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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011
or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34777
BroadSoft, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   52 2130962
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
9737 Washingtonian Boulevard, Suite 350    
Gaithersburg, MD   20878
(Address of principal executive offices)   (Zip Code)
(301) 977-9440
Registrant’s telephone number, including area code:
(former name, former address and former fiscal year, if changed since last report)
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No 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   Smaller reporting company o
 
      (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  
No þ
     The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, on August 4, 2011, was 26,937,695.
 
 

 


 

BroadSoft, Inc.
Table of Contents
         
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EX-10.1
       
EX-31.1
       
EX-31.2
       
EX-32.1
       
EX-32.2
       
 
       
101.INS XBRL
       
101.SCH XBRL
       
101.CAL XBRL
       
101.DEF XBRL
       
101.LAB XBRL
       
101.PRE XBRL
       

2


 

Part I. Financial Information
Item 1. Financial Statements
BroadSoft, Inc.
Unaudited Condensed Consolidated Balance Sheets
                 
    June 30,     December 31,  
    2011     2010  
    (In thousands, except share  
    and per share data)  
Assets:
               
Current assets:
               
Cash and cash equivalents
  $ 157,984     $ 47,254  
Short-term investments
    36,125       13,703  
Accounts receivable, net of allowance for doubtful accounts of $54 and $38 at June 30, 2011 and December 31, 2010, respectively
    34,083       40,491  
Deferred tax asset
    16,481        
Other current assets
    5,740       4,866  
 
           
Total current assets
    250,413       106,314  
 
           
Long-term assets:
               
Property and equipment, net
    3,657       3,590  
Long-term investments
    759       4,970  
Restricted cash
    937       972  
Intangible assets, net
    3,219       3,709  
Goodwill
    6,226       6,226  
Other long-term assets
    3,329       1,575  
 
           
Total long-term assets
    18,127       21,042  
 
           
Total assets
  $ 268,540     $ 127,356  
 
           
Liabilities and stockholders’ equity:
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 9,232     $ 12,439  
Notes payable and bank loans, current portion
    1,194       1,170  
Deferred revenue, current portion
    53,014       57,437  
 
           
Total current liabilities
    63,440       71,046  
 
               
Convertible senior notes
    79,551        
Notes payable and bank loans
          800  
Deferred revenue, net of current portion
    1,365       1,827  
Deferred tax liability
    6,589        
Other long-term liabilities
    1,066       1,138  
 
           
Total liabilities
    152,011       74,811  
 
           
 
               
Commitments and contingencies (Note 7)
               
 
               
Stockholders’ equity:
               
 
               
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized at June 30, 2011 and December 31, 2010; no shares issued and outstanding at June 30, 2011 and December 31, 2010
           
Common stock, par value $0.01 per share; 100,000,000 shares authorized at June 30, 2011 and December 31, 2010; 26,889,058 and 25,452,227 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
    269       255  
Additional paid-in capital
    187,260       142,508  
Accumulated other comprehensive loss
    (2,004 )     (1,736 )
Accumulated deficit
    (68,996 )     (88,482 )
 
           
Total stockholders’ equity
    116,529       52,545  
 
           
Total liabilities and stockholders’ equity
  $ 268,540     $ 127,356  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

BroadSoft, Inc.
Unaudited Condensed Consolidated Statements of Operations
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
    (In thousands, except per share data)  
Revenue:
                               
Licenses
  $ 19,202     $ 10,555     $ 34,393     $ 19,338  
Maintenance and services
    12,977       9,216       27,440       18,237  
 
                       
Total revenue
    32,179       19,771       61,833       37,575  
 
                               
Cost of revenue:
                               
Licenses
    1,345       1,026       2,621       2,242  
Maintenance and services
    4,635       3,842       8,950       7,227  
Amortization of intangibles
    251       192       490       385  
 
                       
Total cost of revenue
    6,231       5,060       12,061       9,854  
 
                       
 
                               
Gross profit
    25,948       14,711       49,772       27,721  
 
                               
Operating expenses:
                               
Sales and marketing
    9,077       7,710       17,561       14,812  
Research and development
    6,730       4,952       13,546       9,443  
General and administrative
    4,496       3,608       8,882       6,887  
 
                       
Total operating expenses
    20,303       16,270       39,989       31,142  
 
                       
 
                               
Income (loss) from operations
    5,645       (1,559 )     9,783       (3,421 )
 
                               
Other expense (income):
                               
Interest income
    (44 )     (10 )     (87 )     (12 )
Interest expense
    238       393       258       699  
Other (income) expense, net
          (12 )           173  
 
                       
Total other expense
    194       371       171       860  
 
                       
Income (loss) before income taxes
    5,451       (1,930 )     9,612       (4,281 )
(Benefit from) provision for income taxes
    (10,340 )     (156 )     (9,874 )     126  
 
                       
Net income (loss)
  $ 15,791     $ (1,774 )   $ 19,486     $ (4,407 )
 
                       
 
                               
Net income (loss) per common share available to BroadSoft, Inc. common stockholders:
                               
Basic
  $ 0.59     $ (0.20 )   $ 0.74     $ (0.58 )
Diluted
  $ 0.57     $ (0.20 )   $ 0.70     $ (0.58 )
 
                               
Weighted average common shares outstanding:
                               
Basic
    26,670       8,824       26,189       7,615  
Diluted
    27,939       8,824       27,796       7,615  
 
                               
Stock-based compensation expense included above:
                               
Cost of revenue
  $ 211     $ 57     $ 277     $ 92  
Sales and marketing
    415       254       749       365  
Research and development
    510       201       757       267  
General and administrative
    765       551       1,220       660  
The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

BroadSoft, Inc.
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and
Comprehensive Income (Loss)
                                                                 
            BroadSoft, Inc. Stockholders’ Equity (Deficit)        
            Compre-                             Accumulated              
    Total     hensive     Common Stock Par     Additional     Other              
    Stockholders’     income     Value $0.01 Per Share     Paid-in     Comprehensive     Accumulated     Noncontrolling  
    Equity (Deficit)     (loss)     Shares     Amount     Capital     Loss     Deficit     Interest  
Balance December 31, 2010
  $ 52,545               25,452     $ 255     $ 142,508     $ (1,736 )   $ (88,482 )   $  
 
                                                 
Issuance of common stock for exercise of stock options and vesting of RSUs, net of effect of early exercises and withholding tax
    2,815               1,436       14       2,801                    
Stock-based compensation expense
    2,723                           2,723                    
 
                                                               
Equity component of convertible senior notes issuance
    39,151                           39,151                    
Tax windfall benefits on exercises of stock options
    77                           77                    
 
                                                             
Comprehensive income:
                                                               
Net income
    19,486     $ 19,486                               19,486        
Other comprehensive income:
                                                               
Foreign currency translation adjustment
    (268 )     (268 )                       (268 )            
 
                                                           
Comprehensive income
    19,218     $ 19,218                                      
 
                                               
Balance June 30, 2011
  $ 116,529               26,888       269       187,260       (2,004 )     (68,996 )      
 
                                                 
 
                                                               
Balance December 31, 2009
  $ (77,800 )           6,320     $ 63     $ 20,340     $ (1,725 )   $ (96,474 )   $ (4 )
 
                                                               
Issuance of common stock from IPO, net of discounts and issuance costs
    39,981               5,048       50       39,931                    
 
                                                               
Redeemable convertible preferred stock converted to common at IPO
    68,866               12,962       130       68,736                    
Reclassification of warrant liability upon IPO
    262                           262                    
Warrant exercise
    100               36             100                    
Issuance of common stock for exercise of stock options and lapse of RSUs, net of effect of early exercises and withholding tax
    (163 )             303       4       (167 )                  
Sale of shares to noncontrolling interest
    4                                             4  
Stock-based compensation expense
    1,384                           1,384                    
 
                                                             
Comprehensive loss:
                                                               
Net loss
    (4,407 )   $ (4,407 )                             (4,407 )      
Other comprehensive loss:
                                                               
Foreign currency translation adjustment
    141       141                         141              
 
                                                           
Comprehensive loss:
    (4,266 )   $ (4,266 )                                    
 
                                               
Balance June 30, 2010
  $ 28,368               24,669     $ 247     $ 130,586     $ (1,584 )   $ (100,881 )   $  
 
                                                 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

BroadSoft, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
                 
    Six Months Ended  
    June 30,  
    2011     2010  
    (In thousands)  
Cash flows from operating activities:
               
Net income (loss)
  $ 19,486     $ (4,407 )
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    1,302       1,277  
Amortization of software licenses
    910       910  
Stock-based compensation expense
    3,003       1,384  
Tax windfall benefits from stock option exercises
    77        
Other
    9       (128 )
Changes in operating assets and liabilities:
               
Accounts receivable
    6,424       2,517  
Other current and long-term assets
    (527 )     (343 )
Deferred income taxes
    (9,926 )     48  
Accounts payable, accrued expenses and other long-term liabilities
    (3,883 )     (1,279 )
Current and long-term deferred revenue
    (4,885 )     6,893  
 
           
Net cash provided by operating activities
    11,990       6,872  
 
           
 
               
Cash flows from investing activities:
               
Purchases of property and equipment
    (879 )     (1,631 )
Purchases of marketable securities
    (31,482 )      
Proceeds from sale and maturities of marketable securities
    13,271        
Change in restricted cash
    35       (453 )
 
           
Net cash used in investing activities
    (19,055 )     (2,084 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from issuance of convertible senior notes, net of issuance costs
    115,688        
Proceeds from the exercise of stock options
    3,195       332  
Proceeds from issuance of common stock in connection with Company’s IPO, net of issuance costs
          39,982  
Proceeds from the exercise of preferred stock warrants
          100  
Redemption of Series A redeemable preferred stock
          (4,224 )
Taxes paid on vesting of RSUs
    (380 )     (506 )
Notes payable and bank loans — payments
    (776 )     (15,895 )
 
