburg, Maryland 20877 and our telephone number is (301) 977-9440. Our website address is www.broadsoft.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus. “BroadSoft,” “BroadWorks,” the BroadSoft logo, “Innovation Calling” and other trademarks or service marks of BroadSoft, Inc. appearing in this prospectus are the property of BroadSoft, Inc. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners.


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THE OFFERING
 
Common stock offered by us           shares
 
Common stock offered by the selling stockholders           shares
 
Common stock to be outstanding after this offering           shares
 
Use of proceeds We expect the net proceeds to us from this offering, after expenses, to be approximately $      million. We intend to use the net proceeds from this offering as follows:
 
  • Approximately $4.3 million for the redemption and subsequent cancellation of all outstanding shares of our Series A redeemable preferred stock.
 
  • Approximately $      million to repay the outstanding balance under our credit facility with ORIX Venture Finance LLC.
 
  • The remaining proceeds will be used for working capital and other general corporate purposes, which may include the acquisition of complementary businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time.
 
We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
 
Risk factors See the section titled “Risk Factors” beginning on page 9 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
 
Proposed NASDAQ Global Market symbol “BSFT”
 
The number of shares of our common stock to be outstanding after this offering is based on 114,995,509 shares of common stock outstanding as of December 31, 2009, including 159,167 shares issued pursuant to a restricted stock grant and early exercise of stock options that are subject to repurchase, and 980,000 shares that will be issued upon the vesting of restricted stock units, or RSUs, outstanding as of December 31, 2009 and that will vest immediately upon the completion of this offering, and excludes, as of December 31, 2009, the following shares:
 
  •  17,049,041 shares of our common stock issuable upon the exercise of options outstanding under our 1999 Stock Incentive Plan and our 2009 Equity Incentive Plan at a weighted average exercise price of $0.38 per share;
 
  •  60,000 shares of our common stock issuable upon the vesting of RSUs outstanding under our 2009 Equity Incentive Plan that will vest upon the expiration of the 180-day lock-up period for this offering;
 
  •  699,301 shares of our common stock issuable upon the exercise of outstanding common stock warrants at an exercise price of $1.43 per share;
 
  •  275,721 shares of our common stock issuable upon the exercise of outstanding preferred stock warrants at an exercise price of $0.66 per share; and


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  •  an aggregate of 2,500,830 additional shares of our common stock reserved for future grants under our 2009 Equity Incentive Plan.
 
Unless otherwise indicated, all information in this prospectus reflects and assumes the following:
 
  •  the redemption and subsequent cancellation of all of our Series A redeemable preferred stock for approximately $4.3 million in cash from the net proceeds of this offering concurrently with the completion of this offering;
 
  •  the conversion of all outstanding shares of our Series B-1 redeemable convertible preferred stock into 8,479,680 shares of common stock, the conversion of all outstanding shares of our Series C-1 redeemable convertible preferred stock into 58,628,599 shares of common stock, the conversion of all outstanding shares of our Series D redeemable convertible preferred stock into 4,827,419 shares of common stock, the conversion of all outstanding shares of our Series E redeemable convertible preferred stock into 2,499,980 shares of common stock and the conversion of all outstanding shares of our Series E-1 redeemable convertible preferred stock into 1,500,000 shares of common stock, in each case, immediately prior to the completion of this offering;
 
  •  the issuance of 980,000 shares upon vesting of RSUs issued upon completion of this offering;
 
  •  the price per share at which we sell shares in this offering will be equal to or greater than $2.0715, such that no adjustment to the conversion ratio of our Series D redeemable convertible preferred stock will occur;
 
  •  no exercise by the underwriters of their option to purchase up to           additional shares of our common stock in this offering;
 
  •  an initial public offering price of $     , which is the midpoint of the range listed on the cover page of this prospectus; and
 
  •  the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering.
 
Share and per share numbers in this prospectus do not reflect a  - for -  reverse split of the shares of our common stock to be effected before the completion of the offering, which will be reflected in an amendment to this prospectus.


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
You should read the summary consolidated financial data in conjunction with “Use of Proceeds,” “Capitalization,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes, all included elsewhere in this prospectus.
 
The summary consolidated financial data as of December 31, 2009 and for the years ended December 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements included elsewhere in this prospectus. Our results of operations for any prior period are not necessarily indicative of results of operations that should be expected in any future periods.
 
Pro forma basic and diluted net loss per common share have been calculated assuming the conversion of all outstanding shares of redeemable convertible preferred stock into 75,935,678 shares of common stock and the issuance of 980,000 shares underlying RSUs that will vest immediately upon completion of this offering. See Note 2 to our consolidated financial statements for an explanation of the method used to determine the number of shares used in computing historical and pro forma basic and diluted net loss per common share.
 
                         
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
    (In thousands, except per share data)  
 
Statements of Operations:
                       
Revenue:
                       
Licenses
  $  46,328     $  40,121     $  37,942  
Maintenance and professional services
    15,272       21,708       30,945  
                         
Total revenue
    61,600       61,829       68,887  
Cost of revenue:
                       
Licenses (1)
    4,899       4,404       4,432  
Maintenance and professional services (1)
    7,270       8,649       12,142  
Amortization of intangibles
    400       414       800  
                         
Total cost of revenue
    12,569       13,467       17,374  
                         
Gross profit
    49,031       48,362       51,513  
Operating expenses:
                       
Sales and marketing (1)
    26,431       30,774       28,534  
Research and development (1)
    12,763       15,876       16,625  
General and administrative (1)
    10,295       12,074       11,405  
                         
Total operating expenses
    49,489       58,724       56,564  
                         
Loss from operations
    (458 )     (10,362 )     (5,051 )
Other expense (income)
    279       (78 )     1,469  
                         
Loss before income taxes
    (737 )     (10,284 )     (6,520 )
Provision for income taxes
    1,021       952       1,333  
                         
Net loss
    (1,758 )     (11,236 )     (7,853 )
Net loss attributable to noncontrolling interest
    (75 )           (4 )
                         
Net loss attributable to BroadSoft, Inc.
  $ (1,683 )   $ (11,236 )   $ (7,849 )
                         
Net loss per common share available to BroadSoft, Inc. common stockholders:
                       
Basic and diluted
  $ (0.05 )   $ (0.30 )   $ (0.21 )
Pro forma (unaudited):
                       
Basic and diluted
                       
Weighted average common shares outstanding:
                       
Basic and diluted
    36,403       37,250       37,709  
Pro forma (unaudited):
                       
Basic and diluted
                       
                       
                         
(1) Includes stock-based compensation as follows:
                       
Cost of revenue
  $ 163     $ 182     $ 325  
Sales and marketing
    628       856       1,088  
Research and development
    255       456       741  
General and administrative
    622       1,422       1,475  


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    As of December 31, 2009  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
             
          (Unaudited)  
    (In thousands)  
 
Balance Sheet Data:
                       
Cash and cash equivalents
  $ 22,869     $                $             
Working capital, net
    2,924                  
Total assets
    66,663                  
Redeemable preferred stock
    4,320                  
Redeemable convertible preferred stock
    68,866                  
Notes payable and bank loans, less current portion
    14,035                  
Total liabilities
    71,277                  
Total stockholders’ (deficit) equity
    (77,800 )                
 
The preceding table summarizes our balance sheet data as of December 31, 2009:
 
  •  on an actual basis;
 
  •  on a pro forma basis after giving effect to the conversion of all outstanding shares of our Series B-1, C-1, D, E and E-1 redeemable convertible preferred stock outstanding on December 31, 2009 into an aggregate of 75,935,678 shares of common stock and the reclassification of our preferred stock warrant liability to additional paid-in-capital, each immediately prior to the completion of this offering, and our issuance of 980,000 shares of common stock underlying RSUs outstanding as of December 31, 2009 that will vest immediately upon the completion of this offering; and
 
  •  on a pro forma as adjusted basis reflecting the sale of shares of common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the range listed on the cover page of this prospectus, and our receipt of the estimated net proceeds from that sale after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our use of a portion of the net proceeds of this offering to redeem and subsequently cancel all of our outstanding Series A redeemable preferred stock and repay the outstanding balance under our credit facility with ORIX Venture Finance LLC.


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RISK FACTORS
 
Investing in our common stock involves a high degree of risk. Before you invest in our common stock, you should carefully consider the following risks, as well as general economic and business risks, and all of the other information contained in this prospectus. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes thereto.
 
Risks Related to Our Business
 
We are substantially dependent upon the commercial success of one product, BroadWorks. If the market for BroadWorks does not develop as we anticipate, our revenue may decline or fail to grow, which would adversely affect our operating results and financial condition.
 
Our future revenue growth depends upon the commercial success of our voice and multimedia application server software, BroadWorks. We derive a substantial portion of our revenue from licensing BroadWorks and related products and services. During 2007, 2008 and 2009, BroadWorks licenses and related services represented 100%, 97% and 82% of our revenue, respectively. We expect revenue from BroadWorks and related products and services to continue to account for the significant majority of our revenue for the foreseeable future.
 
Because we generally sell licenses of BroadWorks on a perpetual basis and deliver new versions and upgrades to customers who purchase maintenance contracts, our future license revenue is dependent, in part, on the success of our efforts to sell additional BroadWorks licenses to our existing service provider customers. The sale of additional licenses to service providers depends upon their increasing the number of their customers subscribing to IP-based communications services rather than traditional services and the purchasing by those subscribers of additional service offerings that use our applications. These service providers may choose not to expand their use of, or make additional purchases of, BroadWorks or might delay additional purchases we expect. These events could occur for a number of reasons, including because their customers are not subscribing to IP-based communications services in the quantities expected, because services based upon our applications are not sufficiently popular or because service providers migrate to a software solution other than BroadWorks. If service providers do not adopt, purchase and successfully deploy BroadWorks, our revenue could grow at a slower rate or decrease.
 
In addition, because our sales are derived substantially from one product, our share price could be disproportionately affected by market perceptions of current or anticipated competing products, allegations of intellectual property infringement, or other matters. These perceptions, even if untrue, could cause our stock price to decline.
 
Infringement claims are common in our industry and third parties, including competitors, could assert infringement claims against us, which could force us to redesign our software and incur significant costs.
 
The IP-based communications industry is highly competitive and IP-based technologies are complex. Companies file patents covering these technologies frequently and maintain programs to protect their intellectual property portfolios. Some of these companies actively search for, and routinely bring claims against, alleged infringers. Our products are technically complex and compete with the products of significantly larger companies. As a result, we believe that we may become increasingly subject to third-party infringement claims. The likelihood of our being subject to infringement claims may be greater as a result of our real or perceived success in selling products to customers, as the number of competitors in our industry grows and as we add functionality to our products. We may in the future receive communications from third parties alleging that we may be


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infringing their intellectual property rights. The visibility we receive from becoming a public company may result in a greater number of such allegations. If third parties claim that we infringe their rights, regardless of the merit of these claims, they could:
 
  •  be time consuming and costly to defend;
 
  •  divert our management’s attention and resources;
 
  •  cause product shipment and installation delays;
 
  •  require us to redesign our products, which may not be feasible or cost-effective;
 
  •  cause us to cease producing, licensing or using software or products that incorporate challenged intellectual property;
 
  •  damage our reputation and cause customer reluctance to license our products; or
 
  •  require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component, which may not be available on terms acceptable to us, or at all.
 
It is possible that other companies hold patents covering technologies similar to one or more of the technologies that we incorporate into our products. In addition, new patents may be issued covering these technologies. Unless and until the U.S. Patent and Trademark Office issues a patent to an applicant, there is no reliable way to assess the scope of the potential patent. We may face claims of infringement from both holders of issued patents and, depending upon the timing, scope and content of patents that have not yet been issued, patents issued in the future. The application of patent law to the software industry is particularly uncertain because the time that it takes for a software-related patent to issue is lengthy, which increases the likelihood of pending patent applications claiming inventions whose priority dates may pre-date development of our own proprietary software. This uncertainty, coupled with the potential threat of litigation related to our intellectual property, could adversely affect our business, revenue, results of operations, financial condition and reputation.
 
We are generally obligated to indemnify our customers for certain expenses and liabilities resulting from intellectual property infringement claims regarding our software, which could force us to incur substantial costs.
 
We have agreed, and expect to continue to agree, to indemnify our customers for certain expenses or liabilities resulting from claimed infringement of intellectual property rights of third parties with respect to our software. As a result, in the case of infringement claims against these customers, we could be required to indemnify them for losses resulting from such claims or to refund license fees they have paid to us. Some of our customers have in the past brought claims against us for indemnification in connection with infringement claims brought against them and we may not succeed in refuting such claims in the future. We are currently disputing an indemnity claim asserted against us by one of our customers. This customer is seeking $3.6 million for reimbursement of a portion of the legal expenses incurred by it in defending a patent infringement lawsuit filed against it by another one of our customers. While we believe this indemnity claim is without merit and we have and plan to continue to vigorously dispute this claim, the customer seeking indemnity from us has substantially greater resources than we do. If a customer, including the one currently asserting the claim against us, elects to invest resources in enforcing a claim for indemnification against us, we could incur significant costs disputing it. If we do not succeed in disputing it, we could face substantial liability.
 
We may be unable to adequately protect our intellectual property rights in internally developed systems and software and efforts to protect them may be costly.
 
Our ability to compete effectively is dependent in part upon the maintenance and protection of systems and software that we have developed internally. While we hold issued patents and pending patent applications covering certain elements of our technology, patent laws may not provide adequate protection for portions of the technology that are important to our business. In addition, our pending patent applications may not result in issued patents. We have largely relied on copyright,


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trade secret and, to a lesser extent, trademark laws, as well as confidentiality procedures and agreements with our employees, consultants, customers and vendors, to control access to, and distribution of, technology, software, documentation and other confidential information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization. If this were to occur, we could lose revenue as a result of competition from products infringing our technology and we may be required to initiate litigation to protect our proprietary rights and market position.
 
U.S. patent, copyright and trade secret laws offer us only limited protection and the laws of some foreign countries do not protect proprietary rights to the same extent. Accordingly, defense of our proprietary technology may become an increasingly important issue as we continue to expand our operations and product development into countries that provide a lower level of intellectual property protection than the United States. Policing unauthorized use of our technology is difficult and the steps we take may not prevent misappropriation of the technology we rely on. If competitors are able to use our technology without recourse, our ability to compete would be harmed and our business would be materially and adversely affected.
 
We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of the rights of others. That litigation may not be ultimately successful and could result in substantial costs to us, the diversion of our management attention and harm to our reputation, any of which could materially and adversely affect our business and results of operations.
 
We may not be able to obtain necessary licenses of third-party technology on acceptable terms, or at all, which could delay product sales and development and adversely impact product quality.
 
We have incorporated third-party licensed technology into our current products. For example, we use a third-party database as the core database for our applications server. We anticipate that we are also likely to need to license additional technology from third parties to develop new products or product enhancements in the future. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms. The inability to retain any third-party licenses required in our current products or to obtain any new third-party licenses to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the competitive position of our products.
 
Our success depends in large part on service providers’ continued deployment of, and investment in, their IP-based networks.
 
Our products are predominantly used by service providers to deliver voice and multimedia services over IP-based networks. As a result, our success depends significantly on these service providers’ continued deployment of, and investment in, their IP-based networks. Service providers’ deployment of IP-based networks and their migration of communications services to IP-based networks is still in its early stages, and these service providers’ continued deployment of, and investment in, IP-based networks depends on a number of factors outside of our control. Among other elements, service providers’ legacy networks include PBXs, Class 5 switches and other equipment that may adequately perform certain basic functions and could have remaining useful lives of 20 or more years and, therefore, may continue to operate reliably for a lengthy period of time. Many other factors may cause service providers to delay their deployment of, or reduce their investments in, their IP-based networks, including capital constraints, available capacity on legacy networks, competitive conditions within the telecommunications industry and regulatory issues. If service providers do not continue deploying and investing in their IP-based networks at the rates we expect, for these or other reasons, our operating results will be materially adversely affected.


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The loss of, or a significant reduction in orders from, one or more major customers or through one or more major distribution partners would reduce our revenue and harm our results.
 
For the year ended December 31, 2009, Verizon Corporate Services Group Inc., or Verizon, accounted for 10% of our total revenue. Additionally, Ericsson AB, one of our distribution partners, and its controlled entities, which we refer to collectively as Ericsson, accounted for approximately 16%, 17% and 11% of our total revenue for the years ended December 31, 2007, 2008 and 2009, respectively. Accordingly, as a result of the current significance of both Verizon and Ericsson to our business, the loss of either Verizon as a customer or Ericsson as a distribution partner could have a material adverse effect on our results of operations. Furthermore, because of the variability of the buying practices of our larger customers, the composition of our most significant customers is likely to change over time. If we experience a loss of one or more significant customers or distribution partners, or if we suffer a substantial reduction in orders from one or more of these customers or distribution partners and we are unable to sell directly or indirectly to new customers or increase orders from other existing customers to offset lost revenue, our business will be harmed.
 
In addition, continued consolidation in the telecommunications industry has further reduced the number of potential customers. This consolidation heightens the likelihood of our dependence on a relatively small number of customers and distribution partners and increases the risk of quarterly and annual fluctuations in our revenue and operating results. In addition, given the current global economic conditions, there is a risk that one or more of our customers or distribution partners could cease operations. Any downturn in the business of our key customers or distribution partners could significantly decrease our sales, which could adversely affect our total revenue and results of operations.
 
We have incurred losses in the past and may incur further losses in the future and our revenue may not grow or may decline.
 
We have incurred significant losses since inception and, as of December 31, 2009, we had an accumulated deficit of $96.5 million. We have incurred net losses in each fiscal year since inception and we may not be profitable in the future. Our recent net losses were $1.7 million for 2007, $11.2 million for 2008 and $7.8 million for 2009. In addition, we expect our expenses to grow in the future, including an increase in our internal and external financial, accounting and legal expenses resulting from operating as a public company. If our revenue does not grow to offset these increased expenses, we may not be able to achieve or maintain profitability. Further, our historical revenue and expense trends may not be indicative of our future performance. In fact, in the future we may not experience any growth in our revenue or our revenue could decline. If any of these occur, our stock price could decline materially.
 
Our revenue, operating results and gross margin can fluctuate significantly and unpredictably from quarter to quarter and from year to year, and we expect they will continue to do so, which could cause the trading price of our stock to decline.
 
The rate at which our customers order our products, and the size of these orders, are highly variable and difficult to predict. In the past, we have experienced significant variability in our customer purchasing practices on a quarterly and annual basis, and we expect that this variability will continue, as a result of a number of factors, many of which are beyond our control, including:
 
  •  demand for our products and the timing and size of customer orders;
 
  •  length of sales cycles;
 
  •  length of time of deployment of our products by our customers;
 
  •  customers’ budgetary constraints;
 
  •  competitive pressures; and
 
  •  general economic conditions.


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As a result of this volatility in our customers’ purchasing practices, our license revenue has historically fluctuated unpredictably on a quarterly and annual basis and we expect this to continue for the foreseeable future. Our budgeted expense levels depend in part on our expectations of future revenue. Because any substantial adjustment to expenses to account for lower levels of revenue is difficult and takes time, if our revenue declines our operating expenses and general overhead would likely be high relative to revenue, which could have a material adverse effect on our operating margin and operating results.
 
In addition to the unpredictability of customer orders, our quarterly and annual results of operations are also subject to significant fluctuation as a result of the application of accounting regulations and related interpretations and policies regarding revenue recognition under accounting principles generally accepted in the United States, or GAAP. Compliance with these revenue recognition rules has resulted in our deferral of the recognition of revenue in connection with the sale of our software licenses, maintenance and professional services. The majority of our deferred revenue balance consists of software license orders that do not meet all the criteria for revenue recognition and the undelivered portion of maintenance. Although we typically use standardized license agreements designed to meet current revenue recognition criteria under GAAP, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in multi-element transactions with larger customers who often desire customized features, which causes us to defer revenue until all elements are delivered. As our transactions increase in complexity with the sale of larger, multi-product licenses, negotiation of mutually acceptable terms and conditions with our customers can require us to defer recognition of revenue on such licenses.
 
The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. This variability and unpredictability could result in our failing to meet the expectations of securities industry analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly securities class action suits. Therefore, you should not rely on our operating results in any quarter or year as being indicative of our operating results for any future period.
 
Lengthy and unpredictable sales cycles may force us either to assume unfavorable pricing or payment terms and conditions or to abandon a sale altogether.
 
Our initial sales cycle for a new customer ranges generally between six and 12 months and sometimes more than two years and can be very unpredictable due to the generally lengthy service provider evaluation and approval process for our products, including internal reviews and capital expenditure approvals. Moreover, the evolving nature of the market may lead prospective customers to postpone their purchasing decisions pending resolution of standards or adoption of technology by others. Sales also typically involve extensive product testing and network certification. Additionally, after we make an initial sale to a customer, its implementation of our products can be very time consuming, often requiring six to 24 months or more, particularly in the case of larger service providers. This lengthy implementation and deployment process can result in a significant delay before we receive an additional order from that customer. As a result of these lengthy sales cycles, we are sometimes required to assume terms or conditions that negatively affect pricing or payment for our product to consummate a sale. Doing so can negatively affect our gross margin and results of operations. Alternatively, if service providers ultimately insist upon terms and conditions that we deem too onerous or not to be commercially prudent, we may incur substantial expenses and devote time and resources to potential relationships that never result in completed sales or revenue. If this result becomes prevalent, it could have a material adverse impact on our results of operations.


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Our products must interoperate with many different networks, software applications and hardware products, and this interoperability will depend on the continued prevalence of open standards.
 
Our products are designed to interoperate with our customers’ existing and planned networks, which have varied and complex specifications, utilize multiple protocol standards, software applications and products from numerous vendors and contain multiple products that have been added over time. As a result, we must attempt to ensure that our products interoperate effectively with these existing and planned networks. To meet these requirements, we have and must continue to undertake development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our products do not interoperate effectively, installations could be delayed or orders for our products could be cancelled, which would harm our revenue, gross margins and our reputation, potentially resulting in the loss of existing and potential customers. The failure of our products to interoperate effectively with our customers’ networks may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our software development efforts and cause significant customer relations problems.
 
We have entered into arrangements with a number of equipment and software vendors for the use or integration of their technology with our products. These arrangements give us access to, and enable our products to interoperate with, various products that we do not otherwise offer. If these relationships terminate, we may have to devote substantially more resources to the development of alternative products and processes, and our efforts may not be as effective as the combined solutions under our current arrangements. In some cases, these other vendors are either companies that we compete with directly, or companies that have extensive relationships with our existing and potential customers and may have influence over the purchasing decisions of those customers. Some of our competitors may have stronger relationships with some of our existing and potential vendors and, as a result, our ability to have successful interoperability arrangements with these companies may be harmed. Our failure to establish or maintain key relationships with third-party equipment and software vendors may harm our ability to successfully market and sell our products.
 
Additionally, the interoperability of our products with multiple different networks is significantly dependent on the continued prevalence of standards for IP multimedia services, such as IMS. Some of our existing and potential competitors are network equipment providers who could potentially benefit from the deployment of their own proprietary non-standards-based architectures. If resistance to open standards by network equipment providers becomes prevalent, it could make it more difficult for our products to interoperate with our customers’ networks, which would have a material adverse effect on our ability to sell our products to service providers.
 
