10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________ 
FORM 10-K
 ______________________________________________ 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2015
or
¨
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)
 ______________________________________________ 
Securities Registered Pursuant to Section 12(b) of the Act
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
NASDAQ Stock Market, LLC
Securities Registered Pursuant to Section 12(g) of the Act: None
______________________________________________  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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  ý    No  ¨
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  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
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  ¨    No  ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2015 was approximately $1,000,199,083.
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 25, 2016 was 29,125,129.


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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2016 annual meeting of stockholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2015, are incorporated by reference into Part III of this Form 10-K.
 


Table of Contents


TABLE OF CONTENTS
 
PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 
 
 
Exhibit Index
 

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Forward-Looking Statements
This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K may include statements about:
our dependence on the success of BroadWorks;
our ability to successfully deploy our BroadCloud offering, expand this offering geographically and increase the associated recurring service revenue;
any potential loss of or reductions in orders from certain significant customers;
our dependence on our service provider customers to sell services using our applications;
claims that we infringe the intellectual property rights of others;
our ability to protect our intellectual property;
competitive factors, including, but not limited to, industry consolidation, entry of new competitors into our market, and new product and marketing initiatives by our competitors;
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, including foreign currency exchange risk;
our significant reliance on distribution partners in international markets;
our ability to manage our growth, including our increased headcount;
the attraction and retention of qualified employees and key personnel;
the interoperability of our products with service provider networks;
our ability to realize the benefits of our recent acquisitions and the successful integration of the personnel, technologies, and customers from such acquisitions;
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 Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission, or SEC. You should read these factors and the other cautionary statements made in this Annual Report on Form 10-K as being applicable to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K to conform these statements to actual results or to changes in our expectations.

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PART I
Item 1.
Business
Overview
We are the leading global provider of software and services that enable telecommunications service providers to deliver hosted, cloud-based Unified Communications, or UC, to their enterprise customers.
Traditionally, many enterprises have utilized premise-based private branch exchanges, or PBX’s, to connect their offices and people to public telephony networks. Hosted UC enables the delivery of PBX features without the need for premise-based equipment. Hosted UC can be delivered through service providers using their own internet protocol, or IP-based networks and their mobile networks; as well as over the public internet (also known as "over the top" or OTT). In addition to voice telephony, UC offers additional features such as full integration with mobile devices, high definition, or HD, voice and video calling and conferencing, instant messaging and presence, or IM&P, and web collaboration.
We believe we are well positioned to enable service providers to capitalize on increasing demand by enterprises for such UC services by enabling them to efficiently and cost-effectively offer a broad suite of services to their end-users. Our service provider customers in more than 80 countries are delivering services and have deployed over 13 million UC subscriber lines worldwide using our software. We count among our customers 26 of the top 30 telecommunications service providers globally, as measured by revenue for the year ended December 31, 2014.
UC-One
UC-One, our UC solution, is a communications and collaboration offering that enables telecommunications service providers to offer businesses and other enterprises UC features and functionalities on a hosted basis without the need for traditional premise-based PBX equipment. Our technology is designed to meet service providers’ stringent requirements for service availability, network integration and scale and to address the needs of various business segments, such as micro, small, medium and large enterprises, and vertical market segments such as hospitality, government, education and healthcare.
Our UC-One services include HD voice and video calling, audio conferencing, IM&P, desktop sharing and collaboration and call center capabilities. Because these capabilities can be accessed through desk phones, smartphones, tablets, laptops and PCs, UC-One provides full support for today’s distributed workforce and mobile employees. Our solution can also be deployed across multiple access networks and technologies, including fixed line/fiber and traditional mobile 3G networks, as well as voice over LTE, or VoLTE, networks and voice over wifi, or VoWiFi.
The benefits of UC-One to enterprises and end users include:
Solution Breadth and Flexibility. UC-One is scalable and can be used by businesses of varying sizes, from very small businesses of two employees to the largest global enterprises with hundreds of thousands of employees in multiple locations. Capacity can be purchased as and when needed by enterprises in response to business and operational needs.
Multi-Location and Ease of Use. Because UC-One is cloud and IP-based, an enterprise can provide uniform communications functionality across its entire organization, enabling a consistent and simplified user experience. It also provides a single console to manage all the communication and collaboration needs for businesses with geographically dispersed offices and mobile workers, greatly streamlining business operations and reducing operational costs.
Enhanced Mobility. Our solution provides the flexibility to work from the office, at home or on the move, with the full range of UC-One services available irrespective of location or end user device.
Business Continuity. Because UC-One is cloud-based, in the event an enterprise has a business interruption issue, the enterprise’s core communications and collaboration services would remain unaffected.
Openness. We have an active ecosystem of development partners who use our open APIs to create complementary offerings designed for specific market segments or industry verticals.
Lower Total Cost of Ownership. We believe that enterprises will experience a lower total cost of ownership compared to legacy premise-based solutions. Because it is cloud-based, there are significantly lower capital investment requirements, fewer highly trained personnel required and reduced costs given the inherent flexibility of per-user based costs.

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We offer service providers two deployment options, software and software-as-a-service, or SaaS, to enable them to offer UC services to their enterprise customers:
Software. BroadWorks is our application server software offering, with the software generally deployed on industry-standard servers located in the service provider’s data centers. With BroadWorks implemented as an application server in its infrastructure, the service provider is responsible for the development and implementation of the overall solution and integration with the service provider’s network, operations, support and billing systems. This deployment model gives the service provider the maximum flexibility to define its UC-One offering. In this model, revenue is derived from perpetual software license and annual maintenance and support fees, as well as associated professional services. Since our inception, the majority of our revenue has been derived from such software licensing.
SaaS. The second deployment option is our BroadCloud SaaS offering. BroadCloud provides a managed services offering for service providers. In this model, we have implemented UC-One and other BroadWorks capabilities within our own data centers and provide operations capabilities covering sales and order management, service delivery, device provisioning, customer service and billing. We believe that through BroadCloud, service providers can accelerate their deployments of UC-One services and reduce their capital expenditures and the internal costs of implementing UC services. Generally, service providers utilizing our BroadCloud offering pay us on a monthly recurring basis based on the total number of subscriber lines the service provider has deployed.
Company
We were incorporated in Delaware in 1998 and we began selling BroadWorks in 2001. 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
Traditionally, many enterprises have used premise-based PBX’s to connect their offices and people to the public telephone network. These PBX offerings were primarily voice communications based. We believe several trends are driving enterprises of all sizes to embrace the change from premise-based to cloud-based delivery of PBX functionality:
The increasing demand by enterprises to move business applications to the cloud for operational savings, flexibility and expanded services;
The desire by enterprises to drive greater team collaboration and workplace productivity through communications and collaboration tools;
The demand by enterprises to offer broader communications services such as HD voice and video calling and conferencing across their organizations;
The increasingly distributed nature of enterprises’ operations and workforces and the desire to provide fully integrated UC to them;
The proliferation of mobile devices used by employees and other workers; and
The rapid expansion of high quality IP bandwidth, particularly the expansion of wireless bandwidth such as Wi-Fi and VoLTE.
We believe that service providers are well-positioned to address these market demands. A number of our service provider customers have made significant investments in their IP-based and mobile networks and are already offering standard communications services such as broadband access and fixed and mobile calling plans. Many have a long track record of reliably delivering these business critical services. We believe that as UC solutions are increasingly being offered over fixed-line and mobile networks, service providers can achieve significant competitive advantages in delivering such services over their networks. Further, we believe service providers have a significant incentive to offer UC services to their enterprise customers as competitive and regulatory pressures have commoditized their historical revenue streams.
In addition, we believe that larger service providers are becoming more focused on implementing transformations of their fixed and mobile networks from traditional circuit switched networks to their IP-based broadband networks. As these service providers embark on such projects, they are incorporating application servers like BroadWorks to enable them to offer enhanced business services that were previously offered over their circuit switched networks. We believe this emerging trend is evident in both fixed-line transformations and increasingly in service providers’ investment in their mobile VoLTE networks. We believe this trend is a positive development for us, as service providers both replace services to their business users on their traditional networks and provide new business services.

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Demand for Voice and Multimedia Services
Service providers are providing UC services to enterprise and consumer customers. Enterprise subscribers include small, medium and large businesses, universities and governments and range in size from a few end-users to tens of thousands. Consumer subscribers include individuals and families purchasing communications services for their personal and residential use.
Enterprises
Enterprises require communications features and functionality that are varied and, in many cases, complex. Four-digit dialing, multi-party conferencing and video conferencing are common enterprise needs. Historically, enterprises have purchased voice and data access from service providers and deployed customer premise-based equipment, or CPE, such as PBXs to help deliver this functionality. In the past, enterprises often choose PBXs because they frequently required greater features and functionality than could previously be obtained efficiently from service providers’ legacy voice networks.
Using our core communications platform, we believe service providers can enhance the quality and functionality of their communications and increase the volume of communication services delivered to customers as hosted offerings. Concurrently, we believe a number of trends are driving increased demand for hosted communication services, including:
Accelerating rate of technology change. Communications technology is evolving rapidly, with the frequent introduction of new devices and services and an increase in the number of ways people interact. Keeping pace with this change becomes difficult and expensive in a CPE-based environment where the investment to interoperate with new devices or provide new services must be fully borne by the enterprise. Furthermore, CPE vendors operate proprietary systems with typically higher prices and a limited selection of end-point devices. As new services are added, equipment upgrades are often required and, unless the equipment of all constituents within the enterprise is upgraded, functionality can remain limited.
Mobile smartphones and tablets are further driving accelerated change. As mobile and other communications services are increasingly integrated, the difficulty of using a CPE-based approach is compounded by the complexity of these additions. Enterprise and consumer users are demanding their communications services be integrated across their fixed-line, personal computer and mobile devices. Hosted services deliver communications services from a network, are centrally managed by or on behalf of the service provider and deliver uniform service across an enterprise. We believe it is far easier to offer integrated services for mobile devices in a hosted environment than in a CPE-based environment. Hosted services also enable enterprises to integrate employee-owned mobile devices within the enterprise (often referred to as “bring your own device”).
Shift towards Unified Communications. We believe enterprises expect their communication tools to address their, and their employee's, desire for solutions that allow employees and teams to collaborate and to drive workplace productivity. As further described below, this has been the focus of our recently announced "Project Tempo," which concentrates our efforts on what we call the "Future of Work."
Increased acceptance of cloud-based services. Enterprises are increasingly obtaining mission-critical IT services, such as computing and storage, from the cloud. We believe the positive experiences and savings enterprises can achieve with cloud-based IT systems will drive enterprises to continue to move other important functions, such as communications services, into the cloud.
New IP-based 4G Wireless Networks. We believe all the trends described above will accelerate even further as service providers deploy and adapt 4G wireless networks, such as LTE networks. This transition will, we believe, become even more pronounced as service providers move to offering fully IP-based voice and telephony services, commonly referred to as VoLTE.
The BroadSoft Solution
To meet market opportunities and competitive challenges, many service providers are offering BroadSoft's UC-One capabilities to their enterprise customers, with service providers doing so using one or both of our two deployment options, our BroadWorks software and our BroadCloud SaaS offering.
BroadSoft’s offerings provide service providers several key advantages, including:
Rapid delivery of feature-rich enterprise and consumer multimedia services. We believe BroadWorks and BroadCloud provide the most extensive set of UC features and applications available for both enterprise and consumer applications. We also believe BroadWorks is the most feature rich application

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server for fixed-line, mobile and cable broadband access networks. BroadCloud allows service providers to quickly market to their customers cloud-based PBX functionality as well as additional, complementary UC offerings and allows end-users to access UC services from a multitude of devices.
Demonstrated adoption globally across many service provider networks. We have service provider customers in more than 80 countries who have purchased and/or are delivering services utilizing our software.
Broad interoperability across network equipment vendors, network architectures and devices. BroadWorks interoperates with all significant network architectures, access types, infrastructures and protocols and integrates and interoperates with the major network equipment vendors’ core network solutions.
Extensive technology and device partner ecosystem. BroadWorks interoperates with more than 900 devices, including more than 800 CPE devices, such as IP phones, computer-based soft-phones, conferencing devices, IP gateways, mobile phones and consumer electronics.
Scalable architecture and carrier-grade reliability. Our applications are designed to scale to support hundreds of millions of subscribers with a carrier-grade level of reliability.
Leadership in emerging standards and requirements. We are actively involved in the development of the IP Multimedia Subsystem, or IMS, SIP and VoLTE standards, as well as several other standards that we expect to shape our market in the future. Our BroadWorks application server supports what we believe is the world’s largest IMS deployment, based on the number of subscribers.
Our Strategy
Our goal is to strengthen our position as the leading provider of software and services that enable service providers to deliver cloud-based UC to their enterprise customers. To achieve this goal, our strategy is to deliver an increasingly feature rich set of services to address the needs of a broader spectrum of business customer types. Key elements of our strategy include:
Extend our technology leadership and product depth and breadth. We intend to continue to provide industry leading UC solutions through product innovation and substantial investment in research and development for new features, applications and services.
Accelerate the adaption of UC solutions by providing communications centric UC and collaboration capabilities. We announced Project Tempo at our annual BroadSoft Connections user conference in October 2015. Project Tempo is our vision of extending UC to help drive how enterprises and people communicate, interact and collaborate by integrating their communication and collaborative tools with contextual intelligence. We also intend to accelerate UC adoption and our service provider customers’ time to market by promoting and expanding our UC offerings. Our BroadCloud solution enables our service providers to offer UC features and functions through a service offering that we host and manage. We also intend to expand the geographic availability of our BroadCloud offerings beyond the United States, United Kingdom, Germany and Japan.
Broaden demand by enterprises and assist our service provider customers by developing more market segment directed UC offerings. We enable service providers to develop UC offerings targeted towards specific business segments, including small, medium and large enterprises and key vertical markets such as hospitality, government, education and healthcare.
Drive revenue growth by:
Assisting our current service provider customers to sell more of their currently deployed BroadWorks and BroadCloud offerings. 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.
Expanding our BroadCloud offering. We believe that service providers will increasingly find that using our BroadCloud offering to deliver UC solutions to their customers will accelerate their time to market and product introduction cycles.
Continuing to acquire new customers. Our customers are located around the world and include many of the top telecommunications services providers globally. We believe we are well positioned to continue to acquire new customers, particularly with the addition of our BroadCloud offering and our focus on developing UC solutions based on enterprise size and vertical market segments.