           
Net cash provided by financing activities
    117,727       19,789  
 
           
 
               
Effect of exchange rate changes on cash and cash equivalents
    68       (80 )
 
           
Net increase in cash and cash equivalents
    110,730       24,497  
Cash and cash equivalents, beginning of period
    47,254       22,869  
 
           
Cash and cash equivalents, end of period
  $ 157,984     $ 47,366  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
1. Nature of Business
BroadSoft, Inc. (“BroadSoft” or the “Company”), a Delaware corporation, was formed in 1998. The Company is a global provider of software that enables fixed-line, mobile and cable service providers to deliver voice and multimedia services over their Internet protocol (“IP”) based networks. The Company’s software enables its 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 (“PBXs”), video calling, unified communications, collaboration and converged mobile and fixed-line services. The Company’s software, 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.
2. Financial Statement Presentation
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts and results of operations of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
Interim Financial Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification for interim financial information and Article 10 of Regulation S-X issued by the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity (deficit) and cash flows. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of results that may be expected for the year ending December 31, 2011 or any other period. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC on March 7, 2011.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates.
Recent Accounting Pronouncements
In December 2010, the FASB issued an accounting standard update for business combinations specifically related to the disclosures of supplementary pro forma information for business combinations. This guidance specifies that pro forma disclosures should be reported as if the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period and the pro forma disclosures must include a description of material, nonrecurring pro forma adjustments. This standard is effective for business combinations with an acquisition date of January 1, 2011 or later. The adoption of the guidance did not have a material impact on the Company’s financial position or results of operations.

7


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The ASU is the result of joint efforts by the FASB and the International Accounting Standards Board (“IASB”) to develop a single, converged fair value framework. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments. Key additional disclosures include quantitative disclosures about unobservable inputs in Level 3 measures, qualitative information about sensitivity of Level 3 measures and valuation process, and classification within the fair value hierarchy for instruments where fair value is only disclosed in the footnotes but the carrying amount is on some other basis. For public companies, the ASU is effective for interim and annual periods beginning after December 15, 2011. The Company does not expect adoption of this ASU to have a material impact on the Company’s results of operations, financial position or cash flow.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income,” which amends current comprehensive income guidance. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income (“OCI”). The ASU does not change the items that must be reported in OCI. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company does not expect adoption of this ASU to have a material impact on the Company’s results of operations, financial position or cash flow.

8


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
3. Investments and Fair Value Disclosures
Investments in Marketable Securities
Marketable debt securities that the Company does not intend to hold to maturity are classified as available-for-sale, are carried at fair value, and are included on the Company’s balance sheet as either short-term or long-term investments depending on their maturity at the time of purchase. Investments with original maturities greater than three months that mature less than one year from the consolidated balance sheet date are classified as short-term investments. Investments with maturities greater than one year from the consolidated balance sheet date are classified as long-term investments. Available-for-sale investments are marked-to-market at the end of each reporting period, with unrealized holding gains or losses, which represent changes in the fair value of the investment, reflected in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. The Company’s primary objective when investing excess cash is preservation of principal.
                 
    As of June 30, 2011  
    Contracted     Carrying  
    Maturity     Value  
            (in thousands)  
Money market funds
  demand   $ 130,989  
 
             
Total cash equivalents
          $ 130,989  
 
             
 
               
U.S. agency notes
  166 - 319 days   $ 3,746  
Commercial paper
  147 - 319 days     9,887  
Corporate bonds
  60 - 319 days     22,492  
 
             
Total short-term investments
          $ 36,125  
 
             
 
               
Corporate bonds
  382 - 662 days   $ 759  
 
             
Total long-term investments
          $ 759  
 
             
Fair Value
The following table summarizes the carrying and fair value of the Company’s financial assets and liabilities (in thousands):

9


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
                                 
    June 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
Assets
                               
Cash equivalents and certificates of deposit *
  $ 132,127     $ 132,127     $ 34,458     $ 34,458  
Short and long-term investments
    36,884       36,884       18,673       18,673  
 
                       
Total assets
  $ 169,011     $ 169,011     $ 53,131     $ 53,131  
 
                       
 
                               
Liabilities
                               
Convertible senior notes**
  $ 79,551     $ 120,000     $     $  
Notes payable and bank loans
    1,194       1,194       1,970       1,970  
 
                       
Total liabilities
  $ 80,745     $ 121,194     $ 1,970     $ 1,970  
 
                       
 
*   Does not include $27.0 million and $14.0 million of operating cash balances as of June 30, 2011 and December 31, 2010, respectively.
 
**   The carrying value represents the bifurcated debt component only, while the fair value is based on the principal amount of the Notes, which did not separate the liability and equity components of the debt instrument.
The carrying amounts of the Company’s other financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their respective fair values due to their short-term nature. (See Note 5 Borrowings for additional information on the fair value of debt.)
The Company uses a three-tier fair value measurement hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The three tiers are defined as follows:
    Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical instruments and include the Company’s investments in money market funds and certificates of deposit;
 
    Level 2. Inputs valued using quoted market prices for similar instruments, nonbinding market prices that are corroborated by observable market data and include the Company’s investments and marketable securities in U.S. agency notes, commercial paper and corporate bonds; and
 
    Level 3. Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. This determination requires significant judgments to be made. There were no transfers between classifications during the periods. The following tables summarize the values (in thousands):

10


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
                                 
    Balance at                    
    June 30, 2011     Level 1     Level 2     Level 3  
Money market funds
  $ 130,989     $ 130,989     $     $  
Certificates of deposit
    1,138       1,138              
 
                       
Total cash equivalents and certificates of deposit
    132,127       132,127              
 
                       
U.S. agency notes
    3,746             3,746        
Commercial paper
    9,887             9,887        
Corporate bonds
    23,251             23,251        
 
                       
Total investments
    36,884             36,884        
 
                       
Total cash equivalents, certificates of deposit and investments
  $ 169,011     $ 132,127     $ 36,884     $  
 
                       
                                 
    Balance at                    
    December                    
    31, 2010     Level 1     Level 2     Level 3  
Money market funds
  $ 26,887     $ 26,887     $     $  
U.S. agency notes
    3,998             3,998        
Commercial paper
    2,399             2,399        
Certificates of deposit
    1,174       1,174              
 
                       
Total cash equivalents and certificates of deposit
    34,458       28,061       6,397        
 
                       
U.S. agency notes
    4,274             4,274        
Commercial paper
    4,995             4,995        
Corporate bonds
    9,404             9,404        
 
                       
Total investments
    18,673             18,673        
 
                       
Total cash equivalents, certificates of deposit and investments
  $ 53,131     $ 28,061     $ 25,070     $  
 
                       
Assets Measured at Fair Value on a Nonrecurring Basis
The Company measures certain assets, including property and equipment, goodwill and intangible assets, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three and six months ended June 30, 2011 and 2010, there were no fair value measurements of assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition.
4. Deferred Revenue
Deferred revenue represents amounts billed to or collected from customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met.
Deferred revenue consisted of the following (in thousands):
                 
    June 30,     December  
    2011     31, 2010  
Licenses
  $ 24,120     $ 25,628  
Maintenance and services
    30,259       33,636  
 
           
 
  $ 54,379     $ 59,264  
 
           
 
               
Current portion
  $ 53,014     $ 57,437  
Non-current portion
    1,365       1,827  
 
           
 
  $ 54,379     $ 59,264  
 
           

11


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
5. Borrowings
Installment Bank Loan
In May 2008, the Company amended a software license and maintenance agreement. The amended agreement provides the Company the right to distribute third-party software on a user basis up to 35,000,000 licenses over a four-year period for an additional one-time fee of approximately $6.4 million. The agreement was financed with an installment bank loan with an effective interest rate of 4.0%. The loan provides for a payment of $0.4 million at loan inception and scheduled principal repayments of $0.4 million each quarter commencing July 1, 2008, with the final payment payable on April 1, 2012. At June 30, 2011 and December 31, 2010, the liability for the installment bank loan amounted to approximately $1.2 million and $2.0 million, respectively.
Convertible Senior Notes
In June 2011, the Company issued $120.0 million aggregate principal amount of 1.50% convertible senior notes due in 2018 (the “Notes”). The Notes are senior unsecured obligations of the Company, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted.
The Notes may be converted by the holders of Notes at their option on any day prior to the close of business on the scheduled trading day immediately preceding April 1, 2018 only under the following circumstances: (a) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day of that measurement period was less than 98% of the product of the last reported sale price of the common stock and the applicable conversion rate on each such day; (b) during any calendar quarter (and only during such quarter) after the calendar quarter ending September 30, 2011, if the last reported sale price of the common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (c) upon the occurrence of specified corporate events; or (d) if the Company calls the Notes for redemption. The Notes will be convertible, regardless of the foregoing circumstances, at any time from, and including, April 1, 2018 through the second scheduled trading day immediately preceding the maturity date.
The initial conversion rate for the Notes is 23.8126 shares of the Company’s common stock per $1,000 principal amount of Notes, equivalent to a conversion price of approximately $41.99 per share of the common stock, a 17.5% conversion premium based on the last reported sale price of $35.74 per share of the Company’s common stock on June 14, 2011. The conversion price will be subject to adjustment in some events, but will not be adjusted for accrued interest. In addition, if a make-whole fundamental change as defined in the indenture governing the Notes (the “Indenture”), occurs, prior to the maturity date, the Company will in some cases increase the conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental change. Upon conversion, the Company will pay cash up to the aggregate principal amount of the Notes to be converted and deliver shares of the common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the Notes being converted.
Holders of the Notes may require the Company to repurchase some or all of the Notes for cash, subject to certain exceptions, upon a fundamental change, as defined in the Indenture, at a repurchase price equal to 100% of the principal amount of the Notes being repurchased, plus any accrued and unpaid interest up to but excluding the relevant repurchase date.
The Company may not redeem the Notes prior to July 1, 2015. Beginning July 1, 2015, the Company may redeem for cash all or part of the Notes (except for the Notes that the Company is required to repurchase as described above) if the last reported sale price of the common stock exceeds 140% of the applicable conversion price for 20 or more trading days in a period of 30 consecutive trading days ending on the