We may not be able to detect errors or defects in our products until after full deployment and product liability claims by customers could result in substantial costs.
 
Our products are sophisticated and are designed to be deployed in large and complex telecommunications networks. Because of the nature of our products, they can only be fully tested when substantially deployed in very large networks with high volumes of telecommunications traffic. Some of our customers have only recently begun to commercially deploy our products and they may discover errors or defects in the software, or the products may not operate as expected. Because we may not be able to detect these problems until full deployment, any errors or defects in our software could affect the functionality of the networks in which they are deployed. As a result, the time it may take us to rectify errors can be critical to our customers. Because of the complexity of our products, it may take a material amount of time for us to resolve errors or defects, if we can resolve them at all. The likelihood of such errors or defects is heightened as we acquire new products from third parties, whether as a result of acquisitions or otherwise.


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If one of our products fails, and we are unable to fix the errors or other performance problems expeditiously, or at all, we could experience:
 
  •  damage to our reputation, which may result in the loss of existing or potential customers and market share;
 
  •  payment of liquidated damages for performance failures;
 
  •  loss of, or delay in, revenue recognition;
 
  •  increased service, support, warranty, product replacement and product liability insurance costs, as well as a diversion of development resources; and
 
  •  costly and time-consuming legal actions by our customers, which could result in significant damages.
 
Any of the above events would likely have a material adverse impact on our business, revenue, results of operations, financial condition and reputation.
 
The quality of our support and services offerings is important to our customers, and if we fail to offer high quality support and services, customers may not buy our products and our revenue may decline.
 
Once our products are deployed within our customers’ networks, our customers generally depend on our support organization to resolve issues relating to those products. A high level of support is critical for the successful marketing and sale of our products. If we are unable to provide the necessary level of support and service to our customers, we could experience:
 
  •  loss of customers and market share;
 
  •  a failure to attract new customers, including in new geographic regions;
 
  •  increased service, support and warranty costs and a diversion of development resources; and
 
  •  network performance penalties, including liquidated damages for periods of time that our customers’ networks are inoperable.
 
Any of the above results would likely have a material adverse impact on our business, revenue, results of operations, financial condition and reputation.
 
If we do not introduce and sell new and enhanced products in a timely manner, customers may not buy our products and our revenue may decline.
 
The market for communications software and services is characterized by rapid technological advances, frequent introductions of new products, evolving industry standards and recurring or unanticipated changes in customer requirements. To succeed, we must effectively anticipate, and adapt in a timely manner to, customer requirements and continue to develop or acquire new products and features that meet market demands and technology and architectural trends. This requires us to identify and gain access to or develop new technologies. The introduction of new or enhanced products also requires that we carefully manage the transition from older products to minimize disruption in customer ordering practices and ensure that new products can be timely delivered to meet demand. We may also require additional capital to achieve these objectives and we may be unable to obtain adequate financing on terms satisfactory to us, or at all, when we require it. As a result, our ability to continue to support our business growth and to respond to business challenges could be significantly limited. It is also possible that we may allocate significant amounts of cash and other development resources toward products or technologies for which market demand is lower than anticipated and, as a result, are abandoned.
 
Developing our products is expensive, complex and involves uncertainties. We may not have sufficient resources to successfully manage lengthy product development cycles. In 2007, 2008 and


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2009, our research and development expenses were $12.8 million, or 20.7% of our total revenue, $15.9 million, or 25.7% of our total revenue, and $16.6 million, or 24.1% of our total revenue, respectively. We believe we must continue to dedicate a significant amount of resources to our research and development efforts to remain competitive. These investments may take several years to generate positive returns and they may never do so. In addition, we may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. If we fail to meet our development targets, demand for our products will decline.
 
Furthermore, because our products are based on complex technology, we can experience unanticipated delays in developing, improving or deploying them. Each phase in the development of our products presents serious risks of failure, rework or delay, any one of which could impact the timing and cost effective development of such product and could jeopardize customer acceptance of the product. Intensive software testing and validation are critical to the timely introduction of enhancements to several of our products and schedule delays sometimes occur in the final validation phase. Unexpected intellectual property disputes, failure of critical design elements and a variety of other execution risks may also delay or even prevent the introduction of these products. In addition, the introduction of new products by competitors, the emergence of new industry standards or the development of entirely new technologies to replace existing product offerings could render our existing or future products obsolete. If our products become technologically obsolete, customers may purchase solutions from our competitors and we may be unable to sell our products in the marketplace and generate revenue, which would likely have a material adverse effect on our financial condition, results of operations or cash flows.
 
We may have difficulty managing our growth, which could limit our ability to increase sales and adversely affect our business, operating results and financial condition.
 
We have experienced significant growth in sales and operations in recent years. We expect to continue to expand our research and development, sales, marketing and support activities. Our historical growth has placed, and planned further growth is expected to continue to place, significant demands on our management, as well as our financial and operational resources, to:
 
  •  manage a larger organization;
 
  •  increase our sales and marketing efforts and add additional sales and marketing personnel in various regions worldwide;
 
  •  recruit, hire and train additional qualified staff;
 
  •  control expenses;
 
  •  manage operations in multiple global locations and time zones;
 
  •  broaden our customer support capabilities;
 
  •  integrate acquisitions, such as our recent acquisitions of the M6 application server business, or M6, from GENBAND Inc., Sylantro Systems Corporation, or Sylantro, and Packet Island, Inc., or Packet Island;
 
  •  implement appropriate operational, administrative and financial systems to support our growth; and
 
  •  maintain effective financial disclosure controls and procedures.
 
If we fail to manage our growth effectively, we may not be able to execute our business strategies and our business, financial condition and results of operations would be adversely affected.


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We depend largely on the continued services of our co-founders, Michael Tessler, our President and Chief Executive Officer, and Scott Hoffpauir, our Chief Technology Officer, and the loss of either of them may impair our ability to grow our business.
 
The success of our business is largely dependent on the continued services of our senior management and other highly qualified technical and management personnel. In particular, we depend to a considerable degree on the vision, skills, experience and effort of our co-founders, Michael Tessler, our President and Chief Executive Officer, and Scott Hoffpauir, our Chief Technology Officer. Neither of these officers is bound by a written employment agreement and either of them therefore may terminate employment with us at any time with no advance notice. The replacement of either of these two officers would likely involve significant time and costs and the loss of either of these officers would significantly delay or prevent the achievement of our business objectives.
 
If we are unable to retain or hire key personnel, our ability to develop, market and sell products could be harmed.
 
We believe that there is, and will continue to be, intense competition for highly skilled technical and other personnel with experience in our industry in the Washington, D.C. area, where our headquarters are located, and in other locations where we maintain offices. We must provide competitive compensation packages and a high-quality work environment to hire, retain and motivate employees. If we are unable to retain and motivate our existing employees and attract qualified personnel to fill key positions, we may be unable to manage our business effectively, including the development, marketing and sale of existing and new products, which could have a material adverse effect on our business, financial condition and operating results. To the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.
 
Volatility in, or lack of performance of, our stock price following this offering may also affect our ability to attract and retain key personnel. Our executive officers have become, or will soon become, vested in a substantial amount of shares of common stock or stock options. Employees may be more likely to terminate their employment with us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. If we are unable to retain our employees, our business, operating results and financial condition will be harmed.
 
Our exposure to the credit risks of our customers may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.
 
In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. The recent challenging economic conditions may have impacted some of our customers’ ability to pay their accounts payable. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our operating results.
 
The worldwide economic downturn may adversely affect our operating results and financial condition.
 
Financial markets around the world have experienced extreme disruption since 2008, which is reflected by extreme volatility in securities prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. While these conditions have not impaired our ability to access credit markets and finance operations to date, there can be no


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assurance that there will not be a further deterioration in financial markets and confidence in major economies that may present future difficulties if we require access to these credit markets. These economic developments affect businesses in a number of ways. The current tightening of credit in financial markets adversely affects the ability of our existing and potential customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in demand for our products and services. Our customers’ ability to pay for our solutions may also be impaired, which may lead to an increase in our allowance for doubtful accounts and write-offs of accounts receivable. Additionally, the adverse global economic conditions could force one or more of our key customers or distribution partners to cease operations altogether. Our global business is also adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the United States and other countries. Should these economic conditions result in our not meeting our revenue growth objectives, it may have a material adverse effect on our financial condition, results of operations, or cash flows.
 
We have recently made three acquisitions, and we may undertake additional strategic transactions to further expand our business, which may pose risks to our business and dilute the ownership of our stockholders.
 
As part of our growth strategy, we recently made three acquisitions. In August 2008, we acquired M6 and in December 2008, we acquired Sylantro. The M6 and Sylantro acquisitions enabled us to acquire additional customers and associated technology. In October 2009, we acquired Packet Island, a provider of software as a service-based quality of experience assessment and monitoring tools for IP-based voice and video networks and services, which represents a complementary product offering for us. Whether we realize the anticipated benefits from these transactions will depend in part upon our ability to service and satisfy new customers gained as part of these acquisitions, the continued integration of the acquired businesses, the performance of the acquired products, the capacities of the technologies acquired and the personnel hired in connection with these transactions. Accordingly, our results of operations could be adversely affected from transaction-related charges, amortization of intangible assets and charges for impairment of long-term assets.
 
We have evaluated, and expect to continue to evaluate, other potential strategic transactions. We may in the future acquire businesses, products, technologies or services to expand our product offerings, capabilities and customer base, enter new markets or increase our market share. We cannot predict the number, timing or size of future acquisitions, or the effect that any such acquisitions might have on our operating results. Because of our size, any of these transactions could be material to our financial condition and results of operations. We have limited experience with such transactions, and the anticipated benefits of acquisitions may never materialize. Some of the areas where we may face acquisition-related risks include:
 
  •  diverting management time and potentially disrupting business;
 
  •  expenses, distractions and potential claims resulting from acquisitions, whether or not they are completed;
 
  •  reducing our cash available for operations and other uses;
 
  •  retaining and integrating employees from any businesses we acquire;
 
  •  the issuance of dilutive equity securities or the incurrence or assumption of debt to finance the acquisition;
 
  •  incurring possible impairment charges, contingent liabilities, amortization expense or write-offs of goodwill;
 
  •  integrating and supporting acquired businesses, products or technologies;
 
  •  integrating various accounting, management, information, human resources and other systems to permit effective management;
 
  •  unexpected capital expenditure requirements;


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  •  insufficient revenues to offset increased expenses associated with the acquisitions;
 
  •  opportunity costs associated with committing time and capital to such acquisitions; and
 
  •  acquisition-related litigation.
 
Foreign acquisitions would involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. We may not be able to address these risks successfully, or at all, without incurring significant costs, delays or other operating problems that could disrupt our business and have a material adverse effect on our financial condition.
 
Our use of open source software could impose limitations on our ability to commercialize our products.
 
We incorporate open source software into our products. Although we closely monitor our use of open source software, the terms of many open source software licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenues and operating expenses.
 
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which would adversely affect our operating results, our ability to operate our business and our stock price.
 
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements is a costly and time-consuming effort that needs to be re-evaluated frequently. As of the end of fiscal year 2006, our auditor notified us of its opinion that there were material weaknesses in our internal controls related to revenue recognition. Specifically, it was determined that we had recognized revenue from certain customer contracts that we should have deferred, which led to our restatement of financial statements for the years ended December 31, 2004 and 2005. Although we have remediated this material weakness in internal controls, we may in the future have additional material weaknesses in our internal financial and accounting controls and procedures.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.
 
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year ending December 31, 2011. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on our management’s assessment of our internal controls. We are expending significant resources to develop the necessary documentation and testing procedures required by


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Section 404. We cannot be certain that the actions we are taking to improve our internal controls over financial reporting will be sufficient, or that we will be able to implement our planned processes and procedures in a timely manner. In addition, if we are unable to produce accurate financial statements on a timely basis, investors could lose confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations and growth.
 
We will Incur significant increased costs as a result of being a public company, which may adversely affect our operating results and financial condition.
 
As a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the Securities and Exchange Commission, or SEC, and The NASDAQ Stock Market. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. For example, we will be required to devote significant resources to complete the assessment and documentation of our internal control system and financial process under Section 404 of the Sarbanes-Oxley Act, including an assessment of the design of our information systems. We will incur significant costs to remediate any material weaknesses, we identify through these efforts. We also expect these rules and regulations to make it more expensive for us to obtain directors’ and officers’ liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
 
New laws and regulations, as well as changes to existing laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act and rules adopted by the SEC and The NASDAQ Stock Market, would likely result in increased costs to us as we respond to their requirements, which may adversely effect our operating results and financial condition.
 
Man-made problems such as computer viruses or terrorism may disrupt our operations and could adversely affect our operating results and financial condition.
 
Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business, operating results, and financial condition. Efforts to limit the ability of third parties to disrupt the operations of the Internet or undermine our own security efforts may be ineffective. In addition, the continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to the economies of the United States and other countries and create further uncertainties or otherwise materially harm our business, operating results, and financial condition. Likewise, events such as widespread electrical blackouts could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, our business, operating results, financial condition and reputation could be materially and adversely affected.


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Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.
 
Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
 
  •  earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates;
 
  •  changes in the valuation of our deferred tax assets and liabilities;
 
  •  expiration of, or lapses in, the research and development tax credit laws;
 
  •  expiration or non-utilization of net operating losses;
 
  •  tax effects of stock-based compensation;
 
  •  costs related to intercompany restructurings; or
 
  •  changes in tax laws, regulations, accounting principles or interpretations thereof.
 
In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Outcomes from these continuous examinations could have a material adverse effect on our financial condition, results of operations or cash flows.
 
Risks Related to the Telecommunications Industry
 
We face intense competition in our markets, especially from larger, better-known companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.
 
The worldwide markets for our products and services are highly competitive and continually evolving and we expect competition from both established and new companies to increase. Our primary competitors include companies such as Alcatel-Lucent SA, Avaya Inc., Cisco Systems, Inc., Comverse Technology, Inc., through its acquisition of Netcentrex S.A., Ericsson, Huawei Technologies Co., Ltd., Metaswitch Networks, Nokia-Siemens Networks B.V., Nortel Networks Corporation and Sonus Networks, Inc. Many of our existing and potential competitors have substantially greater financial, technical, marketing, intellectual property and distribution resources than we have. Their resources may enable them to develop superior products, or they could aggressively price, finance and bundle their product offerings to attempt to gain market adoption or to increase market share. In addition, our customers could also begin using open source software, such as Asterisk, which is incorporated in the products of Digium, Inc., as an alternative to BroadWorks. If our competitors offer deep discounts on certain products in an effort to gain market share or to sell other products or services, or if a significant number of our customers use open source software as an alternative to BroadWorks, we may then need to lower the prices of our products and services, change our pricing models, or offer other favorable terms to compete successfully, which would reduce our margins and adversely affect our operating results.
 
In addition to price competition, increased competition may result in other aggressive business tactics from our competitors, such as:
 
  •  emphasizing their own size and perceived stability against our smaller size and narrower recognition;
 
  •  providing customers “one-stop shopping” options for the purchase of network equipment and application server software;
 
  •  offering customers financing assistance;


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  •  making early announcements of competing products and employing extensive marketing efforts;
 
  •  assisting customers with marketing and advertising directed at their subscribers; and
 
  •  asserting infringement of their intellectual property rights.
 
The tactics described above can be particularly effective in the concentrated base of service provider customers to whom we offer our products. Our inability to compete successfully in our markets would harm our operating results and our ability to achieve and maintain profitability.
 
Competitive pressures in the telecommunications industry may increase and impact our customers’ purchasing decisions, which could reduce our revenue.
 
The recent economic downturn has contributed to a slowdown in telecommunications industry spending, dramatic reductions in capital expenditures, financial difficulties and, in some cases, bankruptcies experienced by service providers. Our customers are under increasing competitive pressure from companies within their industry and other participants that offer, or seek to offer, overlapping or similar services. These pressures are likely to continue to cause our customers to seek to minimize the costs of the software platforms that they purchase and may cause static or reduced expenditures by our customers or potential customers. These competitive pressures may also result in pricing becoming a more important factor in the purchasing decisions of our customers. Increased focus on pricing may favor low-cost vendors and our larger competitors that can spread the effect of price discounts across a broader offering of products and services and across a larger customer base.
 
We expect the developments described above to continue to affect our business by:
 
  •  potentially making it difficult to accurately forecast revenue and manage our business;
 
  •  exposing us to potential unexpected declines in revenue; and
 
  •  exposing us to potential losses because we expect that a high percentage of our operating expenses will continue to be fixed in the short-term.
 
Any one or a combination of the above effects could materially and adversely affect our business, operating results and financial condition.
 
Our business depends upon the success of service providers who are vulnerable to competition from free or low-cost providers of IP-based communications services.
 
We sell software licenses to service providers, who then seek to persuade their customers to subscribe to IP-based communications services that run on our software. The number of licenses a service provider purchases from us is based in large part on the number of customers the service provider expects will subscribe to its IP-based communications services. When the number of customers using the service provider’s IP services running on our software exceeds the number of licenses, the service provider must purchase additional licenses from us. Accordingly, the growth of our business depends upon the success of service providers in attracting new subscribers to IP-based communications services.
 
Our dependence on service providers exposes us to a number of risks, including the risk that service providers will not succeed in growing and maintaining their IP subscriber base. Among the reasons that service providers may not succeed in growing or maintaining subscriptions to IP-based communications is the prevalence of alternative IP-based communications providers who offer services free or for low cost. Current providers of free or low-cost IP-based communication include Skype, JaJah, Yahoo Messenger and GoogleVoice.


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If service providers do not succeed in growing and maintaining their IP subscriber base for any reason, including failure to effectively compete with competitors offering free or low-cost services, then our business, financial condition and results of operations would be harmed.
 
Consolidation in the telecommunications industry will likely continue and result in delays or reductions in capital expenditure plans and increased competitive pricing pressures, which could reduce our revenue.
 
The telecommunications industry has experienced significant consolidation over the past several years. We expect this trend to continue as companies attempt to strengthen or retain their market positions in an evolving industry and as businesses are acquired or are unable to continue operations. Consolidation among our customers, distribution partners and technology partners may cause delays or reductions in capital expenditure plans and increased competitive pricing pressures as the number of available customers and partners declines and their relative purchasing power increases in relation to suppliers. Additionally, the acquisition of one of our customers, distribution partners or technology partners by a company that uses or sells the products of one of our competitors could result in our loss of the customer or partner if the acquiring company elects to switch the acquired company to our competitor’s products. Moreover, the consolidation in the number of potential customers and distribution partners could increase the risk of quarterly and annual fluctuations in our revenue and operating results. Any of these factors could adversely affect our business, financial condition and results of operations.
 
Regulation of IP-based networks and commerce may increase, compliance with these regulations may be time-consuming, difficult and costly and, if we fail to comply, our sales might decrease.
 
In general, the telecommunications industry is highly regulated. However, there is less regulation associated with access to, or delivery of, services on IP-based networks. We could be adversely affected by regulation of IP-based networks and commerce in any country where we do business, including the United States. Such regulations could include matters such as using voice over IP protocols, encryption technology and access charges for service providers. The adoption of such regulations could prohibit entry into a target market or force the withdrawal of such products in that particular jurisdiction. As a result, overall demand for our products could decrease and, at the same time, the cost of selling our products could increase, either of which, or the combination of both, could have a material adverse effect on our business, operating results and financial condition.
 
In addition, the convergence of the public switched telephone network, or PSTN, and IP-based networks could become subject to governmental regulation, including the imposition of access fees or other tariffs, that adversely affects the market for our products and services. User uncertainty regarding future policies may also affect demand for communications products such as ours. We may be required, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to timely alter our products or address any regulatory changes may have a material adverse effect on our financial condition, results of operations or cash flows.
 
Risks Related to Our International Operations
 
We are exposed to risks related to our international operations and failure to manage these risks may adversely affect our operating results and financial condition.
 
We market, license and service our products globally and have a number of offices around the world. During the years ended December 31, 2007, 2008 and 2009, 55%, 55% and 48% of our revenue, respectively, was attributable to our international customers. As of December 31, 2009, approximately 38% of our employees were located abroad. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue opportunities in international


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markets. Therefore, we are subject to risks associated with having worldwide operations. These international operations will require significant management attention and financial resources.
 
International operations are subject to inherent risks and our future results could be adversely affected by a number of factors, including:
 
  •  requirements or preferences for domestic products, which could reduce demand for our products;
 
  •  differing technical standards, existing or future regulatory and certification requirements and required product features and functionality;
 
  •  management communication and integration problems related to entering new markets with different languages, cultures and political systems;
 
  •  greater difficulty in collecting accounts receivable and longer collection periods;
 
  •  difficulties and costs of staffing and managing foreign operations;
 
  •  the uncertainty of protection for intellectual property rights in some countries;
 
  •  potentially adverse tax consequences, including regulatory requirements regarding our ability to repatriate profits to the United States; and
 
  •  political and economic instability and terrorism.
 
Additionally, our international operations expose us to risks of fluctuations in foreign currency exchange rates. To date, the significant majority of our international sales have been denominated in U.S. dollars, although most of our expenses associated with our international operations are denominated in local currencies. As a result, a decline in the value of the U.S. dollar relative to the value of these local currencies could have a material adverse effect on the gross margins and profitability of our international operations. Additionally, an increase in the value of the U.S. dollar relative to the value of these local currencies results in our products being more expensive to potential customers and could have an adverse impact on our pricing or our ability to sell our products internationally. To date, we have not used risk management techniques to hedge the risks associated with these fluctuations. Even if we were to implement hedging strategies, not every exposure can be hedged and, where hedges are put in place based on expected foreign currency exchange exposure, they are based on forecasts that may vary or that may later prove to have been inaccurate. As a result, fluctuations in foreign currency exchange rates or our failure to successfully hedge against these fluctuations could have a material adverse effect on our operating results and financial condition.
 
We rely significantly on distribution partners to sell our products in international markets, the loss of which could materially reduce our revenue.
 
We sell our products to telecommunication service providers both directly and, particularly in international markets, indirectly through distribution partners such as telecommunications equipment vendors, VARs and other distributors. We believe that establishing and maintaining successful relationships with these distribution partners is, and will continue to be, important to our financial success. Recruiting and retaining qualified distribution partners and training them in our technology and product offerings requires significant time and resources. To develop and expand our distribution channel, we must continue to scale and improve our processes and procedures that support our channel, including investment in systems and training.
 
In addition, existing and future distribution partners will only partner with us if we are able to provide them with competitive products on terms that are commercially reasonable to them. If we fail to maintain the quality of our products or to update and enhance them, existing and future distribution partners may elect to partner with one or more of our competitors. In addition, the terms of our arrangements with our distribution partners must be commercially reasonable for both parties. If we


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are unable to reach agreements that are beneficial to both parties, then our distribution partner relationships will not succeed.
 