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Pursuing selected acquisitions and collaborations that complement our strategy. We intend to continue to pursue acquisitions and collaborations that we believe are strategic to strengthen our industry leadership position, expand our geographic presence or allow us to offer new or complementary products or services.
Our Platform
Service providers can offer their subscribers a comprehensive portfolio of enterprise and consumer communications services using BroadWorks and BroadCloud. We typically license and price BroadWorks on a per-subscriber, per-feature package basis and we typically sell our BroadCloud services on a per-month per-user basis. We can deploy BroadWorks or BroadCloud in a variety of network configurations, matching the needs of fixed-line, mobile and cable service providers.
BroadSoft Enterprise Applications
Hosted Unified Communications
Hosted UC products, available as either software deployed within a service provider's network or on a SaaS basis hosted and managed by us, enable service providers to offer enterprises advanced IP PBX and UC features through a hosted service rather than through premise-based equipment, such as PBXs. As enterprise needs become more complex and as enterprise budgets are more closely controlled, we believe enterprise demand for cost-effective and feature-rich applications such as multimedia, mobility and UC is growing. We also believe the delivery of advanced IP PBX and UC features in a hosted model is simpler to implement and more cost efficient for both the service provider and enterprise customer than premise-based alternatives.
The advanced IP PBX and UC features we offer to enterprises through hosted UC applications include:
PBX functionality such as call control, call waiting, call forwarding and conference calling, in each case across multiple locations;
HD voice and video conferencing;
UC features, such as IM&P and email integration and collaboration;
integration of offerings across fixed-line and mobile devices and networks;
integrated voice, video and fax messaging;
enhanced features such as auto attendants, call centers and conferencing;
open APIs for third-party application development that complements the core call control functionality;
clients, which are devices and software that request information, for feature control and administration;
regulatory functions such as emergency calling (E911) and lawful intercept (CALEA); and
geographic redundancy and disaster recovery.
SIP Trunking
Our BroadWorks SIP Trunking solution enables service providers to provide IP interconnectivity and additional services to enterprises that already have premise-based PBXs. With SIP Trunking, service providers are able to bundle voice and data over a single converged IP pipe, creating a more economical offering than can be achieved with separate voice and data connections. We believe our solution enables service providers to differentiate their SIP Trunking service offerings and increase revenue by offering enhanced services such as UC, video, mobility, global four-digit dialing and business continuity.
BroadSoft Consumer Applications
Our consumer IP applications allow service providers to offer consumers voice and multimedia telephony services with voice calling, video calling, enhanced messaging and content sharing over broadband and VoLTE networks.
BroadSoft Xcelerate and Xtended Programs
Our BroadSoft Xcelerate program focuses on and fosters successful go-to-market initiatives with our service provider customers, from target offers to sales and marketing efforts. Our go-to-market consultants help service providers prepare to launch, market and sell their service offerings to their end-users. We generally seek to help our service providers accelerate the launch and development of our applications to their subscribers by providing them with a best-practices framework and resources such as templates, marketing workshops and planning guides.

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Our BroadSoft Xtended program is designed to enable our service provider customers to create and/or deploy highly differentiated IP-based communications services using BroadWorks. BroadSoft Xtended is premised on two operating principles:
Expanding familiarity with web services APIs. The powerful RESTful Xtended Services Interface, or Xsi, exposes our BroadWorks software to other applications; and
Maintaining community. An innovative developer community driven by the BroadSoft Xtended developer program is created.
Technology
We have invested significant time and financial resources into the development of our suite of product offerings. Our BroadWorks code base comprises over twelve million lines of software code refined over 15 years and 21 major releases. While the predominant industry approach has been to use proprietary standards, which greatly limits interoperability, our technology strategy is to adopt and extend leading open standards with the objectives of providing the widest level of interoperability in the industry. Our products implement a diverse set of industry protocols such as SIP, DIAMETER, SNMP, SOAP and RESTful-based interfaces, allowing for the successful penetration of the service provider market across different types of architectures, access types and infrastructures.
Our technology includes software-based server functions and software clients designed for scalability and performance. Our server functions provide a number of discrete capabilities, including call control and signaling, media processing and provisioning interfaces to back office infrastructure. Our software clients run on a variety of devices, including smartphones, tablets and personal computers. Our open interfaces allow service providers to quickly and easily integrate with mobile applications, back office systems, web portals and network infrastructure and also permits them to deploy applications that complement the functionality of the servers. Because the solution reaches the service provider’s subscribers, we believe this end-to-end integration is critical to ensure the usability, look and feel of the service offering is superior.
The key elements of our technology are:
SIP. We believe we have the industry’s most customer-tested and fully functioned SIP stack. Because we developed the software ourselves, we can rapidly customize it and resolve any related issues. We have developed SIP extensions for many advanced PBX functions such as advanced call control and bridged line appearances. Our SIP stack provides programmable controls on a per-device basis to allow for maximum compatibility and interoperability. We have validated our stack and deployed it with leading IMS core network vendors;
Call control. We have developed a patented architecture for service definition, service execution, interface abstraction, event routing and service precedence. This provides an extensible pattern for creating and adding new services and/or interfaces without an impact on existing functionality. Interfaces are abstracted so that services can be written to work with any protocol. This approach yields a product we believe is easier to test and consequently has fewer defects. BroadSoft has evolved the service operating system to natively support the IMS call model;
Geographic redundancy. We have designed a geographically redundant solution tailored for call control that requires no special software and uses standard IP networking configurations with standard IP addressing. This solution supports seamless failover for server outages and IP networking issues. It also allows for placement of servers in any geography without distance limitations. The solution is supported by leading IMS core network vendors and session border controller vendors. Our BroadWorks solution has proven greater than 99.999% reliability with over ten years of historical data;
Common OAMP platform. BroadWorks has a common management container for all BroadSoft servers, providing consistent functions for operations, administration, management and provisioning, or OAMP. It supports identical carrier grade management interfaces on all servers and includes functions for command line interfaces, alarms, statistics, configuration, charging, security and provisioning. It is fully tested and validated with leading carrier network management systems and customer care systems and proven carrier grade in Tier 1 telecommunications service providers. It works on standard servers, as well as virtualized servers;
Media resource framework. We have developed a completely software-based media resource framework for dual-tone multi-frequency detection, media playback, recording, conferencing and repeating. The framework supports all de facto standard audio and video codecs. It supports the Internet Engineering Task Force, or IETF, and the 3rd Generation Partnership Project, or 3GPP, standard protocols, including the standard format for specifying interactive voice dialogues between a human and a computer, or

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VoiceXML, and call control extensible markup language, or CCXML, which provides telephony support to VoiceXML. The framework can be integrated with all leading voice recognition and text-to-speech engines. We believe using a completely software-based platform not only provides us with a technical advantage over our competition, but also a strong commercial advantage since we can bundle this technology with BroadWorks;
Client technology. We support a full suite of smartphone, tablet and personal computer voice over IP, or VoIP, clients. These clients provide audio and video calling, IM, presence, conferences, collaboration and service management. They are designed to be integrated with our network software and cloud services, providing a superior user experience;
IMS and VoLTE. Our products support IMS interfaces, adhering to a 3GPP specifications. We provide a fully functional Telephony Application Server (TAS) and Media Resource Function (MRF), supporting VoLTE and fixed-line applications. We have IMS deployments, providing both business and consumer applications; and
Network Function Virtualization (NFV). Our products are all software, supporting standard IT virtualization technology. This allows our customers to consolidate their networks onto industry standard high volume servers, located in their data centers.
Global Support Services
Providing a broad range of professional support services is an integral part of our business model. We offer services designed to deliver comprehensive support to our service provider customers and distribution partners through every stage of product deployment. Our services can be categorized as follows:
Pre-sales support. Our worldwide sales engineering group works with our direct sales force to provide demonstrations, architecture consulting, interoperability testing and related services in connection with product sales opportunities to establish the capability, functionality, scalability and interoperability of our software with a service provider’s network;
Professional services. Our professional services group provides installation services, such as planning, consulting and staging of software on the customer’s hardware, as well as network integration services, project management and remote upgrades. We also offer our customers the option of longer-term engagements in the form of “resident engineering” services. In addition, we offer a full suite of consulting services including network planning, network architecture definition, back office consulting and solution verification;
Global operations centers. We maintain operations centers in several locations around the world to provide our customers with product life-cycle services, such as platform support and maintenance services. We also host our BroadCloud offerings in select operations centers. Members of our technical assistance center and regional project management and professional services teams provide remote assistance to customers via these locations and our in-depth web support portal, including periodic updates for our software products and product documentation. To respond to our customers’ needs, our technical assistance personnel are available 24 hours a day, seven days a week and accessible by phone, e-mail and, when required, on-site via a professional services engagement; and
Training. We offer an array of training services to our customers, which include systems administration, provisioning and advanced diagnostic courses. We present these courses regularly at our regional centers and headquarters and we also can deliver versions of the courses at customer sites. We also offer product and feature training via streaming video courses, which we refer to as our eLearning offerings, as well as a full product certification program that is available through our BroadSoft University website.
We believe our commitment to providing high-quality services to our customers provides us with a competitive advantage by helping us to retain customers and to identify new revenue opportunities.
Sales and Marketing
We market and sell our products and services either directly, through our internal sales force, or indirectly, through our distribution partners, such as VARs and system integrators. For the years ended December 31, 2015, 2014 and 2013, approximately 89%, 87% and 82%, respectively, of our revenue was generated through direct sales.
Direct sales. Our direct sales team sells our products and services to service providers worldwide and supports the sales efforts of our various distribution partners.

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Distribution partners. In an effort to acquire new customers, we periodically enter into non-exclusive distribution or reseller agreements with distribution partners, such as VARs and system integrators. We predominantly engage with a distribution partner in connection with marketing to international service providers. Our agreements with our distribution partners typically have a duration of one to two years and provide for a full spectrum of sales and marketing services, product implementation services, technical and training support and warranty protection. These agreements generally do not contain minimum sales requirements and we ordinarily do not offer contractual rights of return or price protection to our distribution partners. Our partners include many of the largest networking and telecommunications equipment vendors in the world, as well as regionally focused system and network integrators. We may seek to selectively add distribution partners, particularly in additional countries outside the United States, to complement or expand our business.
Marketing and product management. Our marketing and product management teams focus their marketing efforts on increasing our company and brand awareness, heightening product awareness and specifying our competitive advantages, as well as generating qualified sales leads from existing and prospective customers. As part of marketing our products and services, we communicate enhancements and new capabilities, convey reference solutions that we develop with our partners and announce successful end-user market offerings jointly with our service providers. Within our industry, we work to influence next generation service architectures and service provider requirements globally by actively contributing to industry-related standards organizations, conferences, publications and analyst consulting services. Additionally, we work closely with service providers to develop subscriber loyalty and share successful best practices through user conferences, on-site seminars, monthly webinars, social networking campaigns and newsletters.
Customers
We have several hundred service provider customers in more than 80 countries, including 26 of the top 30 telecommunications service providers globally, as measured by revenue in the year ended December 31, 2014, who are delivering services utilizing our software. These companies have either purchased products or services directly from us or have purchased our software through one of our distribution partners. Our customers are located around the world and include many of the top telecommunications service providers globally. Our customers include fixed-line, mobile, cable and Internet service providers. As a result of the diversity of service providers comprising our customer base, our products are used in a broad array of services, applications, network types and business models worldwide.
Revenue from customers located outside the United States represented 38%, 51% and 43% of our total revenue in 2015, 2014 and 2013, respectively. For the years ended December 31, 2015 and 2013, no customer accounted for 10% or more of our revenues. For the year ended December 31, 2014, Telstra Corporation Limited, or Telstra, accounted for 13% of our total revenue.
Research and Development
Continued investment in research and development is critical to our business. We have assembled a team of engineers primarily engaged in research and development, with expertise in various fields of communications and software development. Our research and development department is responsible for designing, developing and enhancing our software products and performing product testing and quality assurance activities, as well as ensuring the interoperability of our products with third-party hardware and software products. We also validate and produce solution guides for joint reference solutions with our partners that specify infrastructure components and management functions. We employ advanced software development tools, including automated testing, performance and capacity testing, source code control, requirements traceability and defect tracking systems. Research and development expense totaled $60.7 million, $50.1 million and $45.3 million for 2015, 2014 and 2013, respectively.
Competition
The market for IP application offerings is extremely competitive, rapidly evolving and subject to changing technology. We expect competition to persist and intensify in the future. We believe that the principal competitive factors in our industry include product features and performance, interoperability, time required for application deployment, scalability, customer support offerings, customer relationships, partner relationships, pricing and total deployment costs.
Currently, our primary direct competitors consist of established network equipment companies, including Alcatel-Lucent, Avaya Inc., Cisco Systems, Inc., Ericsson AB, GENBAND Inc., Huawei Technologies Co. Ltd., Metaswitch Networks, Microsoft Corporation, Mitel Networks Corporation and Nokia Siemens Networks B.V. Some of the network equipment companies with which we have non-exclusive distributor partnerships may also provide, as a package, their own network equipment in combination with IP application software that they have developed. In addition, we face indirect competition from OTT UC providers such as RingCentral, Inc. and 8x8, Inc., who compete with our service provider customers in offering UC capabilities to enterprises.

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Many of our current and potential competitors may have significantly greater financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. Our competitors may also have more extensive customer bases and broader customer relationships than we do, including relationships with our potential customers. In addition, many of these companies have longer operating histories and greater brand recognition than we do.
Intellectual Property
Our success depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary confidentiality and other contractual protections. We have a number of United States and foreign patents and pending applications that relate to various aspects of our products and technology. While we believe that our patents have value, no single patent is essential to us or to any of our principal products or services. Our registered trademarks in the United States, the European Community and a number of other countries throughout the world include BroadSoft and BroadWorks.
In addition to the protections described above, we generally control access to and use of our proprietary software and other confidential information through the use of internal and external controls, including contractual protections with employees, consultants, customers and vendors, and our software is protected by U.S. and international copyright laws. We also incorporate a number of third-party software programs into our products, including BroadWorks, pursuant to license agreements. Our software is not substantially dependent on any third-party software, with the exception of database technology that is provided by Oracle pursuant to a license agreement expiring in 2020, although our software does utilize open source code. Notwithstanding the use of this open source code, we do not believe that our usage requires public disclosure of our own source code nor do we believe the use of open source code is material to our business.
We may not receive competitive advantages from the rights granted under our patent and other intellectual property rights. If our products, patents or patent applications are found to conflict with any patents held by third parties, we could be prevented from selling our products, our patents may be declared invalid or our patent applications may not result in issued patents. In foreign countries, we may not receive effective patent, copyright and trademark protection. We may be required to initiate litigation to enforce any patents issued to us, or to determine the scope or validity of a third party’s patent or other proprietary rights. In addition, we are currently subject to lawsuits, and in the future we may be subject to additional lawsuits by third parties seeking to enforce their own intellectual property rights. See Item 3, Legal Proceedings.
We license our software to customers pursuant to agreements that impose restrictions on the customers’ ability to use the software, including prohibitions on reverse engineering and limitations on the use of copies. We also seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute nondisclosure and assignment of intellectual property agreements and by restricting access to our source code. Our employees and consultants may not comply with the terms of these agreements and we may not be able to adequately enforce our rights against these non-compliant parties.
Employees
As of December 31, 2015, we had 1,247 employees in 23 countries, 454 of whom were primarily engaged in research and development, 256 of whom were primarily engaged in sales and marketing, 402 of whom were primarily engaged in providing customer support, cloud operations and professional support services and 135 of whom were primarily engaged in administration and finance. As of December 31, 2015, we had 584 employees located in the United States. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other filings with the SEC, and all amendments to these filings, are available, free of charge, on our Investor Relations website at www.investors.broadsoft.com as soon as reasonably practicable following our filing of any of these reports with the SEC. You can also obtain copies free of charge by contacting our Investor Relations department at our office address listed below. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The information posted on or accessible through these websites are not incorporated into this filing.