12


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
trading day immediately prior to the date of the redemption notice. The redemption price will equal the sum of 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, plus a “make-whole premium” payment. The Company must make the make-whole premium payments on all Notes called for redemption prior to the maturity date, including Notes converted after the date the Company delivered the notice of redemption.
The Company has separately accounted for the liability and equity components of the convertible debt instrument by allocating the gross proceeds from the issuance of the Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. This interest rate, estimated at 8%, was used to compute the initial fair value of the liability component of $79.4 million. The excess of the gross proceeds received from the issuance of the Notes over the initial amount allocated to the liability component, of $40.6 million, was allocated to the embedded conversion option, or equity component. This excess is reported as a debt discount and subsequently amortized as interest expense, using the interest method, through July 2018, the maturity date of the Notes. Offering costs, consisting of the initial purchasers’ discount and offering expenses payable by the Company, were $4.3 million. These offering costs were allocated to the liability component and the equity component based on the relative valuations of such components. As a result, $2.9 million of the offering costs were classified as debt issuance costs and recorded on the balance sheet in other assets. This amount is subsequently amortized as interest expense through the July 2018 maturity date of the Notes. The remaining $1.4 million of offering costs were allocated to the equity component.
The following table shows the amounts recorded within the Company’s financial statements with respect to the Notes (in thousands):
         
    As of  
    June 30, 2011  
Convertible debt principal
  $ 120,000  
Unamortized convertible debt discount
    (40,449 )
 
     
Net carrying amount of convertible debt
  $ 79,551  
 
     
The following table presents the interest expense recognized related to the Notes (in thousands):
         
    Three and Six  
    Months Ended  
    June 30, 2011  
Contractual interest expense
  $ 50  
Amortization of debt issuance costs
    11  
Accretion of debt discount
    161  
 
     
Net expense
  $ 222  
 
     
As of June 30, 2011, the unamortized debt discount, which will be amortized over approximately seven years, was $40.4 million.
The net proceeds from the Note Offering were approximately $115.7 million, after deducting discounts to the initial purchasers and estimated offering expenses payable by the Company.
6. Stock-based Compensation
Equity Incentive Plans
In 1999, the Company adopted the 1999 Stock Incentive Plan (the “1999 Plan”). The 1999 Plan provided for the grant of incentive stock options, nonqualified stock options, restricted stock awards and stock appreciation rights. The 1999 Plan terminated in June 2009 whereby no new options or awards are permitted to be granted. In April 2009, the Company adopted the 2009 Equity Incentive Plan. This plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units (“RSUs”) and stock appreciation rights. In June 2010, in connection with the

13


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Company’s initial public offering (“IPO”), the 2009 Equity Incentive Plan was amended and restated to provide for, among other things, annual increases in the share reserve (as amended and restated, the “2009 Plan”). At the same time, an additional 333,333 shares of common stock were added to the share reserve. On January 1, 2011, 1,145,860 shares were added to the 2009 Plan. At June 30, 2011, the Company had 1,015,806 shares of common stock available for issuance under the 2009 Plan.
Stock-based compensation expense recognized by the Company was as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2011     2010     2011     2010  
Stock options
  $ 433     $ 329     $ 934     $ 624  
Restricted stock awards
    19       34       42       60  
Restricted stock units
    1,449       700       2,027       700  
 
                       
Total recognized stock-based compensation expense
  $ 1,901     $ 1,063     $ 3,003     $ 1,384  
 
                       
Stock Options
The following table presents summary information related to stock options:
                                 
                    Weighted   Aggregate
            Weighted   Average   Intrinsic
    Number of   Average   Remaining   Value as of
    Options   Exercise   Contractual   June 30,
    Outstanding   Price   Term (years)   2011
Balance, December 31, 2010
    2,854,949     $ 3.22                  
Granted
    102,700       33.46                  
Exercised
    (1,345,014 )     2.38                  
Forfeited
    (14,099 )     10.81                  
 
                               
Balance, June 30, 2011
    1,598,536     $ 5.80       7.54     $51.8 million
 
                               
 
                               
Vested at June 30, 2011
    908,780     $ 2.65       6.93     $32.2 million
 
                               
Exercisable at June 30, 2011
    1,178,949     $ 2.61       6.94     $41.9 million
The Company granted 102,700 stock options during the six months ended June 30, 2011 and 280,838 stock options during the six months ended June 30, 2010. For the six months ended June 30, 2011 and June 30, 2010, the intrinsic value of stock options exercised was $53.2 million and $0.9 million, respectively, and cash received from stock options exercised was $3.2 million and $0.3 million, respectively. At June 30, 2011, unrecognized stock-based compensation expense related to unvested options was $5.4 million, which is scheduled to be recognized over a weighted average period of 1.19 years.

14


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Restricted Stock Units
The following table presents a summary of activity for RSUs:
                 
            Weighted
    Number of   Average Grant
    RSUs   Date Fair Value
Balance, December 31, 2010
    283,040     $ 7.87  
Granted
    198,103       41.52  
Vested
    (101,643 )     7.99  
Forfeited
    (1,228 )     36.55  
 
               
Balance, June 30, 2011
    378,272     $ 25.37  
 
               
During the six months ended June 30, 2011, the Company granted 111,153 RSUs to certain officers and directors and 86,950 RSUs to certain employees. At June 30, 2011, unrecognized stock-based compensation expense related to unvested RSUs was $2.2 million, which is scheduled to be recognized over a weighted average period of 1.56 years.
In February 2011, the compensation committee approved a bonus plan that provides for the grant of RSUs to the Company’s executive officers with a fixed-dollar value of $0.6 million if the Company achieves certain performance metrics. Upon the achievement of the performance metrics, the number of RSUs to be granted will be determined by dividing $0.6 million by the average of the closing price of the Company’s common stock during the last thirty business days of 2011, and these RSUs will be fully vested on the date of grant.
Tax Benefits
Upon adoption of the FASB’s guidance on stock-based compensation, the Company elected the alternative transition method (short cut method) provided for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid in capital (“APIC”) pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows related to the tax effect of employee stock-based compensation awards that are outstanding upon adoption. As of June 30, 2011, the Company’s APIC pool balance was zero.
The Company applies a with-and-without approach in determining its intra-period allocation of tax expense or benefit attributable to stock-based compensation deductions. Tax deductions in excess of previously recorded benefits (windfalls) included in net operating loss carryforwards but not reflected in deferred tax assets were $55.5 million and $4.3 million at June 30, 2011 and December 31, 2010, respectively.
7. Commitments and Contingencies
In the normal course of business, the Company enters into contracts and agreements that may contain representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made in the future, but have not yet been made. The Company has not paid any claims or been required to defend any action related to indemnification obligations to date.
In accordance with its bylaws and certain agreements, the Company has indemnification obligations to its officers and directors for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims to date under these indemnification obligations.

15


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
In addition, the Company is involved in litigation incidental to the conduct of its business. The Company is not a party to any lawsuit or proceeding that, in the opinion of management, is reasonably possible to have a material adverse effect on its financial position, results of operations or cash flows.
8. Taxes
The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate for each of its legal entities in accordance with the accounting guidance for income taxes. Where the Company has entities with losses and does not expect to release the tax benefits in the foreseeable future, those entities are excluded from the effective tax calculation. Non-recurring and discrete items that impact tax expense are recorded in the period incurred.
In determining the Company’s provision for income taxes, net deferred tax assets, liabilities, valuation allowances and uncertain tax positions, management is required to make judgments and estimates related to projections of domestic and foreign profitability, the timing and extent of the utilization of loss carryforwards, applicable tax rates, transfer pricing methods, expected tax authority positions on audit and prudent and feasible tax planning strategies. Judgments and estimates related to the Company’s projections and assumptions are inherently uncertain and therefore, actual results could differ materially from projections.
As of March 31, 2011, the Company’s U.S. net operating losses (“NOLs”) and other deferred tax assets were fully offset by a valuation allowance primarily because, at March 31, 2011, pursuant to accounting guidance for income taxes, the Company did not have sufficient history of income to conclude that it was more likely than not that the Company would be able to realize the tax benefits of those deferred tax assets. As of June 30, 2011, the Company reevaluated its deferred tax assets. Based upon the Company’s cumulative operating results for the rolling twelve quarters through June 30, 2011 and an assessment of the Company’s expected future results of operations, the Company determined that there was significant positive evidence regarding the realization of its U.S. deferred tax assets. After weighing both the positive and negative evidence, coupled with the continued success in commercializing its core products and services both inside and outside the United States, the Company believes that it is more likely than not that its U.S. deferred tax assets will be realized. As a result, at June 30, 2011, the Company reversed a portion of its valuation allowance and recognized an additional net deferred tax asset of $9.9 million based on the amount of U.S. net deferred tax assets expected to be remaining as of December 31, 2011. The amount was recorded as a discrete tax benefit in the three months ended June 30, 2011.
As of June 30, 2011, the Company has a remaining valuation allowance of approximately $5.9 million. Of the remaining valuation allowance as of June 30, 2011, $1.2 million relates to certain foreign NOLs that the Company has concluded that it is not more likely than not to be realized, and $0.1 million relates to capital losses the Company expects will expire prior to being utilized. It is expected that the remaining valuation allowance of $4.6 million will be released in the third and fourth quarters of 2011 in accordance with accounting guidance for income taxes.
The following table summarizes the Company’s (benefit from) provision for income taxes included in its unaudited condensed consolidated statements of operations for the periods indicated (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Interim period (benefit from) provision for income taxes
  $ (414 )   $ (156 )   $ 52     $ 126  
Release of valuation allowance
    (9,926 )           (9,926 )      
 