The reduction in or loss of sales by these distribution partners could materially reduce our revenue. For example, Ericsson accounted for approximately 11% of our total revenue for the year ended December 31, 2009. If we fail to maintain relationships with our distribution partners, fail to develop new relationships with other distribution partners in new markets, fail to manage, train or incentivize existing distribution partners effectively, fail to provide distribution partners with competitive products on terms acceptable to them, or if these partners are not successful in their sales efforts, our revenue may decrease and our operating results could suffer.
 
We have no long-term contracts or minimum purchase commitments with any VARs or telecommunications equipment vendors, and our contracts with these distribution partners do not prohibit them from offering products or services that compete with ours, including products they currently offer or may develop in the future and incorporate into their own systems. Some of our competitors may have stronger relationships with our distribution partners than we do and we have limited control, if any, as to whether those partners implement our products, rather than our competitors’ products, or whether they devote resources to market and support our competitors’ products, rather than our offerings. Our failure to establish and maintain successful relationships with distribution partners could materially adversely affect our business, operating results and financial condition.
 
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
 
Our products are subject to United States export controls and may be exported outside the United States only with the required level of export license or through an export license exception, because certain of our products contain encryption technology. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute certain of our products or could limit our customers’ ability to implement these products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their networks or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import laws and regulations, shifts in approach to the enforcement or scope of existing laws and regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, operating results and financial condition.
 
We may not successfully sell our products in certain geographic markets or develop and manage new sales channels in accordance with our business plan.
 
We expect to continue to sell our products in certain geographic markets where we do not have significant current business and to a broader customer base. To succeed in certain of these markets, we believe we will need to develop and manage new sales channels and distribution arrangements. Because we have limited experience in developing and managing such channels, we may not be successful in further penetrating certain geographic regions or reaching a broader customer base. Failure to develop or manage additional sales channels effectively would limit our ability to succeed in these markets and could adversely affect our ability to grow our customer base and revenue.


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Risks Related to this Offering and Ownership of Our Common Stock
 
Our stock price may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
 
Prior to this offering, there has been no public market for our common stock and an active trading market may not develop or be sustained after this offering. The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not be representative of the price that will prevail in the open market following the offering or of any other established criteria of the value of our business. If an active trading market for our stock develops and continues, our stock price nevertheless may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include those discussed in this “Risk Factors” section of this prospectus and others such as:
 
  •  a slowdown in the telecommunications industry or the general economy;
 
  •  quarterly or annual variations in our results of operations or those of our competitors;
 
  •  changes in earnings estimates or recommendations by securities analysts;
 
  •  announcements by us or our competitors of new products or services, significant contracts, commercial relationships, capital commitments or acquisitions;
 
  •  developments with respect to intellectual property rights;
 
  •  our ability to develop and market new and enhanced products on a timely basis;
 
  •  our commencement of, or involvement in, litigation;
 
  •  departure of key personnel; and
 
  •  changes in governmental regulations.
 
In addition, in recent years, the stock markets generally, and the market for technology stocks in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In the past, class action litigation has often been instituted against companies whose securities have experienced periods of volatility in market price. Securities litigation brought against us following volatility in our stock price, regardless of the merit or ultimate results of such litigation, could result in substantial costs, which would hurt our financial condition and operating results and divert management’s attention and resources from our business.
 
Securities analysts may not publish favorable research or reports about our business or may publish no information which could cause our stock price or trading volume to decline.
 
The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us and our business. We do not control these analysts. As a newly public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any of the analysts who cover us issue an adverse opinion regarding our stock price, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports covering us, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.


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Following this offering, our executive officers, directors, principal stockholders and their respective affiliates could exert significant influence over matters requiring stockholder approval, which may not be in your best interests.
 
We anticipate that our executive officers, directors, principal stockholders and their respective affiliates will beneficially own or control approximately     % of our outstanding common stock after this offering, assuming no exercise of the underwriters’ option to purchase           additional shares of our common stock in this offering. Accordingly, these stockholders, acting together, would have substantial influence over the outcome of corporate actions requiring stockholder approval, including the election of directors and the approval of significant corporate transactions and they may in some instances exercise this influence in a manner that advances their best interests and not necessarily those of other stockholders. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control, could deprive you of the opportunity to receive a premium for your common stock as part of a sale and could adversely affect the market price of our common stock.
 
Our management might apply the proceeds of this offering in ways that do not increase the value of your investment.
 
We expect to use approximately $4.3 million of the net proceeds received by us in this offering to redeem and subsequently cancel all outstanding shares of our Series A redeemable preferred stock. We also intend to use approximately $      million of the net proceeds to repay the outstanding balance under the ORIX Loan. We intend to use the remaining net proceeds for this offering for working capital and general corporate purposes, including expanding our development, operations, marketing and sales departments. We may also use a portion of the proceeds for the future acquisition of, or investment in, complementary businesses, products or technologies. Our management will have broad discretion as to the use of these proceeds and you will be relying on the judgment of our management regarding the application of these proceeds. We might apply the net proceeds of this offering in ways with which you do not agree, or in ways that do not yield a favorable return. If our management applies these proceeds in a manner that does not yield a significant return, if any, on our investment of these net proceeds, it would adversely affect the market price of our common stock.
 
You will incur immediate and substantial dilution in the book value of your shares.
 
The assumed initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $      per share, based on an assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus. If the holders of outstanding options or warrants exercise those options or warrants, you will suffer further dilution.
 
The market price of our common stock could drop substantially if a significant number of shares of our common stock are sold into the market following this offering.
 
If our existing stockholders sell, or indicate an intent to sell, a significant number of shares of our common stock in the public market after the 180-day contractual lock-up, which period is subject to potential extension in certain circumstances for up to an additional 34 days, and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of          , 2010, upon the completion of this offering, we will have outstanding           shares of common stock, assuming no exercise of outstanding options and warrants. Of these shares,           shares of common stock, plus any shares sold pursuant to the underwriters’


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option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market. Additionally, up to           shares may be sold by employees prior to the expiration of the lock-up agreements, solely for the purpose of paying statutorily required federal, state and local withholding and payroll taxes that they will incur upon the exercise of options that are scheduled to expire during the lock-up period. Goldman, Sachs & Co. may, in its sole discretion, permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements pertaining to this offering expire and based on shares outstanding as of           , 2010, an additional           shares will be eligible for sale in the public market, subject to certain legal and contractual limitations.
 
In addition, promptly following the completion of this offering, we intend to file one or more registration statements on Form S-8 registering the issuance of up to           shares of common stock subject to options or other equity awards issued or reserved for future issuance under our equity incentive plans. Shares registered under these registration statements on Form S-8 will be available for sale in the public market subject to certain vesting arrangements and exercise of options, the lock-up agreements described above and the restrictions of Rule 144 in the case of our affiliates. Additionally, after this offering, the holders of an aggregate of           shares of our common stock as of           , 2010 will have rights, subject to some conditions, to require us to file one or more registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Once we register the issuance of these shares, they can be freely sold in the public market. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
 
We do not intend to pay dividends for the foreseeable future and our stock may not appreciate in value.
 
We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or that the price at which our stockholders have purchased their shares will be able to be maintained.
 
Provisions in our charter documents and under Delaware law could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our common stock.
 
We intend to amend and restate our certificate of incorporation and bylaws, both of which will become effective upon completion of this offering, to add provisions that may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors with three-year staggered terms, a prohibition on actions by written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us in certain circumstances. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirors to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. These provisions could discourage potential acquisition proposals or could delay, deter or prevent a change in control, including transactions that may be in the best interests of our stockholders. Additionally, these provisions could limit the price certain investors might be willing to pay for our common stock.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus, particularly in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described under the section titled “Risk Factors” and elsewhere in this prospectus, regarding, among other things:
 
  •  our dependence on the success of BroadWorks;
 
  •  our dependence on our service provider customers to sell services using our applications;
 
  •  claims that we infringe intellectual property rights of others;
 
  •  our ability to protect our intellectual property;
 
  •  intense competition;
 
  •  any potential loss of or reductions in orders from certain significant customers;
 
  •  our ability to predict our revenue, operating results and gross margin accurately;
 
  •  the length and unpredictability of our sales cycles;
 
  •  our ability to expand our product offerings;
 
  •  our international operations;
 
  •  our significant reliance on distribution partners in international markets;
 
  •  our ability to sell our products in certain markets;
 
  •  our ability to manage our growth;
 
  •  the attraction and retention of qualified employees and key personnel;
 
  •  the interoperability of our products with service provider networks;
 
  •  the quality of our products and services, including any undetected errors or bugs in our software; and
 
  •  our ability to maintain proper and effective internal controls.
 
These risks are not exhaustive. Other sections of this prospectus may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.
 
You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-


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looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.
 
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement on Form S-1, of which this prospectus is a part, that we have filed with the SEC with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
 
INDUSTRY AND MARKET DATA
 
This prospectus also contains market and industry data that we have obtained from analysis and reports of third parties. Although we believe that the analysis and reports are reliable, we have not independently verified the accuracy of this information.


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USE OF PROCEEDS
 
We estimate that the net proceeds we will receive from this offering will be approximately $      million, assuming an initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders, although we will bear the costs, other than underwriting discounts and commissions, associated with those sales.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by $     , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.
 
We expect to use approximately $4.3 million of the net proceeds received by us in this offering to redeem and subsequently cancel all outstanding shares of our Series A redeemable preferred stock under the terms of our restated certificate of incorporation. We also intend to use approximately $           million of the net proceeds to repay the outstanding balance under our credit facility with ORIX Venture Finance LLC, or the ORIX Loan. The ORIX Loan matures on September 26, 2013. The interest rate charged on the advances under the ORIX Loan is variable and was 7.0% per annum as of December 31, 2009.
 
We intend to use the remaining net proceeds from this offering for working capital and other general corporate purposes, including expanding our development, operations, marketing and sales departments. We may also use a portion of the proceeds for the future acquisition of, or investment in, complementary businesses, products or technologies. However, we do not have agreements or commitments for any specific acquisitions at this time and we have not allocated specific amounts of net proceeds for any of these purposes.
 
Our management will have broad discretion in the application of the net proceeds remaining after the redemption of our Series A redeemable preferred stock and repayment of the outstanding balance under the ORIX Loan, and investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering. Pending these uses, we plan to invest these net proceeds in short-term, interest bearing obligations, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the United States. The goal with respect to the investment of these net proceeds is capital preservation and liquidity so that such funds are readily available to fund our operations.
 
DIVIDEND POLICY
 
We have never declared or paid dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. We do not intend to declare or pay cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our ability to pay cash dividends on our stock is limited by the covenants of the ORIX Loan. Although we intend to terminate the ORIX Loan upon the completion of this offering, our future ability to pay cash dividends on our stock may be limited by the terms of any future debt or preferred securities.
 


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents, restricted cash and our capitalization as of December 31, 2009 on:
 
  •  an actual basis;
 
  •  a pro forma basis after giving effect to:
 
  •  the conversion of all outstanding shares of our Series B-1, C-1, D, E and E-1 redeemable convertible preferred stock outstanding as of December 31, 2009 into an aggregate of 75,935,678 shares of common stock immediately prior to the completion of this offering;
 
  •  the reclassification of our preferred stock warrant liability to additional paid-in-capital immediately prior to the completion of this offering; and
 
  •  the issuance of 980,000 shares underlying RSUs that will vest immediately upon the completion of this offering; and
 
  •  a pro forma as adjusted basis to give further effect to:
 
  •  the filing of our amended and restated certificate of incorporation;
 
  •  the sale by us of shares of common stock in this offering at an assumed initial public offering price of $      per share, the midpoint of the range listed on the cover page of this prospectus, and our receipt of the estimated net proceeds from that sale after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us;
 
  •  our use of approximately $4.3 million of the net proceeds of this offering to redeem and subsequently cancel all of our outstanding Series A redeemable preferred stock; and
 
  •  our use of $      million of the net proceeds to repay the outstanding balance under the ORIX Loan.
 
You should read this table together with the sections of this prospectus entitled “Selected Consolidated Financial Data,” “Description of Capital Stock” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 


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    As of December 31, 2009  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
             
          (Unaudited)  
    (In thousands, except share and
 
    per share data)  
 
Cash and cash equivalents
  $ 22,869     $           $        
Restricted cash
    599                  
                         
Total
  $ 23,468     $       $  
                         
Notes payable and bank loans (including current portion)
  $ 18,571     $       $    
Series A Redeemable Preferred Stock, $0.01 par value; 9,000,000 shares authorized, issued and outstanding, actual and pro forma; no shares authorized, issued or outstanding, pro forma as adjusted
    4,320                  
Redeemable Convertible Preferred Stock, $0.01 par value; 71,364,939 shares authorized, 70,989,198 shares issued and outstanding, actual; 71,364,939 shares authorized, no shares issued and outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted
    68,866                  
Stockholders’ (deficit) equity:
                       
Preferred Stock, $0.01 par value; no shares authorized, issued or outstanding, actual and pro forma;           shares authorized and no shares issued or outstanding, pro forma as adjusted
                 
Common stock, $0.01 par value; 139,100,000 shares authorized and 37,920,664 shares issued and outstanding, actual; 139,100,000 shares authorized and 114,836,342 shares issued and outstanding, pro forma;           shares authorized and           shares issued and outstanding, pro forma as adjusted
    379                  
Additional paid-in capital
    20,024                  
Accumulated other comprehensive loss
    (1,725 )                
Accumulated deficit
    (96,474 )                
                         
Total BroadSoft, Inc. stockholders’ (deficit) equity
    (77,796 )                
Noncontrolling interest
    (4 )                
                         
Total stockholders’ (deficit) equity
    (77,800 )                
                         
Total capitalization
  $ 13,957     $       $  
                         
 
The table above excludes, as of December 31, 2009, the following shares:
 
  •  17,049,041 shares of our common stock issuable upon the exercise of options outstanding under our 1999 Stock Incentive Plan and our 2009 Equity Incentive Plan at a weighted average exercise price of $0.38 per share;
 
  •  60,000 shares of our common stock issuable upon the vesting of RSUs outstanding under our 2009 Equity Incentive Plan that will vest upon the expiration of the 180-day lock-up period for this offering;
 
  •  699,301 shares of our common stock issuable upon the exercise of an outstanding common stock warrant at an exercise price of $1.43 per share;

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  •  275,721 shares of our common stock issuable upon the exercise of outstanding preferred stock warrants at an exercise price of $0.66 per share; and
 
  •  an aggregate of 2,500,830 additional shares of our common stock reserved for future grants under our 2009 Equity Incentive Plan.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted stockholders’ equity by $      and our total capitalization by $      , or $      if the underwriters exercise their option to purchase additional shares in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us.


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DILUTION
 
Dilution is the amount by which the offering price paid by the purchasers of the shares of common stock sold in the offering exceeds the net tangible book value per share of common stock after the offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding at that date.
 
Our pro forma net tangible book value as of December 31, 2009 was $      million, or $      per share, which gives effect to the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 75,935,678 shares of our common stock and the reclassification of our preferred stock warrant liability to additional paid-in-capital, each immediately prior to the completion of this offering, and the issuance of 980,000 shares underlying RSUs that will vest immediately upon the completion of this offering. After giving effect to the receipt and our intended use of approximately $      million of estimated net proceeds from our sale of shares of common stock in this offering at an assumed offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, our pro forma as adjusted net tangible book value as of December 31, 2009 would have been $      million, or $      per share. This represents an immediate increase in net tangible book value of $      per share to existing stockholders and an immediate dilution of $      per share to new investors purchasing shares of common stock in the offering. The following table illustrates this substantial and immediate per share dilution to new investors.
 
                 
Assumed initial public offering price per share (the midpoint of the range listed on the cover page of this prospectus)
          $        
Pro forma net tangible book value per share at December 31, 2009
  $                
Pro forma increase per share attributable to new investors
  $            
                 
Pro forma as adjusted net tangible book value per share after giving effect to this offering
          $    
Dilution in net tangible book value per share to new investors
          $  
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $      , the pro forma as adjusted net tangible book value per share by $      per share and the dilution per share to new investors in this offering by $     , or $      if the underwriters exercise their option to purchase additional shares in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.
 
The following table summarizes, as of December 31, 2009:
 
  •  the total number of shares of common stock purchased from us by our existing stockholders and by new investors purchasing shares in this offering;
 
  •  the total consideration paid to us by our existing stockholders and by new investors purchasing shares in this offering, assuming an initial public offering of $      per share, which is the midpoint of the range listed on the cover page of this prospectus (before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering); and
 
  •  the average price per share paid by existing stockholders and by new investors purchasing shares in this offering.
 


35


 

                                         
   
Shares Purchased
   
Total Consideration
    Average Price
 
   
Number
   
Percent
   
Amount
   
Percent
   
Per Share
 
 
Existing stockholders(1)
                      %   $                        %   $                  
New investors
                                       
                                         
Total
            100 %   $             100 %        
                                         
 
(1) Includes 75,935,678 shares resulting from the conversion of all outstanding shares of redeemable convertible preferred stock and 980,000 shares underlying RSUs that will vest immediately upon the completion of this offering.
 
The tables and calculations above are based on the number of shares of our common stock outstanding as of December 31, 2009, including 159,167 unvested shares issued pursuant to a restricted stock grant and early exercise of outstanding stock options that are subject to repurchase, and 980,000 shares issuable upon vesting of RSUs outstanding as of December 31, 2009 immediately upon completion of this offering but do not include, as of December 31, 2009, the following shares:
 
  •  17,049,041 shares of our common stock issuable upon the exercise of options outstanding under our 1999 Stock Incentive Plan and our 2009 Equity Incentive Plan at a weighted average exercise price of $0.38 per share;
 
  •  60,000 shares of our common stock issuable upon the vesting of RSUs outstanding under our 2009 Equity Incentive Plan that will vest upon the expiration of the 180-day lock-up period for this offering;
 
  •  699,301 shares of our common stock issuable upon the exercise of outstanding common stock warrants at an exercise price of $1.43 per share;
 
  •  275,721 shares of our common stock issuable upon the exercise of outstanding preferred stock warrants at an exercise price of $0.66 per share; and
 
  •  an aggregate of 2,500,830 additional shares of our common stock reserved for future grants under our 2009 Equity Incentive Plan.
 
To the extent any of these options or warrants are exercised, or RSUs are settled with shares of our common stock, there will be further dilution to new investors.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) total consideration paid by existing stockholders, total consideration paid by new investors and the average price per share by $     , $      and $     , respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and without deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.
 
The foregoing table does not reflect the sales by existing stockholders in connection with sales made by them in this offering. Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to           shares, or     % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to           shares, or     % of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters exercise their option to purchase additional shares in full, the number of shares held by the existing stockholders after this offering would be reduced to          , or     % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to           or     % of the total number of shares of our common stock outstanding after this offering.

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SELECTED CONSOLIDATED FINANCIAL DATA
 
You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes included in this prospectus.
 
The selected consolidated financial data as of December 31, 2008 and 2009 and for the years ended December 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements included in this prospectus. The selected consolidated financial data as of December 31, 2005, 2006 and 2007 and for the years ended December 31, 2005 and 2006 are derived from our audited consolidated financial statements that are not included in this prospectus. Our results of operations are not necessarily indicative of results of operations that should be expected in any future periods.
 
Pro forma basic and diluted net loss per common share have been calculated assuming the conversion of all outstanding shares of redeemable convertible preferred stock into 75,935,678 shares of common stock and the issuance of 980,000 shares underlying RSUs that will vest immediately upon completion of this offering. See Note 2 to our consolidated financial statements for an explanation of the method used to determine the number of shares used in computing historical and pro forma basic and diluted net loss per common share.
 
                                         
    Year Ended December 31,  
   
2005
   
2006
   
2007
   
2008
   
2009
 
    (In thousands, except per share data)  
 
Statements of Operations:
                                       
Revenue:
                                       
Licenses
    $21,544       $28,280       $46,328       $40,121       $37,942  
Maintenance and professional services
    4,876       8,559       15,272       21,708       30,945  
                                         
Total revenue
    26,420       36,839       61,600       61,829       68,887  
Cost of revenue:
                                       
Licenses (1)
    3,720       5,012       4,899       4,404       4,432  
Maintenance and professional services (1)
    1,885       3,471       7,270       8,649       12,142  
Amortization of intangibles
    133       400       400       414       800  
                                         
Total cost of revenue
    5,738       8,883       12,569       13,467       17,374  
                                         
Gross profit
    20,682       27,956       49,031       48,362       51,513  
Operating expenses:
                                       
Sales and marketing (1)
    12,105       19,234       26,431       30,774       28,534  
Research and development (1)
    7,976       11,568       12,763       15,876       16,625  
General and administrative (1)
    3,092       5,849       10,295       12,074       11,405  
                                         
Total operating expenses
    23,173       36,651       49,489       58,724       56,564  
                                         
Loss from operations
    (2,491 )     (8,695 )     (458 )     (10,362 )     (5,051 )
Other expense (income), net
    25       (204 )     279       (78 )     1,469  
                                         
Loss before income taxes
    (2,516 )     (8,491 )     (737 )     (10,284 )     (6,520 )
Provision for income taxes
    354       515       1,021       952       1,333  
Net loss
    (2,870 )     (9,006 )     (1,758 )     (11,236 )     (7,853 )
                                         
Net loss attributable to noncontrolling interest
          (125 )     (75 )           (4 )
                                         
Net loss attributable to BroadSoft, Inc. 
    $(2,870 )     $(8,881 )     $(1,683 )     $(11,236 )     $(7,849 )
                                         


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    Year Ended December 31,  
   
2005
   
2006
   
2007
   
2008
   
2009
 
    (In thousands, except per share data)  
 
Net loss per common share available to BroadSoft, Inc. common stockholders:
                                       
Basic and diluted
  $ (0.09 )   $ (0.27 )   $ (0.05 )   $ (0.30 )   $ (0.21 )
Pro forma (unaudited):
                                       
Basic and diluted
                                       
Shares used in computing per share amounts:
                                       
Basic and diluted
    32,048       33,255       36,403       37,250       37,709  
Pro forma (unaudited):
                                       
Basic and diluted
                                       
                                       
(1) Includes stock-based compensation as follows:
                                       
Cost of revenue
  $ 45     $ 194     $ 163     $ 182     $ 325  
Sales and marketing
    7       463       628       856       1,088  
Research and development
          258       255       456       741  
General and administrative
    27       398       622       1,422       1,475  
 
                                         
    As of December 31,  
   
2005
   
2006
   
2007
   
2008
   
2009
 
    (In thousands)  
 
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 3,664     $ 6,554     $ 10,717     $ 14,353     $ 22,869  
Working capital
    (1,608 )     (7,326 )     3,200       5,918       2,924  
Total assets
    16,963       28,579       33,167       55,808       66,663  
Redeemable preferred stock
    4,320       4,320       4,320       4,320       4,320  
Redeemable convertible preferred stock
    54,566       54,566       64,866       67,366       68,866  
Notes payable and bank loans, less current portion
          2,412             18,838       14,035  
Total liabilities
    15,976       33,905       28,063       56,846       71,277  
Total stockholders’ deficit
    (57,899 )     (64,212 )     (64,082 )     (72,724 )     (77,800 )

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial Data” section of this prospectus and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Our audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Special Note Regarding Forward-Looking Statements” sections and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.
 