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Our Corporate Information
Our principal executive office is located at 9737 Washingtonian Boulevard, Suite 350, Gaithersburg, Maryland 20878 and our telephone number is (301) 977-9440. Our website address is www.broadsoft.com.
Item 1A.
Risk Factors
Set forth below and elsewhere in this Annual Report on Form 10-K, and in other documents we file with the SEC, are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods.
Risks Related to Our Business
We are substantially dependent upon the commercial success of one product, BroadWorks, which is sold as an application server software offering and also provides the underlying capabilities of our BroadCloud hosted offering. If the market for BroadWorks does not continue to grow, our overall revenue may decline or remain unchanged, which would adversely affect our overall operating results and financial condition.
Our revenue growth depends substantially upon the commercial success of our voice and multimedia application server software, BroadWorks. We derive a significant portion of our revenue from licensing BroadWorks and related products and services. During the years ended December 31, 2015, 2014 and 2013, BroadWorks licenses and related services represented 84%, 82% and 86% of our revenue, respectively. We expect revenue from BroadWorks and related products and services to continue to account for the significant majority of our revenue for the foreseeable future.
We generally sell licenses of BroadWorks on a perpetual basis and deliver new versions and upgrades to customers who purchase maintenance contracts; consequently, our future license software revenue is dependent, in part, on the success of our efforts to sell additional BroadWorks licenses to our existing service provider customers, as well as licenses to new customers. The sale of new or additional licenses to service providers depends upon 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 BroadWorks, or do not purchase and successfully deploy BroadWorks or sell services using BroadWorks to their end-users, 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.
If the significant investments we have recently made to grow our BroadCloud hosted service offering are unsuccessful in increasing revenues from that product, our overall revenue may decline or fail to grow, which would adversely affect our operating results and financial condition
We have been, and will continue to, devote considerable resources and allocate capital expenditures to growing our BroadCloud software-as-a-service offering revenue. There can be no assurance that we will meet our revenue targets for this service and if we fail to achieve our revenue goals, our growth and operating results will be materially adversely affected. Additionally, new or existing customers may choose to purchase our BroadCloud services rather than BroadWorks. If our customers’ purchases trend away from BroadWorks perpetual licenses toward our BroadCloud hosted solutions, or to the extent customers defer or cancel BroadWorks orders due to evaluating BroadCloud, our BroadWorks revenues, and our revenues and/or timing of revenues generally, may be adversely affected, which could adversely affect our results of operations and financial condition.
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-

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based networks, and increased demand by their end-users for UC capabilities. 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. Our expenditures to increase service providers' sell-through sales of our products to their end-users may not be successful and we may not realize a return on this investment. 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 and pricing 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 growth and operating results will be materially adversely affected.
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 years ended December 31, 2015 and December 31, 2013, there were no customers that generated greater than 10% of our total revenue. For the year ended December 31, 2014, Telstra accounted for 13% of our total revenue. Our customer agreements do not require our customers to purchase any minimum amount of our products or services. 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 our significant 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.
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;
customers' budgetary constraints;
length of sales cycles;
length of time of deployment of our products by our customers;
competitive pressures; and
general economic conditions.
As a result of this volatility in our customers’ purchasing practices, our license software 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 generally accepted accounting principles in the United States, or U.S. GAAP. Compliance with these revenue recognition rules has resulted in certain instances 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 U.S. 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 that may be integrated into or with other systems or third party technology, negotiation of mutually acceptable terms and conditions with our customers can require us to defer recognition of revenue on such licenses.

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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.
Changes in accounting principles or standards, or in the way they are applied, could result in unfavorable accounting charges or effects and unexpected financial reporting fluctuations, and could adversely affect our reported operating results.
We prepare our consolidated financial statements in conformity with U.S. GAAP. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. A change in existing principles, standards or guidance can have a significant effect on our reported results, may retroactively affect previously reported results, could cause unexpected financial reporting fluctuations and may require us to make costly changes to our operational processes.
The Financial Accounting Standards Board, or FASB, issued a new accounting standard for revenue recognition in May 2014 - Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606)” - that supersedes nearly all existing U.S. GAAP revenue recognition guidance. Although we are currently in the process of evaluating the impact of ASU 2014-09 on our consolidated financial statements, it is likely to change the way we account for certain of our sales transactions in 2018, the first year that such new rules will be effective. Adoption of the standard could have a significant impact on our financial statements and may retroactively affect the accounting treatment of transactions completed before adoption.
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. Our sales cycle can be very unpredictable due to:
the generally lengthy service provider product testing, evaluation and approval process for our products, including internal reviews and capital expenditure approvals;
the evolving nature of the market, which may lead prospective customers to postpone their purchasing decisions pending resolution of standards or adoption of technology by others;
our service provider customers increasingly asking us to participate in complex transactions involving multiple parties developing a platform or telecommunications solution for the service provider; and
customers making critical decisions regarding the design and implementation of large network deployments engaging in very lengthy procurement processes.
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 additional orders 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 products to consummate a sale, which 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.
We may fail to achieve our financial forecasts due to inaccurate sales forecasts or other factors.
Our revenues are difficult to forecast, and, as a result, our quarterly operating results can fluctuate substantially. We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our sales personnel monitor the status of all proposals and estimate when a customer will make a purchase decision and the dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. Our pipeline estimates can prove to be unreliable both in a particular quarter and over a longer period of time, in part because the “conversion rate” or “closure rate” of the pipeline into contracts can be very difficult to estimate. A reduction in the conversion rate, or in the pipeline itself, could cause us to plan or budget incorrectly and adversely affect our business or results of operations. In particular, a slowdown in capital spending or economic conditions generally can unexpectedly reduce the conversion rate in particular periods as purchasing decisions are

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delayed, reduced in amount or cancelled. The conversion rate can also be affected by the tendency of some of our customers to wait until the end of a fiscal period in the hope of obtaining more favorable terms, which can also impede our ability to negotiate, execute and deliver upon these contracts in a timely manner. In addition, for our newly acquired companies, we have limited ability to predict how their pipelines will convert into sales or revenues for a number of quarters following the acquisition. Conversion rates post-acquisition may be quite different from the acquired companies’ historical conversion rates. Differences in conversion rates can also be affected by changes in our business practices that we implement with our newly acquired companies that may affect customer behavior.
Because a significant portion of our cost structure is largely fixed in the short-term, revenue shortfalls tend to have a disproportionately negative impact on our profitability. The number of large new software licenses transactions increases the risk of fluctuations in our quarterly results because a delay in even a small number of these transactions could cause our quarterly revenues and profitability to fall significantly short of our predictions.
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.
We periodically receive notices from, or have lawsuits filed against us by, others claiming we are infringing their intellectual property rights, principally patent rights. We expect the number of such claims may increase for a variety of reasons, including:
the expansion of our product lines through product development and acquisitions;
our real or perceived success in selling our products to our customers;
the proliferation of non-practicing entities asserting intellectual property infringement claims;
an increase in the number of competitors in our industry segments, the resulting increase in the number of related products and services and the overlap in the functionality of those products and services; and
an increase in the risk that our competitors and third parties could use their own intellectual property rights to seek to restrain our freedom to operate and exploit our products, or to otherwise block us from taking full advantage of our markets.
Regardless of the merit of third-party direct claims that we infringe their rights or indemnification claims arising out of such third party claims, 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 currently face, and may in the future 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.

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The results of litigation and claims cannot be predicted with certainty, and an unsuccessful outcome in a claim of intellectual property infringement could have a material adverse effect on our business. Moreover, even if litigation or claims are resolved in our favor or without significant cash settlements, the time and resources necessary to litigate or resolve them could harm our business, our operating results, financial condition or 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 sought, and we expect certain of our customers in the future to seek, indemnification from us in connection with infringement claims brought against them. In addition, some of our customers have tendered to us the defense of claims brought against them for infringement, and we have received these requests with increasing frequency in recent years. We evaluate each such request on a case-by-case basis and we may not succeed in refuting all such claims.
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 such claim, we could face substantial liability, which may have a material adverse impact on our results of operations.
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.
The “America Invents Act” provides U.S. patent priority based on “first to conceive and file.” That is, the first person or entity to file a patent application on a particular subject matter is deemed to have priority over any other applicant who files an application on the same subject matter in the future, regardless of who first conceived or reduced to practice the claimed invention. This change in patent priority law may make it more difficult for us to obtain U.S. patents in the future.
The act also creates alternative avenues to challenge the validity of issued U.S. patents other than the existing methods of litigation and reexaminations. These new avenues may make it easier and less expensive for third parties to petition the U.S. Patent and Trademark Office to cancel one or more issued patent claims. The act also provides a new defense to infringement based upon prior commercial use for any patents issued on or after the date of enactment of the act. This new defense may make it more difficult for a U.S. patent holder to successfully assert an infringement claim against a third party that has commercially used the patented technology at least one year prior to the earlier of the effective date of the claimed invention, or the date on which the claimed invention was disclosed to the public. Although the effectiveness of these new procedures and defenses will depend on regulations to be promulgated by the U.S. Patent and Trademark Office, as well as future court decisions interpreting the act, these provisions may make it more difficult for us to protect our intellectual property rights through U.S. 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 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

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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 software must interoperate with many different networks, software applications and hardware products, and this interoperability will depend on the continued prevalence of open standards.
Our software is designed to interoperate with our customers’ existing and planned networks, which have varied and complex specifications, utilize multiple protocol standards, software applications and products from numerous vendors and contain multiple products that have been added over time. As a result, we must attempt to ensure that our software interoperates 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 software does not interoperate effectively, installations could be delayed or orders for our software could be canceled, which would harm our revenue, gross margins and our reputation, potentially resulting in the loss of existing and potential customers. The failure of our software 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 software. These arrangements give us access to, and enable our software 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 software 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 software.
Additionally, the interoperability of our software 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 software to interoperate with our customers’ networks, which would have a material adverse effect on our ability to sell our software to service providers.
We may not be able to detect errors or defects in our software until after full deployment and product liability claims by customers could result in substantial costs.
Our software is sophisticated and is designed to be deployed in large and complex telecommunications networks. Because of the nature of our software, it 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 software and they may discover errors or defects in the software, or the software 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 it is 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 software, it may take a material amount of time for us to resolve errors or defects, if we can resolve them at all. The likelihood of such errors or defects is heightened as we acquire new products from third parties, whether as a result of acquisitions or otherwise.

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If one of our software products fails, and we are unable to fix the errors or other performance problems expeditiously, or at all, we could experience:
damage to our reputation, which may result in the loss of existing or potential customers and market share;
payment of liquidated damages for performance failures;
loss of, or delay in, revenue recognition;
increased service, support, warranty, product replacement and product liability insurance costs, as well as a diversion of development resources; and
costly and time-consuming legal actions by our customers, which could result in significant damages.
Any of the above events would likely have a material adverse impact on our business, revenue, results of operations, financial condition and reputation.
Data privacy concerns could result in additional cost and liability to us or inhibit sales of our offerings.
Use of the BroadWorks platform and our BroadCloud offerings can involve the storage and transmission of an end-user’s business and personally identifiable information. Thus, maintaining the security of computers, computer networks and data storage resources is a critical issue for us and our service provider customers, as security breaches could result in the loss of and/or unauthorized access to this information. Data privacy is a significant issue in the United States, and in many other countries where we offer our hosted services. The regulatory framework for privacy issues worldwide is complex, dynamic and likely to remain uncertain for the foreseeable future.
In the United States, there are multiple state and federal laws governing the collection, use and disclosure of the information we store and process in our systems. For example, the Electronic Communications Privacy Act protects electronic communications, among other things; The Federal Trade Commission Act, which prohibits unfair and deceptive privacy practices, covers acts that are unfair or deceptive to consumers; Customer Proprietary Network Information rules restrict use of call records; the Computer Fraud and Abuse Act protects users from unauthorized collection of data from a computer or device; the Communications Assistance for Law Enforcement Act of 1994 requires VoIP operators to assist law enforcement with communications monitoring; and the Cable Privacy Act of 1984 places restrictions on disclosure of any personally identifiable information related to a cable subscriber, among other things.
Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we, our service providers and our customers must comply, including the Data Protection Directive established in the European Union and the Federal Data Protection Act in Germany, which place broad restrictions on use and collection of personal data, including restrictions on cross-border data flows. Further, many federal, state and foreign government bodies and agencies have introduced and are currently considering additional laws and regulations. If passed, we will likely incur additional expenses and costs associated with complying with such laws. In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Our customers may also propose other new and different privacy standards contractually.
Because the interpretation and application of privacy and data protection laws are still uncertain and industry standards are constantly in flux, it is possible that these laws and industry standards may impose requirements that are inconsistent with our, and our service providers’, existing data management practices or the features of our hosted services. If so, in addition to the possibility of fines, lawsuits and other claims and contractual requirements, we and our service providers could be required or compelled to fundamentally change our business activities and practices or modify our hosted services, which could have an adverse effect on our business. Any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies and industry standards, could result in additional costs and other burdens imposed by, the privacy laws, regulations and policies that are applicable to the businesses of our customers may limit the use or adoptions of, and reduce the overall demand for, our hosted services. Privacy and security concerns, whether valid or not valid, may inhibit market adoption of our hosted services particularly in certain foreign countries that perceive the United States as having lesser privacy protections.
If our security measures are breached or unauthorized access to data on our cloud-based networks is otherwise obtained, we may incur significant liabilities under U.S. and foreign laws and our hosted services may be perceived as being vulnerable causing customers to reduce their use of, or stop using, our hosted services.
Our cloud-based services are offered to our customers from hosting facilities located both in the U.S. and in certain countries outside the U.S., and involve the storage and transmission of a large amount of data, and may include personally identifiable

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data, and security breaches could result in the loss of unauthorized disclosure of this information, degradation of our services or denial of ability of users to access our products and service. If our security measures are breached even as a result of third-party action, employee error, malfeasance or otherwise, such breaches could result in negative publicity that causes our reputation and brand to be damaged, our business may suffer, and we could incur significant legal fines and other financial exposure.
Perpetrators of cyber-attacks may be able to develop and deploy viruses, worms, malware and other malicious software programs that attack our products and services, our networks or otherwise exploit any security vulnerabilities of our products, services and networks. Because the techniques used to obtain unauthorized access to networks, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. A cyber-attack may cause additional costs, such as investigative and remediation costs, and the costs of providing individuals and/or data owners with notice of the breach, legal fees and the costs of any additional fraud detection activities required by a court or third party. We devote significant resources to addressing security vulnerabilities in our products and services through engineering more secure products and services, enhancing security and reliability features in our products and services, educating our employees on cyber-security and how to mitigate risk posed by potential attacks, deploying security updates to address security vulnerabilities and seeking to respond to known security incidents in sufficient time to minimize any potential adverse impact. We can make no assurance that we will be able to detect, prevent, timely and adequately address or mitigate the negative effects of cyber-attacks or other security breaches.
In the United States, there are multiple state and federal laws governing the security and protection of the information we store and process in our systems. For example, the Federal Trade Commission, or the FTC, frequently investigates and brings enforcement actions against businesses whose data protection, disclosure, or sharing practices are perceived by the FTC as being unfair or deceptive to consumers. Many states require companies to use reasonable safeguards to protect data and most states require that, in the event of a breach of our data security systems involving sensitive data, we notify every person potentially affected by such breach and to pay considerable damages. Because techniques used to obtain unauthorized access or sabotage systems change frequently and are often difficult to identify until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Further, as the regulatory focus on privacy issues continues to increase and worldwide laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business will intensify.
We have no direct control over the substance of the content within our hosted network. U.S. law provides considerable protections for any indirect liability as a result of storing infringing or even illegal content in the form of the Section 230 of the Communications Decency Act, or the CDA, which provides a safe harbor against claims that content stored on our cloud-based network invades consumer privacy or is indecent, offensive, libelous, profane, pornographic or illegal. The CDA’s safe harbor only offers us partial protection, however, because it only limits our legal liability against allegations that our service provider customer illegally uploaded information to our servers; it offers no protection whatsoever for claims arising from a breach of our security measures.
Any or all of these data privacy concerns could negatively impact our ability to attract new service provider customers and increase engagement by existing service provider customers, cause existing service provider customers to elect to terminate their subscriptions or reduce or delay future purchases, subject us to third-party lawsuits, regulatory fines or other action or liability, thereby increasing our costs and diverting management resources which could materially harm our operating results.
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.
We rely on third-party service providers to host some of our solutions and any interruptions or delays in services from this third party could impair the delivery of our products and harm our business.