                       
(Benefit from) provision for income taxes
  $ (10,340 )   $ (156 )   $ (9,874 )   $ 126  
 
                       

16


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
9. Income (loss) per share data
Basic income (loss) per common share is computed based on the weighted average number of outstanding shares of common stock. Diluted income (loss) per common share adjusts the basic weighted average common shares outstanding for the potential dilution that could occur if stock options, restricted stock, warrants and convertible securities were exercised or converted into common stock.
Diluted loss per common share was the same as basic loss per common share for the three and six months ended June 30, 2010 because the effects of potentially dilutive items were anti-dilutive given the Company’s losses during these periods.
The following table presents a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation. In the table below, net income (loss) represents the numerator and weighted average common shares outstanding represents the denominator:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
    (In thousands except per share data)  
Net income (loss) attributable to BroadSoft, Inc.
  $ 15,791     $ (1,774 )   $ 19,486     $ (4,407 )
 
                               
Weighted average basic common shares outstanding
    26,670       8,824       26,189       7,615  
Dilutive effect of stock-based awards
    1,269     NA     1,607     NA
 
                       
Weighted average diluted common shares outstanding
    27,939       8,824       27,796       7,615  
 
                       
 
                               
Earnings (loss) per share:
                               
Basic
  $ 0.59     $ (0.20 )   $ 0.74     $ (0.58 )
Diluted
  $ 0.57     $ (0.20 )   $ 0.70     $ (0.58 )
NA — Not applicable because the effect was anti-dilutive given the Company’s losses during these periods.
For the three and six months ended June 30, 2011, certain stock options to purchase common stock were not included in the computation of diluted earnings per share as their effect was anti-dilutive because their exercise prices exceeded the average market price of the Company’s common stock during the quarter. For the three and six months ended June 30, 2010, share equivalents were not included in the computation of diluted earnings per share as the effect was anti-dilutive given the Company’s losses for these periods. The weighted average effect of potentially dilutive securities that have been excluded from the calculation of diluted net income (loss) per common share because the effect was anti-dilutive was as follows:
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2011   2010   2011   2010
    (in thousands)
Redeemable convertible preferred stock: *
                               
Series B-1
          524             556  
Series C-1
          8,698             9,232  
Series D
          716             760  
Series E
          371             394  
Series E-1
          223             236  
Warrants on Series C-1 preferred stock **
          40             43  
Warrants on common stock
          117             117  
Restricted stock units and awards
    84       316       42       288  
Early exercise shares
          2       1       2  
Stock options
    35       74       18       57  

17


 

BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
 
*   All of the redeemable convertible preferred stock automatically converted to common stock upon the closing of the Company’s IPO in June 2010. For the three and six months ended June 30, 2010, amounts presented in the table are the weighted average shares of common stock underlying outstanding shares of redeemable convertible preferred stock.
 
**   All of the Series C-1 preferred stock warrants were automatically converted to common stock warrants upon the closing of the IPO. For the three and six months ended June 30, 2010, amounts presented in the table are the weighted average shares of common stock underlying these warrants.
10. Other (Income) Expense
Other (income) expense consisted of the following (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Interest income
  $ (44 )   $ (10 )   $ (87 )   $ (12 )
Interest expense
    238       393       258       699  
Other expense, net
                      64  
Change in fair value of preferred stock warrants
          (12 )           109  
 
                       
Total other expense
  $ 194     $ 371     $ 171     $ 860  
 
                       
11. Segment and Geographic Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is its chief executive officer (the “CEO”). The CEO reviews financial information presented on a consolidated basis, along with information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. Discrete information on a geographic basis, except for revenue, is not provided below the consolidated level to the CEO. The Company has concluded that it operates in one segment and has provided the required enterprise-wide disclosures.
Revenue by geographic area is based on the location of the end-user carrier. The following tables present revenue and long-lived assets, net, by geographic area (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Revenues:
                               
United States
  $ 20,801     $ 9,204     $ 37,873     $ 18,743  
EMEA
    4,898       4,264       9,645       8,708  
APAC
    3,809       3,663       7,382       6,558  
Other
    2,671       2,640       6,933       3,566  
 
                       
 
  $ 32,179     $ 19,771     $ 61,833     $ 37,575  
 
                       

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BroadSoft, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
                 
    June 30,     December 31,  
    2011     2010  
Long-Lived Assets, net
               
United States
  $ 7,064     $ 5,375  
EMEA
    185       187  
APAC
    122       70  
Other
    559       505  
 
           
 
  $ 7,930     $ 6,137  
 
           

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission, or SEC, on March 7, 2011.
This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q 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. Forward-looking statements in this Quarterly Report on Form 10-Q may include statements about:
    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.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including those factors we discuss in the “Risk Factors” section of this Quarterly Report on Form 10-Q and in our other filings with the SEC. You should read these factors and the other cautionary statements made in this Quarterly Report on Form 10-Q as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report on Form 10-Q. These risks are not exhaustive. Although we believe that the expectations reflected in the forward-looking statements are based on reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations.
Company Overview
We are the leading global provider of software that enables fixed-line, mobile and cable service providers to deliver real time voice and multimedia communications 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 real time voice and 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. BroadWorks performs a critical network function by serving as the software element that delivers and coordinates

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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 IP real time voice and multimedia 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 450 service providers, located in more than 65 countries, including 16 of the top 25 telecommunications service providers globally as measured by revenue in the year ended December 31, 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 Background
We believe 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 IP real time 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. 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.
Company Strategy
Our goal is to strengthen our position as the leading global provider of IP real time voice and multimedia communications 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

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      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 16 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 that complement our strategy. We intend to continue to pursue acquisitions where we believe they are strategic to strengthen our leadership position.
Key Financial Highlights
Some of our key financial highlights for the quarter ended June 30, 2011 include:
    Total revenue increased to $32.2 million, compared to $19.8 million in the quarter ended June 30, 2010;
 
    Gross profit increased to $25.9 million, compared to $14.7 million in the quarter ended June 30, 2010;
 
    Gross margin increased to 81%, compared to 74%, in the quarter ended June 30, 2010;
 
    Operating income increased to $5.6 million, or 18% of total revenue, compared to a loss from operations of $1.6 million in the quarter ended June 30, 2010;
 
    Net income increased to $15.8 million, compared to net loss of $1.8 million in the quarter ended June 30, 2010;
 
    Deferred revenue decreased $3.4 million to $54.4 million, compared to an increase of $0.6 million in the quarter ended June 30, 2010; and
 
    Cash provided by operating activities for was $8.9 million, compared to $4.4 million for the quarter ended June 30, 2010.
Components of Operating Results
Revenue
     We derive our revenue from the sale of licenses, maintenance and 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.
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. Our deferred license revenue balance consists of software orders that do not meet all the criteria for revenue recognition. We are unable to predict the proportion of orders that will meet all the criteria for revenue recognition relative to those orders that will not meet all such criteria and, as a result, we cannot forecast whether any historical trends in recognized license revenue and deferred license revenue will continue.

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    Maintenance and services. We generally 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 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 services revenue. Cost of maintenance and 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 services revenue. We generate higher gross margins on license revenue compared to maintenance and 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 we are unable to determine vendor-specific objective evidence, or VSOE, of fair value for any undelivered element within an arrangement, or any other revenue recognition criteria have not been met, the applicable revenue derived from the arrangement is deferred, including license, maintenance and services revenue, until all elements for which we could not determine VSOE have been delivered or other revenue recognition criteria have been met. However, the cost of revenue, including the costs of license, maintenance and 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. Because the ability to recognize revenue on sales depends largely on the terms of the sale arrangement, and because we are not able to predict the proportion of orders that will not meet all the criteria for revenue recognition, we cannot forecast whether any historical trends in gross margin will continue.
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

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these expense categories. We grew to 408 employees at June 30, 2011 from 372 employees at December 31, 2010, 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 consist primarily 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 consist primarily 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 general and administrative expenses to increase in the foreseeable future but to 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 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. For the three months ended June 30, 2011 and June 30, 2010, we recorded stock-based compensation expense of $1.9 million and $1.1 million, respectively. For the six months ended June 30, 2011 and June 30, 2010, we recorded stock-based compensation expense of $3.0 million and $1.4 million, respectively.
In February 2011, the compensation committee approved a bonus plan that provides for the grant of RSUs to the Company’s executive officers with a fixed-dollar value of $0.6 million if the Company achieves certain performance metrics. Upon the achievement of the performance metrics, the number of RSUs to be granted will be determined by dividing $0.6 million by the average of the closing price of the Company’s common stock during the last thirty business days of 2011, and these RSUs will be fully vested on the date of grant.
Based on stock options and other equity awards outstanding as of June 30, 2011, we expect to recognize future expense related to the non-vested portions of such options and other equity awards in the amount of $7.6 million over a weighted average period of approximately 1.45 years.

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Other (Income) Expense, Net
Other (income) expense, net consists primarily of interest income and interest expense. Interest income represents interest received on our cash and cash equivalents and restricted cash. Interest expense consists primarily of the interest accrued on our convertible senior notes (including amortization of debt issuance costs and accretion of debt discount) and outstanding borrowings under our installment bank loan with Bank of America Leasing and Capital, LLC, or Bank of America.
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 where there are no loss carryforwards to offset income in those jurisdictions. To date, we have been able to utilize our U.S. net operating loss carryforwards to offset our U.S. federal income. For the year ended December 31, 2010, we paid alternative minimum taxes due to the taxable income generated in the period.
As of March 31, 2011, the our U.S. net operating losses, or NOLs, and other deferred tax assets were fully offset by a valuation allowance primarily because, at March 31, 2011, pursuant to accounting guidance for income taxes, we did not have sufficient history of income to conclude that it was more likely than not that we would be able to realize the tax benefits of those deferred tax assets. As of June 30, 2011, we reevaluated our deferred tax assets. Based upon our cumulative operating results through June 30, 2011 and an assessment of our expected future results of operations, we determined that there was significant positive evidence regarding the realization of our U.S. deferred tax assets. After weighing both the positive and negative evidence, coupled with the continued success in commercializing our core products and services both inside and outside the United States, we believe that it is more likely than not that our U.S. deferred tax assets will be realized. As a result, at June 30, 2011, we reversed a portion of our valuation allowance and recognized an additional net deferred tax asset of $9.9 million based on the amount of U.S. net deferred tax assets expected to be remaining as of December 31, 2011. The amount was recorded as a discrete tax benefit in the three months ended June 30, 2011.
As of June 30, 2011, we have a remaining valuation allowance of approximately $5.9 million. Of the remaining valuation allowance as of June 30, 2011, $1.2 million relates to certain foreign NOLs that we have concluded that it is not more likely than not to be realized, and $0.1 million relates to capital losses we expect will expire without being utilized. It is expected that the remaining valuation allowance of $4.6 million will be released in the third and fourth quarters of 2011 in accordance with accounting guidance for income taxes.
Recent Accounting Pronouncement
In December 2010, the Financial Accounting Standards Board, or FASB, issued an accounting standard update for business combinations specifically related to the disclosures of supplementary pro forma information for business combinations. This guidance specifies that pro forma disclosures should be reported as if the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period and the pro forma disclosures must include a description of material, nonrecurring pro forma adjustments. This standard is effective for business combinations with an acquisition date of January 1, 2011 or later. The adoption of the guidance did not have a material impact on our financial position or results of operations.
In May 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” This ASU is the result of joint efforts by the FASB and the International Accounting Standards Board, or IASB to develop a single, converged fair value framework. While the ASU is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands existing disclosure requirements for fair value measurements and makes other amendments. Key additional disclosures include quantitative disclosures about unobservable inputs in Level 3 measures, qualitative information about sensitivity of Level 3 measures and valuation process, and classification within the fair value hierarchy for instruments where fair value is only disclosed in the footnotes but the

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carrying amount is on some other basis. For public companies, the ASU is effective for interim and annual periods beginning after December 15, 2011. We do not expect adoption of this ASU to have a material impact on our results of operations, financial position or cash flow.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income,” which amends current comprehensive income guidance. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, it requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used today, and the second statement would include components of other comprehensive income, or OCI. The ASU does not change the items that must be reported in OCI. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. We do not expect adoption of this ASU to have a material impact on our results of operations, financial position or cash flow.
Results of Operations
Comparison of the Three Months Ended June 30, 2011 and 2010
Revenue
                                                 
    Three Months Ended June 30,        
    2011     2010        
            Percent             Percent     Period-to-Period  
            of Total             of Total     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Revenue by Type:
                                               
Licenses
  $ 19,202       60 %   $ 10,555       53 %   $ 8,647       82 %
Maintenance and services
    12,977       40       9,216       47       3,761       41  
 
                                     
Total revenue
  $ 32,179       100 %   $ 19,771       100 %   $ 12,408       63 %
 
                                     
 
                                               
Revenue by Geography:
                                               
Americas
  $ 23,472       73 %   $ 11,844       60 %   $ 11,628       98 %
EMEA
    4,898       15       4,264       22       634       15  
APAC
    3,809       12       3,663       18       146       4  
 
                                     
Total revenue
  $ 32,179       100 %   $ 19,771       100 %   $ 12,408       63 %
 
                                     
Total revenue for the three months ended June 30, 2011 increased by 63%, or $12.4 million, to $32.2 million, compared to the same period in 2010. This growth was driven by an 82% increase in license revenue and a 41% increase in maintenance and services revenue. Deferred revenue decreased by $3.4 million for the three months ended June 30, 2011, compared to growth of $0.6 million for the same period in 2010.
Total revenue from the Americas for the three months ended June 30, 2011 increased by 98%, or $11.6 million, to $23.5 million compared to the same period in 2010. The increase in the Americas revenue for the three months ended June 30, 2011 was primarily due to growth in software license sales and related maintenance in addition to strong growth in services. Europe, Middle East and Africa, or EMEA, total revenue for the three months ended June 30, 2011 increased by 15%, or $0.6 million, to $4.9 million compared to the same period in 2010. Asia Pacific, or APAC, total revenue for the three months ended June 30, 2011 increased by 4%, or $0.1 million, to $3.8 million compared to the same period in 2010.

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The increase in EMEA and APAC revenue for the three months ended June 30, 2011 was due to growth in software license sales, particularly our hosted UC and trunking applications.
License Revenue
License revenue for the three months ended June 30, 2011 increased by 82%, or $8.6 million, to $19.2 million. The increase in license revenue for the three months ended June 30, 2011 was primarily related to strong growth in sales of software licenses in the Americas. Deferred license revenue decreased by $0.9 million for the three months ended June 30, 2011, compared to growth of $0.7 million for the same period in 2010. The decrease in deferred revenue for the three months ended June 30, 2011 was primarily driven by license orders that we deferred in prior periods and for which we recognized the revenue in the quarter.
Maintenance and Services Revenue
Maintenance and services revenue for the three months ended June 30, 2011 increased by 41%, or $3.8 million, to $13.0 million, compared to the same period in 2010. The increase in maintenance and services revenue was the result of growth in our installed base of customers and licenses and growth in demand by our customers for our professional service offerings. Deferred maintenance and services revenue declined by $2.5 million for the three months ended June 30, 2011, compared to a slight decrease for the same period in 2010. The decrease in deferred revenue for the three months ended June 30, 2011 was primarily driven by professional services projects that we deferred in prior periods and for which we recognized the revenue in the quarter.
Cost of Revenue and Gross Profit
                                                 
    Three Months Ended June 30,        
    2011     2010        
            Percent             Percent        
            of             of     Period-to-Period  
            Related             Related     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Cost of Revenue:
                                               
Licenses (1)
  $ 1,596       8 %   $ 1,218       12 %   $ 378       31 %
Maintenance and services
    4,635       36       3,842       42       793       21  
 
                                         
Total cost of revenue
  $ 6,231       19 %   $ 5,060       26 %   $ 1,171       23 %
 
                                         
 
                                               
Gross Profit:
                                               
Licenses (1)
  $ 17,606       92 %   $ 9,337       88 %   $ 8,269       89 %
Maintenance and services
    8,342       64       5,374       58       2,968       55  
 
                                         
Total gross profit
  $ 25,948       81 %   $ 14,711       74 %   $ 11,237       76 %
 
                                         
 
(1)   Includes amortization of intangibles aggregating $251 and $192 for the three months ended June 30, 2011 and 2010, respectively.
For the three months ended June 30, 2011, gross margin percent increased to 81% of revenue, compared to 74% for the same period in 2010. Our gross profit increased by 76%, or $11.2 million, to $25.9 million. We experienced an increase in both license revenue gross profit and maintenance and services revenue gross profit for the three months ended June 30, 2011, primarily due to growth in license revenue and maintenance and services revenue.

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For the three months ended June 30, 2011, license gross margin percent increased to 92% as compared to 88% in the same period in 2010, and license gross profit increased by 89% to $17.6 million. License cost of revenue increased by 31% to $1.6 million for the three months ended June 30, 2011. This increase was primarily due to a $0.2 million increase in personnel related expenses.
For the three months ended June 30, 2011, maintenance and services gross margin percent increased to 64% compared to 58% for the same period in 2010, with a corresponding increase in gross profit of 55% to $8.3 million, due to increased services revenue and higher utilization of maintenance and services resources. Maintenance and services cost of revenue increased by 21% to $4.6 million in the three months ended June 30, 2011 as compared to the same period in 2010. The increase in maintenance and services cost of revenue was primarily due to an increase in personnel costs due to an increase in services personnel working directly on specific projects for certain customers which will also be included in future releases of our products.
Operating Expenses
                                                 
    Three Months Ended June 30,        
    2011     2010        
            Percent             Percent     Period-to-Period  
            of Total             of Total     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Sales and marketing
  $ 9,077       28 %   $ 7,710       39 %   $ 1,367       18 %
Research and development
    6,730       21       4,952       25       1,778       36  
General and administrative
    4,496       14       3,608       18       888       25  
 
                                     
Total operating expenses
  $ 20,303       63 %   $ 16,270       82 %   $ 4,033       25 %
 
                                     
Sales and Marketing. Sales and marketing expense increased by 18%, or $1.4 million, to $9.1 million for the three months ended June 30, 2011. The primary driver of this increase was a $1.0 million increase in personnel costs.
Research and Development. Research and development expense increased by 36%, or $1.8 million, to $6.7 million for the three months ended June 30, 2011. This increase was primarily due to a $1.3 million increase in personnel costs, driven by both organic growth and as a result of an acquisition completed in October 2010, and a $0.2 million increase in consulting expenses.
General and Administrative. General and administrative expense increased by 25%, or $0.9 million, to $4.5 million for the three months ended June 30, 2011. This increase was primarily attributable to a $0.8 million increase in personnel costs. A key driver of this growth in expense was as a result of our transition to becoming a public company.
Income from Operations
We had income from operations of $5.6 million for the three months ended June 30, 2011, compared to a loss of $1.6 million for the same period in 2010. The increase in income from operations for the three months ended June 30, 2011 was primarily a result of revenue and associated gross profit growing more quickly than expenses increased; specifically, gross profit grew by $11.2 million, compared with a $4.0 million increase in total operating expenses described above.