Overview
 
We are the leading global provider of software that enables fixed-line, mobile and cable service providers to deliver voice and multimedia services over their IP-based networks. Our software enables our service provider customers to provide enterprises and consumers with a range of cloud-based, or hosted, IP multimedia communications, such as hosted PBXs, video calling, UC, collaboration and converged mobile and fixed-line services. Over 425 service providers, located in more than 65 countries, including 15 of the top 25 telecommunications service providers globally, have purchased our software. We sell our software, maintenance and professional services through our direct sales force and indirectly through approximately 44 distribution partners, including some of the largest telecommunications equipment vendors in the world.
 
We were founded in November 1998 and we began generating revenue in 2001. From inception to date, we have raised approximately $70.9 million in cash proceeds through the issuance of preferred stock. With these funds, we have invested significantly in research and development activities. In addition, we have acquired four businesses, which have provided us with additional customers and contributed to our revenue growth. A substantial majority of our revenue is generated from sales of licenses of BroadWorks and related maintenance and professional services. We increased our revenue from $1.4 million in 2001 to $68.9 million in 2009.
 
Our Business Model
 
We sell our software and services to telecommunications service providers through our direct sales force and distribution partners. Our distribution partners include telecommunications equipment vendors and VARs. Typically, we sell software licenses with maintenance, support and upgrades and we invoice for licenses upon delivery. While we generally recognize license revenue upon delivery, we defer revenue if any of the applicable revenue recognition criteria have not been satisfied. We recognize revenue for maintenance contracts ratably over the service period, which is typically 12 months. As a result, the revenue deferral of software orders that do not meet revenue recognition criteria and the sale of maintenance contracts increases our deferred revenue balance. Such increases in deferred revenue contributed significantly to our positive cash flows from operating activities in 2009. As discussed below, we view deferred revenue and cash flows from operating activities as key financial metrics. During the year ended December 31, 2009, our total deferred revenue balance increased by $18.9 million to $40.0 million and our cash provided by operating activities was $10.4 million.
 
We are a global, geographically diversified business. Since 2007, more than 40% of our total revenue in each year has been generated outside of the Americas region, which consists of North, South and Central America. In 2009, 59% of our total revenue was generated from the Americas (primarily from the United States), 26% of our total revenue was generated from the Europe, Middle East and Africa region, or EMEA, and 15% was generated from the Asia Pacific region, or APAC. We generally denominate our sales globally in U.S. dollars, while our international expenses are typically denominated in local currencies.


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Key Operating and Financial Performance Metrics
 
We monitor the key operating and financial performance metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue, gross profit and gross margin below under “— Components of Operating Results” and we discuss our cash and cash equivalents under “— Liquidity and Capital Resources.” Deferred revenue and cash flows from operating activities are discussed immediately following the table below.
 
                         
    As of and for the
 
   
Year Ended December 31,
 
   
2007
   
2008
   
2009
 
    (Dollars in thousands)  
 
Cash and cash equivalents
  $ 10,717     $ 14,353     $ 22,869  
Total deferred revenue (1)
    14,687       21,179       40,047  
(Decrease) increase in deferred revenue (2)
    (7,518 )     6,492       18,868  
Revenue (2)
    61,600       61,829       68,887  
Gross profit
    49,031       48,362       51,513  
Gross margin
    80 %     78 %     75 %
Cash (used in) provided by operating activities
    (3,679 )     (5,011 )     10,427  
 
(1) Consists of current and non-current deferred revenue.
 
(2) For 2008, includes the impact of the acquisitions of M6 and Sylantro.
 
Deferred Revenue. Our deferred revenue consists of the net aggregate amounts that have been invoiced but that have not yet been recognized as revenue. The majority of our deferred revenue balance consists of software license orders that do not meet all the criteria for revenue recognition and the undelivered portion of maintenance. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods. For a discussion of our revenue recognition policies, see “— Critical Accounting Policies and Significant Judgments and Estimates — Revenue Recognition.”
 
(Decrease) Increase in Deferred Revenue. The increase (decrease) in deferred revenue illustrates how the balance in deferred revenue has changed over a period of time. We monitor the increase or decrease in our deferred revenue balance plus revenue we recognized in a particular period as a measure of our sales activity for that period. In addition, an increase in deferred revenue is a key component of cash flows from operating activities.
 
Cash Flows from Operating Activities. We monitor cash flows from operating activities as an additional measure of our overall business performance, which enables us to analyze our financial performance without the effects of certain non-cash items such as depreciation, amortization and stock-based compensation expenses. Additionally, cash flows from operating activities takes into account the impact of changes in deferred revenue, which reflects the receipt of cash payment for software and services before they are recognized as revenue. As a result, our cash flows from operating activities are significantly impacted by changes in deferred revenue.
 
Components of Operating Results
 
Revenue
 
We derive our revenue from the sale of licenses, maintenance and professional services. We recognize revenue when all revenue recognition criteria have been met in accordance with software revenue recognition guidance. This guidance provides that revenue should be recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.


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Our total revenue consists of the following:
 
  •  Licenses. We derive license revenue from the sale of perpetual software licenses. We price our software based on the types of features and applications provided and on the number of subscriber licenses sold. These factors impact the average selling price of our licenses and the comparability of average selling prices. Our license revenue may vary significantly from quarter to quarter or from year to year as a result of long sales and deployment cycles, variations in customer ordering practices and the application of management’s judgment in applying complex revenue recognition rules.
 
  •  Maintenance and professional services. We sell annual maintenance contracts with our software licenses. These contracts provide for software updates, upgrades and technical support. Our typical warranty on licensed software is 90 days and, during this period, our customers are entitled to receive maintenance and support without the purchase of a maintenance contract. After the expiration of the warranty period, our customers must purchase an annual maintenance contract to continue receiving ongoing software maintenance and customer support. We also sell professional services, which consist of implementation, training and consulting services.
 
Cost of Revenue
 
Our total cost of revenue consists of the following:
 
  •  Cost of license revenue. A substantial majority of the cost of license revenue consists of royalties paid to third parties whose technology or products are sold as part of BroadWorks and, to a lesser extent, amortization of acquired technology. Most of these royalty payments are for the underlying embedded data base technology within BroadWorks for which we currently pay a fixed fee per quarter. Such costs are expensed in the period in which they are incurred.
 
  •  Cost of maintenance and professional services revenue. Cost of maintenance and professional services revenue consists primarily of personnel-related expenses and other direct costs associated with the support, maintenance and implementation of our software licenses, as well as training and consulting services. Personnel expenses include salaries, commissions, benefits, bonuses, reimbursement of expenses and stock-based compensation. Such costs are expensed in the period in which they are incurred.
 
Gross Profit
 
Gross profit is the calculation of total revenue minus cost of revenue. Our gross profit as a percentage of revenue, or gross margin, has been and will continue to be affected by a variety of factors, including:
 
  •  Mix of license, maintenance and professional services revenue. We generate higher gross margins on license revenue compared to maintenance and professional services revenue.
 
  •  Growth or decline of license revenue. A substantial portion of cost of license revenue is fixed and is expensed in the period in which it occurs. This cost consists primarily of the royalty payments to our embedded database provider. If license revenue increases, these fixed payments will decline as a percentage of revenue. If license revenue declines, these fixed payments will increase as a percentage of revenue.
 
  •  Impact of deferred revenue. If revenue is deferred because we are unable to determine vendor-specific objective evidence, or VSOE, of fair value for any undelivered element within an arrangement, all of the revenue derived from the arrangement is deferred, including license, maintenance and professional services revenue, until all elements for which we could not determine VSOE have been delivered. However, the cost of revenue, including the costs of license, maintenance and professional services, is expensed in the period in which it is incurred. Therefore, if relatively more revenue is deferred in a particular period, gross margin would decline in that period.


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Operating Expenses
 
Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and personnel costs are the most significant component of each of these expense categories. We grew from 260 employees at December 31, 2007 to 318 employees at December 31, 2009 and we expect to continue to hire new employees to support our anticipated growth.
 
Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and personnel costs for our sales and marketing employees, including stock-based compensation, commissions and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead. We expect our sales and marketing expenses to increase in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities. Through leveraging our sales and marketing personnel and our indirect sales channel, we expect sales and marketing expenses will decrease as a percentage of total revenue as sales grow.
 
Research and development expenses. Research and development expenses primarily consist of salaries and personnel costs for development employees, including stock-based compensation and bonuses. Additional expenses include costs related to development, quality assurance and testing of new software and enhancement of existing software, consulting, travel and other related overhead. We engage third-party international and domestic consulting firms for various research and development efforts, such as software development, documentation, quality assurance and software support. We intend to continue to invest in our research and development efforts, including by hiring additional development personnel and by using outside consulting firms for various research and development efforts. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position. We expect research and development expenses to increase in the foreseeable future but to decrease as a percentage of total revenue as sales grow.
 
General and administrative expenses. General and administrative expenses primarily consist of salary and personnel costs for administration, finance and accounting, legal, information systems and human resources employees, including stock-based compensation and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other corporate expenses. We expect our general and administrative expenses to increase in absolute terms as a result of our preparing to become, and operate as, a public company. These expenses include costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, directors’ and officers’ liability insurance, increased professional services and a new investor relations function. We anticipate that following the increase in expenditures associated with becoming and operating as a public company, general and administrative expenses will decrease as a percentage of total revenue as sales grow.
 
Stock-Based Compensation
 
We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant or modification of stock options and other equity awards to our directors, employees and certain consultants. We apply the fair value method in accordance with authoritative guidance for determining the cost of stock-based compensation. The total cost of the grant or modification is measured based on the estimated fair value of the award at the date of grant. The fair value is then recognized as stock-based compensation expense over the requisite service period, which is the vesting period, of the award. We recorded stock-based compensation expense of $1.7 million, $2.9 million and $3.6 million for the years ended December 31, 2007, 2008 and 2009, respectively.
 
In April 2008, our compensation committee and board of directors approved an amendment to the terms of outstanding stock options held by employees and a non-employee director having an exercise price of $2.07 per share to reduce the exercise price of such options to $1.43 per share,


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which was the then-current fair market value, or FMV, of our common stock. As of the repricing date, we determined that the aggregate incremental value of the awards resulting from the repricing was $0.2 million, which amount is being recognized over the remaining service period for the repriced options.
 
Since April 2009, we have granted RSUs covering an aggregate of 1,835,000 shares to certain of our executive officers, key employees and directors, of which 1,790,000 are presently outstanding. All of these RSUs have a term of ten years and are settled in shares of our common stock, although the vesting provisions of the RSUs vary. Of the total amount, RSUs covering an aggregate of 980,000 shares will fully vest only upon the earlier of an initial public offering, or IPO, or a change in control of the company, assuming that the consideration received in the change in control transaction is cash or freely-tradable registered shares. Of the total amount, RSUs covering another 60,000 shares will vest only upon the earlier of:
 
  •  an IPO of our common stock (or, if the recipient is precluded from selling that number of shares of common stock as would be necessary to satisfy the recipient’s statutory minimum federal, state and local income and employment tax obligations associated with such IPO as a result of a lock-up agreement entered in connection with the offering, then on the expiration date of the applicable lock-up period imposed in connection with the IPO); and
 
  •  a change in control of the company, assuming that the consideration received in the change in control transaction is cash or freely-tradable registered shares.
 
The RSUs covering the remaining 750,000 shares are subject to a combination of performance-based (that is, the completion of an IPO or, in some cases, a change in control) and time-based vesting conditions (ranging from two to four years).
 
In all instances, the vesting of the RSUs is further subject to the recipient’s continued service through the date of vesting. Because of the performance-based vesting conditions of the awards, we have not yet recognized any expense in connection with these grants. However, we expect to record aggregate non-cash compensation expense of approximately $      million as a result of these awards. Of this amount, we expect to record non-cash compensation expense of approximately $0.4 million upon completion of this offering and to record the remainder over the vesting periods of the awards.
 
In June 2009, our compensation committee and board of directors approved programs to offer eligible directors, employees and certain consultants the ability to exchange outstanding options with exercise prices in excess of $0.40 per share for new option awards with an exercise price equal to the then-current FMV of $0.40 per share. Generally, for those employees who participated in this exchange, any portion of an exchanged option that was vested prior to March 1, 2009 was subject to a new two-year vesting period, although our executive officers and directors who participated in this exchange were not subject to this new vesting. As of the date of the exchange, we estimated that the aggregate incremental fair value of the awards resulting from the exchange was $2.0 million, which amount is being recognized over the remaining service period for the exchanged options. This exchange offer is described in more detail under the caption “Compensation Discussion and Analysis — Compensation Components — Equity Incentive Compensation — 2009 Restricted Stock Unit Grants and Stock Option Exchange Offer.”
 
Other (Income) Expense, Net
 
Other (income) expense, net consists primarily of interest income, interest expense and change in the fair value of the preferred stock warrants. Interest income represents interest received on our cash and cash equivalents and restricted cash. Interest expense consists primarily of the interest accrued on outstanding borrowings under our loan and security agreement with ORIX Venture Finance LLC, or ORIX, which we refer to as the ORIX Loan, and our installment bank loan with Bank of America Leasing and Capital, LLC, or Bank of America. We expect interest expense to decrease in


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future periods as a result of our repayment of all amounts outstanding under the ORIX Loan with a portion of the net proceeds of this offering. The fair value of preferred stock warrants is re-measured each reporting period and changes in fair value are recognized in other (income) expense. Upon completion of this offering, the preferred stock warrants will be converted into warrants to purchase common stock and no further changes in fair value will be recognized in other (income) expense.
 
Income Tax Expense
 
Income tax expense consists of U.S. federal, state and foreign income taxes. We are required to pay income taxes in certain states and foreign jurisdictions. To date, we have not been required to pay U.S. federal income taxes because of our current and accumulated net operating losses.
 
Critical Accounting Policies and Significant Judgments and Estimates
 
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
 
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this prospectus, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.
 
Revenue Recognition
 
We follow specific guidance applicable to software companies to determine when revenue should be recognized. We derive substantially all of our revenue from the sale of software licenses and from the sale of maintenance for those licenses and professional services. We generally license our software in combination with maintenance and may also include professional services. We evaluate revenue recognition on a contract-by-contract basis because the terms of each arrangement may vary. The accounting related to license revenue in the software industry is complex and affected by interpretation of rules that are subject to change. As a result, the evaluation of our contractual arrangements often requires judgments and estimates that affect the timing of revenue recognition. Specifically, we are required to make judgments concerning: whether the fees are fixed or determinable; whether collection of our fees is reasonably assured; whether professional services are essential to the functionality of the related software; and whether we have verifiable objective evidence of the fair value of our software and services.
 
For license, maintenance and professional services revenue, our judgment is required to assess the probability of collection, which is generally based on the evaluation of customer-specific information, historical collection experience and economic market conditions. If market conditions decline or if the financial condition of our customers deteriorates, we may be unable to determine that collectability is probable and we could be required to defer the recognition of revenue until we receive payment.
 
In accordance with software revenue recognition guidance, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, acceptance is received, if applicable, the amount of fees to be paid by the customer are fixed or determinable and collectability is probable and VSOE of fair value exists for all undelivered elements. We generally do not license software on a stand-alone basis. Therefore, allocation of fees to the software component of multiple


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element arrangements is determined using the residual method. If we are unable to determine VSOE for any undelivered element included within an arrangement, we defer revenue recognition until all elements for which we could not determine VSOE have been delivered.
 
License Revenue
 
We sell software licenses to service providers through our direct sales force and indirectly through distribution partners.
 
For direct sales, we generally consider a purchase order or executed sales quote, when combined with a master license agreement, to constitute evidence of an arrangement. In the case of sales through distribution partners, we generally consider a purchase order or executed sales quote, when combined with a reseller or similar agreement with the distribution partner, and evidence of the distribution partner’s customer, to constitute evidence of an arrangement. For sales through distribution partners for which we are not able to ascertain proof of the distribution partner’s customer, we defer revenue until we are able to do so.
 
We consider delivery to have occurred when the customer is given electronic access to the licensed software and a license key for the software has been delivered or made available. Instances in which all ordered software features are not delivered are considered to be partial deliveries. Since we cannot determine VSOE of an undelivered software feature in the case of a partial delivery, we defer revenue recognition on all elements of such order until delivery for all ordered software features is complete.
 
Acceptance of our licensed software generally occurs upon delivery. From time to time, we have agreed with certain customers to a specific set of acceptance criteria. In such cases, we defer revenue until these acceptance criteria have been met.
 
Our sales generally consist of multiple elements: software licenses, maintenance and professional services. We calculate the amount of revenue allocated to the software license by determining the fair value of the undelivered elements, which often are maintenance and professional services, and subtracting it from the total order amount. We establish VSOE of the fair value of maintenance based on the renewal price as stated in the agreement and as charged in the first optional renewal period under the arrangement. Our VSOE for professional services is determined based on an analysis of our historical daily rates when these services are sold separately from the software license.
 
The warranty period for our licensed software is generally 90 days. During this period, the customer receives technical support and has the right to unspecified product upgrades on an if-and-when available basis. For these periods, we defer a portion of the license fee and recognize it ratably over the warranty period.
 
As of December 31, 2009, our deferred license revenue balance was $19.6 million, the current portion of which was $15.6 million.
 
Maintenance and Professional Services Revenue
 
We typically sell software in combination with maintenance. Maintenance is generally renewable annually at the option of the customer. Rates for maintenance, including subsequent renewal rates, are typically established based upon a specific percentage of net license fees as set forth in the arrangement with the customer. Maintenance revenue is recognized ratably over the maintenance period, assuming all other criteria of revenue recognition have been met.
 
Revenue from professional services is recognized as services are performed. Professional services are not considered essential to the functionality of the licensed software.
 
As of December 31, 2009, our deferred maintenance and professional services revenue balance was $20.4 million, the current portion of which was $18.2 million.


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Software Development Costs
 
Software development costs incurred prior to the establishment of technological feasibility are expensed as incurred as research and development expense. Software development costs incurred subsequent to the establishment of technological feasibility, if any, are capitalized until the software is available for general release to customers. For each software release, judgment is required to evaluate when technological feasibility has occurred. Historically, we have determined that technological feasibility has been established at approximately the same time as our general release of such software to customers. Therefore, to date, we have not capitalized any software development costs.
 
Accounts Receivable and Allowance for Doubtful Accounts
 
Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts that is maintained for estimated losses that would result from the inability of some customers to make payments as they become due. The allowance is based on an analysis of past due amounts and ongoing credit evaluations. Customers are generally evaluated for creditworthiness through a credit review process at the time of each order. Our collection experience has been consistent with our estimates.
 
Business Combinations
 
In a business combination, we allocate the purchase price to the acquired business’ identifiable assets and liabilities at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. The excess, if any, of the fair value of the identifiable assets acquired and liabilities assumed over the consideration transferred is recognized as a gain within other income in the consolidated statement of operations as of the acquisition date.
 
To date, the assets acquired and liabilities assumed in our business combinations have primarily consisted of acquired working capital and definite-lived intangible assets. The carrying value of acquired working capital is assumed to be equal to its fair value, given the short-term nature of these assets and liabilities. We estimate the fair value of definite-lived intangible assets acquired using a discounted cash flow approach, which includes an analysis of the future cash flows expected to be generated by such assets and the risk associated with achieving such cash flows. The key assumptions used in the discounted cash flow model include the discount rate that is applied to the discretely forecasted future cash flows to calculate the present value of those cash flows and the estimate of future cash flows attributable to the acquired intangible assets, which include revenue, operating expenses and taxes.
 
Goodwill
 
Goodwill represents the excess of: (a) the aggregate of the fair value of consideration transferred in a business combination, over (b) the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to annual impairment tests as described below.
 
We test goodwill for impairment annually on December 31, or more frequently if events or changes in business circumstances indicate the asset might be impaired. Examples of such events or circumstances include the following:
 
  •  a significant adverse change in our business climate;
 
  •  unanticipated competition;
 
  •  a loss of key personnel;
 
  •  a more likely than not expectation that a significant portion of our business will be sold; or
 
  •  the testing for recoverability of a significant asset group within the reporting unit.


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Goodwill is tested for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two is required to measure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of the reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the purchase price were being initially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded to operating expenses in the consolidated statement of operations in the period the determination is made.
 
We have determined that we have one reporting unit, BroadSoft, Inc., which is the consolidated entity. To determine the fair value of our reporting unit as a whole, we use a discounted cash flow analysis, which requires significant assumptions and estimates about our future operations. Significant judgments inherent in this analysis include the determination of an appropriate discount rate and the amount and timing of expected future cash flows. The cash flows utilized in our 2007 through 2009 discounted cash flow analyses were based on three- to five-year financial forecasts, which in turn were based on the annual budgets developed internally by management, plus an estimated terminal value. The primary driver of our discrete future cash flow projections is our revenue growth assumptions and we estimate future operating expenses on a percentage-of-revenue basis. For 2007 and 2008, the terminal value assumption was based on an assumed perpetual free cash flow growth rate. For 2009, the terminal value assumption was based on a multiple of revenues from the last year of discrete projected cash flows. We used discount rates ranging from 19% to 25% for our 2007 through 2009 annual impairment tests performed at December 31. These discount rates were based on an assessment of our weighted average cost of capital.
 
Based on the results of our annual goodwill impairment testing in 2007 through 2009, the fair value of the company exceeded its book value by a substantial margin. Therefore, the second step of the impairment test was not required to be performed and no goodwill impairment was recognized. However, there can be no assurance that goodwill will not be impaired at any time in the future.
 
Intangible Assets
 
We acquired intangible assets in connection with certain of our business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. Estimated useful lives are determined based on our historical use of similar assets and the expectation of future realization of revenue attributable to the intangible assets. Changes in circumstances, such as technological advances or changes to our business model, could result in the actual useful lives differing from our current estimates. In those cases where we determine that the useful life of an intangible asset should be shortened, we amortize the net book value in excess of the estimated salvage value over its revised remaining useful life. We did not revise our useful life estimates attributed to any of our intangible assets in 2007, 2008 or 2009.
 
The estimated useful lives used in computing amortization of intangible assets are as follows:
 
         
Customer relationships
    5-7 years  
Developed technology
    4-5 years  
Non-compete agreement
    1  year  
Trade names
    4 years  


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Impairment of Long-Lived Assets
 
We review our long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or an asset group may not be recoverable. Typical indicators that an asset may be impaired include:
 
  •  a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
 
  •  a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; or
 
  •  a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
 
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell. Recoverability measurement and estimating of undiscounted cash flows for assets to be held and used is done at the lowest possible levels for which there are identifiable assets. If such assets are considered impaired, generally the amount of impairment recognized would be equal to the amount by which the carrying amount of the assets exceeds the fair value of the assets, which the company would compute using a discounted cash flow approach. Estimating future cash flows attributable to our long-lived assets requires significant judgment and projections may vary from cash flows eventually realized. We did not record an impairment charge as a result of our 2007 and 2008 recoverability measurements of long-lived assets. During the fourth quarter of 2009, we recognized an impairment totaling $0.1 million on the property and equipment held by one of our foreign subsidiaries.
 