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We currently outsource some of our hosting services to third parties. We do not control the operation of any third party facilities. These facilities are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of any of these disasters or other unanticipated problems could result in lengthy interruptions in our service. Furthermore, the availability of our platform could be interrupted by a number of additional factors, including our customers’ inability to access the Internet, the failure of our network or software systems due to human or other error, security breaches or ability of the infrastructure to handle spikes in customer usage. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
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 software 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 software. 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 including via new deployment models such as cloud-based service offerings, evolving industry standards and recurring or unanticipated changes in customer requirements and deployment model preferences. 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, gain access to or develop new technologies or service models. 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 product technologies or business models for which market demand is lower than anticipated and, as a result, are abandoned. For example, we have devoted considerable resources to UC-One, which offers service providers the capabilities of BroadWorks and BroadCloud enabled-Unified Communications. We cannot guarantee our investment in UC-One will be successful or generate additional revenue from existing or new customers.
Developing our products is expensive and complex and involves uncertainties. We may not have sufficient resources to successfully manage lengthy product development cycles. For the years ended December 31, 2015, 2014 and 2013, our research and development expenses were $60.7 million, or 22% of our total revenue, $50.1 million, or 23% of our total revenue, and $45.3 million, or 25% of our total revenue, respectively. We believe we must continue to dedicate a significant amount of resources to our research and development efforts to remain competitive. These investments may take several years to generate positive returns and they may never do so. In addition, we may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. If we fail to meet our development targets, demand for our products will decline.
Furthermore, because our products are based on complex technology, we can experience unanticipated delays in developing, improving or deploying them. Each phase in the development of our products presents serious risks of failure, rework or delay, any one of which could impact the timing and cost effective development of such product and could jeopardize customer acceptance of the product. Intensive software testing and validation are critical to the timely introduction of enhancements to several of our products and schedule delays sometimes occur in the final validation phase. Unexpected intellectual property

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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, retain customers and grow the operations of such acquired businesses;
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 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 and other 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.

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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 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.
General global economic conditions could adversely affect our operating results and financial condition.
As a company with significant global sales, we are subject to the risks arising from global economic and market conditions. The worldwide economy underwent significant turmoil in the past several years. While the United States economy has strengthened, economic indicators in Europe and Asia are mixed and negative economic and market conditions persist, and the rate and pace of recovery in individual economies is uncertain. The continuing uncertainty about future global economic conditions could negatively impact our current and prospective customers by affecting their buying decisions or ability to obtain financing for significant purchases and operations. Specific economic trends, such as declines in the demand for infrastructure spending by service providers, or softness in corporate telecommunications software spending, could have an even more direct, and harmful, impact on our business. As a result, we could experience fewer orders, longer sales cycles, slower adoption of new technologies by our customers and increased price competition, any of which could materially and adversely affect our business, results of operations and financial condition.
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.
Acquisitions have been, and are expected to continue to be, an important part of our strategy to grow our business and augment our product offerings. Whether we realize the anticipated benefits from these and prior 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. While we have experience with such transactions, 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;
difficulties entering into new markets or vertical segments in which we are not experienced or where competitors may have stronger positions;
expenses, distractions and potential claims resulting from acquisitions, whether or not they are completed;
reducing our cash available for operations and other uses;
an uncertain revenue and earnings stream from the acquired company, which could dilute our earnings;
retaining and integrating employees from any businesses we acquire;
integrating and supporting acquired businesses, products or technologies into our sales channel;
integrating various accounting, management, information, human resources and other systems to permit effective management;
additional regulatory compliance obligations resulting from an acquired business;
the issuance of dilutive equity securities or the incurrence or assumption of debt to finance the acquisition;

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incurring possible impairment charges, contingent liabilities, amortization expense or write-offs of goodwill;
unexpected capital expenditure requirements;
insufficient revenues to offset increased expenses associated with the acquisitions;
undetected errors or unauthorized use of a third-party’s code in products of the acquired companies;
entry into markets in which we have no or limited direct prior experience and where competitors have stronger market positions and which are highly competitive;
assuming pre-existing contractual relationships of an acquired company that we would not have otherwise entered into, the termination or modification of which may be costly or disruptive to our business;
being subject to unfavorable revenue recognition or other accounting treatment as a result of an acquired company’s practices;
opportunity costs associated with committing time and capital to such acquisitions; and
acquisition-related litigation, including intellectual property infringement claims.
Foreign acquisitions involve risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, our ability to enforce contracts in various jurisdictions, currency risks and the particular economic, political and regulatory risks associated with specific countries. We may not be able to address these risks successfully, or at all, without incurring significant costs, delays or other operating problems that could disrupt our business and have a material adverse effect on our financial condition.
Our use of open source software could impose limitations on our ability to commercialize our products.
We incorporate open source software into our products. Although we closely monitor our use of open source software, the terms of many open source software licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to sell our products. In such event, we could be required to make our proprietary software generally available to third parties, including competitors, at no cost, to seek licenses from third parties to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis or at all, any of which could adversely affect our revenues and operating expenses.
If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which would adversely affect our operating results, our ability to operate our business and our stock price.
Ensuring that we have adequate internal financial and accounting controls and procedures in place to produce accurate financial statements is a costly and time-consuming effort that needs to be re-evaluated frequently. 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.
The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires that we test our internal control over financial reporting and disclosure controls and procedures. Compliance with Section 404 of the Sarbanes-Oxley Act requires that we incur substantial expense and expend significant management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in the future, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock may decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require significant additional financial and management resources.
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;
changes in the valuation of our deferred tax assets and liabilities;

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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 2018 Notes and 2022 Notes, and we may incur additional indebtedness in the future. The indebtedness created by the sale of our 2018 Notes and 2022 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 issued $120 million aggregate principal amount of notes due in 2018, or the 2018 Notes, and incurred $201.3 million of senior indebtedness in September 2015 when we issued $201.3 million aggregate principal amount of notes due in 2022, or the 2022 Notes.

As of December 31, 2015, we had $188.3 million of consolidated indebtedness related to the 2018 Notes and 2022 Notes, which we refer to collectively as 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, cash flows and financial condition, including:
increasing our vulnerability to adverse economic and industry conditions;
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 events 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.

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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, Avaya Inc., Cisco Systems, Inc., Ericsson AB, GENBAND Inc., Huawei Technologies Co. Ltd., Metaswitch Networks, Microsoft Corporation, Mitel Networks Corporation and Nokia-Siemens Networks B.V. 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.
Over-the-top business models, which provide telecommunications services directly to end-users through third-party network connections, may reduce demand for our services.
Our revenue is largely derived from our service provider customers’ end-users accessing telecommunications services through service provider networks. The emergence of over-the-top services that provide telecommunications services directly to customers over third-party network connections, such as those offered by 8x8, Inc. and RingCentral, Inc., may cause end-users of our service provider customers to reduce their demand for telecommunications through carrier-branded services or to demand carrier-branded services for free or at reduced pricing. Service providers may fail to offer branded services that can compete with these over-the-top services. If end-users do not find service provider-branded services compelling or cost-effective, or demand that our service provider customers provide such communications services for free, or if we are unable to expand or modify our service offerings to compete with, or sell to, potential customers in this market, demand for our services may be reduced, which would harm our business.
Our business depends upon the success of service providers selling IP-based communications services.
We sell software licenses or provide cloud-based UC service offerings to service providers, who then seek to persuade their customers to subscribe to IP-based communications services that use our software. The number of licenses or subscriptions 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 or subscriptions, the service provider must purchase additional licenses or subscriptions 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.
If service providers do not succeed in growing and maintaining their IP subscriber base for any reason, then our business, financial condition and results of operations would be harmed.

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Competitive pressures in the telecommunications industry may increase and impact our customers’ purchasing decisions, which could reduce our revenue.
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.
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 in the United States and elsewhere 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, to date Congress and the Federal Communications Commission, or the FCC, have imposed less regulation on IP-based services and networks. We could be adversely affected by regulation of IP-based services or networks in any country where we do business, including the United States. Regulatory treatment of VoIP telephony outside the United States varies from country to country and often the laws are unclear. We currently distribute our products and services directly to service providers and through resellers that may be subject to telecommunications regulations in their home countries. The failure by us or our customers or resellers to comply with these laws and regulations could reduce our revenue and profitability. As we expand our BroadCloud offerings and operations internationally, we have been and expect to continue to be subject to additional government regulations. Such regulations could include matters such as using or providing VoIP services or protocols, encryption technology and access charges for service providers. The existence of such regulations could prohibit entry into a target market or force us to withdraw products in one or more jurisdictions. 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, and such regulation could adversely affect the market for our products and services. User uncertainty regarding future policies and regulations 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.
Our acquisition in 2012 of the assets of Adaption Technologies Ventures, Ltd., a provider of hosted business VoIP solutions, subjects us to additional regulation. Such providers are subject to certain FCC rules and regulations, including with respect to

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the provision of enhanced 911 services, or E911 services, disability access requirements, communications assistance for law enforcement requirements, customer proprietary network information requirements, and other requirements. If we become subject to the rules and regulations applicable to such providers in individual states, or such existing state rules and regulations are amended or modified to apply to such services, we may incur significant increased costs, and we may have to restructure our hosted VoIP services business, exit certain markets, or raise the price of these services, any of which could cause these services to be less attractive to our customers. We are unable to predict the impact, if any, that future legislation, judicial decisions or FCC or other regulations concerning hosted VoIP service providers generally may have on our business, financial condition, and results of operations, and if we fail to comply with applicable state or federal rules associated with such services, including the provision of E911 services, we may be exposed to significant liability.
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 years ended December 31, 2015, 2014 and 2013, 38%, 51% and 43% of our revenue, respectively, was attributable to our international customers. As of December 31, 2015, approximately 53% of our employees were located abroad. We expect that our international activities will continue to be dynamic over the foreseeable future as we pursue additional 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 certain international markets, the loss of which could materially reduce our revenue.
We sell our products to telecommunication service providers both directly and 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. 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.
Failure to comply with the United States Foreign Corrupt Practices Act, or FCPA, and similar laws associated with our activities outside the United States could subject us to penalties and other adverse consequences.
As a substantial portion of our revenues is, and we expect will continue to be, from jurisdictions outside of the United States, we face significant risks if we fail to comply with the FCPA and other laws that prohibit us and other business entities with whom we do business from making improper payments or offers of payment to governments and their officials and political parties for the purpose of obtaining or retaining business. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors or resellers will not violate our policies. If we are found to be liable for violations of the FCPA or similar anti-corruption laws in international jurisdictions, either due to our own acts or out of inadvertence, or due to the acts or inadvertence of others, we could suffer from criminal or civil penalties that could have a material and adverse effect on our business, operating results and financial condition.

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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 sell 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. During the period from January 1, 2014 to December 31, 2015, our common stock traded at prices ranging from $18.88 to $40.90. 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 industry or financial analysts publish about us and our business. We do not control these analysts. 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.
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.

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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 indentures for the Notes may deter or prevent a business combination.
Under the terms of the indentures 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 indentures 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 note holder 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. Dilution will be greater if the conversion rate of the Notes is adjusted upon the occurrence of certain events specified in the indentures to the Notes.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our principal offices occupy approximately 35,000 square feet of leased office space in Gaithersburg, Maryland which we lease pursuant to a sublease with a sublessor. We also maintain sales, development or technical assistance offices in Phoenix, Arizona; San Jose, California; Richardson and Houston, Texas; Tulsa, Oklahoma; Cedar Rapids, Iowa; Boca Raton, Florida; McLean, Virginia; Montreal, Canada; Belfast, Northern Ireland; Crawley, United Kingdom; Chennai and Bangalore, India; Madrid, Spain; Paris, France; Seoul, South Korea; Sydney, Australia; Warsaw, Poland; Tokyo, Japan; Sophia, Bulgaria; Cologne and Frankfurt, Germany; Amsterdam, Netherlands; Rome, Italy; and Helsinki, Finland.
Item 3.
Legal Proceedings
We are subject to litigation and claims arising in the ordinary course of business. While we intend to defend ourselves vigorously, we cannot be certain of any particular outcome and an adverse outcome in this lawsuit could have a material adverse effect on our business. We are not aware of any pending or threatened legal proceeding against us that could have a material adverse effect on our business, operating results or financial condition. The software and communications infrastructure industries are characterized by frequent claims and litigation, including claims regarding patent and other intellectual property rights as well as improper hiring practices and claims for indemnification. As a result, we may be involved in various legal proceedings from time to time.
Item 4.
Mine Safety Disclosures
Not applicable.


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PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market under the symbol “BSFT."
The following table sets forth for the indicated periods the high and low sales prices of our common stock as reported on the NASDAQ Global Select Market.
 