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Other (Income) Expense
                                                 
    Three Months Ended June 30,        
    2011     2010        
            Percent             Percent     Period-to-Period  
            of Total             of Total     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Interest income
  $ (44 )     *     $ (10 )     *     $ (34 )     340 %
Interest expense
    238       *       393       2 %     (155 )     (39 )
Other expense
          *       (12 )     *       12       (100 )
 
                                     
Total other expense
  $ 194       *     $ 371       2 %   $ (177 )     (48 )%
 
                                     
 
*   Less than 1%
Interest income for the three months ended June 30, 2011 was relatively unchanged as compared to the same period in 2010. Interest expense for the three months ended June 30, 2011 decreased by $0.2 million as a result of the voluntary early repayment of a credit facility subsequent to June 30, 2010. We expect interest expense to increase in future quarters as a result of our recently issued convertible senior notes (the “Notes”).
Benefit From Income Taxes
Benefit from income taxes was $10.3 million for the three months ended June 30, 2011, compared to a $0.2 million benefit for the same period in 2010. The income tax benefit for the three months ended June 30, 2011 relates primarily the discrete release of the U.S. valuation allowance of $9.9 million and to foreign taxes. Excluding the release of the valuation allowance, changes in our taxes are due primarily to the change in the mix of earnings by jurisdiction. The following table summarizes the our benefit from income taxes included in our unaudited condensed consolidated statements of operations for the periods indicated (in thousands):
                 
    Three Months Ended  
    June 30,  
    2011     2010  
Interim period benefit from income taxes
  $ (414 )   $ (156 )
Release of valuation allowance
    (9,926 )      
 
           
Benefit from income taxes
  $ (10,340 )   $ (156 )
 
           
As of March 31, 2011, the our NOLs and other deferred tax assets were fully offset by a valuation allowance primarily because, at March 31, 2011, pursuant to accounting guidance for income taxes, we did not have sufficient history of income to conclude that it was more likely than not that we would be able to realize the tax benefits of those deferred tax assets. As of June 30, 2011, we reevaluated our deferred tax assets. Based upon our cumulative operating results through June 30, 2011 and an assessment of our expected future results of operations, we determined that there was significant positive evidence regarding the realization of our U.S. deferred tax assets. After weighing both the positive and negative evidence, coupled with the continued success in commercializing our core products and services both inside and outside the United States, we believe that it is more likely than not that our U.S. deferred tax assets will be realized. As a result, at June 30, 2011, we reversed a portion of our valuation allowance and recognized an additional net deferred tax asset of $9.9 million based on the amount of U.S. net deferred

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tax assets expected to be remaining as of December 31, 2011. The amount was recorded as a discrete tax benefit in the three months ended June 30, 2011.
Comparison of the Six Months Ended June 30, 2011 and 2010
Revenue
                                                 
    Six Months Ended June 30,        
    2011     2010        
            Percent of             Percent of     Period-to-Period  
            Total             Total     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Revenue by Type:
                                               
Licenses
  $ 34,393       56 %   $ 19,338       51 %   $ 15,055       78 %
Maintenance and services
    27,440       44       18,237       49       9,203       50  
 
                                     
Total revenue
  $ 61,833       100 %   $ 37,575       100 %   $ 24,258       65 %
 
                                     
 
                                               
Revenue by Geography:
                                               
Americas
  $ 44,806       72 %   $ 22,309       59 %   $ 22,497       101 %
EMEA
    9,645       16       8,708       23       937       11  
APAC
    7,382       12       6,558       18       824       13  
 
                                     
Total revenue
  $ 61,833       100 %   $ 37,575       100 %   $ 24,258       65 %
 
                                     
Total revenue for the six months ended June 30, 2011 increased by 65%, or $24.3 million, to $61.8 million, compared to the same period in 2010. This growth was driven by a 78% increase in license revenue and a 50% increase in maintenance and services revenue. Deferred revenue decreased by $4.9 million for the six months ended June 30, 2011, compared to growth of $6.9 million for the same period in 2010.
Total revenue from the Americas for the six months ended June 30, 2011 increased by 101%, or $22.5 million, to $44.8 million compared to the same period in 2010. The increase in the Americas revenue for the six months ended June 30, 2011 was primarily due to growth in software license sales and related maintenance and services. EMEA total revenue for the six months ended June 30, 2011 increased by 11%, or $0.9 million, to $9.6 million compared to the same period in 2010. APAC total revenue for the six months ended June 30, 2011 increased by 13%, or $0.8 million, to $7.4 million compared to the same period in 2010. The increase in EMEA and APAC revenue for the six months ended June 30, 2011 was due to growth in software license sales.
License Revenue
License revenue for the six months ended June 30, 2011 increased by 78%, or $15.1 million, to $34.4 million. The increase in license revenue for the six months ended June 30, 2011 was primarily related to growth in sales of software licenses in the Americas and APAC. Deferred license revenue decreased by $1.5 million for the six months ended June 30, 2011, compared to growth of $2.2 million for the same period in 2010. The decrease in deferred revenue for the six months ended June 30, 2011 was primarily driven by license orders that we deferred in prior periods and for which we recognized the revenue in the period.
Maintenance and Services Revenue
Maintenance and services revenue for the six months ended June 30, 2011 increased by 50%, or $9.2 million, to $27.4 million, compared to the same period in 2010. The increase in maintenance and services revenue was the result of growth in our installed base of customers and licenses and growth in demand by our customers for our professional service offerings. Deferred maintenance and services revenue

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declined by $3.4 million for the six months ended June 30, 2011, compared to growth of $4.7 million for the same period in 2010. The decrease in deferred revenue for the six months ended June 30, 2011 was primarily driven by professional services projects that we deferred in prior periods and for which we recognized the revenue in the period.
Cost of Revenue and Gross Profit
                                                 
    Six Months Ended June 30,        
    2011     2010        
            Percent             Percent        
            of             of     Period-to-Period  
            Related             Related     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Cost of Revenue:
                                               
Licenses (1)
  $ 3,111       9 %   $ 2,627       14 %   $ 484       18 %
Maintenance and services
    8,950       33       7,227       40       1,723       24  
 
                                         
Total cost of revenue
  $ 12,061       20 %   $ 9,854       26 %   $ 2,207       22 %
 
                                         
 
                                               
Gross Profit:
                                               
Licenses (1)
  $ 31,282       91 %   $ 16,711       86 %   $ 14,571       87 %
Maintenance and services
    18,490       67       11,010       60       7,480       68  
 
                                         
Total gross profit
  $ 49,772       80 %   $ 27,721       74 %   $ 22,051       80 %
 
                                         
 
(1)   Includes amortization of intangibles aggregating $490 and $385 for the six months ended June 30, 2011 and 2010, respectively.
For the six months ended June 30, 2011, our gross margin percent increased to 80% of revenue, compared to 74% for the same period in 2010. Our gross profit increased by 80%, or $22.1 million, to $49.8 million. We experienced an increase in both license revenue gross profit and maintenance and services revenue gross profit for the six months ended June 30, 2011, primarily due to growth in license revenue and maintenance and services revenue.
For the six months ended June 30, 2011, license gross margin percent increased to 91% as compared to 86% in the same period in 2010 and license gross profit increased by 87% to $31.3 million. License cost of revenue increased by 18% to $3.1 million for the six months ended June 30, 2011. This increase was primarily due to a $0.2 million increase in personnel related expenses.
For the six months ended June 30, 2011, maintenance and services gross margin percent increased to 67%, compared to 60% in the same period in 2010, with a corresponding increase in gross profit of 68% to $18.5 million, due to increased services revenue and higher utilization of maintenance and services resources. Maintenance and services cost of revenue increased by 24% to $9.0 million in the six months ended June 30, 2011 as compared to the same period in 2010. The increase in maintenance and services cost of revenue was primarily due to an increase in personnel costs due to an increase in services personnel working directly on specific projects for certain customers that will also be included in future releases of our products.

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Operating Expenses
                                                 
    Six Months Ended June 30,        
    2011     2010        
            Percent             Percent     Period-to-Period  
            of Total             of Total     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Sales and marketing
  $ 17,561       28 %   $ 14,812       39 %   $ 2,749       19 %
Research and development
    13,546       22       9,443       25       4,103       43  
General and administrative
    8,882       15       6,887       19       1,995       29  
 
                                     
Total operating expenses
  $ 39,989       65 %   $ 31,142       83 %   $ 8,847       28 %
 
                                     
Sales and Marketing. Sales and marketing expense increased by 19%, or $2.7 million, to $17.6 million for the six months ended June 30, 2011. The primary driver of this increase was a $2.1 million increase in personnel costs.
Research and Development. Research and development expense increased by 43%, or $4.1 million, to $13.5 million for the six months ended June 30, 2011. This increase was primarily due to a $2.8 million increase in personnel costs, primarily from an increase in headcount that was both organic and as a result of an acquisition, and a $0.4 million increase in consulting expenses.
General and Administrative. General and administrative expense increased by 29%, or $2.0 million, to $8.9 million for the six months ended June 30, 2011. This increase was primarily attributable to a $1.5 million increase in personnel costs and an increase of $0.5 million in professional services expenses. A key driver of this growth in expense was as a result of our transition to becoming a public company.
Income from Operations
We had income from operations of $9.8 million for the six months ended June 30, 2011, compared to a loss of $3.4 million for the same period in 2010. The increase in income from operations for the six months ended June 30, 2011 was primarily a result of revenue and associated gross profit growing more quickly than expenses increased; specifically, gross profit grew by $22.1 million increase in gross profit, compared with a $8.8 million increase in total operating expenses described above.
Other (Income) Expense
                                                 
    Six Months Ended June 30,        
    2011     2010        
            Percent             Percent     Period-to-Period  
            of Total             of Total     Change  
    Amount     Revenue     Amount     Revenue     Amount     Percentage  
    (dollars in thousands)  
Interest income
  $ (87 )     *     $ (12 )     *     $ (75 )     625 %
Interest expense
    258       *       699       2 %     (441 )     (63 )
Other expense
          *       173       *       (173 )     (100 )
 
                                     
Total other expense
  $ 171       *     $ 860       2 %   $ (689 )     (80 )%
 
                                     
 
*   Less than 1%
Interest income for the six months ended June 30, 2011 was relatively unchanged as compared to the same period in 2010. Interest expense for the six months ended June 30, 2011 decreased by $0.4 million as a result of the voluntary early repayment of a credit facility subsequent to June 30, 2010. Other expense for the six months ended June 30, 2011 decreased $0.2 million due to the conversion of our preferred stock warrants to common stock warrants in connection with our initial public offering, or IPO, of

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common stock subsequent to June 30, 2010. We expect interest expense to increase in future quarters as a result of our recently issued convertible senior notes.
(Benefit from) Provision for Income Taxes
Benefit from income taxes was $9.9 million for the six months ended June 30, 2011, compared to a provision for income taxes of $0.1 million for the same period in 2010. The income tax provision relates primarily to foreign taxes and the discrete release of the U.S. valuation allowance of $9.9 million. Excluding the release of the valuation allowance, changes in our taxes are due primarily to the change in the mix of earnings by jurisdiction. The following table summarizes our (benefit from) provision for income taxes included in our unaudited condensed consolidated statements of operations for the periods indicated (in thousands):
                 
    Six Months Ended  
    June 30,  
    2011     2010  
Interim period provision for income taxes
  $ 52     $ 126  
Release of valuation allowance
    (9,926 )      
 
           
(Benefit from) provision for income taxes
  $ (9,874 )   $ 126  
 
           
As of March 31, 2011, the our NOLs and other deferred tax assets were fully offset by a valuation allowance primarily because, at March 31, 2011, pursuant to accounting guidance for income taxes, we did not have sufficient history of income to conclude that it was more likely than not that we would be able to realize the tax benefits of those deferred tax assets. As of June 30, 2011, we reevaluated our deferred tax assets. Based upon our cumulative operating results through June 30, 2011 and an assessment of our expected future results of operations, we determined that there was significant positive evidence regarding the realization of our U.S. deferred tax assets. After weighing both the positive and negative evidence, coupled with the continued success in commercializing our core products and services both inside and outside the United States, we believe that it is more likely than not that our U.S. deferred tax assets will be realized. As a result, at June 30, 2011, we reversed a portion of our valuation allowance and recognized an additional net deferred tax asset of $9.9 million based on the amount of U.S. net deferred tax assets expected to be remaining as of December 31, 2011. The amount was recorded as a discrete tax benefit in the six months ended June 30, 2011.
Liquidity and Capital Resources
Resources
Since the beginning of 2009, we have funded our operations principally with cash provided by operating activities, which has resulted primarily from our ability to generate revenue and deferred revenue in excess of our expenses. In June 2010, we completed our IPO through which we raised net proceeds of $40.0 million. In December 2010, we completed our follow-on offering through which we raised net proceeds of $9.9 million.
In June 2011, we completed an offering of 1.50% convertible senior notes with net proceeds from the offering of approximately $115.7 million, after deducting the initial purchasers’ discount and estimated offering expenses payable by us.

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Cash and Cash Equivalents, Accounts Receivable and Working Capital
The following tables present a summary of our cash and cash equivalents, accounts receivable, working capital and cash flows for the periods indicated (in thousands).
                 
            As of
    As of June   December
    30, 2011   31, 2010
Cash and cash equivalents
  $ 157,984     $ 47,254  
Accounts receivable, net
    34,083       40,491  
Working capital
    186,973       35,268  
                 
    For the Six Months
    Ended June 30,
    2011   2010
Cash provided by (used in):
               
Operating activities
  $ 11,990     $ 6,872  
Investing activities
    (19,055 )     (2,084 )
Financing activities
    117,727       19,789  
Our cash and cash equivalents at June 30, 2011 were held for working capital and other general corporate 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 $1.1 million at June 30, 2011 and is not included in cash and cash equivalents, consisted primarily of certificates of deposit that secure letters of credit related to operating leases for office space.
Operating Activities
For the six months ended June 30, 2011, operating activities provided $12.0 million in net cash compared to $6.9 million for the same period in 2010, primarily as a result of net income of $19.5 million plus non-cash items, such as depreciation and amortization of $1.3 million, amortization of software licenses of $0.9 million and stock-based compensation expense of $3.0 million and a decrease in accounts receivable of $6.4 million that was partially offset by the release of the tax valuation allowance of $9.9 million, a $3.9 million decrease in accounts payables, accrued expenses and other long-term liabilities and a $4.9 million decrease in deferred revenue.
Investing Activities
Our investing activities have consisted primarily of purchases of marketable securities and property and equipment.
For the six months ended June 30, 2011, net cash used in investing activities was $19.1 million, compared to $2.1 million for the same period in 2010. This increase was primarily attributable to an $18.2 million increase in net purchases of marketable securities as we increased our investment of excess cash.
Financing Activities
For the six months ended June 30, 2011, net cash provided by financing activities was $117.7 million, compared to net cash provided by financing activities of $19.8 million for the same period in 2010.

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The principal source of cash generated from financing activities was related to the issuance of the Notes, which generated $115.7 million. Additionally, we issued common stock upon exercise of stock options, which generated $3.2 million.
Borrowings and Credit Facilities
Convertible Senior Notes
In June 2011, we issued $120.0 million aggregate principal amount of our 1.50% Notes. The Notes are senior unsecured obligations of the Company, with interest payable semi-annually in cash at a rate of 1.50% per annum, and will mature on July 1, 2018, unless earlier repurchased, redeemed or converted. See Footnote 5 to our Unaudited Condensed Consolidated Financial Statements contained elsewhere in this report for additional details about the Notes.
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 June 30, 2011, the liability for the installment bank loan was approximately $1.2 million.
Operating and Capital Expenditure Requirements
We believe that the cash generated from operations, our current cash and investment 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 grow 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 resources are insufficient to satisfy our capital 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.

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Contractual Obligations
We have contractual obligations for non-cancelable office space, notes payable and other short-term and long-term liabilities. The following table discloses aggregate information about our contractual obligations and periods in which payments are due as of June 30, 2011 (in thousands):
                                         
    Payments Due by Year  
    Total     2011     2012 - 2013     2014 - 2015     After 2015  
Convertible Senior Notes, including interest *
  $ 132,650     $     $ 3,650     $ 3,600     $ 125,400  
Operating lease obligations
    8,195       646       2,504       2,686       2,359  
Bank of America installment loan
    1,194       394       800              
Equipment leases
    147       28       110       9        
 
                             
Total
  $ 142,186     $ 1,068     $ 7,064     $ 6,295     $ 127,759  
 
                             
 
*   Contractual interest obligations related to our Notes total $12.7 million at June 30, 2011, including $3.7 million, $3.6 million, and $5.4 million due in years 2012-2013, 2014-2015, and after 2015, respectively.
The amounts in the table above do not include contingent payments potentially payable to GENBAND Inc. in August 2011, as we are not able to provide a reliable estimate of the future payment.
As of June 30, 2011, we had unrecognized tax benefits of $0.9 million, which did not include any interest or penalties. We do not expect to recognize any of these benefits in 2011. Furthermore, we are not able to provide a reliable estimate of the timing of future payments relating to these unrecognized benefits.
Off-Balance Sheet Arrangements
As of June 30, 2011, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures 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
The interest rate is fixed on all our outstanding loan balances; consequently, we do not have exposure to risks due to increases in the variable rates tied to indexes. 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. At June 30, 2011, we had long-term debt of $79.6 million associated with our convertible senior notes, which are fixed rate instruments. We would not expect a 10% change in interest rates to have a material impact on our results of operations.

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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 June 30, 2011 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2011, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a defendant in litigation arising out of the ordinary course of business. Except as described in our Annual Report on Form 10-K for the year ended December 31, 2010, we are not a party to any material, pending legal proceeding, nor are we aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our common stock are adverse to us or have a material interest adverse to us.

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Item 1A. 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 Quarterly Report on Form 10-Q. 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.
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 the six months ended June 30, 2011, BroadWorks licenses and related services represented 83% of our revenue and 86% and 82% for the years ended December 31, 2010 and 2009, 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, have and could in the future assert infringement claims against us including for past infringement, 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.
On October 22, 2010, we were named as a defendant in a lawsuit brought by EON Corp. IP Holdings, LLC in the United States District Court for the Eastern District of Texas. The lawsuit seeks unspecified damages for alleged infringement of a patent. We intend to defend this lawsuit vigorously, but we cannot be certain of any particular outcome and an adverse outcome in this lawsuit could have a material adverse effect on our business. As a public company, we believe that we may become increasingly subject to third-party infringement claims.

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The likelihood of our being subject to additional 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 infringing their intellectual property rights. The visibility we receive from being a public company may result in a greater number of such allegations. Regardless of the merit of third-party claims that we infringe their rights, these claims 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 pay amounts for past infringement or 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 litigation or 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.
If a customer 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, trade secret and, to a lesser extent, trademark laws, as well as confidentiality procedures and agreements with our

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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 the six months ended June 30, 2011 and the years ended December 31, 2010 and 2009, Verizon Corporate Services Group Inc., or Verizon, accounted for approximately 11%, 15%, and 10%, respectively, 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 9% and 11% of our total revenue for the years ended December 31, 2010 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. In addition, under our agreements with Verizon and Ericsson, neither party is required to purchase any minimum amount of our products or services. 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 June 30, 2011, we had an accumulated deficit of $69.0 million. Although we were profitable for the first time in 2010, we incurred net losses in each fiscal year prior to 2010 from inception, including a net loss of $7.8 million in 2009 and we may not be profitable in the future. 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 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 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.
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

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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.
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

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    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. For example, in the fall of 2010, we announced BroadCloud, a cloud-based hosted infrastructure whereby we will deliver applications via our cloud, and we cannot guarantee that BroadCloud will be successful.
Developing our products is expensive, complex and involves uncertainties. We may not have sufficient resources to successfully manage lengthy product development cycles. For the six months ended June 30, 2011 and the years ended December 31, 2010 and 2009, our research and development expenses were $13.5 million, or 22% of our total revenue, $19.6 million, or 21% of our total revenue, and $16.6 million, or 24% 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

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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 acquisitions of Packet Island, Inc., or Packet Island, and Casabi, Inc., or Casabi;
 
    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.
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

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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 may also affect our ability to attract and retain key personnel. Our executive officers are, or will soon be, 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. Economic conditions have impacted and in the future may impact 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 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 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, 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.