Stock-Based Compensation
 
New and modified stock-based compensation arrangements, such as stock options, stock appreciation rights, or SARs, restricted stock and RSUs, awarded to directors, employees and consultants are measured at fair value at each grant or modification date. Management estimates the fair value of our stock-based compensation arrangements using a binomial options pricing model, or the binomial lattice model, and the fair value related to the portion of awards granted that is ultimately expected to vest is generally recognized as compensation expense over the requisite service period.
 
Determination of the fair value of stock-based compensation grants
 
The determination of the fair value of stock-based compensation arrangements is affected by a number of variables, including estimates of the fair value of our stock price, expected stock price volatility, risk-free interest rate and projected stock option exercise behaviors. We utilize the binomial option pricing model to measure the estimated fair value of stock option awards. Certain of the assumptions are as follows, expressed on a weighted average basis during the periods indicated:
 
                         
    Year Ended December 31,  
   
2007
   
2008
   
2009
 
 
Assumptions:
                       
Expected dividend yield
    0.0 %     0.0 %     0.0 %
Risk-free interest rate
    4.2 %     1.9 %     1.7 %
Expected volatility
    47 %     38 %     61 %
 
We have assumed no dividend yield because we do not expect to pay dividends in the near future, which is consistent with our history of not paying dividends. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities


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consistent with the term of our employee stock options. The expected life of an option is derived from the binomial lattice model, and is based on several factors, including the contract life, exercise factor, post-vesting termination rates and volatility. The expected exercise factor, which is the ratio of the fair value of common stock on the expected exercise date to the exercise price, and expected post-vesting termination rate, which is the expected rate at which employees are likely to terminate after vesting occurs, are based on our analysis of actual historical behavior by option holders. Expected volatility is based on the historical volatility of comparable public companies, including public communications software and telecommunications companies. The weighted-average expected term output from the 2007, 2008 and 2009 binomial lattice models were 5.0, 3.7 and 6.0 years, respectively.
 
Our estimate of pre-vesting forfeitures, or forfeiture rate, is based on our analysis of historical behavior by option holders. The estimated forfeiture rate is applied to the total estimated fair value of the awards, as derived from the binomial lattice model, to compute the stock-based compensation expense, net of pre-vesting forfeitures, to be recognized in our consolidated statements of operations.
 
The following table summarizes, for 2008 and 2009, the number of shares of our common stock subject to cash-settled SARs and RSUs granted and stock options that were newly granted or repriced, the associated per share base or exercise price of the award and the estimated FMV per share of our common stock on the event date.
 
                                 
    Number of
          Number of
    Estimated Fair
 
    SARs and Shares
    Per Share
    Shares
    Market Value
 
    Underlying
    Exercise or Base
    Underlying
    of Common
 
Event Date (1)
 
Options
   
Price
   
RSUs
   
Stock
 
 
April 2008 (2)
    5,741,667     $ 1.43             $ 1.43  
January 2009
    2,434,000       0.40               0.40  
April 2009
                    1,005,000       0.40  
June 2009 (3)
    11,777,241       0.40               0.40  
November 2009
                    60,000       0.65  
 
(1) In January 2010 and February 2010, we issued additional RSUs covering an aggregate of 770,000 shares of common stock.
 
(2) Consists of new grants of stock options to purchase an aggregate of 4,257,500 shares, new grants of cash-settled SARs underlying an aggregate of 22,000 shares and the repricing of options to purchase an aggregate of 1,462,167 shares.
 
(3) Consists of stock options to purchase an aggregate of 10,928,241 shares issued pursuant to the exchange offer and new grants of additional options to purchase an aggregate of 849,000 shares.
 
Determination of the Fair Value of Common Stock on Grant or Modification Dates
 
We are a private company with no active public market for our common stock. Therefore, In response to Section 409A of the Internal Revenue Code of 1986, as amended, or the Code, and related regulations issued by the IRS, management has periodically determined the estimated per share fair value of our common stock at various dates using contemporaneous valuations consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” or the Practice Aid. In conducting these valuations, management considered all objective and subjective factors that it believed to be relevant in each valuation conducted, including management’s best estimate of our business condition, prospects and operating performance at each valuation date. Within the contemporaneous valuations performed by our management, a range of factors, assumptions and methodologies were used. The significant factors included:
 
  •  the fact that we are a private technology company with illiquid securities;
 
  •  our historical operating results;


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  •  our discounted future cash flows, based on our projected operating results;
 
  •  valuations of comparable public companies;
 
  •  the potential impact on common stock of liquidation preference rights of preferred stock for certain valuation scenarios;
 
  •  our stage of development and business strategy;
 
  •  the likelihood of achieving a liquidity event for shares of our common stock, such as an IPO or sale of our company, given prevailing market conditions; and
 
  •  the state of the IPO market for similarly situated privately-held technology companies.
 
The dates of our contemporaneous valuations have not always coincided with the dates of our stock-based compensation grants and modifications. In such instances, our process for determining FMV of our common stock on such grant or modification dates has been, first, for our management to present its estimate of the FMV of the underlying shares of our common stock to our audit committee. Management’s estimates have been based on the most recent contemporaneous valuation of our shares of common stock and its assessment of additional objective and subjective factors it believed were relevant and which may have changed from the date of the most recent contemporaneous valuation through the date of the grant or modification. After considering the information presented by management, the audit committee recommended a fair value estimate to our compensation committee, which assessed the recommendation and rendered its final fair value determination. The additional factors considered when determining changes in fair value between the most recent contemporaneous valuation and the grant or modification dates included, when available, the prices paid in recent transactions in our securities between our existing stockholders and other third parties. While these transactions were not consummated in a highly liquid market, we believe they were transacted among active, sophisticated investors. We believe that the prices paid by the buyers in these transactions represented the fair value of the securities sold, based on several factors related to the transactions, including the relatively large size of the transactions, the sophistication of the buyers and sellers and the fact that these transactions were, to our knowledge, negotiated at arms-length. Transactions that we considered in assessing the fair value of our shares of common stock included:
 
  •  sales of our convertible preferred stock by venture capital and other institutional investors to new and existing investors in March 2008 (which sale also included shares of common stock), September 2009 and January 2010; and
 
  •  sales of our common stock by certain former employees to new and existing investors in November 2009.
 
Common Stock Valuation Methodologies
 
For the contemporaneous valuations of our common stock that we performed prior to September 2009, our management estimated, as of the various valuation dates, our enterprise value on a continuing operations basis, primarily using the income and market approaches, which are both acceptable valuation methods in accordance with the Practice Aid. The income approach utilized the discounted cash flow, or DCF, methodology based on management’s financial forecasts and projections, as described further below. The market approach utilized the market multiple and comparable transaction methodologies based on comparable public companies’ equity pricing and comparable acquisition transactions, as described further below. Management placed greater reliance on the income and market multiple approaches, and less emphasis on the comparative transaction approach because of the limited number of recent comparable transactions. When appropriate, management also placed significant emphasis on the pricing of recent transactions involving our equity securities, which we view as a strong indicator of the value of illiquid securities such as ours. Each contemporaneous valuation also reflects a marketability discount, resulting from the illiquidity of our common stock.


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For the DCF methodology, management prepared detailed annual projections of future cash flows over a period of four years, which we refer to as the discrete projection period, and applied a terminal value assumption to the final year within the discrete projection period to estimate the total value of the cash flows beyond the final year. Our projections of future cash flows were based on our estimated net debt-free cash flows. These cash flows were then discounted to the valuation date at an estimated cost of capital. We derived the estimated cost of capital by applying an average venture capital rate of return for different types of funds and a weighted-average cost of capital of comparable public companies. The terminal multiple applied to the final year within the discrete projection period to determine the value of cash flows beyond the final year was derived from the market multiple and comparable transaction estimates. Management believes that the procedures employed in the DCF methodology, including estimating the net debt-free cash flows, discount rate and terminal multiple, are reasonable and consistent with the Practice Aid.
 
For the comparative transactions methodology, we first determined a range of implied revenue multiples (reflecting the ratio of the purchase price paid in the transactions to the target companies’ trailing 12 months revenue prior to the acquisition date) for comparable companies that were recently sold. We then applied these multiples to our actual trailing 12 months revenue, after which we applied a discount to the resulting value to reflect the lower value attributable to a minority position. Our analysis of comparable transactions for the valuations described below included both software and services companies, especially those enterprise software firms selling into particular vertical or specialized markets, such as security software companies and firms selling to telecommunications service providers. We selected these comparable transactions because of the limited number of transactions between companies competing directly and exclusively in our market segment.
 
For the market multiple methodology, management determined, as of the valuation date, a range of trading multiples for a group of comparable public companies, based on trailing 12 months and estimated future revenues. These multiples were then applied to our actual trailing 12 months and projected revenues as of the valuation date.
 
The valuation ranges resulting from calculations using the foregoing methodologies were then combined to determine an estimated overall enterprise value, which was then reduced by the value of our debt (net of cash) and aggregate value of our outstanding preferred stock as of each valuation date to estimate the aggregate value available to our common equity holders. The per share value of our common stock was estimated by dividing the resulting value by the number of diluted shares of common stock outstanding, using the treasury method. We also applied marketability discounts as considered appropriate to reflect the illiquidity of our common stock. The number of outstanding shares used in determining diluted shares of common stock outstanding included shares issuable upon the exercise of outstanding stock options and warrants to purchase Series C-1 redeemable convertible preferred stock, shares of restricted stock, options reserved for issuance, shares issued in connection with early exercises of stock options and, for valuations occurring after April 2009, RSUs expected to vest upon an IPO as of the valuation date.
 
Details of the assumptions and judgments reflected in the contemporaneous valuations and the additional factors considered when determining changes in fair value between the most recent contemporaneous valuation and the grant or modification date are presented below.
 
March 17, 2008 Valuation. We conducted a contemporaneous valuation of our common stock as of March 17, 2008. The valuation methodologies employed in determining the FMV of our common stock and the results of these methodologies are set forth below:
 
  •  Market multiple. The range of multiples for comparable public companies was between 1.9x and 2.0x trailing 12 months revenue, between 1.55x and 1.65x estimated revenue for the first year after the valuation date and between 1.3x and 1.4x estimated revenue for the second year following the valuation date. When applied to our trailing 12 months revenue and our projections, the market multiple methodology yielded an enterprise valuation range of $121 million to $128 million.


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  •  Discounted cash flow. Based on our projected operating results and assuming a discount rate of 23% and a terminal value assumption of between 1.95x and 2.05x projected revenue for the fourth year of the discrete projection period, the DCF methodology yielded a valuation range of $169 million to $184 million.
 
  •  Comparative transactions. The range of multiples for comparable transactions was between 3.0x and 3.3x trailing 12 months revenue. When applied to our trailing 12 months revenue, and after applying a minority discount, the comparative transaction methodology yielded a valuation range of $154 million to $170 million.
 
  •  Arms-length transactions in our equity securities among third parties. In March 2008, a venture capital fund stockholder sold shares of our common stock and Series B-1 and Series C-1 redeemable convertible preferred stock to a third party at a blended price per share of $1.43. The enterprise valuation implied by this transaction price was $157 million.
 
Based on these methodologies, we estimated our enterprise value to be in a range of $155 million to $180 million. After deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents and applying a marketability discount, the estimated aggregate value attributable to common stockholders was between $43 million and $51 million, or $1.16 to $1.38 per share, and we estimated the FMV of our common stock to be $1.43 per share as of March 17, 2008. In April 2008, we granted new stock options with an exercise price of $1.43 per share and cash-settled SARs with a base price of $1.43 per share. Also in April 2008, we repriced options to reduce the exercise price from $2.07 per share to $1.43 per share. Our compensation committee and board of directors determined that $1.43 per share was the FMV of our common stock on the applicable grant and repricing dates.
 
September 30, 2008 Valuation. We conducted a contemporaneous valuation of our common stock as of September 30, 2008, whereby we estimated the FMV of our common stock to be $0.40 per share. The primary factors that supported this estimate, and which contributed to the substantial decrease in the estimated FMV of our common stock between March 17, 2008 and September 30, 2008 were:
 
  •  lower than expected operating results, including revenue and profitability metrics, for the quarter ended September 30, 2008;
 
  •  reduced revenue and profitability expectations by our board of directors for 2008 and subsequent years;
 
  •  our adoption of a plan to reduce personnel and other costs by approximately 10% in response to the global economic downturn and our board’s revised expectations of future financial results;
 
  •  uncertainties about our business as a result of the broader economic trends occurring during this period, particularly because of our dependence on capital spending by communications service providers;
 
  •  the contraction of the worldwide credit markets in the fall of 2008 and its consequences;
 
  •  widespread, significant reluctance of institutional and other investors to invest capital in private companies on acceptable terms, if at all;
 
  •  substantially decreased acquisition activity, including among technology companies;
 
  •  the failure of equity markets to support IPOs by technology companies;
 
  •  substantial declines in the equity valuations of comparable public companies; and
 
  •  a significant increase in our indebtedness resulting from our borrowing $15.0 million from ORIX, which also imposed significant financial and operating covenants on our business.


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The valuation methodologies employed in determining the FMV of our common stock and the results produced by applying these methodologies are set forth below:
 
  •  Market multiple. The range of multiples for comparable public companies was between 1.2x and 1.4x trailing 12 months revenue and between 1.1x and 1.3x estimated revenue for the first year after the valuation date. When applied to our trailing 12 months revenue and our revenue projections, the market multiple methodology yielded an enterprise valuation range of $77 million to $91 million.
 
  •  Discounted cash flow. Based on our projected operating results and assuming a discount rate of 25% and a terminal value assumption of between 1.35x and 1.45x projected revenue for the fourth year of the discrete projection period, the DCF methodology yielded a valuation range of $71 million to $80 million.
 
  •  Comparative transactions. The range of multiples for comparable transactions was between 1.9x and 2.1x trailing 12 months revenue. When applied to our trailing 12 months revenue, and after applying a minority discount, the comparative transaction methodology yielded a valuation range of $96 million to $106 million.
 
Based on these methodologies, we estimated our enterprise value to be in a range of $80 million to $100 million. The reduction in our enterprise value between March 17, 2008 and September 30, 2008 had a disproportionate impact on the value attributable to our common equity because of the seniority of our indebtedness and the liquidation preferences of our preferred stock. After deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents and applying a marketability discount, the estimated aggregate value attributable to common stockholders was between $6.5 million and $19.5 million, or $0.17 to $0.52 per share and we estimated the FMV of our common stock to be $0.40 per share as of September 30, 2008.
 
January 2009 Stock Option Grants. We granted stock options in January 2009 with an exercise price of $0.40 per share, which our compensation committee determined was the FMV of our common stock on the grant date. In determining the FMV of our common stock on the grant date, our compensation committee placed significant emphasis on the September 30, 2008 contemporaneous valuation described above, and also considered the following factors:
 
  •  the substantial business uncertainties that we continued to face, particularly because of our dependence on capital spending by telecommunications service providers;
 
  •  the uncertain impact of our recent expense reduction measures and the fact that we were contemplating additional expense reduction measures in 2009;
 
  •  the dilutive impact on our common stock of the issuance of Series E redeemable convertible preferred stock issued in December 2008 as consideration for the Sylantro acquisition, as well as additional indebtedness assumed in connection with that acquisition;
 
  •  the continuing, substantial declines in the valuations of the equity securities of comparable public companies; and
 
  •  the results of the continued deterioration of worldwide capital markets, which caused institutional and other investors to remain reluctant to invest in private companies, the unavailability of the IPO market to technology companies and limited acquisition activity among technology companies.
 
Relative to the September 30, 2008 valuation, the market multiples of comparable public companies had declined to approximately 50% of their September 30, 2008 levels. However, because the assumptions underlying the other valuation methodologies remained substantially similar to their levels as of September 30, 2008, our compensation committee estimated that our enterprise value remained in a range between $80 million to $100 million, and concluded that the FMV of our common stock remained $0.40 per share as of the grant date of the options.


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March 31, 2009 Valuation. We conducted a contemporaneous valuation of our common stock as of March 31, 2009 whereby we estimated the FMV of our common stock to be $0.40 per share. The valuation methodologies employed in determining the FMV of our common stock and the results produced by applying these methodologies are set forth below:
 
  •  Market multiple. The range of multiples for comparable public companies was between 1.15x and 1.35x trailing 12 months revenue, between 1.05x and 1.25x estimated revenue for the first year following the valuation date and between 0.95x and 1.15x estimated revenue for the second year following the valuation date. When applied to our trailing 12 months revenue and our projections, the market multiple methodology yielded an enterprise valuation range of $72 million to $86 million.
 
  •  Discounted cash flow. Based on our projected operating results and assuming a discount rate of 20% and a terminal value assumption of between 1.3x and 1.4x projected revenue for the fourth year of the discrete projection period, the DCF methodology yielded a valuation range of $81 million to $92 million.
 
  •  Comparative transactions. The range of multiples for comparable transactions was between 1.5x and 2.0x trailing 12 months revenue. When applied to our trailing 12 months revenue, the comparative transaction methodology yielded a valuation range of $77 million to $102 million.
 
Based on these methodologies, we estimated that our enterprise value continued to be in a range of $80 million to $100 million as of March 31, 2009. After deducting the value of indebtedness and preferred stock and applying a marketability discount, the estimated aggregate value attributable to our common stockholders was between $3.5 million and $17.3 million, or $0.09 to $0.46 per share, and we estimated the FMV of our common stock to be $0.40 per share as of March 31, 2009.
 
June 2009 Stock Option Grants. In June 2009, we granted new stock options with an exercise price of $0.40 per share. We also repriced eligible stock options tendered in option exchange programs to reduce the exercise price to $0.40 per share. Our compensation committee and board of directors determined that the FMV of our common stock on the grant dates was $0.40 per share. In determining the FMV of our common stock on the grant dates, our compensation committee and board of directors placed significant emphasis on the March 31, 2009 contemporaneous valuation described above and also considered the following factors:
 
  •  While equity values of comparable public companies had increased since their relative low points in the first quarter of 2009, those companies’ trading multiples were still at a slight discount to their trading multiples as of September 30, 2008, when the FMV of our common stock was initially estimated to be $0.40 per share.
 
  •  The market multiple valuation methodology had, in connection with prior valuations, generally yielded the lowest enterprise value among the methodologies we used in our prior valuations and the assumptions underlying the other methodologies had not changed materially since March 31, 2009.
 
As a result, our compensation committee and board of directors believed that the improvement in trading prices of comparable public companies did not materially alter the estimated FMV of our common stock. Therefore, our compensation committee and board of directors concluded that the FMV of our common stock remained $0.40 per share as of the grant dates of these options.
 
Subsequent Valuations
 
Due to our improved financial results, improved expectations of capital purchasing by communications service providers and indications of improvement in the market for IPOs in general, the possibility of undertaking an IPO appeared greater to us during the second half of 2009. As a result, management began using the probability-weighted expected return method, or the PWER method, outlined in the Practice Aid, for its contemporaneous valuations of our common stock and


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increased the frequency at which it conducts contemporaneous valuations to quarterly. Under the PWER method, shares of preferred stock and common stock are valued separately based on the probability-weighted average expected future returns, considering various future outcomes of our operations and liquidity events. Such events include a continued operations scenario, which is consistent with the approach used in our previous contemporaneous valuations and two scenarios assuming that an IPO would be consummated (one scenario that assumed an IPO in June 2010 and one scenario that assumed an IPO in September 2010).
 
September 30, 2009 Valuation.  As of September 2009, we had not commenced a formal process to pursue an IPO, and there continued to be significant uncertainty concerning the receptivity of the capital markets to an IPO. Additionally, we still faced relatively high operational and financial performance uncertainties over a planning horizon. Accordingly, for the September 30, 2009 valuation, we assigned a weight of 70% for the continued operations scenario and a weight of 15% for each of the two IPO scenarios.
 
Continued Operations Scenario
 
The valuation methodologies employed in determining the FMV of our common stock under the continued operations scenario and the results of these methodologies are set forth below:
 
  •  Market multiple. The range of multiples for comparable public companies was between 1.3x and 1.4x trailing 12 months revenue and between 1.2x and 1.3x estimated revenue for the first year after the valuation date. When applied to our trailing 12 months revenue and revenue projections, the market multiple methodology yielded an enterprise valuation range of $95 million to $103 million.
 
  •  Discounted cash flow. Based on our projected operating results and assuming a discount rate of 20% and a terminal value assumption of between 1.35x and 1.45x projected revenue for the fourth year of the discrete projection period, the DCF methodology yielded a valuation range of $113 million to $125 million.
 
  •  Comparative transactions. The range of multiples for comparable transactions was between 1.5x and 2.0x trailing 12 months revenue. When applied to our trailing 12 months revenue, and after applying a minority discount, the comparative transaction methodology yielded a valuation range of $86 million to $113 million.
 
  •  Arms-length transactions in our equity securities among third parties. In September 2009, a corporate stockholder sold Series C-1 redeemable convertible preferred stock to third parties at a price per share of $0.66. The implied enterprise valuation based on this transaction price was $85 million.
 
Based on these methodologies, we estimated the enterprise value of our company in a continued operations scenario to be in a range of $100 million to $115 million. After deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents, the estimated aggregate value attributable to common stockholders was estimated to be $30.9 million. A marketability discount was then applied, resulting in an estimated per share value for common stock of $0.62 per share. The primary factors that contributed to the increase in the estimated FMV of our common stock under the continued operations scenario between June 30, 2009 and September 30, 2009 were:
 
  •  improved operating results, including quarter-over-quarter growth and cash flow positive performance;
 
  •  improved comparable public company valuations;
 
  •  an arms-length third-party sale of our preferred stock; and
 
  •  improving capital markets.


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IPO Scenarios
 
For each of the IPO scenarios, based on prevailing market multiples, we assumed that, on an enterprise basis, our company would be valued at 2.0x trailing 12 months revenue. After deducting the estimated value of an IPO discount, as well as deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents, the estimated aggregate value attributable to common stockholders was estimated to be between $39.8 and $40.6 million, respectively, for each of the IPO scenarios. We then discounted these values back to the valuation date of September 30, 2009, and applied a marketability discount, which yielded a per share value of our common stock of $0.76 for the first IPO scenario and $0.73 for the second IPO scenario.
 
Based on the relative weights of the continued operations and IPO scenarios, we estimated the FMV of our common stock to be $0.65 per share as of September 30, 2009.
 
December 31, 2009 Valuation. During the fourth quarter of 2009, we began preparations for a possible IPO of our common stock. Following the November 5, 2009 meeting of our board of directors, management and the board of directors undertook a process to evaluate underwriters for a potential IPO. As a result, for the December 31, 2009 valuation, the continued operations scenario was assigned a 50% probability and the two IPO scenarios were each assigned a 25% probability. We increased the relative IPO probabilities for the December 31, 2009 valuation because we had, by then, initiated a process to pursue an IPO, but recognized that there still existed significant uncertainty related to the consummation of an IPO, including continuing uncertainties of the future capital markets and the economy.
 
Continued Operations Scenario
 
The valuation methodologies employed in determining the FMV of our common stock under the continued operations scenario and the results of these methodologies, are set forth below:
 
  •  Market multiple. The range of multiples for comparable public companies was between 1.4x and 1.5x trailing 12 months revenue, between 1.2x and 1.3x estimated revenue for the first year after the valuation date and between 1.1x and 1.2x estimated revenue for the second year after the valuation date. When applied to our trailing 12 months revenue and revenue projections, the market multiple methodology yielded an enterprise valuation range of $102 million to $111 million.
 