 
2015
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
High
$
35.76

 
$
38.83

 
$
36.80

 
$
40.90

Low
26.42

 
31.51

 
27.84

 
28.37

 
2014
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
High
$
31.93

 
$
28.23

 
$
26.79

 
$
30.81

Low
25.24

 
18.88

 
21.00

 
19.12

Dividend Policy
We have never declared or paid dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. We do not intend to declare or pay cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements.
Stockholders
As of February 23, 2016, there were 20 registered stockholders of record of our common stock.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock between December 31, 2010 and December 31, 2015, with the comparative cumulative total return of such amount on (a) the NASDAQ Telecommunications Index and (b) the NASDAQ Composite Index, over the same period. We have not paid any cash dividends and, therefore, the cumulative total return calculation for us is based solely upon stock price appreciation and not upon reinvestment of cash dividends.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from the NASDAQ Stock Market, Inc., a financial data provider and a source believed to be reliable. The NASDAQ Stock Market, Inc. is not responsible for any errors or omissions in such information.

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The information presented above in the stock performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, except to the extent that we subsequently specifically request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the Securities Act of 1933, as amended, or a filing under the Securities Exchange Act of 1934, as amended.
Recent Sale of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.


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Item 6.
Selected Consolidated Financial Data
You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and the related notes included in this Annual Report on Form 10-K.
We derived the consolidated financial data for the years ended December 31, 2015, 2014 and 2013 and as of December 31, 2015 and 2014 from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. We derived the consolidated financial data for the years ended December 31, 2012 and 2011 and as of December 31, 2013, 2012 and 2011 from audited financial statements that are not included in this Annual Report on Form 10-K. Consolidated financial data include (a) retrospective application of our change in accounting policy related to the attribution method for stock-based compensation expense and (b) our retrospective application of ASU 2015-03 related to debt issuance costs. See Note 2 Summary of Significant Accounting Policies for additional information on the changes. Historical results are not necessarily indicative of the results to be expected in any future periods.

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Statements of Operations Data:
 
 
Years Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands, except per share data)
Statements of Operations:
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
License software
$
119,808

 
$
103,311

 
$
94,408

 
$
89,750

 
$
77,289

Subscription and maintenance support
112,836

 
92,492

 
69,357

 
58,249

 
42,462

Professional services and other
46,199

 
21,054

 
14,728

 
16,843

 
18,313

Total revenue
278,843

 
216,857


178,493


164,842


138,064

Cost of revenue:
 
 
 
 
 
 
 
 
 
License software
10,231

 
9,755

 
8,867

 
8,420

 
5,986

Subscription and maintenance support
38,602

 
32,984

 
20,359

 
14,729

 
10,293

Professional services and other
28,925

 
14,955

 
10,415

 
8,905

 
8,399

Total cost of revenue
77,758

 
57,694


39,641


32,054


24,678

Gross profit
201,085

 
159,163


138,852


132,788


113,386

Operating expenses:
 
 
 
 
 
 
 
 
 
Sales and marketing
83,806

 
69,471

 
56,822

 
46,036

 
37,768

Research and development
60,749

 
50,125

 
45,271

 
35,060

 
27,053

General and administrative
41,287

 
32,993

 
29,992

 
22,769

 
19,475

Total operating expenses
185,842

 
152,589


132,085


103,865


84,296

Income (loss) from operations
15,243

 
6,574


6,767


28,923


29,090

Other expense, net
15,100

 
8,477

 
6,798

 
6,480

 
3,593

Income (loss) before income taxes
143

 
(1,903
)

(31
)

22,443


25,497

Provision for (benefit from) income taxes
(36
)
 
(2,199
)
 
(406
)
 
7,612

 
(7,533
)
Net income (loss)
179

 
296


375


14,831


33,030

Net income (loss) per common share:
 
 
 
 
 
 
 
 
 
Basic
0.01


0.01


0.01


0.54


1.24

Diluted
0.01


0.01


0.01


0.53


1.18

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
29,113

 
28,654

 
28,116

 
27,581

 
26,603

Diluted
29,818

 
29,365

 
28,711

 
28,215

 
27,892

Stock based compensation expense included above:
 
 
 
 
 
 
 
 
 
Cost of revenue
$
7,227

 
$
3,862

 
$
3,122

 
$
1,399

 
$
619

Sales and marketing
13,821

 
9,856

 
8,984

 
3,734

 
1,376

Research and development
11,844

 
10,164

 
8,800

 
3,380

 
1,210

General and administrative
7,552

 
6,391

 
6,526

 
3,001

 
2,645


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Balance Sheet Data:
 
As of December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
175,857

 
$
101,543

 
$
69,866

 
$
90,545

 
$
94,072

Working capital
234,506

 
156,322

 
156,101

 
157,381

 
166,636

Total assets
592,374

 
436,151

 
382,018

 
322,023

 
286,421

Convertible senior notes, notes payable and bank loans, less current portion
188,331

 
95,628

 
89,722

 
84,632

 
79,559

Total liabilities
335,341

 
223,190

 
189,159

 
163,438

 
155,074

Total stockholders’ equity
257,033

 
212,961

 
192,859

 
158,585

 
131,347


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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
We are the leading global provider of software and services that enable telecommunications service providers to deliver hosted, cloud-based Unified Communications, or UC, to their enterprise customers.
Traditionally, many enterprises have utilized premise-based private branch exchanges, or PBX’s, to connect their offices and people to public telephony networks. Hosted UC enables the delivery of PBX features without the need for premise-based equipment. Hosted UC can be delivered through service providers using their own IP-based and mobile networks, as well as over the public internet (also known as "over the top" or OTT). In addition to voice telephony, UC offers additional features such as full integration with mobile devices, high definition, or HD, voice and video calling and conferencing, instant messaging and presence, or IM&P, and web collaboration.
We believe we are well positioned to enable service providers to capitalize on increasing demand by enterprises for such UC services by enabling them to efficiently and cost-effectively offer a broad suite of services to their end-users. Over 450 service provider customers in more than 85 countries are delivering services and have deployed over 13 million UC subscriber lines worldwide using our software.
Executive Summary
Our management team monitors and analyzes a number of key industry trends and performance indicators to manage our business and evaluate our financial and operating performance.
We believe the trend towards adoption of cloud-based unified communications by enterprises will continue and even accelerate over the next several years. We also believe that service providers using our products and services are strongly positioned to take advantage of this demand. Our objective is to provide our service provider customers with the service and software offerings they need to effectively address this market opportunity and their end-user customer needs.
We experienced strong revenue from our UC solutions in 2015 and expect continued strong growth during 2016. We believe our UC solutions growth is largely driven by increased market acceptance of hosted UC offerings and our continued market leadership. We believe converged and mobile operators desire to deliver UC solutions to their enterprise customer base to grow revenue, reduce subscriber turnover, or churn, and raise average revenue per user. Our UC-One solutions, which are either delivered through our hosted UC offering, BroadCloud, or through our BroadWorks server software that resides within the service provider’s network, enable service providers to rapidly and efficiently deliver a UC experience regardless of end-user device and whether or not the end-user has fixed-line or wireless access.
BroadCloud continues to be a particularly important area of investment and marketing focus for us. Many of our service provider customers are interested in accessing the capabilities of our BroadWorks features and functions through a service offering hosted and managed by us. We believe that service providers choose BroadCloud to accelerate their time to market and reduce their capital and implementation costs and that delivering innovative solutions to our customers will drive our revenue growth. In November 2015, we expanded our BroadCloud offering platform into the Japanese market through an acquisition. In 2016, we expect to continue to invest in our BroadCloud offerings, including by expanding the geographic availability of these offerings.
We announced Project Tempo at our annual BroadSoft Connections user conference in October 2015. Our goal with Project Tempo is to enable service providers to adopt UC as the centerpiece in what we have entitled "The Future of Work." This is our vision of extending UC to help drive how enterprises and people communicate, interact and collaborate by integrating their communication, collaborative and work productivity tools with contextual intelligence. We expect that in 2016 we will continue our strategic investments in initiatives such as Project Tempo and in research and development of existing and new products, such as client and portal software, mobility and cloud-based services, including products acquired in connection with our acquisitions.
We also continue to invest in our service providers' ability to differentiate their UC offerings, as evidenced by our acquisition in the second quarter of 2015 of mPortal, Inc. a company that designs and develops customer experiences across mobile, web and other connected devices. mPortal became part of our BroadSoft Design group. This acquisition increases our ability to help our service provider customers to highly-customize the UC experience for their end-users and their system administrators across different size market segments. We also expect to continue to invest in our sales and our go-to-market efforts to take advantage of these market opportunities.
During the first quarter of 2016, we acquired Transera Communications, Inc. (now called BroadSoft Contact Center, Inc.), a provider of cloud based contact center software. The Transera products and services will allow our customers to offer a

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comprehensive cloud contact center portfolio that is complementary to, and integrates with, our BroadWorks and BroadCloud platform. The contact center offering is an enterprise grade cloud contact center utilizing multiple interaction channels, including voice, email, chat and social media. We also believe that Transera’s contact center data analytics capabilities have the ability to assist our customers in improving their contact center operational performance.
We also believe that many of the largest carriers in the world are embarking on projects to ultimately transform most, if not all, of their legacy fixed and mobile circuit switched networks to IP-based networks, driven in part by the movement to migrate their wireless networks to VoLTE. We believe transformation projects by certain of our largest service provider customers could drive significant growth for us over the next several years. We think that we are well-positioned to meet such carrier demand for these transformation projects, especially with regard to our UC and UC for VoLTE offerings. We have experienced a significant positive revenue impact from these projects in 2015, and expect this to continue in 2016.

Key Financial Highlights
Some of our key U.S. GAAP financial highlights for the year ended December 31, 2015 include:
Total revenue increased by 29%, or $62.0 million, to $278.8 million, compared to $216.9 million for 2014;
Gross profit increased to $201.1 million, or 72% of revenue, compared to $159.2 million, or 73% of revenue for 2014;
Income from operations was $15.2 million, compared to $6.6 million for 2014;
Net income was $0.2 million, compared to $0.3 million for 2014;
Net income per diluted share was $0.01 per share, compared to $0.01 per share for 2014;
Revenue plus net change in deferred revenue increased by 20% to $288.4 million, compared to $240.7 million for 2014;
Deferred revenue increased $9.6 million, compared to an increase of $23.8 million for 2014; and
Cash provided by operating activities was $44.8 million, compared to $54.8 million for 2014.
Some of our key non-GAAP financial highlights for the year ended December 31, 2015 include:
Non-GAAP gross profit increased to $214.4 million, or 77% of revenue, compared to $168.4 million, or 78% of revenue in 2014;
Non-GAAP income from operations was $61.8 million, or 22% of total revenue, compared to $42.2 million, or 19% of total revenue, in 2014;
Non-GAAP net income was $58.6 million, compared to $40.1 million in 2014; and
Non-GAAP net income per diluted share was $1.96 per common share, compared to $1.37 per common share in 2014.
For a discussion of these non-GAAP financial measures and a reconciliation of GAAP and non-GAAP financial results, please refer to “Non-GAAP Financial Measures” included elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Components of Operating Results
Revenue
We derive our revenue primarily from software licenses, subscription and maintenance support and professional services and other. We recognize revenue when all revenue recognition criteria have been met in accordance with 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:
License software. We derive license software revenue primarily from the sale of perpetual software licenses. We generally price our software based on the packages 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 software 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 software revenue balance consists of software orders that do not meet all the criteria for

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revenue recognition. We are unable to predict with certainty 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, it is difficult to forecast whether recognized license software revenue and deferred license software revenue will continue to increase or decrease in a given period. As of December 31, 2015, our deferred license software revenue balance was $33.2 million, the current portion of which was $31.9 million.
Subscription and maintenance support. Subscription and maintenance support revenue includes recurring revenue from annual maintenance support contracts for our software licenses and from subscriptions related to our delivery of BroadCloud services.
Rates for maintenance support, including subsequent renewal rates, are typically established based upon a specific percentage of net license fees as set forth in the arrangement with the customer. Maintenance support revenue is recognized ratably over the maintenance support period, assuming all other revenue recognition criteria have been met. Our annual maintenance support 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 maintenance support services to continue receiving such support.
Under our BroadCloud subscriptions, we are paid a recurring fee typically calculated based on the number of seats and type of services purchased or a usage fee based on the actual number of transactions. The recurring fee is typically billed monthly or annually in advance based on the terms of the arrangement and the usage fee is billed one month in arrears.
Our deferred subscription and maintenance support revenue balance consists of maintenance support and subscription orders that do not meet all the criteria for revenue recognition. As of December 31, 2015, our deferred subscription and maintenance support revenue balance was $61.4 million, the current portion of which was $58.9 million.
Professional services and other. Professional services and other revenue primarily includes revenue from professional service engagements consisting of implementation, training, consulting and design and customization services. Our professional services and other deferred revenue balance consists of orders that do not meet all the criteria for revenue recognition. As of December 31, 2015, our deferred professional services and other revenue balance was $16.5 million, the current portion of which was $15.7 million.
Cost of Revenue
Our total cost of revenue consists of the following:
Cost of license software revenue. A majority of the cost of license software revenue consists of amortization of acquired intangibles, personnel-related expenses and royalties paid to third parties whose technology or products are sold as part of BroadWorks. A significant amount of the royalty fees are for the underlying embedded data base technology within BroadWorks for which we currently incur a fixed expense per quarter. Personnel-related expenses include salaries, benefits, bonuses, reimbursement of expenses and stock-based compensation. Such costs are expensed in the period in which they are incurred.
Cost of subscription and maintenance support revenue. Cost of subscription and maintenance support revenue consists primarily of personnel-related expenses and other direct costs associated with support and maintenance obligations to our customers who have licensed our software and BroadCloud services, including maintenance and support expenses due to our use of third party software, amortization of acquired intangibles and operating and depreciation expenses associated with the delivery of BroadCloud services.
Cost of professional services and other revenue. Cost of professional services and other revenue consists primarily of personnel-related expenses and other direct costs associated with the delivery of our professional services, which 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 software, subscription and maintenance support and professional services and other revenue. We generate higher gross margins on license software revenue compared to subscription and maintenance support or professional services and other revenue.
Growth or decline of license software revenue. A significant portion of cost of license software revenue is fixed and is expensed in the period in which it is incurred. This cost consists primarily of royalty fees to our

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embedded database provider and amortization of acquired technology. If license software revenue increases, these fixed fees will decline as a percentage of revenue. If license software revenue declines, these fixed fees will increase as a percentage of revenue.
Impact of deferred revenue. If any revenue recognition criteria have not been met, the applicable revenue derived from the arrangement is deferred, including license software, subscription and maintenance support, and professional services and other revenue, until all elements of revenue recognition criteria have been met. However, the cost of revenue, including the costs of license software, subscription and maintenance support and professional services and other, is typically 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 orders depends largely on the terms of the sale arrangement and we are not able to predict with certainty 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.
Intangible amortization related to mergers and acquisitions. Over the last several years, our business combinations resulted in a number of intangibles assets. These intangible assets are amortized over their useful lives, resulting in additional expense impacting gross profit over the applicable period. We may undertake additional strategic transactions in the future that would result in additional intangible amortization expense.
Revenue Plus Net Change in Deferred Revenue
We believe revenue recognized in a particular period plus the net change in our deferred revenue balance is a key measure of our sales activity for that period.
Revenue plus the net change in deferred revenue is as follows (in thousands):
 