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We have made a number of 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 have made a number of acquisitions, most recently Packet Island and Casabi. In October 2009, we acquired Packet Island, a software as a service, or SaaS, provider of 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. Our acquisition of Casabi in October 2010, a provider of cloud-based personalized content and messaging applications, expands our SaaS offerings. 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;
 
    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.

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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. Although we believe we have effective internal controls, we may in the future have 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 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 incur significant costs as a result of being a public company, which may adversely affect our operating results and financial condition.
As a public company, we incur significant accounting, legal and other expenses that we did not incur as a private company. We also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the SEC and The NASDAQ Stock Market. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains various provisions applicable to the corporate governance functions of public companies. These rules and regulations have increased our legal and financial compliance costs and made some activities more time-consuming and costly. In addition, we incur additional costs associated with our public company reporting requirements and we expect those costs to increase in the future. 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 maintain 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, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules adopted by the SEC and The NASDAQ Stock Market, would likely

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result in increased costs to us as we respond to their requirements, which may adversely affect 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.
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 tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates;
 
    the effective tax rate in the years following the year in which the valuation allowance is released may increase and/or be subject to volatility;
 
    changes in the valuation of our deferred tax assets and liabilities;
 
    expected timing and amount of the release of the tax valuation allowance;
 
    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.
We incurred significant indebtedness through the sale of our 1.50% convertible senior notes due 2018, and we may incur additional indebtedness in the future. The indebtedness created by the sale of the notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and results of operations.
We incurred $120 million of senior indebtedness in June 2011 when we sold $120 million aggregate principal amount of 1.50% convertible senior notes due 2018, or the Notes. We may also incur additional long-term indebtedness or obtain additional working capital lines of credit to meet future financing needs. Our indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:
    increasing our vulnerability to adverse economic and industry conditions;

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    limiting our ability to obtain additional financing;
 
    requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;
 
    limiting our flexibility in planning for, or reacting to, changes in our business; and
 
    placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.
We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of the Notes, or any indebtedness that we may incur in the future, we would be in default, which would permit the holders of the Notes and such other indebtedness to accelerate the maturity of the Notes and such other indebtedness and could cause defaults under the Notes and such other indebtedness. Any default under the Notes or any indebtedness that we may incur in the future could have a material adverse effect on our business, results of operations and financial condition.
The repurchase rights and events of default features of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the repurchase rights features of the Notes are triggered, holders of the Notes will be entitled to require us to repurchase all or a portion of their Notes. If the event of default features of the Notes are triggered, holders of the Notes may declare the principal amount of the Notes, plus accrued and unpaid interest thereon, to be immediately due and payable. In either event, we would be required to make cash payments to satisfy our obligations, which could adversely affect our liquidity. In addition, even if holders do not elect to exercise their repurchase rights or declare their Notes immediately due and payable, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital.
The accounting method for convertible debt securities, such as the Notes, could have a material adverse effect on our reported financial results.
Under applicable accounting guidance, we must separately account for the liability and equity components of the Notes, because they may be settled partially in cash upon conversion, in a manner that reflects our economic interest cost. This guidance requires us to record the fair value of the conversion option of the Notes as a component of stockholders’ equity and include this amount in additional paid-in-capital on our consolidated balance sheet. The value of the conversion option of the Notes is reported as debt discount and subsequently amortized as interest expense through the expected maturity date of the Notes. We will report lower net income in our financial results because we will be required to include both the current period’s amortization of the debt discount (non-cash interest) and the instrument’s cash interest, which could adversely affect our reported or future financial results and the trading price of our common stock.

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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., Ericsson, Huawei Technologies Co., Ltd., Metaswitch Networks, Nokia-Siemens Networks B.V., GENBAND Inc. 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;
 
    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 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.

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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.
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.

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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. For the six months ended June 30, 2011 and the years ended December 31, 2010 and 2009, 39%, 46% and 48% of our revenue, respectively, was attributable to our international customers. As of June 30, 2011, approximately 39% 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 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.

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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 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 9% and 11% of our total revenue for the years ended December 31, 2010 and 2009, respectively. 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 Ownership of Our Common Stock
Our stock price has been and may continue to be highly volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
Our stock price has been and may continue to be highly volatile and it 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 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. Since our IPO, our common stock has traded at prices ranging from $7.34 to $55.45. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. 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 relatively new 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.
Our management might apply our available capital resources in ways that do not increase the value of your investment.
We intend to use our available capital resources, including remaining net proceeds from our IPO, our follow-on offering and our recently completed offering of the Notes, for working capital and general corporate purposes, including expanding our development, operations, marketing and sales departments. We may also use a portion of these resources for the future acquisition of, or investment in, complementary businesses, products or technologies. Our management has broad discretion as to the use of these resources and you will be relying on the judgment of our management regarding the application of these resources. We might apply these resources in ways with which you do not agree, or in ways that do not yield a favorable return. If our management applies these resources in a manner that does not yield a significant return, if any, on our investment of these resources, it would adversely affect the market price of our common stock.

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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.
Our certificate of incorporation and bylaws include 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 acquirers 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.
Provisions in the indenture for the Notes may deter or prevent a business combination.
Under the terms of the indenture governing the Notes, the occurrence of certain merger and business combination transactions could require us to repurchase all or a portion of the Notes, or, in some circumstances, increase the conversion rate applicable to the Notes. In addition, the indenture for the Notes prohibits us from engaging in certain mergers or business combination transactions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions could prevent or deter a third party from acquiring us even where the acquisition could be beneficial to our stockholders.
We may issue additional shares of our common stock or instruments convertible into shares of our common stock, including additional shares associated with the potential conversion of the Notes, which could materially and adversely affect the market price of our common stock and cause dilution to existing stockholders.
Upon conversion of the Notes, we will repay the principal portion of the Notes in cash, but we will deliver shares of common stock to the noteholder in respect of any conversion value of the Notes. Additionally, we are not restricted from issuing additional shares of our common stock or other instruments convertible into, or exchangeable or exercisable for, shares of our common stock. If we issue additional shares of our common stock, including upon the conversion of the Notes, or if we issue additional instruments convertible into shares of our common stock, it may materially and adversely affect the market price of our common stock. The issuance of additional shares of our common stock, including upon conversion of some or all of the Notes, will also dilute the ownership interests of existing holders of our common stock.

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Dilution will be greater if the conversion rate of the Notes is adjusted upon the occurrence of certain events specified in the indenture to the Notes.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
In June 2010, we completed our initial public offering. We raised a total of $45.5 million in gross proceeds from the initial public offering, or $40.0 million in net proceeds after deducting underwriting discounts and commissions of $3.2 million and other estimated offering costs of $2.3 million.
We intend to use the net proceeds from the offering for working capital and other general corporate purposes, including financing our growth, developing new products and funding capital expenditures. Pending such usage, we have invested the net proceeds primarily in short-term, interest-bearing investment grade securities.
Item 3. Defaults Upon Senior Securities.
     None.
Item 4. Removed and Reserved.
Item 5. Other Information.
     None.
Item 6. Exhibits.
     
Exhibit    
Number   Description of Document
 
   
3.1
  Amended and Restated Certificate of Incorporation. (1)
 
   
3.2
  Amended and Restated Bylaws. (2)
 
   
4.1
  Indenture, dated as of June 20, 2011, by and between the Company and Wells Fargo Bank, N.A., as Trustee. (3)
 
   
4.2
  Form of Note representing the Company’s 1.50% Convertible Senior Notes due 2018. (3)
 
   
10.1*†
  BroadSoft, Inc. Executive Bonus Plan.
 
   
31.1
  Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Exhibit    
Number   Description of Document
 
   
101.INS XBRL#
  Instance Document
 
   
101.SCH XBRL#
  Taxonomy Extension Schema
 
   
101.CAL XBRL#
  Taxonomy Extension Calculation Linkbase
 
   
101.DEF XBRL#
  Taxonomy Extension Definition Linkbase
 
   
101.LAB XBRL#
  Taxonomy Extension Label Linkbase
 
   
101.PRE XBRL#
  Taxonomy Extension Presentation Linkbase
 
(1)   Previously filed as an exhibit to the registrant’s Current Report on Form 8-K (File No. 001-34777) filed with the Securities and Exchange Commission on June 25, 2010 and incorporated herein by reference.
 
(2)   Previously filed as an exhibit to the registrant’s Registration Statement on Form S-1 (Registration No. 333-165484) filed with the Securities and Exchange Commission on March 15, 2010 and incorporated herein by reference.
 
(3)   Previously filed as an exhibit to the registrant’s Current Report on Form 8-K (File No. 1-34777) filed with the Securities and Exchange Commission on June 21, 2011 and incorporated by reference herein.
 
*   Denotes management compensation plan or arrangement.
 
  Confidential treatment has been requested with respect to certain portions of this exhibit. A complete copy of the document, including the redacted portions, has been filed separately with the SEC.
 
#   Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  BROADSOFT, INC.
 
 
  By:   /s/ James A. Tholen    
    James A. Tholen   
    Chief Financial Officer
(Principal Financial and Accounting Officer and duly authorized signatory) 
 
 
Date: August 8, 2011

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