  •  Discounted cash flow. Based on our projected operating results and assuming a discount rate of 20% and a terminal value assumption of between 1.45x and 1.55x projected revenue for the fourth year of the discrete projection period, the DCF methodology yielded a valuation range of $120 million to $133 million.
 
  •  Comparative transactions. The range of multiples for comparable transactions was between 1.75x and 2.25x trailing 12 months revenue. When applied to our trailing 12 months revenue, and after applying a minority discount, the comparative transaction methodology yielded a valuation range of $101 million to $129 million.
 
  •  Arms-length transactions in our equity securities among third parties. In November 2009, three holders of common stock sold their shares to third-party investors at a price per share of $0.55. The implied enterprise valuation based on this transaction price was $83 million.
 
Based on these methodologies, we estimated the enterprise value in a continued operations scenario to be in a range of $110 million to $125 million. After deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents, the estimated aggregate value attributable to common stockholders was estimated to be $35.2 million. A marketability discount was then applied, resulting in an estimated per share value for common stock of $0.70 per share. The


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primary factors that contributed to the increase in the estimated FMV of our common stock under the continued operations scenario between September 30, 2009 and December 31, 2009 were:
 
  •  continued improved operating results, including quarter-over-quarter growth and cash flow positive performance;
 
  •  improved comparable public company valuations;
 
  •  arms-length third-party sales of our common stock;
 
  •  continued improvement in the capital markets; and
 
  •  efforts we undertook to prepare for a possible IPO of our common stock.
 
IPO Scenarios
 
For each of the IPO scenarios, based on prevailing market multiples, we assumed that, on an enterprise basis, our company would be valued at 2.5x trailing 12 months revenue. After deducting the estimated value of an IPO discount, as well as deducting the value of indebtedness (net of cash), preferred stock and other common share equivalents, the estimated aggregate value attributable to common stockholders was estimated to be between $47.2 million and $48.2 million, respectively, for each of the IPO scenarios. We then discounted these values back to the valuation date of December 31, 2009 and applied a marketability discount, which yielded a per share value of our common stock of $0.98 for the first IPO scenario and $0.94 for the second IPO scenario.
 
Based on the relative weights of the continued operations and IPO scenarios, we estimated the FMV of our common stock to be $0.83 per share as of December 31, 2009.
 
Post-December 31, 2009. Subsequent to December 31, 2009, we continued making progress toward a potential IPO. On January 15, 2010, management and our external legal counsel and our independent registered public accounting firm and the proposed underwriters and their external legal counsel held an organizational meeting to formally begin the IPO process and process of underwriter due diligence.
 
On March 15, 2010, we filed a registration statement, of which this prospectus is a part, with the SEC.
 
Aggregate Intrinsic Value of Equity Awards
 
Based upon an assumed IPO price of $      per share, the mid-point of the range reflected on the cover page of this prospectus, the aggregate intrinsic value of outstanding vested stock options as of          , 2010 was $      million, and the aggregate intrinsic value of outstanding unvested stock options, restricted stock and RSUs as of          , 2010 was $      million.
 
Income Taxes
 
We use the liability method to account for income taxes, which requires an asset and liability approach for the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred amounts are expected to be settled or realized.
 
Realization of net deferred tax assets is dependent on generating sufficient future taxable income prior to the expiration of the operating loss and tax credit carryforwards. Based on an assessment of positive and negative evidence, including historical net operating losses and our limited history of generating positive taxable income, we determined that it was more likely than not that our future taxable income would not be sufficient to realize our net operating losses and tax credit


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carryforwards in the United States and certain foreign jurisdictions. Therefore, valuation allowances in the amount of $37.1 million at December 31, 2009 have been established to reduce deferred tax assets to the amount expected to be realized. These valuation allowances would be reversed and recognized as a benefit in Provision for Income Taxes in our consolidated statement of operations at such time that realization is believed to be more likely than not.
 
Effective January 1, 2007, we adopted FASB guidance for uncertainty in income taxes that requires the application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions. If the recognition threshold is met, this guidance permits us to recognize a tax benefit measured at the largest amount of the tax benefit that, in our judgment, is more likely than not to be realized upon settlement. If recognized, our unrecognized tax benefits at December 31, 2009, totaling $0.4 million, would not have a material impact on the provision for income taxes or the effective tax rate since it would result in a corresponding adjustment to the valuation allowance. We do not expect material changes in unrecognized tax benefits within the next twelve months.
 
At December 31, 2009, we had U.S. net operating loss carryforwards of approximately $79.0 million and research and experimentation tax credit carryforwards of $1.8 million, which are scheduled to begin to expire in 2019. We acquired approximately $10.0 million of these net operating loss carryforwards in 2008 and 2009, which amount reflects the impact of the annual limitation on net operating loss carryforwards due to ownership changes. We have not accrued a provision for income taxes on undistributed earnings of $0.3 million of certain foreign subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed, we would be subject to federal income and foreign withholding taxes. Determination of an unrecognized deferred income tax liability with respect to such earnings is not practicable.
 
Results of Operations
 
Comparison of Years Ended December 31, 2008 and 2009
 
Revenue
 
                                                 
    Year Ended December 31,              
    2008     2009              
          Percentage of
          Percentage of
    Period-to-Period
 
          Total
          Total
    Change  
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Percentage
 
    (Dollars in thousands)  
 
Revenue by Type:
                                               
Licenses
  $  40,121       65 %   $  37,942       55 %   $  (2,179 )     (5 )%
Maintenance and professional services
    21,708       35       30,945       45       9,237       43  
                                                 
Total revenue
  $ 61,829       100 %   $ 68,887       100 %   $ 7,058       11 %
                                                 
Revenue by Geography:
                                               
Americas
  $ 32,954       53 %   $ 40,380       59 %   $ 7,426       23 %
EMEA
    21,078       34       17,969       26       (3,109 )     (15 )
APAC
    7,797       13       10,538       15       2,741       35  
                                                 
Total revenue
  $ 61,829       100 %   $ 68,887       100 %   $ 7,058       11 %
                                                 
 
Total revenue for the year ended December 31, 2009 increased by 11%, or $7.1 million, to $68.9 million, compared to 2008. Additionally, deferred revenue grew by $18.9 million in 2009, compared to growth of $6.5 million in 2008. Substantially all of the deferred revenue growth in 2009 was attributable to increased sales of BroadWorks licenses and related maintenance and professional services.


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Total revenue from the Americas for the year ended December 31, 2009 increased by 23%, or $7.4 million, compared to 2008. Deferred revenue from the Americas grew by $9.6 million in 2009, compared to growth of $5.7 million in 2008. The increase in 2009 revenue was primarily related to the acquisition of M6 and Sylantro in 2008. The growth in deferred revenue was attributable to increased sales of BroadWorks and associated maintenance and professional services. EMEA total revenue decreased by 15%, or $3.1 million, compared to 2008, while EMEA deferred revenue grew by $4.1 million in 2009, compared to a decline of $2.3 million in 2008. The decline in EMEA revenue and the increase in EMEA deferred revenue in 2009 was primarily a result of a shift from indirect sales through distribution partners to direct sales in the EMEA, which we believe has lengthened our sales cycles in the region, as well as a small number of large orders received in 2009 for which there were undelivered elements. APAC total revenue increased by 35%, or $2.7 million, compared to 2008. APAC deferred revenue grew by $5.2 million in 2009, compared to growth of $3.1 million in 2008. The increase in APAC revenue was due to both growth in sales of BroadWorks and associated maintenance and professional services and to the acquisition of M6. The increase in APAC deferred revenue was due to sales of BroadWorks and associated maintenance and professional services.
 
License Revenue
 
License revenue for the year ended December 31, 2009 decreased by 5%, or $2.2 million, to $37.9 million, and deferred license revenue grew by $11.9 million for the year ended December 31, 2009, compared to growth of $2.2 million in 2008. The increase in deferred revenue in 2009 was primarily driven by a number of large orders for which there were undelivered elements. As a result, license revenue as a percent of total revenue decreased from 65% to 55%. Additionally, the change in license revenue during 2009 includes a $3.9 million increase related to M6 and Sylantro due to their inclusion in our results of operations for the full year of 2009.
 
Maintenance and Professional Services Revenue
 
Maintenance and professional services revenue for the year ended December 31, 2009 increased by 43%, or $9.2 million, to $30.9 million. Deferred maintenance and professional services revenue grew by $7.0 million in 2009, compared to growth of $4.3 million in 2008. The increase in maintenance and professional services revenue was the result of growth in our installed base of customers and licenses, including a $6.4 million increase in maintenance and professional services revenue from the inclusion of the results of M6 and Sylantro in our results of operations for the full year of 2009.


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Cost of Revenue and Gross Profit
 
                                                 
    Year Ended December 31,              
    2008     2009              
          Percentage of
          Percentage of
    Period-to-Period
 
          Related
          Related
    Change  
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Percentage
 
    (Dollars in thousands)  
 
Cost of Revenue:
                                               
Licenses (1)
  $ 4,818       12 %   $ 5,232       14 %   $ 414       9 %
Maintenance and professional services
    8,649       40       12,142       39       3,493       40  
                                                 
    $ 13,467       22 %   $ 17,374       25 %   $ 3,907       29 %
                                                 
                                                 
Gross Profit:
                                               
Licenses (1)
  $ 35,303       88 %   $ 32,710       86 %   $ (2,593 )     (7 )%
Maintenance and professional services
    13,059       60       18,803       61       5,744       44  
                                                 
Total gross profit
  $ 48,362       78 %   $ 51,513       75 %   $ 3,151       7 %
                                                 
 
(1) Includes amortization of intangibles aggregating $414 for 2008 and $800 for 2009.
 
For the year ended December 31, 2009, our gross profit increased by 7%, or $3.2 million, to $51.5 million. Gross margin declined from 78% to 75% from 2008 to 2009. The decrease in total gross margin from 2008 to 2009 was primarily a result of growth in deferred license revenue, for which no corresponding expenses were deferred.
 
During 2009, license cost of revenue increased by 9% to $5.2 million. This increase was primarily due to an increase in amortization of intangibles, primarily as a result of our acquisition of Sylantro. Given this increase and the reduction in license revenue, and the proportional increase in deferred revenue, our license gross profit declined by 7% to $32.7 million, with a corresponding decline in gross margin from 88% to 86%, for 2009.
 
Maintenance and professional services cost of revenue increased by 40%, or $3.5 million, during 2009. The increase in maintenance and professional services cost of revenue was primarily due to a $1.2 million increase in personnel costs as a result of the Sylantro and M6 acquisitions, a $0.9 million increase in royalties for third-party software maintenance and a $1.4 million growth in personnel costs allocated to cost of revenue due to an increase in the number of research and development employees working directly on specific features for certain customers. Maintenance and professional services gross profit increased by 44% to $18.8 million, with a corresponding increase in gross margin from 60% to 61%, for 2009.


60


 

 
Operating Expenses
 
                                                 
    Year Ended December 31,              
    2008     2009              
          Percentage of
          Percentage of
    Period-to-Period
 
          Total
          Total
    Change  
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Percentage
 
    (Dollars in thousands)  
 
Sales and marketing
  $  30,774       50 %   $  28,534       41 %   $  (2,240 )     (7 )%
Research and development
    15,876       26       16,625       24       749       5  
General and administrative
    12,074       20       11,405       17       (669 )     (6 )
                                                 
Total operating expenses
  $ 58,724       96 %   $ 56,564       82 %   $ (2,160 )     (4 )%
                                                 
 
Sales and Marketing. Sales and marketing expense decreased by 7%, or $2.2 million, during the year ended December 31, 2009. The decrease was primarily due to a $1.1 million reduction in marketing programs and a $1.0 million decrease in travel expenses, as a result of cost control measures implemented in response to the economic downturn in late 2008 and 2009.
 
Research and Development. Research and development expense increased by 5%, or $0.7 million, during the year ended December 31, 2009. This increase was primarily due to a $1.4 million increase in personnel costs, primarily resulting from an increase in research and development headcount, and a $0.3 million increase in stock-based compensation expense, partially offset by a $1.4 million decrease in personnel costs that were allocated to cost of revenue as a result of an increase in the number of research and development employees working directly on specific features for certain customers. Our number of full-time research and development employees increased from 91 at December 31, 2008 to 115 at December 31, 2009 as we continued to invest in research and development.
 
General and Administrative. General and administrative expense decreased by 6%, or $0.7 million, during the year ended December 31, 2009. This decrease was primarily attributable to a $0.6 million reduction in outside consulting expenses during 2009, as part of our cost control measures.
 
Loss from Operations
 
We incurred a loss from operations of $5.1 million for the year ended December 31, 2009, compared to a loss from operations of $10.4 million in 2008. The decrease in loss from operations is a result of the $3.2 million increase in gross profit and the $2.2 million decrease in total operating expenses described above.


61


 

Other (Income) Expense
 
                                                 
    Year Ended December 31,        
    2008   2009        
        Percentage of
      Percentage of
  Period-to-Period
        Total
      Total
  Change
   
Amount
 
Revenue
 
Amount
 
Revenue
 
Amount
 
Percentage
    (Dollars in thousands)
 
Interest income
  $   (173 )     * %   $   (39 )     * %   $   134       (77 )%
Interest expense
    521       1       1,398       2       877       168  
Change in fair value of preferred stock warrants
    (426 )     (1 )     110       *       536       NM  
                                                 
Total other (income) expense
  $ (78 )     * %   $ 1,469       2 %   $ 1,547       NM  
                                                 
 
* Less than 1%
NM=Not meaningful
 
The decrease in interest income for the year ended December 31, 2009 was due to lower interest rates earned on borrowings, despite higher cash balances during 2009. Interest expense increased 168%, or $0.9 million, for the year ended December 31, 2009 due to interest incurred on the ORIX Loan. We expect interest expense to decrease in future periods as a result of our repayment of all amounts outstanding under the ORIX Loan with a portion of the net proceeds of this offering.
 
The fair value of preferred stock warrants increased $0.5 million in 2009 as a result of the increase in the estimated fair value of the company as of December 31, 2009. Upon the completion of this offering, all outstanding shares of our convertible preferred stock will automatically convert to common stock and our results of operations will no longer be impacted by these warrants.
 
Provision for Income Taxes
 
Provision for income tax was $1.3 million for the year ended December 31, 2009, compared to $1.0 million in 2008. The income tax provision relates primarily to foreign taxes. Changes in our taxes are due primarily to the change in the mix of earnings by jurisdiction. The increase of $0.3 million consisted primarily of a $0.4 million increase in Canadian income taxes, compared to 2008, a year in which we received certain Canadian income tax credits. The corresponding Canadian income tax credits for 2009 were pending regulatory approval as of December 31, 2009 and, accordingly, are not reflected in the net tax amount for 2009. We also incurred an income tax expense of $0.1 million in 2009 related to the sale of a subsidiary. The annual tax rate was negative for 2008 and 2009, which is primarily due to historical losses in the United States, for which we have continued to record a full valuation against our U.S. deferred taxes.


62


 

Comparison of Years Ended December 31, 2007 and 2008
 
Revenue
 
                                                 
    Year Ended December 31,              
    2007     2008              
          Percentage of
          Percentage of
    Period-to-Period
 
          Total
          Total
    Change  
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Percentage
 
    (Dollars in thousands)  
 
Revenue by Type:
                                               
Licenses
  $   46,328       75 %   $   40,121       65 %   $   (6,207 )     (13 )%
Maintenance and professional services
    15,272       25       21,708       35       6,436       42  
                                                 
Total revenue
  $ 61,600       100 %   $ 61,829       100 %   $ 229       0 %
                                                 
Revenue by Geography:
                                               
Americas
  $ 34,070       55 %   $ 32,954       53 %   $ (1,116 )     (3 )%
EMEA
    19,611       32       21,078       34       1,467       7  
APAC
    7,919       13       7,797       13       (122 )     (2 )
                                                 
Total revenue
  $ 61,600       100 %   $ 61,829       100 %   $ 229       0 %
                                                 
 
Total revenue for the year ended December 31, 2008 was $61.8 million, which was substantially unchanged from 2007. However, deferred revenue grew by $6.5 million in 2008, compared to a decline of $7.5 million in 2007. The deferred revenue growth in 2008 was attributable to deferred revenue acquired in connection with the acquisitions of M6 and Sylantro, as well as increased sales of BroadWorks licenses and related maintenance and professional services.
 
Total revenue from the Americas for the year ended December 31, 2008 decreased by 3%, or $1.1 million, compared to 2007. Deferred revenue from the Americas grew by $5.7 million in 2008, compared to a decline of $6.0 million in 2007. EMEA total revenue for the year ended December 31, 2008 increased by 7%, or $1.5 million, compared to 2007. EMEA deferred revenue declined by $2.3 million in 2008, compared to a decline of $0.4 million in 2007. APAC total revenue for the year ended December 31, 2008 was substantially unchanged compared to 2007. APAC deferred revenue grew by $3.1 million in 2008, compared to a decline of $1.1 million in 2007.
 
License Revenue
 
License revenue for the year ended December 31, 2008 decreased by 13%, or $6.2 million, to $40.1 million, and deferred license revenue grew by $2.2 million for the year ended December 31, 2008, compared to a decline of $9.7 million in 2007. The change in license revenue in 2008 includes a $0.6 million increase related to M6 and Sylantro, as a result of the acquisition of these businesses during 2008.
 
Maintenance and Professional Services Revenue
 
Maintenance and professional services revenue for the year ended December 31, 2008 increased by 42%, or $6.4 million, to $21.7 million. Deferred maintenance and professional services revenue grew by $4.3 million in 2008, compared to growth of $2.2 million in 2007. The increase in recognized and deferred revenue was the result of growth in our installed base of customers and licenses, including a $1.3 million increase in maintenance and professional services revenue attributable to M6, which was acquired in 2008.


63


 

Cost of Revenue and Gross Profit
 
                                                 
    Year Ended December 31,              
    2007     2008              
          Percentage of
          Percentage of
    Period-to-Period
 
          Related
          Related
    Change  
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Percentage
 
    (Dollars in thousands)  
 
Cost of Revenue:
                                               
Licenses (1)
  $ 5,299       11 %   $ 4,818       12 %   $ (481 )     (9 )%
Maintenance and professional services
    7,270       48       8,649       40       1,379       19  
                                                 
Total cost of revenue
  $ 12,569       20 %   $ 13,467       22 %   $ 898       7 %
                                                 
Gross Profit:
                                               
Licenses (1)
  $ 41,029       89 %   $ 35,303       88 %   $ (5,726 )     (14 )%
Maintenance and professional services
    8,002       52       13,059       60       5,057       63  
                                                 
Total gross profit
  $ 49,031       80 %   $ 48,362       78 %   $ (669 )     (1 )%
                                                 
 
(1) Includes amortization of intangibles aggregating $400 for 2007 and $414 for 2008.
 
For the year ended December 31, 2008, our gross profit declined by 1%, or $0.7 million, to $48.4 million. Gross profit as a percentage of revenue declined from 80% to 78% from 2007 to 2008.
 
License cost of revenue decreased by 9% to $4.8 million during 2008. The decrease in license cost of revenue was primarily due to a decrease in royalty expense, particularly related to the database technology we embed in our software. However, as a result of the reduction in license revenue and the associated increase in deferred revenue, license gross profit declined 14% to $35.3 million for 2008. License gross margin declined from 89% to 88% from 2007 to 2008.
 
Maintenance and professional services cost of revenue increased by 19%, or $1.4 million, during 2008. The increase in maintenance and services cost of revenue was primarily due to a $0.4 million increase in personnel costs related to the M6 acquisition and a $0.1 million increase in royalties for third-party software maintenance. Maintenance and professional services gross profit increased by 63%, or $5.1 million, during 2008.
 
The decrease in total gross profit percentage in 2008 from 2007 was primarily due to the change in revenue mix toward maintenance and professional services revenue, which offers lower gross profit margins than license revenue. This change during 2008 was primarily a result of the recognition in 2007 of a significant amount of previously deferred revenue.


64


 

Operating Expenses
 
                                                 
    Year Ended December 31,              
    2007     2008              
          Percentage of
          Percentage of
    Period-to-Period
 
          Total
          Total
    Change  
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Percentage
 
    (Dollars in thousands)  
 
Sales and marketing
  $   26,431       43 %   $   30,774       50 %   $   4,343       16 %
Research and development
    12,763       21       15,876       26       3,113       24  
General and administrative
    10,295       17       12,074       20       1,779       17  
                                                 
Total operating expenses
  $ 49,489       81 %   $ 58,724       96 %   $ 9,235       19 %
                                                 
 
Sales and marketing. Sales and marketing expense increased by 16%, or $4.3 million, during the year ended December 31, 2008. This increase was primarily due to a $3.1 million increase in personnel costs, as we increased headcount during 2008, and a $0.2 million increase in stock-based compensation. Our number of full-time sales and marketing employees increased from 94 at December 31, 2007 to 103 at December 31, 2008. The increase in sales and marketing expense during 2008 also includes a $0.5 million increase in consulting expenses.
 
Research and development. Research and development expense increased by 24%, or $3.1 million, during the year ended December 31, 2008. This increase was primarily due to a $1.9 million increase in personnel costs as we increased headcount and a $0.2 million increase in stock-based compensation. Our number of full-time research and development employees increased from 88 at December 31, 2007 to 91 at December 31, 2008 as we continued to invest in research and development.
 
General and administrative. General and administrative expense increased by 17%, or $1.8 million, during the year ended December 31, 2008. This increase was primarily due to a $0.8 million increase in personnel costs and a $0.8 million increase in stock-based compensation expense.
 
Loss from Operations
 
We incurred a loss from operations of $10.4 million for the year ended December 31, 2008, compared to a loss from operations of $0.5 million in 2007. The increase in loss from operations is primarily attributable to the $9.2 million increase in operating expenses described above and a decrease in gross profit of $0.7 million.


65


 

Other (Income) Expense
 
                                                 
    Year Ended December 31,              
    2007     2008              
          Percentage of
          Percentage of
    Period-to-Period
 
          Total
          Total
    Change  
   
Amount
   
Revenue
   
Amount
   
Revenue
   
Amount
   
Percentage
 
    (Dollars in thousands)  
 
Interest income
  $   (265 )     * %   $   (173 )     * %   $   92       (35 )%
Interest expense
    324       1       521       1       197       61  
Change in fair value of preferred stock warrants
    220       *       (426 )     (1 )     (646 )     NM  
                                                 
Total other (income) expense
  $ 279       * %   $ (78 )     * %   $ (357 )     NM  
                                                 
 
* Less than 1%
NM = Not meaningful
 
The decrease in interest income for the year ended December 31, 2008 was due to lower average cash balances during 2008 and decline in interest rates. Interest expense increased for the year ended December 31, 2008 due to higher average borrowings during 2008, including interest expense on the ORIX Loan in the last quarter of 2008.
 
The fair value of preferred stock warrants decreased $0.4 million in 2008 as a result of the decline in the estimated fair value of the company as of December 31, 2008.
 