 
Year ended December 31,
 
2015
 
2014
 
2013
Beginning of period deferred revenue balance
$
101,456

 
$
77,662

 
$
61,149

End of period deferred revenue balance
111,054

 
101,456

 
77,662

Increase in deferred revenue
9,598

 
23,794

 
16,513

Revenue
278,843

 
216,857

 
178,493

Revenue plus net change in deferred revenue
$
288,441

 
$
240,651

 
$
195,006

Operating Expenses
We grew our total headcount to 1,247 employees at December 31, 2015 from 867 employees at December 31, 2014, and we expect to continue to hire new employees to support our anticipated growth.
Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries and other personnel costs are the most significant component of each of these expense categories. We expect our operating expenses to increase in 2016 primarily due to increases in headcount and stock-based compensation expense.
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, benefits and bonuses. Additional expenses include marketing programs, consulting, travel and other related overhead.
Research and development expenses. Research and development expenses consist primarily of salaries and personnel costs for development employees, including stock-based compensation, benefits 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 third-party 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.
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

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compensation, benefits and bonuses. Additional expenses include consulting and professional fees, travel, insurance and other administrative expenses.
Stock-Based Compensation
We include stock-based compensation as part of cost of revenue and operating expenses in connection with the grant of stock-based 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 is measured based on the estimated fair value of the award at the date of grant. The fair value of service-only awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period, which is the vesting period, of the award. Straight-line expense recognition for service-only awards is an accounting policy change in the fourth quarter of 2015, applied retrospectively. See Note 2 Summary of Significant Accounting Policies for additional information on the accounting policy change. The fair value of awards with a performance condition continues to be recognized as stock-based compensation on a graded basis over the requisite vesting period of the award. For the years ended December 31, 2015, 2014 and 2013, we recorded stock-based compensation expense of $40.4 million, $30.3 million and $27.4 million, respectively.
Based on stock-based awards outstanding as of December 31, 2015, we expect to recognize future expense related to the non-vested portions of such stock-based awards in the amount of $56.9 million over a weighted average period of approximately 1.91 years.
Other Expense, Net
Other expense, net, consists primarily of interest income, interest expense, loss on repurchase of convertible senior notes and foreign currency translation gains and losses. Interest income represents interest received on our cash and cash equivalents. Interest expense consists primarily of the interest related to our 2018 convertible senior notes, or the 2018 Notes, and our 2022 convertible senior notes, or the 2022 Notes. Loss on repurchase of convertible senior notes relates to the fair value in excess of the carrying value of the portion of the 2018 Notes repurchased. Foreign currency translation gains and losses relate to the revaluation of foreign currency denominated trade receivables.
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. Historically, we have not been required to pay significant U.S. federal income taxes due to our accumulated net operating losses. As of December 31, 2015 and 2014, we had net operating loss carryforwards, or the NOLs, to utilize in the U.S of approximately $32.1 million and $39.2 million, respectively. Additionally, we have $11.3 million and $5.9 million of tax credit carryforwards for tax return purposes as of December 31, 2015 and 2014, respectively. The U.S. NOLs and tax credit carryforwards are scheduled to begin to expire in 2018 and 2019, respectively. As of December 31, 2015 and 2014, we had a remaining valuation allowance of approximately $0.3 million and $0.3 million, respectively, which primarily relate to certain foreign NOLs and tax credits that more likely than not will not be realized.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 ("ASU 2014-09"), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard allows entities to apply either of two methods: (i) retrospective application to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective application with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Topic 606 ("ASU 2015-14"), which defers the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are evaluating the impact of adopting this new standard on our financial statements and our method of adoption.
In April 2015, the FASB issued Accounting Standards Updated 2015-03, Interest-Imputation of Interest ("ASU 2015-03"), which provides updated guidance for accounting for debt issuance costs. The update is intended to simplify and standardize the

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presentation of debt issuance costs. ASU 2015-13 requires that we present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with the treatment of debt discounts. We adopted the new guidance effective July 1, 2015 and reclassified our unamortized debt issuance costs from "other current assets" and "other long-term assets" to "convertible senior notes" on the consolidated balance sheets for all periods presented. The balances of unamortized debt issuance costs reclassified as of December 31, 2014 were $0.4 million and $1.0 million from other current assets and other long-term assets, respectively.
In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations: Topic 805 ("ASU 2015-16"), which provides updated guidance on recognizing adjustments to provisional amounts for items in a business combination. ASU 2015-16 requires that the we recognize adjustments to provisional amounts during the reporting period in which the adjustment amounts are determined. We will adopt ASU 2015-16 upon its effective date, which is for annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. The guidance will be applied prospectively.
In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes: Topic 740 ("ASU 2015-17"), which provides updated guidance for the presentation of deferred income taxes. ASU 2015-17 requires that we present deferred income taxes as non-current in the balance sheet. We adopted the new guidance effective December 31, 2015 and reclassified our current deferred tax assets and deferred tax liabilities to non-current on the consolidated balance sheet for all periods presented. The balances of current deferred tax assets and current deferred tax liabilities reclassified to non-current as of December 31, 2014 were $14.3 million and an immaterial amount, respectively.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition
We derive our revenue from the sale of software licenses and related maintenance for those licenses, subscription and usage fees related to our cloud offerings and the sale of professional services.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement fee is fixed or determinable and collectability of the related receivable is probable. In making judgments regarding revenue recognition, we analyze various factors, including the nature and terms of the specific transaction, the creditworthiness of our customers, our historical experience, accuracy of prior estimates and overall market and economic conditions. Moreover, in connection with the sale of a number of products and services under a single contractual arrangement (a multiple element arrangement), we make judgments as to whether there is sufficient vendor specific objective evidence (“VSOE”) to enable the allocation of fair value among the various elements in software arrangements that contain multiple elements and as to relative selling prices for multiple element arrangements that do not contain software elements. In determining relative selling prices for products and services, we consider, among other things, our use of discounts from list prices, prices we charge for similar offerings and our historical pricing practices. Changes in judgments related to these items, or deterioration in market or economic conditions, could materially impact the timing and amount of revenue recognized.
License Software Revenue
We sell software licenses to service providers through our direct sales force and indirectly through distribution partners.
For direct sales, we generally consider a purchase order or executed sales quote, when combined with a master license agreement, to constitute evidence of an arrangement. In the case of sales through distribution partners, we generally consider a purchase order or executed sales quote, when combined with a reseller or similar agreement with the distribution partner, and evidence of the distribution partner’s customer, to constitute evidence of an arrangement. For sales through distribution partners for which we are not able to ascertain proof of the distribution partner’s customer, we defer revenue until we are able to do so.

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We consider delivery to have occurred when the customer is given electronic access to the licensed software and a license key for the software has been delivered or made available. Instances where all ordered software features are not delivered are considered to be partial deliveries. Since we cannot determine VSOE of an undelivered software feature in the case of a partial delivery, we defer revenue recognition on all elements of such order until delivery for all ordered software features is complete.
Acceptance of our licensed software generally occurs upon delivery. From time to time, we have agreed with certain customers to a specific set of acceptance criteria. In such cases, we may defer revenue until these acceptance criteria have been met.
Our sales generally consist of multiple elements: software licenses; maintenance support; and professional services. We calculate the amount of revenue allocated to the software license by determining the fair value of the undelivered elements, which often are maintenance support and professional services, and subtracting it from the total order amount. We establish VSOE of the fair value of maintenance support based on the renewal price as stated in the agreement and as charged in the first optional renewal period under the arrangement. Our VSOE for professional services is determined based on an analysis of our historical daily rates when these professional services are sold separately from the software license.
The warranty period for our licensed software is generally 90 days. During this period, the customer receives technical support and has the right to unspecified product upgrades on an if-and-when available basis. For these periods, we defer a portion of the license fee and recognize it ratably over the warranty period. The revenue is reflected under the subscription and maintenance support revenue line item in the consolidated income statement.
Our license software revenue is subject to significant fluctuation as a result of the application of accounting regulations and related interpretations and policies regarding revenue recognition. We do not believe license revenue to be the only meaningful measure of our level of sales activity during the periods reported because of the impact of software license orders for these periods that were not yet recognized as revenue and therefore were recorded as deferred license software revenue. Our deferred license software 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. As a result, we cannot forecast whether historical trends in recognized license software revenue, and corresponding changes in deferred license revenue, will continue.
Subscription and Maintenance Support Revenue
We typically sell software in combination with maintenance support. Maintenance support is generally renewable annually at the option of the customer. Rates for maintenance support, including subsequent renewal rates, are typically established based upon a specific percentage of net license fees as set forth in the arrangement with the customer. Maintenance support revenue is recognized ratably over the maintenance support period, assuming all other revenue recognition criteria have been met.
Under our BroadCloud subscriptions, we are paid a recurring fee calculated based on the number of seats and type of services purchased or a usage fee based on actual number of transactions. Typically, the recurring fee is billed monthly or annually based on the terms of the arrangement and the usage fee is billed one month in arrears. Revenue is recognized ratably over the contract term beginning with the date our service is made available to customers.
We enter into arrangements with multiple-elements that generally include subscription and professional services. To treat deliverables in a multiple-element arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. If the deliverables have standalone value upon delivery, we account for each deliverable separately. Subscription services have standalone value as such services are often sold separately. In determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors; the nature of the professional services; the timing of when the professional services contract was signed in comparison to the subscription service start date; and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work.
Per the accounting guidance, when multiple-elements included in an arrangement are separated into different units of accounting, the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy. We determine the relative selling price for each element based on its VSOE, if available, or our best estimate of selling price, or BESP, if VSOE is not available. We have determined that third-party evidence is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing information. The amount of revenue allocated to delivered items is limited by contingent revenue, if any.
We determined BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, our price lists, our go-to-market strategy, historical standalone sales and contract prices. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.

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Professional Services Revenue
Professional services are generally either daily-rate or fixed-fee arrangements. Revenue from daily-rate arrangements is typically recognized as services are performed. Revenue related to fixed-fee arrangements is typically recognized upon completion of all of the deliverables. Services are generally not considered essential to the functionality of the licensed software.
Software Development Costs
Software development costs for software to be sold, leased or marketed that is incurred prior to the establishment of technological feasibility are expensed as incurred as research and development expense. Software development costs incurred subsequent to the establishment of technological feasibility, if any, are capitalized until the software is available for general release to customers. For each software release, judgment is required to evaluate when technological feasibility has occurred. We have determined that technological feasibility has been established at approximately the same time as our general release of such software to customers. Therefore, to date, we have not capitalized any related software development costs.
Internal-Use Software Development Costs
Costs associated with customized internal-use software systems, which include development costs associated with our BroadCloud platforms, that have reached the application development stage are capitalized. Such capitalized costs include costs directly associated with the development of the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts that is maintained for estimated losses that would result from the inability of some customers to make payments. The allowance is based on an analysis of past due amounts and ongoing credit evaluations. Customers are generally evaluated for creditworthiness through a credit review process at the time of each order. Our collection experience has been consistent with our estimates.
Business Combinations
In a business combination, we allocate the purchase price to the acquired business’ identifiable assets and liabilities at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. The excess, if any, of the fair value of the identifiable assets acquired and liabilities assumed over the consideration transferred is recognized as a gain within other income in the consolidated statements of operations as of the acquisition date.
To date, the assets acquired and liabilities assumed in our business combinations have primarily consisted of acquired working capital and definite-lived intangible assets. The carrying value of acquired working capital approximates its fair value, given the short-term nature of these assets and liabilities. We estimate the fair value of definite-lived intangible assets acquired using a discounted cash flow approach, which includes an analysis of the future cash flows expected to be generated by such assets and the risk associated with achieving such cash flows. The key assumptions used in the discounted cash flow model include the discount rate that is applied to the discretely forecasted future cash flows to calculate the present value of those cash flows and the estimate of future cash flows attributable to the acquired intangible assets, which include revenue, operating expenses and taxes. Our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the fair value of assets acquired and liabilities assumed, with the corresponding offset to goodwill.
Goodwill
Goodwill represents the excess of (a) the aggregate of the fair value of consideration transferred in a business combination over (b) the fair value of assets acquired, net of liabilities assumed. Goodwill is not amortized, but is subject to annual impairment tests as described below.
We test goodwill for impairment annually on December 31, or more frequently if events or changes in business circumstances indicate the asset might be impaired. Examples of such events or circumstances include the following:
a significant adverse change in our business climate;
unanticipated competition;
a loss of key personnel;

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a more likely than not expectation that a significant portion of our business will be sold; or
the testing for recoverability of a significant asset group within the reporting unit.
We first may assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test included in U.S. GAAP. To the extent our assessment identifies adverse conditions, or if we elect to bypass the qualitative assessment, goodwill is tested for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two is required to measure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of the reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the purchase price were being initially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded to operating expenses in the consolidated statements of operations in the period the determination is made.
We have determined that we have one reporting unit, BroadSoft, Inc., which is the consolidated entity. Based on our qualitative assessment, there was no indication of impairment as of December 31, 2015, 2014 or 2013. However, there can be no assurance that goodwill will not be impaired at any time in the future.
Intangible Assets
We acquired intangible assets in connection with certain of our business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used. Estimated useful lives are determined based on our historical use of similar assets and the expectation of future realization of cash flows attributable to the intangible assets. Changes in circumstances, such as technological advances or changes to our business model, could result in the actual useful lives differing from our current estimates. In those cases where we determine that the useful life of an intangible asset should be shortened, we amortize the net book value in excess of the estimated salvage value over its revised remaining useful life. We did not revise our previously assigned useful life estimates attributed to any of our intangible assets during the years ended December 31, 2015, 2014 or 2013.
The estimated useful lives used in computing amortization of intangible assets are as follows:
 
Customer relationships
3 - 8 years
Developed technology
2 - 6 years
Tradenames
1 - 7 years
Impairment of Long-Lived Assets
We review our long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or an asset group may not be recoverable. Typical indicators that an asset may be impaired include, but are not limited to:
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; or
a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated. Recoverability measurement and estimating of undiscounted cash flows for assets to be held and used is done at the lowest possible levels for which there are identifiable cash flows. If such assets are considered impaired, generally the amount of impairment recognized would be equal to the amount by which the carrying amount of the assets exceeds the fair value of the assets, which we would compute using a discounted cash flow approach. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell. Estimating future cash flows attributable to our long-lived assets requires significant judgment and projections may vary from cash flows eventually

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realized. There were no triggering events to cause us to record an impairment charge during the years ended December 31, 2015, 2014 or 2013.
Income Taxes
We use the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. This method requires an asset and liability approach for the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred amounts are expected to be settled or realized.
We operate in various tax jurisdictions and are subject to audit by various tax authorities. We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. Changes in facts and circumstances could have a material impact on our effective tax rate and results of operations.
Results of Operations
Comparison of the Years Ended December 31, 2015 and 2014
Revenue
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2015
 
2014
 
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue by Type:
 
 
 
 
 
 
 
 
 
 
 
License software
$
119,808

 
43
%
 
$
103,311

 
47
%
 
$
16,497

 
16
 %
Subscription and maintenance support
112,836

 
40

 
92,492

 
43

 
20,344

 
22

Professional services and other
46,199

 
17

 
21,054

 
10

 
25,145

 
119

Total revenue
$
278,843

 
100
%
 
$
216,857

 
100
%
 
$
61,986

 
29
 %
Revenue by Geography:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
191,573

 
69
%
 
$
120,719

 
56
%
 
$
70,854

 
59
 %
EMEA
61,114

 
22

 
54,950

 
25

 
6,164

 
11

APAC
26,156

 
9

 
41,188

 
19

 
(15,032
)
 
(36
)
Total revenue
$
278,843

 
100
%
 
$
216,857

 
100
%
 
$
61,986

 
29
 %
Total revenue for 2015 increased by 29%, or $62.0 million, to $278.8 million, compared to 2014. This growth was driven by a 16% increase in license software revenue, a 22% increase in subscription and maintenance support revenue and a 119% increase in professional services and other revenue. Deferred revenue increased by $9.6 million for 2015, compared to an increase of $23.8 million in 2014.
Americas revenue for 2015 increased by 59%, or $70.9 million, to $191.6 million compared to 2014. The increase in Americas revenue for 2015 was due to increases in license software revenue, subscription and maintenance support revenue and professional services and other revenues.
Europe, Middle East and Africa, or EMEA, revenue for 2015 increased by 11%, or $6.2 million, to $61.1 million compared to 2014. The increase in EMEA revenue in 2015 was primarily due to an increase in license software revenue and subscription and maintenance support revenue, partially offset by a decrease in professional services and other revenue.
Asia Pacific, or APAC, total revenue for 2015 decreased by 36%, or $15.0 million, to $26.2 million compared to 2014. The decrease in APAC revenue was primarily due to the recognition of revenue in the prior year related to a multi-year project for an APAC service provider customer.