Provision for Income Taxes
 
Provision for income tax was $1.0 million for the year ended December 31, 2008, which was substantially unchanged from 2007. The income tax provision relates primarily to foreign taxes. The annual tax rate was negative for 2007 and 2008, which is primarily due to historical losses in the United States, for which we have continued to record a full valuation against our U.S. deferred taxes.


66


 

Quarterly Results of Operations
 
The tables below show our unaudited consolidated quarterly results of operations for each of our eight most recently completed quarters, as well as the percentage of total revenue (or, for cost of revenue line items only, the percentage of the related revenue type) for each line item shown. This information has been derived from our unaudited financial statements, which, in the opinion of management, have been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the financial information for the quarters presented. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.
 
                                                                 
    Three Months Ended  
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
   
2008
   
2008
   
2008
   
2008
   
2009
   
2009
   
2009
   
2009
 
    (Unaudited)
 
    (In thousands)  
 
Statements of Operations Data:
                                                               
Revenue:
                                                               
Licenses
  $   10,344     $   10,039     $   7,835     $   11,903     $   7,066     $   10,001     $   10,170     $   10,705  
Maintenance and professional services
    4,729       5,084       5,626       6,269       6,594       7,731       8,024       8,596  
                                                                 
Total revenue
    15,073       15,123       13,461       18,172       13,660       17,732       18,194       19,301  
Cost of revenue:
                                                               
Licenses (1)
    1,163       1,260       1,198       1,197       1,323       1,351       1,235       1,323  
Maintenance and professional services
    2,058       2,105       2,181       2,305       2,908       3,634       3,016       2,584  
                                                                 
Total cost of revenue
    3,221       3,365       3,379       3,502       4,231       4,985       4,251       3,907  
                                                                 
Gross profit
    11,852       11,758       10,082       14,670       9,429       12,747       13,943       15,394  
Operating expenses:
                                                               
Sales and marketing
    7,305       8,604       7,968       6,897       7,091       7,503       7,034       6,906  
Research and development
    3,865       3,914       4,005       4,092       4,192       4,090       3,864       4,479  
General and administrative
    2,724       3,275       2,562       3,513       2,801       3,077       2,683       2,844  
                                                                 
Total operating expenses
    13,894       15,793       14,535       14,502       14,084       14,670       13,581       14,229  
                                                                 
(Loss) income from operations
    (2,042 )     (4,035 )     (4,453 )     168       (4,655 )     (1,923 )     362       1,165  
Other (income) expense
    (194 )     26       100       (10 )     334       337       339       459  
                                                                 
(Loss) income before income taxes
    (1,848 )     (4,061 )     (4,553 )     178       (4,989 )     (2,260 )     23       706  
Provision for income taxes
    320       252       86       294       245       383       373       332  
                                                                 
Net (loss) income
  $ (2,168 )   $ (4,313 )   $ (4,639 )   $ (116 )   $ (5,234 )   $ (2,643 )   $ (350 )   $ 374  
Net loss attributable to noncontrolling interest
                            (1 )     (1 )     (1 )     (1 )
                                                                 
Net income (loss) attributable to BroadSoft, Inc.
  $ (2,168 )   $ (4,313 )   $ (4,639 )   $ (116 )   $ (5,233 )   $ (2,642 )   $ (349 )   $ 375  
                                                                 
                                                                 
                                                               
(1) Includes amortization of intangibles as follows:
                                                                 
    $ 100     $ 100     $ 104     $ 110     $ 210     $ 210     $ 210     $ 170  
 


67


 

                                                                 
    Three Months Ended
    Mar. 31,
  June 30,
  Sept. 30,
  Dec. 31,
  Mar. 31,
  June 30,
  Sept. 30,
  Dec. 31,
   
2008
 
2008
 
2008
 
2008
 
2009
 
2009
 
2009
 
2009
    (Unaudited)
 
Statements of Operations:
                                                               
Revenue:
                                                               
Licenses
    69 %     66 %     58 %     66 %     52 %     56 %     56 %     55 %
Maintenance and professional services
    31       34       42       34       48       44       44       45  
                                                                 
Total revenue
    100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %
                                                                 
Cost of revenue:
                                                               
Licenses (as a % of license revenue)
    11 %     13 %     15 %     10 %     19 %     14 %     12 %     12 %
Maintenance and professional services (as a % of maintenance and professional services revenue)
    44       41       39       37       44       47       38       30  
                                                                 
Total cost of revenue
    21       22       25       19       31       28       23       20  
                                                                 
Gross margin
    79       78       75       81       69       72       77       80  
Operating expenses:
                                                               
Sales and marketing
    48       57       59       38       52       42       39       36  
Research and development
    26       26       30       23       31       23       21       23  
General and administrative
    18       22       19       19       21       17       15       15  
                                                                 
Total operating expenses
    92       105       108       80       104       82       75       74  
                                                                 
(Loss) income from operations
    (13 )     (27 )     (33 )     1       (35 )     (10 )     2       6  
Other (income) expense
    (1 )           1             2       2       2       2  
                                                                 
Income (loss) before income taxes
    (12 )     (27 )     (34 )     1       (37 )     (12 )           4  
Provision for income taxes
    2       2       1       2       2       2       2       2  
                                                                 
Net income (loss)
    (14 )     (29 )     (35 )     (1 )     (39 )     (14 )     (2 )     2  
Net loss attributable to noncontrolling interest
                                               
Net income (loss) attributable to BroadSoft, Inc.
    (14 )%     (29 )%     (35 )%     (1 )%     (39 )%     (14 )%     (2 )%     2 %
                                                                 
 
                                                                 
    As of and for the Three Months Ended
    Mar. 31,
  June 30,
  Sept. 30,
  Dec. 31,
  Mar. 31,
  June 30,
  Sept. 30,
  Dec. 31,
   
2008
 
2008
 
2008
 
2008
 
2009
 
2009
 
2009
 
2009
    (Unaudited)
    (In thousands)
 
Additional Key Metrics
                                                               
Cash and cash equivalents
  $   6,703     $   5,481     $   17,556     $   14,353     $   16,778     $   18,057     $   20,904     $   22,869  
Total deferred revenue
    13,311       16,828       15,668       21,179       25,133       27,584       31,089       40,047  
Increase (decrease) in total deferred revenue
    (1,375 )     3,517       (1,160 )     5,511       3,954       2,451       3,505       8,958  
Cash (used in) provided by operating activities
    (2,789 )     (6,975 )     (261 )     4,492       2,998       2,489       4,003       937  
 
Variability in Quarterly Results
 
Our quarterly results vary significantly as a result of many factors, many of which are outside our control. These factors include customer ordering practices and deployment cycles, the impact of deferred revenue and general economic conditions. In addition, increased customer purchases at year-end have generally positively impacted sales activity in the fourth quarter, which can result in fewer customer orders in the first quarter. Results of operations during the third quarter of 2008 were adversely impacted as a result of the global economic downturn. Results of operations in the first quarter of 2009 were affected by increases in deferred revenue and the impact of seasonal factors that typically adversely impact our first quarter sales. Our historical results should not be considered a reliable indicator of our future results of operations.

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Our total quarterly revenue has generally increased, with revenue increasing from $13.5 million in the quarter ended September 30, 2008 to $19.3 million in the quarter ended December 31, 2009. Our increase in quarterly revenue is mainly due to the increase in maintenance and professional services revenue. The increases in maintenance revenue are primarily due to increases in the total number of software licenses sold to customers and the high percentage of renewal agreements for post-contract maintenance and support, including customer relationships acquired through the M6 and Sylantro acquisitions. The increase in professional services revenue is a result of an increase in the demand for our professional services from customers using our software.
 
Gross margin has fluctuated on a quarterly basis primarily due to changes in revenue and deferred revenue and shifts in the mix of sales between licenses, maintenance and professional services. In 2008, license gross margin fluctuated on a quarterly basis as expenses remained relatively unchanged for each quarter, but license revenue fluctuated due to the reasons discussed above. However, in 2009, license gross margin increased each sequential quarter as license revenue increased and expenses decreased during the third and fourth quarters. Maintenance and professional services gross profit increased sequentially in each of the eight quarters presented due to maintenance and professional services revenue increasing each quarter without a proportionate increase in related costs.
 
Liquidity and Capital Resources
 
Resources
 
We funded our operations from 1999 through 2008 primarily with approximately $70.9 million of net proceeds from issuances of preferred stock and, to a lesser extent, borrowings under credit facilities. Since the beginning of 2009, we have funded our operations principally with cash provided by operating activities, which has resulted primarily from growth in revenue and deferred revenue.
 
Cash, Cash Equivalents and Working Capital
 
The following table presents a summary of our cash and cash equivalents, accounts receivable, working capital and cash flows for the periods indicated.
 
                         
    As of and for the Year Ended
    December 31,
   
2007
 
2008
 
2009
    (In thousands)
 
Cash and cash equivalents
  $   10,717     $   14,353     $   22,869  
Accounts receivable, net
    15,804       21,413       25,471  
Working capital
    3,200       5,918       2,924  
Cash provided by (used in):
                       
Operating activities
    (3,679 )     (5,011 )     10,427  
Investing activities
    (1,412 )     (8,776 )     694  
Financing activities
    9,148       17,597       (2,684 )
 
Our cash and cash equivalents at December 31, 2009 were held for working capital purposes and were invested primarily in demand deposit accounts or money market funds. We do not enter into investments for trading or speculative purposes. Restricted cash, which totaled $0.6 million at December 31, 2009 and is not included in cash and cash equivalents, consists primarily of certificates of deposit that secure letters of credit related to operating leases for office space.
 
Operating Activities
 
For the year ended December 31, 2009, operating activities provided $10.4 million in cash, primarily as a result of a net loss of $7.9 million that was offset by an $18.9 million increase in


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deferred revenue, which was attributable primarily to increased sales of our software, and non-cash items, such as depreciation and amortization of $2.2 million, amortization of software licenses of $1.8 million and stock-based compensation expense of $3.6 million. Cash provided by operating activities was adversely impacted by a $4.1 million increase in accounts receivable resulting from increased sales activity and a $3.5 million decrease in accounts payable and other liabilities primarily due to the payment of liabilities incurred through the acquisition of M6 and Sylantro.
 
For the year ended December 31, 2008, operating activities used $5.0 million in cash, primarily as a result of a net loss of $11.2 million that was partially offset by a $2.5 million increase in deferred revenue (exclusive of deferred revenue acquired through acquisitions) and non-cash items, such as depreciation and amortization of $1.7 million, amortization of software licenses of $2.2 million and stock-based compensation expense of $2.9 million. Cash used in operating activities was adversely impacted by a $1.6 million increase in accounts receivable (exclusive of accounts receivable acquired through acquisitions) resulting from increased sales activity and a $0.7 million decrease in accounts payable.
 
For the year ended December 31, 2007, operating activities used $3.7 million in cash as a result of a net loss of $1.8 million and a $7.5 million decrease in deferred revenue that was attributable primarily to the recognition of a significant amount of revenue during 2007 that had been deferred between 2004 and 2006, partially offset by non-cash items, such as depreciation and amortization of $1.5 million, amortization of software licenses of $2.1 million and stock-based compensation expense of $1.7 million.
 
Investing Activities
 
Our investing activities have consisted primarily of purchases of property and equipment, as well as business acquisitions.
 
For the year ended December 31, 2009, net cash provided by investing activities was $0.7 million, consisting of $0.8 million of cash received in connection with our acquisition of Packet Island, which we acquired for stock, and the release of restricted cash of $0.7 million, partially offset by the purchase of property and equipment of $0.8 million.
 
For the year ended December 31, 2008, net cash used in investing activities was $8.8 million, consisting primarily of $6.4 million for the acquisition of third-party software, $1.3 million for the purchases of property and equipment, $0.6 million for new certificates of deposit that are securing letters of credit and $0.5 million for net assets acquired in the acquisitions of M6 and Sylantro.
 
For the year ended December 31, 2007, net cash used in investment activities was $1.4 million, consisting primarily of purchases of property and equipment.
 
Financing Activities
 
For the year ended December 31, 2009, net cash used in financing activities was $2.7 million, consisting primarily of the repayment of outstanding indebtedness.
 
For the year ended December 31, 2008, net cash provided by financing activities was $17.6 million, consisting primarily of $15.0 million of proceeds from the ORIX Loan and $6.3 million of debt incurred in connection with our purchase of third-party software, partially offset by net debt repayments of $4.0 million.
 
For the year ended December 31, 2007, net cash provided by financing activities was $9.1 million, consisting primarily of $9.9 million of net proceeds from the issuance of Series D redeemable convertible preferred stock, $0.3 million from the exercise of outstanding warrants and $0.3 million from the exercise of stock options, partially offset by debt repayments of $1.4 million.


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Credit Facilities
 
Bank of America Installment Loan
 
We have an installment loan with Bank of America, in the original principal amount of $6.4 million, to finance the payment of a one-time license and maintenance fee in connection with our license of certain third-party software. The interest rate on the loan is fixed at 4.0%. The loan provides for scheduled quarterly principal repayments of $0.4 million with the final principal payment due on April 1, 2012. As of December 31, 2009, the liability for the installment bank loan was approximately $3.5 million.
 
ORIX Loan
 
On September 26, 2008, we entered into a $15.0 million Loan and Security Agreement with ORIX, which we refer to as the ORIX Loan. As amended to date, the ORIX Loan requires 42 equal monthly principal payments of approximately $0.4 million beginning in April 2010 and the loan matures in September 2013. Borrowing under this agreement bears interest at a rate equal to 3% plus the greater of (a) the prime rate and (b) the LIBOR rate plus 2.5%, provided that in no event will the interest rate on the ORIX Loan be less than 7.0% per annum. The effective interest rate for the year ended December 31, 2009 was 7.0%. The balance outstanding under this agreement at December 31, 2009 was $15.0 million. We intend to use a portion of the net proceeds of this offering to repay the outstanding balance under the ORIX Loan and to terminate the ORIX Loan.
 
Operating and Capital Expenditure Requirements
 
We believe the net proceeds from this offering, together with the cash generated from operations, our cash balances and interest income we earn on these balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. In the future, we expect our operating and capital expenditures to increase as we increase headcount, expand our business activities, grow our customer base and implement and enhance our information technology and enterprise resource planning system. As sales grow, we expect our accounts receivable balance to increase. Any such increase in accounts receivable may not be completely offset by increases in accounts payable and accrued expenses, which would likely result in greater working capital requirements.
 
If our available cash balances and net proceeds from this offering are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible debt securities or enter into a credit facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all.
 
Our estimates of the period of time through which our financial resources will be adequate to support our operations and the costs to support research and development and our sales and marketing activities are forward-looking statements and involve risks and uncertainties and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the section “Risk Factors” of this prospectus. We have based our estimates on assumptions that may prove to be wrong and we could utilize our available capital resources sooner than we currently expect.
 
Our short- and long-term capital requirements will depend on many factors, including the following:
 
  •  our ability to generate cash from operations;
 
  •  our ability to control our costs;


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  •  the emergence of competing or complementary technological developments;
 
  •  the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights or participating in litigation-related activities; and
 
  •  the acquisition of businesses, products and technologies.
 
Contractual Obligations
 
We have contractual obligations for non-cancelable office space, notes payable and redeemable preferred stock. The following table discloses aggregate information about our contractual obligations and periods in which payments are due as of December 31, 2009:
 
                                         
    Payment Due by Period  
          Less Than
                More Than
 
   
Total
   
1 Year
   
1-3 Years
   
3-5 Years
   
5 Years
 
    (In thousands)  
 
Operating lease obligations
  $ 2,214     $ 1,032     $ 804     $ 378     $  
ORIX Loan (1)
    15,000       3,214       8,572       3,214        
Bank of America installment loan
    3,475       1,124       2,351              
Other borrowings
    198       198                    
Other long-term liabilities
    950       449       501              
Series A redeemable preferred stock (2)
    4,320       4,320                    
                                         
    $ 26,157     $ 10,337     $ 12,228     $ 3,592     $  
                                         
 
(1) We intend to repay this loan in full using a portion of the net proceeds of this offering.
 
(2) We intend to use a portion of the net proceeds of this offering to redeem the Series A redeemable preferred stock.
 
The amounts in the table above do not include contingent payments potentially payable to GENBAND in connection with our acquisition of M6. Pursuant to the terms of the acquisition agreement, we are required to make a payment to GENBAND equal to 15% of annual qualifying sales related to M6 for three years from the acquisition date of August 27, 2008. In the first year following the acquisition, we incurred an obligation of $0.6 million pursuant to this requirement.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2009, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
 
Quantitative and Qualitative Disclosure About Market Risk
 
We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into interest rate or exchange rate hedging arrangements to manage the risks described below.
 
Interest Rate Risk
 
We maintain a short-term investment portfolio consisting mainly of highly liquid short-term money market funds, which we consider to be cash equivalents. Our restricted cash consists primarily of certificates of deposit that secure letters of credit related to operating leases for office space. These securities and investments earn interest at variable rates and, as a result, decreases in market interest rates would generally result in decreased interest income. Our borrowings under the ORIX


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Loan are at variable rates and, as a result, increases in market interest rates would generally result in increased interest expense on outstanding borrowings.
 
We have performed sensitivity analyses to determine how changes in market interest rates would affect our net loss before income taxes. These analyses reflect the expected net change to interest income on our cash equivalents and restricted cash and interest expense on our ORIX Loan, which accrues interest at a variable rate, that would result from a hypothetical 1% change in market interest rates. All of our other debt instruments accrue interest at fixed rates. Therefore, changes in market interest rates under these instruments would not impact our results of operations. A 1% change in interest rates would have changed our annual loss before income taxes by approximately $0.1 and $0.2 million for December 31, 2008 and 2009, respectively. The analyses described above are inherently limited in that they reflect a singular, hypothetical set of assumptions and actual market movements may vary significantly from our assumptions.
 
Foreign Currency Exchange Risk
 
With international operations, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and if our exposure increases, adverse movement in foreign currency exchange rates would have a material adverse impact on our financial results. Historically, our primary exposures have been related to non-U.S. dollar denominated operating expenses in Canada, Europe and the APAC region. As a result, our results of operations would generally be adversely affected by a decline in the value of the U.S. dollar relative to these foreign currencies. However, based on the size of our international operations and the amount of our expenses denominated in foreign currencies, we would not expect a 10% decline in the value of the U.S. dollar from rates on December 31, 2009 to have a material effect on our financial position or results of operations. Substantially all of our sales contracts are currently denominated in U.S. dollars. Therefore, we have minimal foreign currency exchange risk with respect to our revenue.
 
Recent Accounting Pronouncements
 
Business combinations and noncontrolling interests. On January 1, 2009, we adopted the authoritative guidance issued by the Financial Accounting Standards Board, or the FASB, on business combinations. The guidance addresses the manner in which the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired business. This guidance also provides standards for recognizing and measuring the goodwill acquired in the business combination and for disclosure of information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance applies prospectively to business combinations with an acquisition date on or after the date the guidance became effective. Our acquisition of Packet Island, Inc. on October 19, 2009 was accounted for under this guidance.
 
In April 2009, the FASB issued guidance relating to accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. This pronouncement amends the guidance on business combinations to clarify the initial and subsequent recognition, subsequent accounting and disclosure of assets and liabilities arising from contingencies in a business combination. This pronouncement requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, as determined in accordance with guidance for fair value measurements, if the acquisition-date fair value can be reasonably estimated. If the acquisition-date fair value of an asset or liability cannot be reasonably estimated, the asset or liability would be measured at the amount that would be recognized in accordance with the accounting guidance for contingencies. This pronouncement became effective as of January 1, 2009, and the provisions of the pronouncement are applied prospectively to business combinations with an acquisition date on or after the date the guidance became effective. The adoption of this pronouncement did not have a material impact on our financial position or results of operations.


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Concurrent with the issuance of the new business combinations guidance, the FASB issued guidance on noncontrolling interests. This guidance which we applied prospectively as of January 1, 2009 (except for the presentation and disclosure requirements, which are being applied retrospectively to all periods presented), did not have a material impact on our results of operations, cash flows or financial position for the year ended December 31, 2009.
 
Intangible assets. On January 1, 2009, we adopted the authoritative guidance issued by the FASB which revises the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under GAAP. This guidance applies prospectively to intangible assets that are acquired on or after January 1, 2009. The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
Fair value measurements and disclosures. On January 1, 2009, we adopted authoritative guidance issued by the FASB on fair value measurements of nonfinancial assets and liabilities, other than non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which already were subject to the FASB guidance. The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
In April 2009, the FASB issued additional guidance on fair value measurements and disclosures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. The new guidance requires an evaluation of whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. If there has been a significant decrease in activity, transactions or quoted prices may not be indicative of fair value and a significant adjustment may need to be made to those prices to estimate fair value. Additionally, an entity must consider whether the observed transaction was orderly (that is, not distressed or forced). If the transaction was orderly, the obtained price can be considered a relevant, observable input for determining fair value. If the transaction is not orderly, other valuation techniques must be used when estimating fair value. This guidance, which we applied prospectively as of June 30, 2009, did not impact our results of operations, cash flows or financial position for the year ended December 31, 2009.
 
Recent Accounting Guidance Not Yet Adopted
 
Revenue recognition. In October 2009, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of current authoritative software revenue recognition guidance. Under the new guidance, when VSOE or third-party evidence of selling price is not available, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration based on the relative selling prices of the separate deliverables (the “relative selling price method”). The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of each deliverable’s selling price. The guidance also significantly expands related disclosure requirements. This standard is effective for us beginning January 1, 2010. We are continuing to evaluate the impact that the adoption of this guidance will have on our consolidated financial statements.
 
In October 2009, the FASB issued authoritative guidance on revenue recognition for arrangements that include software elements. Under the guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are excluded from the scope of software revenue recognition guidance and will be subject to other relevant revenue recognition guidance. This guidance is effective for us beginning January 1, 2010. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.


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Fair value disclosures. In January 2010, the FASB issued guidance amending the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 inputs (quoted prices in active market for identical assets or liabilities) and Level 2 inputs (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires separate disclosure of purchases, sales, issuance, and settlements of assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). This standard is effective for us for all interim and year-end financial statements issued after January 1, 2010, except for the disclosure on the activities for Level 3 fair value measurements, which is effective for us for all interim and year-end financial statements issued after January 1, 2011. Other than requiring additional disclosures, adoption of this guidance will not have a material impact on our consolidated financial statements.


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BUSINESS
 
Overview
 
We are the leading global provider of software that enables fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol-based, or IP-based, networks. Our software, BroadWorks, enables our service provider customers to provide enterprises and consumers with a range of cloud-based, or hosted, IP multimedia communications, such as hosted IP private branch exchanges, or PBXs, video calling, unified communications, or UC, collaboration and converged mobile and fixed-line services. For the year ended December 31, 2009, Infonetics Research, Inc., or Infonetics, a leading industry research firm, estimated that our global market share of multimedia application server software was approximately 33%. BroadWorks performs a critical network function by serving as the software element that delivers and coordinates voice, video and messaging communications through a service provider’s IP-based network. Service providers use BroadWorks to offer services that generate new revenue, reduce subscriber churn, capitalize on their investments in IP-based networks and help them migrate services from their legacy, circuit-based networks to their IP-based networks. We believe that we are well-positioned to enable service providers to capitalize on their IP-based network investments by efficiently and cost-effectively offering a broad suite of services to their end-users.
 
The market for communications services is changing. Enterprises and consumers are increasingly demanding new and better ways to communicate, including by voice, video, mobile, instant messaging and text messaging. Many of these users also seek greater features and functionality to enhance their experience with these types of communications. At the same time, enterprises and consumers are also demanding that their communications be flexible and cost-effective. We believe that in response, service providers are shifting toward providing cloud-based, real-time multimedia communications service offerings. The delivery of these services from legacy network infrastructure is difficult and impractical. As a result, many service providers are looking to software to enable their IP-based networks to deliver the communications services that their subscribers demand.
 
BroadWorks delivers and coordinates the enterprise, consumer, mobile and trunking communications applications that service providers offer through their IP-based networks. BroadWorks is installed on industry-standard servers, typically located in service providers’ data centers. It interoperates with service providers’ core networks, accesses other networks for interworking with end-users’ communications devices and connects to service providers’ support and billing systems.
 
We began selling BroadWorks in 2001. Over 425 service providers, located in more than 65 countries, including 15 of the top 25 telecommunications service providers globally as measured by revenue in the first three quarters of 2009, have purchased our software. We sell our products to service providers both directly and indirectly through distribution partners such as telecommunications equipment vendors, VARs and other distributors.
 
Industry
 
Telecommunications service providers are facing significant challenges to their traditional business models, including declining revenues in their legacy businesses, rapidly evolving customer communications demands and the need to generate returns on their increasing investments in IP-based networks. Historically, service providers derived much of their revenue from providing reliable voice and high speed data access. However, these legacy services have been increasingly commoditized as technological and regulatory changes have brought increased competition and lower prices. At the same time, enterprises and consumers have started to seek new and enhanced cloud-based communications services, such as hosted voice and multimedia communications, converged mobile and fixed-line services, video calling and collaboration. These new and enhanced services


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provide service providers with opportunities to counter falling legacy revenues and increase subscriber growth. Service providers are utilizing their existing IP-based networks to deliver these services. Although these IP-based networks were originally built to deliver high speed data, they are being configured, through the use of new network software, to efficiently enable the broader, richer services that their subscribers increasingly demand.
 
Demand for Voice and Multimedia Services
 
Service providers are delivering these services to enterprise and consumer customers. Enterprise subscribers include small, medium and large businesses, universities and governments and range in size from a few end-users to tens of thousands. Consumer subscribers include individuals and families purchasing communications services for their personal and residential use.
 
Enterprises
 
Enterprises require communication features and functionality that are varied and, in many cases, complex. For many years, four-digit dialing, multi-party conferencing and video conferencing have been common enterprise needs. Historically, enterprises have purchased voice and data access from service providers and deployed customer premises-based equipment, or CPE, such as private branch exchanges, or PBXs, to help deliver this functionality. Infonetics estimates that during the first three quarters of 2009 enterprises spent over $9.7 billion on PBX equipment. Enterprises could avoid the costly purchase of CPE by obtaining these services directly from a service provider’s network, often called hosted services. However, enterprises frequently required greater features and functionality than could previously be delivered efficiently from service providers’ legacy voice networks.
 
As service providers further invest in their IP-based networks, they are able to enhance the quality and functionality of their cloud-based communications, which has enabled service providers to increase the volume of communications services delivered to customers as hosted offerings. Concurrently, we believe a number of trends are driving increased demand for cloud-based services, including:
 
  •  Accelerating rate of technology change. Communications technology is evolving rapidly, with the frequent introduction of new devices and services and an increase in the number of ways people interact. Keeping pace with this change becomes difficult and expensive in a CPE-based environment where the investment to interoperate with new devices or provide new services must be fully born by the enterprise. Furthermore, CPE vendors operate proprietary systems with typically higher prices and limited selection of end-point devices. As new services are added, equipment upgrades are often required and, unless the equipment of all constituents within the enterprise is upgraded, functionality can remain limited. Furthermore, as mobile and other communications services are increasingly integrated, the difficulty of using a CPE-based approach is compounded by the complexity of these additions. Cloud-based hosted services deliver communications services from the network itself, are centrally managed by the service provider and deliver uniform service across an enterprise. This increased efficiency and the ability of service providers to offer new services across their entire subscriber base also allows service providers to deliver services at lower cost.
 
  •  Shift towards unified communications. UC is the integration of voice and video calling and conferencing with instant and text messaging, presence information, collaboration tools and e-mail. UC increases significantly the number of devices to be supported, the number of network interconnect points and the associated amount of required network integration. We also believe UC increases the pace at which enterprises will seek to introduce new services. CPE-based UC solutions can be complex, expensive and consume significant time and resources as compared to cloud-based solutions.
 
  •  Increased acceptance of cloud-based services. Enterprises are increasingly obtaining mission-critical IT services, such as computing and storage, from the cloud. We believe the


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  positive experiences and savings enterprises can achieve with cloud-based IT systems will drive enterprises to continue to move other important functions, such as communications services, into the cloud.
 
Consumers
 
Service providers have experienced a high degree of subscriber attrition, partially due to their limited ability to differentiate service offerings. To retain subscribers and introduce new revenue streams, service providers have bundled services into integrated packages. To date, bundled services have included voice, TV and internet services, with mobile increasingly included, and are commonly referred to as either “triple play” or “quad play.”
 
To further increase revenue and decrease subscriber churn, service providers are expanding beyond triple and quad play and are starting to offer services such as video calling, single number mobile and fixed-line dialing and messaging and integration with household devices, such as television set top boxes. At the same time, we believe that the proliferation of new devices, such as smart wireless phones and home video phones, is driving increased consumer demand for expanded service offerings. We believe that this trend has been accelerated by the emerging multimedia telephony, or MMTel, standard. Service providers are increasingly demanding MMTel in their IP telephony implementations so they can seamlessly offer multimedia telephony to their consumer subscribers.
 
As communications evolve from voice to multimedia, devices proliferate and modes of communications broaden, service providers are finding that services delivered to one category of subscriber, enterprise or consumer, are starting to drive demand for similar services in the other category. For example, consumers’ personal use of their smart wireless phones for varied modes of communications, such as instant messaging, or IM, e-mail and voice, can create expectations for multimedia and collaboration services within the enterprises where they work. Conversely, in the work context, when consumers experience converged mobile and fixed-line services, such as one number calling, find me/follow me, single unified voicemail, e-mail delivery of voicemail, etc., or video calling, they may seek similar services to use in their personal communications. In addition, the division between enterprise and consumer communications is blurring, as workforces become more mobile and people seek to work either part- or full-time from their homes. We believe that this dynamic increases overall demand for multimedia services and provides service providers opportunities to enable feature-rich services across their subscriber bases.
 
Challenges in Enabling Multimedia Services on IP-based Networks
 
Historically, applications such as voice messaging, call forwarding and call waiting were delivered from within the core network by network elements, such as legacy Class 5 and softswitches. These applications were voice-focused, limited in nature and changed infrequently. As service providers look to rapidly introduce new services, many of which include multimedia and not merely voice communications, they require network elements that are capable of:
 
  •  Coordinating delivery of a large and rapidly increasing number of applications. Each new application requires coordination within the service provider’s network to ensure that the application is authorized, appropriately charged for and delivered in a way that is appropriate to the end-user based on the device and user preferences.
 
  •  Operating across heterogeneous network elements and devices. Most service providers’ networks consist of network equipment and software from multiple vendors. In addition, service providers’ subscribers and end-users operate a variety of devices. New applications must seamlessly navigate these varied network elements and devices without impacting functionality.


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  •  Ensuring high levels of reliability and quality. Service providers and their subscribers are accustomed to a high level of reliability and quality and expect similar levels of reliability and quality from new applications.
 
  •  Efficiently scaling as more subscribers are added. As more subscribers purchase applications and service providers acquire new subscribers, service providers need to be able to efficiently add capacity without increasing complexity.
 
It is no longer efficient for the responsibility of application delivery to reside in network elements such as softswitches. These elements are dedicated to other crucial network roles, are not designed to deliver multimedia applications and are typically limited in the number of network elements with which they interact. In addition, because these network elements are generally dispersed throughout a service provider’s network, deploying, scaling and managing these multimedia services through these network elements is even more difficult.
 
The BroadSoft Solution
 
To meet these challenges, many service providers are deploying a separate voice and multimedia application server that is specifically designed to deliver multimedia services as part of their network architecture. A voice and multimedia application server is the dedicated network software element that delivers and coordinates voice, video and messaging communications. In addition, many service providers are shifting their networks toward new all-IP-based network architectures, such as IP Multimedia Subsystem, or IMS. Within these new all-IP architectures, the application server is a defined function or layer.


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BroadWorks is the industry’s leading voice and multimedia application server. BroadWorks is installed on industry-standard servers, typically located in service providers’ data centers. As illustrated below, BroadWorks utilizes well-defined interfaces to interoperate with service providers’ core networks, accesses other networks for interworking with end-users’ communications devices and connects to service providers’ support and billing systems for management and charging functions.
 
(LOGO)
 
We believe that we are well-positioned to enable service providers to capitalize on their IP-based network investments by efficiently and cost-effectively offering a broad suite of essential and value-added services to their end-users. BroadWorks provides service providers several key advantages when they offer voice and multimedia services on their IP-based networks, including:
 
  •  Rapid delivery of enterprise and consumer multimedia services from a single platform. We believe BroadWorks provides the most extensive set of features and applications available on a single platform for fixed-line, mobile and cable broadband access networks, for both enterprise and consumer applications. We currently offer more than 150 licensable applications, such as custom ringback, conferencing, call centers, unified messaging and simultaneous ringing. As our customers and their subscribers demand additional applications, we believe the breadth of our existing applications, our commitment to innovation and our Xtended Web 2.0 APIs, which we describe below, all position us to continue offering cost-effective, feature-rich applications to meet our customers’ needs.
 
  •  Demonstrated carrier adoption globally across many service provider networks. Over 425 service providers in more than 65 countries have purchased our software, including 15 of the top 25 telecommunications service providers globally.
 
  •  Broad interoperability across network equipment vendors, network architectures and devices. BroadWorks interoperates with all significant network architectures (such as IMS and Next Generation Network, or NGN, architectures), access types, infrastructures and protocols.


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  Service providers are able to migrate their BroadWorks implementation from pre-IMS to IMS with a simple feature change within our software. In addition, BroadWorks integrates and interoperates with the major network equipment vendors’ core network solutions. We believe this independence helps service providers implement innovative multimedia application server functions in a cost-effective manner because BroadWorks can be deployed without expensive, complex collateral changes to service providers’ networks. BroadWorks is presently deployed in service provider networks consisting of each of the major vendor’s pre-IMS and IMS core technologies.
 
  •  Extensive technology and device partner ecosystem. BroadWorks interoperates with more than 450 devices, including approximately 250 CPE devices, such as IP phones, computer-based soft-phones, conferencing devices, IP gateways, mobile phones and consumer electronics. We work closely with CPE vendors to create a positive overall end-user experience with simplified provisioning, troubleshooting, enhanced feature functionality and synchronized device and server state. In addition, BroadWorks session initiation protocol, or SIP, trunking interoperates with most of the major IP PBX offerings.
 
  •  Scalable architecture and carrier-grade reliability. Our applications are designed to scale to support hundreds of millions of subscribers. With our innovative geographic redundancy solution, BroadWorks can be deployed in a fault-tolerant architecture that has achieved a carrier-grade system availability of greater than 99.999%. In addition, we were recently awarded TL 9000 certification for our quality management system.
 
  •  Leadership in emerging standards and requirements. We are actively involved in the development of the IMS, SIP and MMTel standards, as well as several other standards that we expect to shape our market in the future. BroadWorks is the application server supporting what we believe to be the world’s largest IMS deployment based on the number of subscribers. Furthermore, as of December 31, 2009, we have shipped over 7.8 million IMS voice over IP subscriber lines. These lines represent 48% of the 16.8 million total lines we have shipped. We were also instrumental in founding the SIPConnect working group of the SIPForum, an industry forum promoting the SIP protocol. We believe this technology leadership, together with our work with industry standards organizations, allows us to anticipate emerging standards and will help us shape future industry practices.
 
Strategy
 
Our goal is to strengthen our position as the leading global provider of multimedia application servers by enabling service providers to increase revenue opportunities by delivering feature-rich services to their enterprise and consumer subscribers and to leverage their investment in IP-based networks. Key elements of our strategy include:
 
  •  Extend our technology leadership and product depth and breadth. We intend to provide an industry-leading solution through continued focus on product innovation and substantial investment in research and development for new features, applications and services. In 2009, we delivered approximately 300 new features and in 2010 we plan to deliver additional new features, including additional mobile business applications, voice and text messaging over long term evolution, or LTE, a rich communications suite, or RCS, applications for presence awareness and instant messaging and cloud-based web collaborations. We believe our ability to innovate is advanced by feedback gathered from our extensive customer relationships, allowing us to better meet our customers’ needs and anticipate market demand.
 
  •  Drive revenue growth by:
 
  •  Assisting our current service provider customers to sell more of their currently-deployed BroadWorks-based services. We support our service provider customers by regularly offering enhanced and new features to their current applications as well as


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  providing tools and training to help them market their services to subscribers. As an example, we provide training and marketing materials to our customers’ sales and marketing teams to assist them in selling services based on BroadWorks.
 
  •  Selling new applications and features to our current service provider customers. Although our initial engagement with a service provider may be for a single initiative or business unit, once BroadWorks is implemented by a service provider, we believe that we are well-positioned to sell additional applications and features to that service provider.
 
  •  Continuing to acquire new customers. Our customers are located around the world and include 15 of the top 25 telecommunications service providers globally. We believe we are well positioned to grow, both by adding customers in regions where we already have a strong presence and also by expanding our geographic footprint. We also intend to penetrate more deeply into some types of service provider customers, such as additional cable and mobile service providers.
 
  •  Pursue selected acquisitions and collaborations that complement our strategy. To date, we have successfully completed several acquisitions and have also collaborated with a number of industry-leading companies on technology initiatives. We intend to continue to pursue acquisitions and collaborations where we believe they are strategic to strengthen our leadership position.
 
Products
 
BroadWorks enables service providers to offer their subscribers a comprehensive portfolio of enterprise and consumer communications services from a common network platform. We typically license BroadWorks on a per-subscriber, per-feature basis and we can deploy it in a variety of network configurations, matching the needs of fixed-line, mobile and cable service providers.
 
BroadSoft Enterprise Applications
 
Hosted Unified Communications
 
Hosted unified communications enables service providers to offer enterprises advanced IP PBX and UC features through a hosted service rather than through premises-based equipment, such as PBXs. As enterprise needs become more complex and as enterprise budgets are more closely controlled, we believe that enterprise demand for cost-effective and feature-rich applications such as multimedia, mobility and UC is growing. We also believe that the delivery of advanced IP PBX and UC features in a cloud-based hosted model is simpler to implement and more cost efficient for both the service provider and enterprise customer than premises-based alternatives.
 
The advanced IP PBX and UC features we offer to enterprises through BroadWorks’ hosted unified communications application include:
 
  •  PBX functionality such as call control, call waiting, call forwarding and conference calling, in each case across multiple locations;
 
  •  real-time multimedia communications support for voice and video calling;
 
  •  integration of offerings across fixed and mobile devices and networks;
 
  •  integrated voice, video and fax messaging;
 
  •  enhanced features such as auto attendants, call centers and conferencing;
 
  •  UC features, such as presence awareness, IM and e-mail integration and collaboration;
 
  •  quality of service monitoring and reporting;


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  •  open APIs for third-party application development that complement the core call control functionality;
 
  •  clients, which are devices and software that request information, for feature control and administration;
 
  •  regulatory functions such as emergency calling (E911) and lawful intercept (CALEA); and
 
  •  geographic redundancy and disaster recovery.
 
SIP Trunking
 
BroadWorks’ SIP trunking enables service providers to provide IP interconnectivity and additional services to enterprises that already have CPE-based IP PBXs, PBXs and/or video endpoints. With SIP trunking, service providers are able to bundle voice, which interconnects to either circuit or IP-based networks, and data over a single converged IP pipe, creating a more economical offering than can be achieved with separate voice and data connections. We believe that BroadWorks-powered service providers can differentiate their SIP trunking service offerings and increase revenue by offering enhanced services such as UC, video, mobility, global four-digit dialing and business continuity, in connection with their core SIP trunking service offerings.
 
Since BroadWorks’ hosted UC and SIP trunking applications share the same software and platform, service providers can easily and cost-effectively expand their addressable markets by offering hosted UC services in conjunction with SIP trunking. This hybrid offering is attractive to multi-site enterprises that have some environments using premises-based PBXs and others that are hosted. Despite their complex legacy systems, service providers can use BroadWorks to deliver a consistent set of mobility, multimedia and application integration capabilities to all end-users across these enterprises.
 
BroadSoft Consumer Applications
 
Our consumer IP applications offer voice and multimedia telephony services with voice calling, video calling, enhanced messaging, content sharing and web interfaces. They also provide full regulatory compliance for fixed-line, mobile and cable service providers. Additionally, we enable BroadWorks-powered service providers to differentiate their offerings through advanced feature sets for managing family and small office/residential office communications, including multiple lines, video calling and mobility support.
 
BroadSoft Xtended
 
The purpose of our Xtended program is to enable our service provider customers to create and/or deploy highly differentiated IP-based communications services on the BroadWorks platform. Xtended is premised on three operating principles:
 
  •   Expanding familiarity with web services APIs. The powerful RESTful Xtended Services Interface, or Xsi, exposes the BroadWorks platform to other applications;
 
  •   Maintaining community. An innovative developer community driven by the Xtended developer program is created; and
 
  •   Promoting commerce. The Xtended Marketplace allows developers to monetize their applications by enabling end-users of BroadSoft-powered networks to directly browse and purchase their applications through online Application Stores, most often from their service providers.
 
While Xtended is still at an early stage of market acceptance, we hope that the applications that will be made available in the Xtended Marketplace will increase functionality for subscribers, which will in turn make them more likely to maintain their subscriptions with our customers.


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Technology
 
We have invested significant time and financial resources into the development of our suite of product offerings. Our code base comprises over three million lines of software code refined over 11 years and 16 major releases. While the predominant industry approach has been to use proprietary standards, which greatly limits interoperability, our technology strategy is to adopt and extend leading open standards with the objectives of providing the widest level of interoperability in the industry. Our products implement a diverse set of industry protocols such as SIP, DIAMETER, SNMP, SOAP and RESTful-based interfaces, allowing for the successful penetration of the service provider market across different types of architectures, access types and infrastructures.
 
BroadWorks’ technology consists of software-based server functions and software clients designed for scalability and performance. Our server functions provide a number of discrete capabilities, including call control and signaling, media processing and provisioning interfaces to back office infrastructure. Our software clients run on a variety of CPE devices, including PCs, mobile devices and conferencing equipment. Our open interfaces allow service providers to quickly and easily integrate the servers with back office systems, web portals and network infrastructure and also permits them to deploy applications that complement the functionality of the servers. Because the BroadWorks solution reaches the service provider’s subscribers, we believe that this end-to-end integration is critical to ensure that the usability, look and feel of the service offering is superior.
 
The key elements of our technology are:
 
  •   SIP. We believe that we have the industry’s most customer-tested and fully functioned SIP stack. Because we developed the software ourselves, we can rapidly customize it and resolve any related issues. We have developed SIP extensions for many advanced PBX functions such as advanced call control and bridged line appearances. Our SIP stack provides programmable controls on a per-device basis to allow for maximum compatibility and interoperability. We have achieved full interoperability with over 450 SIP-based devices and applications. We have validated our stack and deployed it with leading IMS core network vendors.
 
  •   Java-based. BroadWorks is one of the first real-time Java-based applications in the telecommunications industry. Java allows for rapid software development with better quality than traditional programming languages such as C/C++, without reliance on third-party service delivery platforms. We manage all of the BroadWorks software source code with the exception of the database technology, which is provided by Oracle. We leverage open source software, when appropriate, for swift time-to-market and reduced research and development expenses.
 
  •   Call control. We have developed a patented architecture for service definition, service execution, interface abstraction, event routing and service precedence. This provides an extensible pattern for creating and adding new services and/or interfaces without an impact on existing functionality. Interfaces are abstracted so that services can be written to work with any protocol. This approach yields a product that we believe is easier to test and subsequently has fewer defects as evidenced by current support for over 150 services. BroadSoft has evolved the service operating system to natively support the IMS call model.
 
  •   Geographic redundancy. We have designed a geographic redundancy solution tailored for call control that requires no special software and uses standard IP networking configurations with standard IP addressing. This solution supports seamless failover for server outages and IP networking issues. It also allows for placement of servers in any geography without distance limitations. The solution is supported by leading IMS core network vendors and session border controller vendors. Our solution has proven greater than 99.999% reliability with over five years of historical data.


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  •   Common OAMP platform. BroadWorks has a common management container for all BroadSoft servers, providing consistent functions for operations, administration, management and provisioning, or OAMP. It supports identical carrier grade management interfaces on all servers and includes functions for command line interfaces, alarms, statistics, configuration, charging, security and provisioning. It is fully tested and validated with leading carrier network management systems and customer care systems and proven carrier grade in over 50 Tier 1 telecommunications service providers. It works on standard servers as well as virtualized servers.
 
  •   Media resource framework. We have developed a completely software-based media resource framework for dual-tone multi-frequency detection, media playback, recording, conferencing and repeating. The framework supports all de facto standard audio and video codecs. It supports the Internet Engineering Task Force, or IETF, and the 3rd Generation Partnership Project, or 3GPP, standard protocols, including the standard format for specifying interactive voice dialogues between a human and a computer (VoiceXML) and call control extensible markup language, or CCXML, which provides telephony support to VoiceXML. The framework can be integrated with all leading voice recognition and text-to-speech engines. Using an exclusively software-based technology has allowed us to offer a very high capacity media server using low-cost, off-the-shelf hardware platforms. We developed the media server framework internally using open source software. We believe that it not only provides us with a technical advantage over our competition, but also a strong commercial advantage since we can bundle this technology with BroadWorks.
 
Global Support Services
 
The provision of a broad range of professional support services is an integral part of our business model. We offer services designed to deliver comprehensive support to our service provider customers and distribution partners through every stage of product deployment. Our services can be categorized as follows:
 
  •   Pre-sales support. Our worldwide sales engineering group works with our direct sales force to provide demonstrations, architecture consulting, interoperability testing and related services in connection with product sales opportunities to establish the capability, functionality, scalability and interoperability of our software with a service provider’s network.
 
  •   Professional services. Our professional services group provides installation services, such as planning, consulting and staging of software on the customer’s hardware, as well as installation and network integration services, project management and remote upgrades. We also offer our customers the option of longer-term engagements in the form of “resident engineer” services. In addition, we offer a full suite of consulting services including network planning, network architecture definition, back office consulting and solution verification.
 
  •   Global operations centers. We maintain operations centers around the world to provide our customers with post-installation services, such as platform support and maintenance services. Members of our technical assistance center and regional project management and professional services teams provide remote assistance to customers via these locati