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License Software
License software revenue for 2015 increased by 16%, or $16.5 million, to $119.8 million. The increase in revenue for 2015 reflects an increase in license software revenue in the Americas and EMEA, partially offset by a decrease in license software revenue in APAC. Deferred license software revenue increased by $6.7 million in 2015, compared to an increase of $6.3 million in 2014.
Subscription and Maintenance Support
Subscription and maintenance support revenue for 2015 increased by 22%, or $20.3 million, to $112.8 million, compared to 2014. The increase in subscription and maintenance support revenue was the result of growth in our subscription revenue associated with our BroadCloud platforms, which included contributions from recent acquisitions, and growth in our maintenance support revenue. Our BroadCloud subscription revenue for 2015 increased by $8.8 million to $34.5 million, compared to 2014. Our maintenance support revenue grew as a result of growth in the installed base of our customers who purchase maintenance support. Deferred subscription and maintenance support revenue increased by $8.6 million in 2015, compared to an increase of $5.8 million in 2014.
Professional Services and Other
Professional services and other revenue for 2015 increased by 119%, or $25.1 million, to $46.2 million, compared to 2014. The increase in professional services and other revenue for 2015 was primarily due to revenue recognized from several large projects as we've reached milestones for those projects, and also due to increased professional services activity, including contributions from recent acquisitions. Deferred professional services and other revenue decreased by $5.7 million in 2015, compared to an increase of $11.7 million in 2014.
Cost of Revenue and Gross Profit
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2015
 
2014
 
 
Amount
 
Percent
of
Related
Revenue
 
Amount
 
Percent
of
Related
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Cost of Revenue:
 
 
 
 
 
 
 
 
 
 
 
License software
$
10,231

 
9
%
 
$
9,755

 
9
%
 
$
476

 
5
%
Subscription and maintenance support
38,602

 
34

 
32,984

 
36

 
5,618

 
17

Professional services and other
28,925

 
63

 
14,955

 
71

 
13,970

 
93

Total cost of revenue
$
77,758

 
28
%
 
$
57,694

 
27
%
 
$
20,064

 
35
%
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
License software
$
109,577

 
91
%
 
$
93,556

 
91
%
 
$
16,021

 
17
%
Subscription and maintenance support
74,234

 
66

 
59,508

 
64

 
14,726

 
25

Professional services and other
17,274

 
37

 
6,099

 
29

 
11,175

 
183

Total gross profit
$
201,085

 
72
%
 
$
159,163

 
73
%
 
$
41,922

 
26
%
For 2015, our gross margin decreased to 72% as compared to 73% in 2014 and our gross profit increased by 26%, or $41.9 million, to $201.1 million. We experienced an increase in gross profit across all of our revenue streams for 2015. The total gross profit growth is primarily due to higher revenue growth relative to the growth in cost of revenue.
For 2015, license software gross margin remained approximately unchanged at 91% as compared to 2014 and license software gross profit increased by 17% to $109.6 million. License software cost of revenue increased by 5%, or $0.5 million, to $10.2 million in 2015. This increase was primarily due to a $0.8 million increase in intangible amortization related to our acquisitions. The increase in license software gross profit was driven by higher revenue growth relative to the growth in license software cost of revenue.
For 2015, subscription and maintenance support gross margin increased to 66% as compared to 64% in 2014 and subscription and maintenance support gross profit increased by 25% to $74.2 million. Subscription and maintenance support cost of revenue increased by 17%, or $5.6 million, to $38.6 million in 2015. The increase in subscription and maintenance support cost of

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revenue was related to our continued investment in our product offerings, primarily investment in our BroadCloud offering, including a $3.0 million increase in personnel-related costs and a $2.5 million increase in operating costs associated with hosting our BroadCloud services. The increase in subscription and maintenance support gross profit was driven by higher revenue growth relative to growth in subscription and maintenance services cost of revenue.
For 2015, professional services and other gross margin increased to 37% as compared to 29% in 2014 and professional services and other gross profit increased by 183% to $17.3 million. Professional services and other cost of revenue increased 93%, or $14.0 million, to $28.9 million in 2015. The increase in professional services and other cost of revenue was primarily due to a $9.7 million increase in personnel-related costs, which includes the impact of acquisitions we made during 2015. The increase was also due to a $1.2 million increase in hardware expense and a $1.1 million increase in travel expenses. The increase in professional services and other gross profit was driven by higher revenue growth relative to growth in professional services and other cost of revenue.
Operating Expenses
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2015
 
2014
 
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Sales and marketing
$
83,806

 
30
%
 
$
69,471

 
32
%
 
$
14,335

 
21
%
Research and development
60,749

 
22

 
50,125

 
23

 
10,624

 
21

General and administrative
41,287

 
15

 
32,993

 
15

 
8,294

 
25

Total operating expenses
$
185,842

 
67
%
 
$
152,589

 
70
%
 
$
33,253

 
22
%
Sales and Marketing. Sales and marketing expense increased by 21%, or $14.3 million, to $83.8 million for 2015. The increase was primarily due to a $9.3 million increase in personnel-related costs, a $2.1 million increase in outside consulting expenses, a $0.7 million increase in equipment and software expenses and a $0.6 million increase in travel expenses.
Research and Development. Research and development expense increased by 21%, or $10.6 million, to $60.7 million for 2015. The increase was primarily due to an $8.9 million increase in personnel-related costs, a $0.8 million increase in depreciation expenses and a $0.7 million increase in equipment and software expenses.
General and Administrative. General and administrative expense increased by 25%, or $8.3 million, to $41.3 million for 2015. The increase was primarily related to a $3.6 million increase in personnel-related costs and a $4.1 million increase in third party legal and consulting expenses.
Income from Operations
We had income from operations of $15.2 million for 2015, compared to $6.6 million in 2014.
Other Expense
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2015
 
2014
 
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Interest expense, net
$
9,386

 
3
%
 
$
7,177

 
3
%
 
$
2,209

 
31
%
Other, net
5,714

 
2
%
 
1,300

 
1
%
 
4,414

 
340
%
Total other expense, net
$
15,100

 
5
%
 
$
8,477

 
4
%
 
$
6,623

 
78
%
Other expense, net increased by $6.6 million for 2015 compared to 2014. The increase in total other expenses was related to the loss of $4.2 million related to the repurchase of a portion of the 2018 Notes, interest expense of $3.2 million related to the 2022 Notes and a $0.7 million increase in foreign currency translation losses related to the revaluation of foreign denominated trade

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receivables compared to 2014, partially offset by an increase in interest income of $0.7 million related to our investments and a decrease in interest expense of $0.7 million related to the 2018 Notes.
Benefit from Income Taxes
Benefit from income taxes was an immaterial amount for the year ended December 31, 2015, compared to $2.2 million for the year ended December 31, 2014. For the year ended December 31, 2015, the tax provision was primarily impacted by research tax credits generated in 2015 and prior years, partially offset by non-deductible share base compensation. The decrease in the income tax benefit in 2015 compared to 2014 was primarily related to the release of a valuation allowance in 2014 due to expected realization of our deferred tax assets in certain foreign jurisdictions.
Comparison of the Years Ended December 31, 2014 and 2013
Revenue
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2014
 
2013
 
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Revenue by Type:
 
 
 
 
 
 
 
 
 
 
 
License software
$
103,311

 
47
%
 
$
94,408

 
53
%
 
$
8,903

 
9
%
Subscription and maintenance support
92,492

 
43

 
69,357

 
39

 
23,135

 
33

Professional services and other
21,054

 
10

 
14,728

 
8

 
6,326

 
43

Total revenue
$
216,857

 
100
%
 
$
178,493

 
100
%
 
$
38,364

 
21
%
Revenue by Geography:
 
 
 
 
 
 
 
 
 
 
 
Americas
$
120,719

 
56
%
 
$
113,268

 
63
%
 
$
7,451

 
7
%
EMEA
54,950

 
25

 
44,235

 
25

 
10,715

 
24

APAC
41,188

 
19

 
20,990

 
12

 
20,198

 
96

Total revenue
$
216,857

 
100
%
 
$
178,493

 
100
%
 
$
38,364

 
21
%
Total revenue for 2014 increased by 21%, or $38.4 million, to $216.9 million, compared to 2013. This growth was driven by a 9% increase in license software revenue, a 33% increase in subscription and maintenance support revenue and a 43% increase in professional services and other revenue. Deferred revenue increased by $23.8 million for 2014, compared to an increase of $16.5 million in 2013.
Americas revenue for 2014 increased by 7%, or $7.5 million, to $120.7 million, compared to 2013. The increase in the Americas revenue for 2014 was primarily due to growth in subscription revenue associated with our BroadCloud offering and growth in maintenance support revenue.
EMEA revenue for 2014 increased by 24%, or $10.7 million, to $55.0 million, compared to 2013. The increase in EMEA revenue in 2014 was primarily due to growth in subscription revenue from acquisitions and maintenance support revenue due to an increase in software sales. The increase was partially offset by a decrease in license software revenue due to the deferral of a large order that did not meet the criteria for revenue recognition, with revenue recognition from such order anticipated in 2016.
APAC revenue for 2014 increased by 96%, or $20.2 million, to $41.2 million, compared to 2013. The increase in APAC revenue was primarily due to the recognition of $18.3 million of revenue related to a multi-year project for an APAC service provider customer, including revenue from license software, subscription and maintenance support and professional services and other.
License Software
License software revenue for 2014 increased by 9%, or $8.9 million, to $103.3 million, compared to 2013. The increase in revenue for 2014 reflects an increase in license software revenue in APAC partially offset by a decrease in software license revenue in EMEA. Deferred license software revenue increased by $6.3 million in 2014, compared to a decrease of $1.8 million in 2013.

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Subscription and Maintenance Support
Subscription and maintenance support revenue for 2014 increased by 33%, or $23.1 million, to $92.5 million, compared to 2013. The increase in subscription and maintenance support revenue was the result of growth in our subscription revenue associated with our BroadCloud offering, which included contributions from acquisitions. Our BroadCloud subscription revenue for 2014 increased by $13.2 million to $25.7 million, compared to 2013. Our maintenance support revenue grew as a result of growth in the installed base of our customers who purchase maintenance support. Deferred subscription and maintenance support revenue increased by $5.8 million in 2014, compared to an increase of $11.3 million in 2013.
Professional Services and Other
Professional services and other revenue for 2014 increased by 43%, or $6.3 million, to $21.1 million, compared to 2013. The increase in professional services and other revenue for 2014 was primarily due to the timing of revenue recognition, including revenue related to a multi-year project for an APAC service provider customer that had been deferred in prior periods. Deferred professional services and other revenue increased by $11.7 million in 2014, compared to remaining approximately unchanged in 2013.
Cost of Revenue and Gross Profit
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2014
 
2013
 
 
Amount
 
Percent
of
Related
Revenue
 
Amount
 
Percent
of
Related
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Cost of Revenue:
 
 
 
 
 
 
 
 
 
 
 
License software
$
9,755

 
9
%
 
$
8,867

 
9
%
 
$
888

 
10
%
Subscription and maintenance support
32,984

 
36

 
20,359

 
29

 
12,625

 
62

Professional services and other
14,955

 
71

 
10,415

 
71

 
4,540

 
44

Total cost of revenue
$
57,694

 
27
%
 
$
39,641

 
22
%
 
$
18,053

 
46
%
Gross Profit:
 
 
 
 
 
 
 
 
 
 
 
License software
$
93,556

 
91
%
 
$
85,541

 
91
%
 
$
8,015

 
9
%
Subscription and maintenance support
59,508

 
64

 
48,998

 
71

 
10,510

 
21

Professional services and other
6,099

 
29

 
4,313

 
29

 
1,786

 
41

Total gross profit
$
159,163

 
73
%
 
$
138,852

 
78
%
 
$
20,311

 
15
%
For 2014, gross margin decreased to 73% as compared to 78% in 2013 and our gross profit increased by 15%, or $20.3 million, to $159.2 million. We experienced an increase in gross profit across all of our revenue streams for 2014. The total gross profit growth was primarily due to higher revenue growth relative to the growth in cost of revenue.
For 2014, license software gross margin remained approximately unchanged at 91% as compared to 2013 and license software gross profit increased by 9% to $93.6 million. License software cost of revenue increased by 10%, or $0.9 million, to $9.8 million in 2014. This increase was primarily due to a $0.7 million increase in personnel-related costs and a $0.6 million increase in equipment and software expense, partially offset by a $0.5 million decrease in royalty expense. The increase in license software gross profit was driven by higher revenue growth relative to the growth in license software cost of revenue.
For 2014, subscription and maintenance support gross margin decreased to 64% as compared to 71% in 2013, and subscription and maintenance support gross profit increased by 21% to $59.5 million. Subscription and maintenance support cost of revenue increased by 62%, or $12.6 million, to $33.0 million in 2014. The increase in subscription and maintenance support cost of revenue was related to our continued investment in our product offerings, primarily investment in our BroadCloud offering. The increase was primarily due to a $5.2 million increase in personnel-related costs, a $5.4 million increase in operations costs associated with hosting our BroadCloud services and a $1.5 million increase in amortization of acquired intangibles. The increase in subscription and maintenance support gross profit was driven by higher revenue growth relative to growth in subscription and maintenance support cost of revenue.
For 2014, professional services and other gross margin remained approximately unchanged at 29% as compared to 2013, and professional services and other gross profit increased by 41% to $6.1 million. Professional services and other cost of revenue

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increased 44%, or $4.5 million, to $15.0 million in 2014. The increase in professional services and other cost of revenue was primarily due to a $1.9 million increase in hardware costs delivered under an order related to a multi-year project for an APAC service provider customer, a $1.0 million increase in outside consulting expenses and a $1.2 million increase in personnel-related costs. The increase in professional services and other gross profit was driven by higher revenue growth relative to growth in professional services and other cost of revenue.
Operating Expenses
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2014
 
2013
 
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Sales and marketing
$
69,471

 
32
%
 
$
56,822

 
32
%
 
$
12,649

 
22
%
Research and development
50,125

 
23

 
45,271

 
25

 
4,854

 
11

General and administrative
32,993

 
15

 
29,992

 
17

 
3,001

 
10

Total operating expenses
$
152,589

 
70
%
 
$
132,085

 
74
%
 
$
20,504

 
16
%
Sales and Marketing. Sales and marketing expense increased by 22%, or $12.6 million, to $69.5 million for 2014, compared to 2013. This increase was primarily due to a $9.2 million increase in personnel-related costs, a $1.1 million increase in travel expenses, a $0.8 million increase in outside consulting expenses and a $0.6 million in training and marketing expenses.
Research and Development. Research and development expense increased by 11%, or $4.9 million, to $50.1 million for 2014, compared to 2013. This increase was primarily due to a $3.2 million increase in personnel-related costs and a $0.5 million increase in equipment and software expenses. The increase in personnel-related costs was reflective of our continued investment in our product offerings, which includes the impact of the acquisitions we made during 2013 and 2014.
General and Administrative. General and administrative expense increased by 10%, or $3.0 million, to $33.0 million for 2014, compared to 2013. This increase was primarily due to a $1.3 million increase in personnel-related costs and a $0.9 million increase in third-party legal and consulting expenses.
Income from Operations
We had income from operations of $6.6 million for 2014, compared to $6.8 million in 2013.
Other Expense
 
 
Year ended December 31,
 
Period-to-Period
Change
 
2014
 
2013
 
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percent
of Total
Revenue
 
Amount
 
Percentage
 
(dollars in thousands)
Interest expense, net
$
7,177

 
3
%
 
$
6,946

 
4
%
 
$
231

 
3
 %
Other, net
1,300

 
1
%
 
(148
)
 
*

 
1,448

 
(978
)%
Total other expense, net
$
8,477

 
4
%
 
$
6,798

 
4
%
 
$
1,679

 
25
 %
*
Less than 1%
Other expense, net increased by $1.7 million for 2014 primarily related to the increase of $1.4 million in foreign currency transaction losses related to the revaluation of foreign currency denominated trade receivables.
Benefit from Income Taxes
Benefit from income taxes was $2.2 million for 2014, compared to $0.4 million for 2013. For 2014, in addition to the tax impact of the pre-tax loss for the year, the tax provision was primarily impacted by the release of the valuation allowance on certain deferred tax assets in foreign jurisdictions and the increase in research credits claimed in 2014. The decrease in the

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valuation allowance by approximately $3.0 million was related to the expected realization of our deferred tax assets in certain foreign jurisdiction.
Liquidity and Capital Resources
Resources
We fund our operations principally with cash provided by operating activities. Cash flow from operations was $44.8 million, $54.8 million and $31.9 million for the years ended December 31, 2015, 2014 and 2013, respectively. In September 2015, we completed an offering of our 2022 Notes with net proceeds from the offering of approximately $194.8 million.
Cash and Cash Equivalents, Accounts Receivable and Working Capital
The following table presents a summary of our cash and cash equivalents, accounts receivable, working capital and cash flows as of the dates and for the periods indicated (in thousands).
 
 
December 31,
2015
 
December 31,
2014
Cash and cash equivalents
$
175,857

 
$
101,543

Accounts receivable, net
108,113

 
81,794

Working capital
234,506

 
156,322

 
 
Year ended December 31,
 
2015
 
2014
 
2013
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
44,786

 
$
54,759

 
$
31,934

Investing activities
(88,011
)
 
(17,558
)
 
(57,406
)
Financing activities
118,918

 
(4,135
)
 
4,831

Our cash and cash equivalents at December 31, 2015 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 was immaterial at December 31, 2015, is not included in cash and cash equivalents.
Operating Activities
For the year ended December 31, 2015, net cash provided by operating activities was $44.8 million, compared to $54.8 million for 2014. The decrease was primarily due to a $26.2 million decrease from the net change in other current and long-term assets and liabilities and a decrease in net income of $0.1 million, partially offset by a $16.3 million increase from the aggregate changes in non-cash items. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, non-cash interest on convertible debt, tax windfall benefits from stock option exercises and amortization of software licenses.
For the year ended December 31, 2014, net cash provided by operating activities was $54.8 million, compared to $31.9 million for 2013. The increase was primarily due to a $11.4 million increase from the aggregate changes in non-cash items and a $11.5 million increase from the net change in other current and long-term asset and liabilities. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, non-cash interest on convertible debt, tax windfall benefits from stock option exercises and amortization of software licenses.
For the year ended December 31, 2013, net cash provided by operating activities was $31.9 million, compared to $30.0 million in 2012. The increase was primarily due to a $13.3 million increase from the net change in other current and long-term asset and liabilities and a $3.1 million increase from the aggregate changes in non-cash items, partially offset by a decrease in net income of $14.5 million. Non-cash items primarily consist of stock-based compensation expense, depreciation and amortization, provision for deferred income taxes, non-cash interest on convertible debt, tax windfall benefits from stock option exercises and amortization of software licenses.

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Investing Activities
Our investing activities have consisted primarily of purchases of marketable securities and property and equipment and the acquisitions of businesses.
For the year ended December 31, 2015, net cash used in investing activities was $88.0 million, compared to $17.6 million for 2014. This increase was primarily attributable to a $50.0 million increase in net purchases of marketable securities, $17.5 million increase in cash used for acquisitions and a $2.4 million increase in purchases of property and equipment.
For the year ended December 31, 2014, net cash used in investing activities was $17.6 million, compared to $57.4 million for 2013. This decrease was primarily attributable to a $34.1 million decrease in cash used for acquisitions and a $9.9 million decrease in net purchases of marketable securities, partially offset by a $4.7 million increase in purchases of property and equipment.
For the year ended December 31, 2013, net cash used in investing activities was $57.4 million, compared to $34.2 million for 2012. This increase was primarily attributable to a $12.6 million increase in cash used for acquisitions, an $8.4 million increase in net purchases of marketable securities and a $1.9 million increase in purchases of property and equipment.
Financing Activities
For the year ended December 31, 2015, net cash provided by financing activities was $118.9 million, compared to net cash used in financing activities of $4.1 million for 2014. Net cash provided by financing activities in 2015 consisted of proceeds from 2022 Notes of $194.8 million and proceeds from the exercise of stock options of $6.2 million, partially offset by our repurchase of a portion of the 2018 Notes for $48.6 million, our repurchase of 790,880 shares of our common stock for $25.0 million, and taxes paid on the vesting of restricted stock units of $10.3 million.
For the year ended December 31, 2014, net cash used in financing activities was $4.1 million, compared to net cash provided by financing activities of $4.8 million for 2013. Net cash used in financing activities in 2014 consisted of taxes paid on the vesting of restricted stock units of $7.8 million, partially offset by our tax windfall benefits from stock option exercises of $3.0 million and proceeds from the exercise of stock options of $0.7 million.
For the year ended December 31, 2013, net cash provided by financing activities was $4.8 million, compared to $0.5 million in 2012. Net cash provided by financing activities in 2013 consisted of our tax windfall benefits from stock option exercises of $7.5 million and proceeds from the exercise of stock options of $1.3 million, partially offset by taxes paid on the vesting of restricted stock units of $3.0 million and payments of notes payable of $1.0 million.
Borrowings and Credit Facilities
2022 Convertible Senior Notes
In September 2015, we issued $201.3 million aggregate principal amount of the 2022 Notes, with net proceeds of approximately $194.8 million. The 2022 Notes are general unsecured obligations, with interest payable semi-annually in cash at a rate of 1.0% per annum, and will mature on September 1, 2022, unless earlier repurchased, redeemed or converted.
The initial conversion rate for the 2022 Notes is approximately $38.72 per share. The conversion price is subject to adjustment in some events, but will not be adjusted for accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date or if we issue a notice of redemption on or after September 1, 2019, we will increase the conversion rate for a holder who elects to convert its 2022 Notes in connection with such a corporate event or during the related redemption period in certain circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our current intent to settle conversions through combination settlement with a specified dollar amount per $1,000 principal amount of 2022 Notes of $1,000. See Note 9, Borrowings, contained elsewhere in this Annual Report on Form 10-K for additional details about the 2022 Notes.
2018 Convertible Senior Notes
In June 2011, we issued $120.0 million aggregate principal amount of our 2018 Notes, with net proceeds of approximately $116 million. The 2018 Notes are our senior unsecured obligations, 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.
Concurrently with the closing of the 2022 Notes offering, we repurchased $50.9 million principal amount of the 2018 Notes in privately negotiated transactions for an aggregate purchase price of $53.4 million.

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The initial conversion rate for the 2018 Notes is approximately $41.99 per share. 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 2018 Notes (the “2018 Indenture”), occurs prior to the maturity date, we will in some cases increase the conversion rate for a holder that elects to convert its 2018 Notes in connection with such make-whole fundamental change. Upon conversion, we will pay cash up to the aggregate principal amount of the 2018 Notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of the conversion obligation in excess of the aggregate principal amount of the 2018 Notes being converted. See Note 9, Borrowings, contained elsewhere in this Annual Report on Form 10-K for additional details about the 2018 Notes.
Tekes Loan
In connection with our acquisition of Movial Applications Oy in October 2011, we assumed five installment loans with Tekes, the Finnish Funding Agency for Technology and Innovation, which we repaid in full in September 2013.
Operating and Capital Expenditure Requirements
We believe that the cash generated from operations, our current cash, cash equivalents and short-term and long-term 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, through organic growth and acquisitions, as we increase headcount, expand our business activities, grow our customer base and implement and enhance our information technology 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 liquidity requirements, we may seek to sell additional 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.
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 as of December 31, 2015 and periods in which payments are due (in thousands):
 
 
Payments Due by Year
 
Total
 
2016
 
2017 - 2018
 
2019 - 2020
 
After 2020
Convertible senior notes, including interest * ^
$
286,984

 
$
2,999

 
$
74,685

 
$
4,025

 
$
205,275

Operating lease obligations
21,841

 
4,743

 
8,758

 
3,340

 
5,000

Total
$
308,825

 
$
7,742

 
$
83,443

 
$
7,365

 
$
210,275

*
Contractual interest obligations related to our Notes totaled $16.6 million at December 31, 2015, including $3.0 million, $5.6 million, $4.0 million and $4.0 million due in years 2016, 2017-2018, 2019-2020 and 2020 and thereafter, respectively. 
^
Principal payment obligations for the 2018 Notes are $69.1 million, due in July 2018, and principal payment obligations for the 2022 Notes are $201.3 million, due in September 2022.
As of December 31, 2015, we had unrecognized tax benefits of $4.9 million. We do not expect to recognize any of these benefits in 2016. 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 December 31, 2015, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.


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Non-GAAP Financial Measures
In addition to our U.S. GAAP operating results, we use certain non-GAAP financial measures when planning, monitoring, and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of certain non-cash expenses, such as stock-based compensation expense, amortization of acquired intangibles expense, non-cash interest expense on our convertible senior notes and non-cash tax benefit or expense included in our tax provision, so management and investors can compare our core business operating results over multiple periods. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for operating results in accordance with U.S. GAAP. In addition, other companies, including companies in our industry, may calculate such measures differently, which reduces its usefulness as a comparative measure. We believe that these non-GAAP measures reflect our ongoing business in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business, as they exclude certain expenses.
The presentation of non-GAAP net income, non-GAAP net income per basic and diluted share, non-GAAP cost of revenue, non-GAAP gross profit, non-GAAP income from operations and other non-GAAP financial measures in this Annual Report on Form 10-K is not meant to be a substitute for “net income,” “net income per share,” “cost of revenue,” “gross profit,” “income from operations” or other financial measures presented in accordance with GAAP, but rather should be evaluated in conjunction with such data. Our definition of “non-GAAP net income,” “non-GAAP net income per share,” "non-GAAP cost of revenue," “non-GAAP gross profit,” “non-GAAP income from operations” and other non-GAAP financial measures may differ from similarly titled non-GAAP measures used by other companies and may differ from period to period. In reporting non-GAAP measures in the future, we may make other adjustments for expenses and gains we do not consider reflective of core operating performance in a particular period and may modify “non-GAAP net income,” “non-GAAP net income per share,” "non-GAAP cost of revenue," “non-GAAP gross profit,” “non-GAAP income from operations” and such other non-GAAP measures by excluding these expenses and gains.
Non-GAAP cost of revenue, license software cost of revenue, subscription and maintenance cost of revenue and professional services and other cost of revenue. We define non-GAAP cost of revenue as a cost of revenue less stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP cost of revenue to be a useful metric for management and our investors because it excludes the effect of certain non-cash expenses so management and investors can compare our cost of revenue over multiple periods.
Non-GAAP gross profit, license software gross profit, subscription and maintenance support gross profit and professional services and other gross profit. We define non-GAAP gross profit as gross profit plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP gross profit to be a useful metric for management and our investors because it excludes the effect of certain non-cash expenses so management and investors can compare our sales margins over multiple periods.
Non-GAAP income from operations. We define non-GAAP income from operations as income from operations plus stock-based compensation expense and amortization expense for acquired intangible assets. We consider non-GAAP income from operations to be a useful metric for management and investors because it excludes the effect of certain non-cash expenses so management and investors can compare our core business operating results over multiple periods.
Non-GAAP operating expenses, sales and marketing expense, research and development expense and general and administrative expense. We define non-GAAP operating expenses as operating expense less stock-based compensation expense allocated to sales and marketing, research and development and general and administrative expenses. Similarly, we define non-GAAP sales and marketing, research and development and general and administrative expenses as the relevant GAAP measure less stock-based compensation expense allocated to the particular expense item.
Non-GAAP net income and net income per share. We define non-GAAP net income as net income plus stock-based compensation expense, amortization expense for acquired intangible assets, non-cash interest expense on our convertible senior notes, foreign currency transaction gains and losses, loss on repurchase of our convertible senior notes and non-cash tax expense included in the GAAP tax provision. We define non-GAAP income per share as non-GAAP net income divided by the weighted average shares outstanding.

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Years Ended December 31,
 
2015
 
2014
 
2013
 
(In thousands)
Non-GAAP cost of revenue: