Nov 5, 2014
Executives
Michael Tessler – President & Chief Executive Officer Jim Tholen – Chief Financial Officer John Kiang – Investor Relations
Analysts
George Notter – Jefferies & Company Dmitry Netis – William Blair Kent Schofieldi – Goldman Sachs Catharine Trebnick – Dougherty & Company Tavis McCourt – Raymond James Rich Valera – Needham & Company Brian Modoff – Deutsche Bank Jess Lubert – Wells Fargo Paul Silverstein – Cowen and Company
Operator
Good day, ladies and gentlemen, and welcome to the BroadSoft Q3 2014 Earnings Call. (Operator instructions.)
I would now like to turn today’s conference call over to Mr. John Kiang.
You may begin.
John Kiang
Thank you, Kevin. Good morning everyone, and thank you for joining us on today’s conference call to discuss BroadSoft’s results for Q3 ended September 30, 2014.
This call is also being broadcast live over the web and can be accessed in the Investor Relations section of the BroadSoft website at www.broadsoft.com. With me on today’s call are Michael Tessler, BroadSoft’s President and Chief Executive Officer, and Jim Tholen, BroadSoft’s Chief Financial Officer.
This morning BroadSoft issues a press release discussing its financial results for Q3 ended September 30, 2014. If you would like a copy of the release you can access it on our website or the SEC’s website.
We would like to remind you that during the course of this conference call BroadSoft management may make forward-looking statements including statements regarding the company’s future financial and operating results, future market conditions, the plans and objectives of management for future operations, and the company’s future product offerings. These forward-looking statements are not historical fact but are rather based on BroadSoft’s current expectations and beliefs and are based on information currently available to us.
The outcome of the events described in each forward-looking statement is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements including but not limited to those factors contained in the “Risk Factors” section of the company’s Form 10(k) for the year ended December 31, 2013, filed on February 28, 2014 with the SEC. All information provided in this conference call is as of November 5, 2014.
Except as required by law, we undertake no obligation to update publicly any forward-looking statement made on this call to conform the statement to actual results or changes in our expectations. Also in light of Regulation FD we advise you that it is BroadSoft’s policy not to comment on our financial guidance other than in public communications.
Certain financial measures we use on this call are expressed in a non-GAAP basis and have been adjusted to exclude the impact of noncash stock-based compensation, noncash amortization expense related to acquired intangible assets, noncash interest expense on our convertible notes, foreign currency transaction gains and losses and non-cash tax benefit and expense. Collectively these items totaled $12.4 million in the quarter.
Also on this call when we use the terms “cost of sales,” “gross margin,” “operating expense,” “operating margin,” “operating income” or “net income” we are referring to non-GAAP figures. Additionally, when we use the term “EPS” we are referring to diluted non-GAAP EPS.
We have provided reconciliations of these non-GAAP measures in our earnings release which is available in the Investor Relations section of our website located at www.broadsoft.com. I will now turn the call over to BroadSoft’s President and CEO, Michael Tessler.
Michael Tessler
Good morning, and thank you for taking the time to discuss our Q3 2014 results. As you saw from the press release we issued earlier this morning we had a very strong quarter, achieving our highest quarterly revenue.
This favorable performance was a result of strong momentum in our UC-ONE software and Cloud Unified Communications Solutions. A little later Jim will provide more color on our results and guidance.
I want to spend my time focusing on two other positive areas of our business. The first is our growing traction in new customer and project acquisition.
The second is our latest strategic initiatives which we believe will further extend our leadership position in the hosted unified communications market. On the customer side we’ve been talking about some large strategic wins over the last several quarters.
We think it’s best to label these types of deals as network transformation projects as we are enabling service providers to completely transform how they provide services to end customers. Our wireless deals certainly are transformative.
For a couple of other projects we will replace legacy switches with our Unified Communications Application Service. In yet other projects we have been selected as the primary unified communications solution across the customer’s network in both their fixed line and wireless networks.
The interesting part of these projects is that we will be transitioning existing customers onto our platforms, resulting in faster growth. We’re very pleased then to have won several more network transformation deals with some of the largest Tier 1 service providers in the world and believe that these wins will be meaningful contributors to our 2015 results.
I’m sure you saw the press release we issued this morning regarding our selection by Verizon to be the application server for business communications for both Verizon’s mobile and fixed line subscribers. This is an example of a network transformation project and we couldn’t be more excited.
We believe that a key to our selection was our full suite of Unified Communications Solutions and our ability to provide a seamless experience across different Verizon networks and end devices from mobile phones to tablets to PCs. On the customer front we also continued to experience growing demand for our BroadCloud services.
An example is the market launch of Cloud Voice by British Telecom’s Business Group last month. This service is designed for the SMB business segment in the United Kingdom and is a major proof point of the value of the investment we have made in BroadCloud within Europe.
To talk about our latest strategic initiatives, let me share with you what we introduced last month at our annual users conference BroadSoft Connections where we were joined by over 1000 individuals from 43 countries, making it our largest event ever. This year I was excited to reveal to attendees our new corporate brand.
With our new brand we communicated how important the end-to-end user experience is as it’s a continuous, never-ending journey. We also wanted to show the importance of having more than one dimension in our business as our customers explore the many different aspects of unified communications.
Our new brand is also a commitment to our three key principles: simplify, innovate and accelerate as we deliver solutions to make our customers and end users more successful. First we will simplify everything we do, making it easier for customers to sell, deliver and support our UC-ONE Unified Communications Services.
Second, we will drive innovation and remain ahead of our peers by extending Unified Communications from core telephony to the frontend of business operations to drive employee productivity and increase revenue. Finally and most importantly we will accelerate market adoption of our UC-ONE services by developing new value propositions that address the needs of specific vertical users and will enhance how we go to market.
We have developed initiatives, programs and processes to ensure we deliver on these three key principles. For example, in order to simplify our offers and communicate their benefits effectively we wanted to gain a deep understanding of end users’ communication needs, requirements and business drivers.
So over the past year we invested significantly in a variety of research efforts including creating an SMB Advisory Board, conducting quantitative and qualitative research, and meeting with vertical user groups. When we’ve demonstrated our UC-ONE services to research group participants over 70% of them immediately recognized how our comprehensive Unified Communications app can make them more productive.
With our increased understanding about how end users in specific market segments share information and collaborate we are now designing market offers that significantly improve their employee productivity. We’ve already created a number of market offers both by size – micro, small, medium and large enterprise – and by vertical: hospitality, government, legal and education.
An example of our market segment focus was our introduction of UC-ONE Hospitality. UC-ONE Hospitality combines the best of our Unified Communications Services with our recently-acquired Jazz Fusion application that integrates with hotel property management systems.
Our solution not only handles the guest phone billing but also provides a set of powerful tools that allows the hotel and its employees to be productive and lower their operational costs. We are excited about the progress we have made in this vertical.
We now have a direction relationship with the hospitality industry and a compelling solution. Coupled with our team and best-in-class technology we will continue to develop and deliver new value to the hotel owners.
Our second core principle is innovation. As we’ve done for the past 16 years we will continue to innovate on behalf of our customers to further enhance individual productivity ensuring businesses can collaborate efficiently and succeed.
We demonstrated this commitment at BroadSoft Connections with our introduction of new group collaboration capabilities to UC-ONE’s My Room. My Room is an individual’s online meeting room that can be accessed through UC-ONE’s desktop, smartphone or tablet app.
To ensure meetings run efficiently we added visual indicators that highlight who is talking, show if someone is available for a group chat, and indicate who has joined a sharing session. The owner of the room even has the power to mute or even dismiss participants.
The most significant enhancements to My Room came out of research findings that employees communicate with people outside of their business over 50% of the time. This fact highlighted to us that in order to truly deliver on the productivity enhancing benefits of Unified Communications we needed to extend our services beyond employees within a business and enable employees to collaborate with their customers and business partners.
So at Connections we were very excited to introduce an industry first – a full Unified Communications experience for external-leading participants. Now a My Room owner simply sends a link to an individual they want to invite to their online meeting.
These individuals can easily join the meeting from their web browser and have access to audio and video conferencing, desktop sharing, file sharing and group chat. Our intuitive design allows an external guest user to have the same full Unified Communications experience as if they’d joined from our UC-ONE app.
Over time we believe this could help to drive adoption of UC-ONE as guest end users start to understand the productivity and efficiency benefits of using it for their own internal operations. Another important announcement at Connections that demonstrates our commitment to innovation was BroadSoft Labs.
BroadSoft Labs is our online innovation incubator that offers our customers the ability to design, develop and test new applications that leverage emerging technologies. The first technology supported by BroadSoft Labs is WebRTC which is a standard that defines how real time communications for voice, video and data work within a web browser.
BroadSoft Labs includes a suite of tools that dramatically reduce the time and complexity of integrating WebRTC with our UC-ONE Unified Communications Services for our customers. These tools enable end users with little to no technical expertise to build WebRTC-powered voice and video communications services.
These new services can then be embedded in a website in as little as five minutes. We’re very excited about WebRTC and how it can extend the reach and benefits of Unified Communications to an entirely new set of business applications.
Now, for example, when a customer prospect is browsing a WebRTC-enabled website and has a question that visitor can simply click an icon and communicate through their web browser by voice or video with a company representative. These interactive communication options will help eliminate friction in the buying decision process and significantly improve customer satisfaction.
As you can see we are fully committed to deepening our understanding of end user needs and providing innovative solutions that significantly enhance their productivity. We believe by bolstering our expertise at the user level we will gain even more trust with our customers, giving us the opportunity to more directly influence their go-to-market approaches.
With this greater trust we deliver on our third and final core principle, accelerating the adoption of our UC-ONE services. On an organization note, Charlie Hill our Worldwide VP of Sales has just left the company for personal reasons.
Having said that, as you can see from our Q3 results and our Q4 guidance the business momentum at BroadSoft is strong as we head into 2015. With that let me now hand the call over to Jim who will go through our results.
Afterwards I’ll be happy to answer any questions. Jim?
Jim Tholen
Thanks, Mike. I’m pleased to report strong Q3 results today, our largest revenue quarter ever.
I thought that I’d mix things up a little bit. I’ll first provide some key financial highlights for Q3 and then I’ll provide some more detail behind our results.
Then I’d like to give some narrative behind some of the current demand trends that we’re seeing and their impact on our guidance for Q4 and for the full year 2014. Finally, I will close with some initial thoughts on 2015.
So for the highlights: in Q3 total revenue was $54.6 million, up a strong 27% from the year-ago quarter. Billings, which we define as revenue plus the net change in deferred revenue were $56.7 million, up an even stronger 43% year-over-year.
We had one customer that counted for greater than 10% of revenue in the quarter. Non-GAAP EPS was $0.34.
Now let me provide you a bit more color on our Q3 revenue and billings. Software license revenue was $25.7 million, up 19% year-over-year.
Software license billings were $27.5 million, up 46% year-over-year. Our core-hosted UC business was once again the key growth engine.
Sell through remained very solid. From a geographic perspective we saw a year-over-year revenue growth in all regions led by the US.
Our subscription and maintenance support revenue was up 37% year-over-year to $24.2 million. Of this, maintenance support revenue was up 22% year-over-year.
Cloud SaaS revenue of $7 million grew from $3.6 million in the year-ago period and from $5.7 million in Q2. Within our Cloud business, our Core UC component grew mid-high teens percentage sequentially and triple digits year-over-year.
The number of BroadCloud hosted UC subscribers continued to grow strongly. Total subscription and maintenance support billings were $21.3 million, up 42% year-over-year.
Professional services and other revenue of $4.7 million was up 28% from the year-ago period while professional services and other billings of $7.9 million were up 35% from the year-ago quarter. Both revenue and billings growth were driven by increased customer activity.
Now moving on to costs and margins. In Q3 we had 76% versus 81% in the year-ago quarter, and 76% in Q2 of 2014.
In comparing Q3 to Q2 this year there were two different effects that led to the roughly flat sequential margin. The first was an improvement in SaaS margins back to the mid-40%s level given greater scale.
This was offset by a decline in professional services and other margins to 13% from 27% in Q2. We saw a meaningful increase in our PS activity and associated costs this quarter, much of which is in support of the network transformation projects that Mike talked about, including some one-time items.
While we would expect these projects to see some revenue recognition in Q4 revenue for these will be mostly recognized in 2015. Since we expense all of our professional services cost in period, when we defer PS revenue we experience a margin reduction in professional services.
The decline in overall gross margin versus the previous year’s level is just a revenue mix impact as SaaS and professional services grew in proportion. For Q4 2014 I would expect overall cost of sales on a dollars basis to be up just a little bit over Q3, leading to our typical increase in Q4 margins assuming we are within our guided revenue range.
Operating expenses in the quarter totaled $31 million and operating margin was 20%. Sales and marketing and R&D were both relatively in line with our expectations.
G&A expenses were up due to approximately $900,000 in non-trend line spend, primarily related to legal fees and M&A transaction expenses. On the balance sheet cash, cash equivalents and investments totaled $207.2 million at the end of Q3.
Accounts receivable of $60.2 million were up slightly from Q2 due to strong billings in the quarter. Deferred revenue of $82.8 million was up $2.1 million from Q2.
CAPEX for the quarter was $3.0 million. Net cash from operations was $19.1 million in the quarter.
I would note that this number was impacted by tax accounting rules that create some noise around our cash flow. If we back out what are really noncash tax-accounting-driven impacts, our real operating cash flow was still a very strong $15.3 million for the quarter and $43.0 million on a year-to-date basis.
We have mentioned to you on the last several calls that we are seeing a lot of strategic account activity. As Mike suggested we’ve won several major new engagements which is a very exciting thing.
These are big, transformative deals. We see these major carriers now fully committed to both the transformation of their networks to IP and the offering of business services via VoLTE.
I note that while these new wins did not contribute to our strong Q3 revenue and billings results certainly the implications for us for these wins are very positive. They do require us to appropriately continue to grow our investment in R&D and professional services so there are also implications for us as we think about Q4 in 2015 for both revenue and expense.
As you’ve seen in our press release we expect Q4 revenue to be in the range of $60 million to $65 million. This implies that for the full year our revenue range is now $211 million to $216 million.
Regarding earnings we now expect Q4 EPS to be in the range of $0.48 to $0.64 implying full-year EPS of $1.19 to $1.35. So you can see some of the impact on us from investing in these large wins while we increased our annual revenue guidance for EPS and expect it to come in at the lower end of our previously guided range.
Specifically we expect that our total costs in Q4 including cost of sales and OPEX will be approximately $45 million to $46 million, up $1 million or so from $44 million in Q3. This theme also drives our thinking about 2015.
While we will provide more formal guidance for 2015 next February when we announce our Q4 I wanted to provide some early thoughts on next year. For 2014 we would achieve 20% revenue growth for the year assuming we come in at the midpoint of our revenue guidance.
For 2015 I think we could see a similar 20% top line growth from that midpoint. We expect that this growth would be led overall by our UC business and specifically by SaaS and professional services.
Given the above trend line services in SaaS and PS and some increased R&D investment for these large projects, I would expect operating margins to be flattish to 2014 and so would expect earnings to grow at similar rates to revenue. And given the nature and timing of these large projects I would expect it to be a bit of a backend-loaded year.
So to summarize we had a strong quarter and we look forward to closing out the year in Q4 on a very positive note. With that I’ll turn the call back over to Mike.
Michael Tessler
Thanks, Jim. Now Jim and I will be happy to take your questions.
Operator, can you please open the call?
Operator
(Operator instructions.) Our first question comes from George Notter with Jefferies.
George Notter – Jefferies & Company
Hi guys, thanks very much. I guess I wanted to ask about the new Verizon win.
I’m just scanning the press release here but I guess I’m trying to understand exactly how this is different from where you guys have been involved in previously with Verizon. Obviously this extends I believe across the wireless piece of the business as well, but I know on the wire line side of Verizon you guys were involved with different tiers of customers.
There was a small- and medium-sized business offering; there was a large enterprise offering that I think was provided by another vendor. I guess I’m just trying to understand exactly how you guys fit in now with Verizon.
Michael Tessler
Thanks, George. I think first of all it’s clear that the press release indicates a growing strategic relationship with Verizon across more of the segments and more of the networks.
Unfortunately at this time I can’t get into lots of specifics of how the technology will get rolled out, George, because that’s kind of proprietary to our customer.
George Notter – Jefferies & Company
Got it, okay. And any thoughts in terms of when this could start to become revenue incrementally for you guys?
Is this a 2015 event? Does this start to flow in later?
Help me understand the revenue impact.
Jim Tholen
Hey George, it’s Jim. I would expect that we’ll see billings, some billings this year and billings and revenue next year
George Notter – Jefferies & Company
Got it, okay. And then these other transformative wins that you guys are referencing here on the conference call, can you talk about those?
How many wins, what types of customers, when would those start to become material in terms of revenue contribution? I mean any more detail you can give us on those projects would be helpful.
Michael Tessler
Right, George, let me take the strategic side or the usage side and Jim can talk a little bit about the revenue flow. I think the projects vary quite a bit.
I think generally what we’re seeing is the operators looking to consolidate platforms across segments and across networks. And so that means fixed and wireless, and obviously wireless to VoLTE.
So there’s a general desire to consolidate from legacy platforms, and in some cases from what I would call Generation 1 IP platforms and converge all that to a single new infrastructure – usually led by the wireless side, again, not surprising. And so what we’re seeing is a desire from a number of these operators, usually the largest Tier Ones in the world, to consolidate that infrastructure, take out the costs, make it consistent, be able to scale their business across the business segment.
So that’s the other side of the dimension – it’s not only for small but it’s for small, medium and actually very large; and looking to not only use these tools to obviously gain market share but also to transform and close down existing legacy networks. So that’s how we kind of put these deals into this network transformative category, if we’re actually consolidating a number of platforms, moving customers from legacy onto our infrastructure.
George Notter – Jefferies & Company
Got it. And then number of wins, timing, anything else you can give us would be great.
Jim Tholen
So George, I guess we’re not going to get that specific other than I expect there’s an impact in ’15 that’s certainly from a billing standpoint an eight-figure impact. I think broadly these deals in and of themselves over several years are eight-figure deals, and I expect that it’ll be pretty impactful revenue-wise next year as well.
George Notter – Jefferies & Company
Got it, great. Thanks very much.
Operator
Your next question comes from Dmitry Netis with William Blair.
Dmitry Netis – William Blair
Thank you. Nice results, gentlemen, and a very impressive guide on ’15.
I just wanted to ask you a couple questions here. First, the customer that you mentioned, the 10% customer in the quarter, can you tell us who that is?
Jim Tholen
No but it’s a customer that’s been a 10% customer in the past.
Dmitry Netis – William Blair
International or domestic? [laughter]
Jim Tholen
International. [laughter]
Michael Tessler
[laughing] That’s the last question you get, Dmitry.
Dmitry Netis – William Blair
Alright, okay. Well thank you.
And then on the VoLTE can you guys give us sort of the lay of the land there? How many projects are you working on, where is Sprint in their implementation, when will the billings be coming into the model – can you give us some status there?
Thank you.
Michael Tessler
Let me cover the customer traction and Jim will try to answer your revenue questions. I think we’re seeing very good traction on the Business VoLTE side.
Clearly as we’ve talked about this for some time, we believe that’s a great market entry position for us, leveraging our very, very comprehensive Unified Communications capabilities. And as you can see from previous announcements and the work we’ve been doing that we believe that running the Unified Communications Suite over a VoLTE infrastructure will be significant for a large number of operators.
So we’re actually seeing very good traction as generally as we’ve stated in the past VoLTE rollouts are taking their time. But we’re seeing increased activity and interest by operators around the world for exploring how to really leverage their investments in VoLTE on the business front.
Jim Tholen
Yeah, and I’d say from billings and revenue we’re certainly now in a position where broadly speaking VoLTE billings in a particular quarter are in the millions of dollars. That was true in Q3; I expect it to be in Q4.
And there’ll be, I mean there’s reasonable overlay between some of these network transformation deals we’ve talked about and business VoLTE. So again I think it’s an eight-figure kind of billings and revenue impact for us next year.
Michael Tessler
Yeah, I wanted to add, and Jim raises a good point, I think the transformation deals, some of them that we’re engaged with start in other parts of network but are planned to roll out in VoLTE. So I think it’s going to get somewhat hard sometimes to actually dice up which revenue is VoLTE and which one’s not.
But I think typically when we look at these transformative deals we are looking at consolidating legacy platforms and also being the Unified Communications application server for their VoLTE rollouts.
Dmitry Netis – William Blair
Mike, is this Verizon announcement, do you count that as a VoLTE win? I know you talked about FMC but would you consider that a VoLTE deployment?
Michael Tessler
As I mentioned on the previous question I can’t really go into the deployment models that Verizon’s going to use.
Dmitry Netis – William Blair
Okay, fine, and then one last one if I may. As far as the sales initiatives, you have announced and you had a sales, Mr.
Charles Hill. Can you talk about what some of the priorities are and is there any low-hanging fruit right now that you can go after?
What are some of the areas that Charles will focus on starting here? Thank you.
Michael Tessler
I announced that Charlie has just left the company so I’m not sure I understand your question.
Dmitry Netis – William Blair
Really. Okay so I had understood that one of the Board members had joined to be a Head of Sales at the company – am I confusing something?
Michael Tessler
No, you’re correct but he just left this week so that’s why I mentioned it in my remarks.
Dmitry Netis – William Blair
Oh okay, I must have missed that. So what is your plan then to where you’re going to replace that position – are you going to fill that position pretty soon or…
Michael Tessler
Well we’re going to evaluate the options and we’ll let you know.
Dmitry Netis – William Blair
Okay, thank you very much.
Operator
Your next question comes from Simona Jankowski with Goldman Sachs.
Kent Schofieldi – Goldman Sachs
Great, thank you, this is Ken Schofield for Simona. The first question, I just wanted to clarify a little bit on the Q4 guidance around costs.
What was the number again, the range that you gave us? And I assume that was a cost and OPEX number?
Jim Tholen
Yeah, so correct – cost of sales and OPEX are going to be in the $45 million to $46 million range.
Kent Schofieldi – Goldman Sachs
Okay, thank you for clarifying that. And then that does lead right to my next question: around the gross margin side of things you said that you expect it to be up.
As I look back at the model in the past we’ve seen a nice bounce up even all the way up into the mid-80%s I think last year. Can you talk about should we expect to see the gross margins bounce back up above 80%?
Should we expect to see them down year-on-year? Can you talk just a little bit about the puts and takes there?
Jim Tholen
Yeah, I think at the midpoint of the guidance you’re going to be in the 80% zip code for non-GAAP gross margins.
Kent Schofieldi – Goldman Sachs
Okay. And we should just be thinking about the impact of professional services and BroadCloud driving that?
Jim Tholen
Correct. It’s a mix issue and as I said with PS in particular, as you even saw in Q3 the billings were quite a bit ahead of revenue.
And we expense all the PS expenses in-quarter so you’ll see a bit of margin compression in PS that’s keeping the margins down just a little bit.
Kent Schofieldi – Goldman Sachs
Okay, thank you. And then on the other side is there a chance with the Head of Sales that you might not fill that position?
Or should we expect that that position should be filled?
Michael Tessler
We’re just evaluating the options right now. One thing we want to highlight is we have a very strong regional sales infrastructure that’s been together for a very long time.
They’ve been working for us for a while, been successful so there’s no immediate panic to refill that position.
Kent Schofieldi – Goldman Sachs
Thank you, Michael, thank you, Jim. I’ll cede the floor.
Operator
Your next question comes from Catharine Trebnick with Dougherty & Company.
Catharine Trebnick – Dougherty & Company
Thank you for taking my question, nice quarter. Did you give your geographic split out?
Just a quick housekeeping on that.
Michael Tessler
So basically what we said was it was led by the US. It was really led by the US – that’s where we saw the biggest growth.
So in particular the US revenue, actually John, do you have that… So we were a little north of $30 million in the US, about $12 million in Europe and Rest of World was also about $12 million.
Catharine Trebnick – Dougherty & Company
Okay, thanks. Quick question: in the US would you say Tier One/ Tier Two operators, are you seeing any different pull through in the sell through models maybe between the two operators?
The reason I’m asking the question is I’m trying to get a gauge of Century Link/Comcast versus the pull through at AT&T and Verizon.
Jim Tholen
Yeah, so I mean we’ve seen pretty solid strength across the names you mentioned. I’d particularly note sell through with the cable guys is continuously really, really strong.
Our SaaS sell through highlighted by the Verizon VCE continues to be strong. And then I’d say the bigger Tier Twos, the Windstream’s, TDS’s, certainly the Century Link’s are also exhibiting solid growth.
I don’t know, Mike, if you have anything?
Michael Tessler
Yeah, I was going to say that I think to look under that detail, I think it’s important also to look at the segment focuses of the various operators. I think as Jim mentioned cable operators are doing very well in sell through, primarily driven at the say micro segment, small segment – whereas you mentioned Century Link typically at this point a little bit higher line count.
So the sell through numbers are different. I think as Jim said we’re seeing strength across all the operators but I think clearly there’s a little bit of difference based on the average sale time.
And closing a larger deal takes longer than a five-seat deal so a little bit of different cadence in the businesses between the micro guys and the guys that are going after midmarket.
Catharine Trebnick – Dougherty & Company
Got it. And the final question is what did you think of Mavenir’s announcement to go after, offer an IP/PBX solution to ten lines and below with the mobile operators?
Michael Tessler
You know, Catharine, it’s easy to announce stuff. We’ll see if they can deliver.
Catharine Trebnick – Dougherty & Company
Alright. Well I had to ask.
[laughs]
Michael Tessler
I know. [laughs]
Catharine Trebnick – Dougherty & Company
I’ll cede the floor, thanks guys.
Michael Tessler
Thank you.
Operator
Our next question comes from Tavis McCourt with Raymond James.
Tavis McCourt – Raymond James
Hey Mike and Jim, thanks for taking my questions, two of them. Just so I’m clear on the transformational network deals that you’ve been referencing, these are deals that have not yet, or some of these are deals that have not yet shown up in billings but you expect to over the next twelve months – is that correct?
Jim Tholen
Yes.
Tavis McCourt – Raymond James
Alright. And then in terms of the revenue rec on that, thanks, Jim, for the insight into 2015 – you specifically mentioned Professional Services revenue rec in the back half of the year growing nicely.
Should we then presume that a lot of the licensed software revenue rec on these deals will flow into 2016?
Jim Tholen
Not necessarily. So it’s been a series of deals, and Mike and I have been kind of talking about the pipeline of these deals for several quarters.
If you remember in Q2 there was a particularly large set of dollars that went into long-term deferred – that was primarily one of these projects. And you can see it’s still in long-term deferred so I think one can infer from that that that would be 2016 or probably 2016.
I’d say generally with these, I mean the deals’ facts, the rev recs’ facts and circumstances base – again, using that one as an example, both Professional Services and the Software are, as we bill the PS, all deferred until we get acceptance. There are a couple deals where we’ll see Professional Services revenue prior to the delivery of Software.
When I refer to it, so it’s really two different impacts for next year: seeing PS revenue continue to grow and that the overall year would be backend-loaded. I think really the backend-loaded is both PS and Software.
So my expectation is that on several of these projects, they will be 2015 revenue events but farther back in the year. So normally Q4 is our biggest quarter and I think that’s absolutely going to be true next year and perhaps more so than normal.
Tavis McCourt – Raymond James
Gotcha. So big picture is typically Professional Services revenue rec happens simultaneously with Software revenue rec – sometimes it happens a bit before though, is that right?
Jim Tholen
Yeah, I’d say a much more succinct answer. [laughter]
Tavis McCourt – Raymond James
All I was looking for. I also wanted to dig down on the BroadCloud economics a bit.
You talked about 40%s gross margin now. What’s the revenue level you think from that business you need to get it up to the gross margin levels you ultimately want to get to, and can you remind us – is that a multi-tenant software deployment?
Are you doing it in your own datacenters or using third-party Amazon-Web Services-type offerings? Thanks.
Michael Tessler
So let me take the second first. It is absolutely a multi-tenant offering.
We run it out of our own datacenters in the US, UK and Germany right now. We expect to continue to grow it.
You’re correct – we’re running the business in the mid-40%s margin-wise now. Our long-term model is 70% to 80%.
I think we’ll track towards that, but rather than give you a dollar amount I think we’re a couple of years away from really getting close to those numbers. So it’ll improve year-over-year as we get scale, but to get to that long-term model is more of a 2017 kind of thing.
Tavis McCourt – Raymond James
Great, thanks a lot.
Operator
Our next question comes from Rich Valera with Needham & Company.
Rich Valera – Needham & Company
Thank you. Jim, you mentioned that 2015 might be a back-half-weighted year again.
I’m wondering if you can give us any sort of baseline for that relative to 2014 – might it be similarly backend-loaded or more or less than 2014?
Jim Tholen
[laughter] So my attempt was not to guide for ’15 but just give some thoughts. And I’ll be honest – I saw a lot of the sell side models for ’15 and I thought I could be helpful giving some thoughts.
We’ll give the formal guidance in February but I guess I would, in the more, the same, or less to ’14 I’d say it’s going to be a little more backend-loaded.
Rich Valera – Needham & Company
Okay, that’s helpful. And then you mentioned the flat operating margins roughly next year as you continue to invest for these big projects.
I was wondering if you could give us a little bit of longer-term thoughts on leverage in the model. I don’t know if you’d speak specifically to ’16 but what you see as the longer-term op margin of the business – does it get back into the mid- or even upper-20%s at some point and when do we start seeing that leverage do you think?
Jim Tholen
Yeah, so a really good question, Rich. We have not changed our long-term operating model and I think our expectation is that we can get back to that.
But kind of key to my perspective is again, from a next year standpoint these deals are I think so profound for us that it absolutely warranted the balance between near-term operating profit and kind of growth and opportunity. So again, I think we’ll see linear improvement post next year, like with SaaS overall.
I don’t think you start getting back to mid- to high-20%s till 2017.
Rich Valera – Needham & Company
That’s very helpful. Thanks, Jim.
Operator
Our next question comes from Brian Modoff with Deutsche Bank.
Brian Modoff – Deutsche Bank
Thanks. A question actually on a couple of things: one, how’s end customer demand for fixed to mobile convergences?
How would you say that looks to you? And is the Verizon deal a pay-by-use deal?
In other words, as you get customer loading you see as customers buy and use the service you get paid for it – in other words, more of a success-driven model? Thank you.
Michael Tessler
Sorry, Brian, can you just repeat the first part of the question? I wasn’t sure I totally got it.
Brian Modoff – Deutsche Bank
Fixed mobile convergences – just you guys are trying to move the product to have the VoLTE, a Voice over LTE application on a smartphone. You’ve got now Mavenir similarly trying to do more or less the same thing, kind of a PBX on a cell phone if you will.
How do you see the demand for that type of product given most smartphones have a lot of that functionality already? So we’re just curious as to what you’re seeing from a demand standpoint, and then the second part is really just Verizon.
How is that deal structured? Is it a pay-by-use type deal?
I’m just trying to get a good understanding of that. Thank you.
Michael Tessler
On the FMC side it’s sometimes a technology term that I don’t love us using because it’s very technical. I think the end user proposition that is doing very well in a number of markets where carriers have launched it, is what I would prefer to call sort of one subscription – and the idea being is for a business owner, for every employee I basically get a single subscription and that employee can use the service on any device.
So if they’re at the office they can use it on a hard phone, they can use it on a laptop, they can use it on a mobile. And the concept is really to kind of reduce the cost on one side but also improve the productivity by being able to have all the Unified Communications capabilities on kind of anywhere at any time.
And generally I’d say that the carriers who have launched these one subscription models have seen really great take up because it just makes a lot of sense for a business owner. Why do I want to buy a mobile subscription for an employee and then maybe a line at their house, and then a PBX at the office?
I can really consolidate this. And I don’t think it’s just an SMB-type offer.
I think we’re really seeing the demand for one subscription from very small to corporate. Corporations spend a tremendous amount of money having multiple subscriptions for every employee.
So I think generally that’s what we’re going after in terms of this technology that people call fixed mobile convergences, but what we see and we see it very strongly being rolled out in a number of European operators in this one subscription model. And yes, in the micro segment it may be mobile only but very quickly you need to be able to basically support both mobile and fixed and in a variety of different networks – VoLTE, WiFi and also a variety of devices.
So I think trying to just pick off the micro segment is probably way too narrow a focus. It’s much broader than that.
Jim, do you want to comment on the second half?
Jim Tholen
Yeah, so we can’t, Brian, get into details on the economic arrangement with Verizon specifically. I’d say generally we don’t see a lot of models similar to what you suggest in your question.
Brian Modoff – Deutsche Bank
Okay, perfect. Thanks guys, good luck in Q4.
Michael Tessler
Thank you.
Operator
Our next question comes from Jess Lubert with Wells Fargo.
Jess Lubert – Wells Fargo
Hi guys, thanks for taking my question, a couple questions. Maybe just first for Mike I also have a question on the Verizon contract.
To what extent do you believe you’re the exclusive supplier of fixed mobile convergence services and do you have reason to believe that they’re not also purchasing similar functions from some of their other hosted UC providers like Cisco?
Michael Tessler
Well I think, I can’t use the word “exclusive,” nobody would. I think what you see with most of the transformative deals that we’re talking about, the operator is looking to consolidate onto a primary single platform.
And I think that’s certainly what we’re seeing in the case with Verizon, is their desire to consolidate a number of legacy platforms and a number of other offers onto a single infrastructure. So I think generally with all the transformative deals we would imagine to be the strategic vendor of choice, and it’s really what the operators are asking us to do, is to be able to help them serve all the various segments across all of their networks.
So I think that we would see us as being the primary vendor – I prefer to use that word.
Jess Lubert – Wells Fargo
Alright, and then for Jim, on the gross margin it’s been firmly in the mid-70% range for three quarters and BroadCloud seems to be seeing pretty good growth. So why isn’t this the right gross margin to be thinking about going forward?
And I know you’re not looking to guide for the full year 2015 but would you expect gross margin to be in the 80% range? Or should we be thinking mid- to high-70%s?
Jim Tholen
So yeah, I’m not quite ready to get that specific for next year. I think you’ll see, as I said relative to an earlier question, that for Q4 I think the midpoint of the range is going to be in the 80% zip code but I’m going to wait until February to get more specific about next year.
Jess Lubert – Wells Fargo
Alright, and then last one from me: can you talk about how you’re feeling about the overall stability of the organization? We’ve seen a couple of fairly senior people leave this quarter.
I was just hoping to understand why we’re seeing some of these departures and how you’re feeling about the general feeling within the organization. Do you expect things to stabilize here?
Any thoughts there would be helpful.
Michael Tessler
I agree – it’s been a bit unusual for us to have changes at the exec level. As I mentioned on a previous question probably not visible to everybody is we have a very strong team that’s worked together for a long time especially in the sales function in the regions.
We have a number of Regional Leaders who’ve had those positions for quite some time. So while to you guys it might look like there’s lots of churn there’s not – it’s a pretty stable environment throughout the organization.
So that gives us comfort that we can continue to operate and continue to be effective.
Jess Lubert – Wells Fargo
Thanks, guys.
Operator
The next question is from Paul Silverstein with Cowen and Company.
Paul Silverstein – Cowen and Company
I’m slipping in right under the wire, I appreciate it. Guys, maybe I misheard on the revenue mix but if I heard you correctly I think you said $32 million US, $12 million EMEA, $12 million APAC – is that right?
Jim Tholen
$12 million Rest of World.
Paul Silverstein – Cowen and Company
And Jim, I apologize – what was the EMEA number?
Jim Tholen
$12 million.
Paul Silverstein – Cowen and Company
Alright. And I apologize if you already commented on this: I know the numbers fluctuate on a regional basis and there’s not necessarily a predictable pattern, but it looks like in the US the revenue was the highest it’s been in quite some time – maybe in forever.
I think there was a big step up there. It looks like it went from $24 million to $32 million sequentially and it’s a good $5 million to $10 million over your next best quarter.
Can you comment on that in terms of I know there’s lumpiness but what is driving that and the predictability going forward?
Michael Tessler
Yeah, so it was both overall the largest revenue quarter we’ve had as a company and that was absolutely true in North America. And I think it was pretty broad-based, Paul.
Obviously on the SaaS side, that continues to be the biggest area on the SaaS revenue is North America led by Verizon VCE; and on Software, strength in cable, strength in the other Tier Ones and then strength with our large Tier Twos in the US and Canada. And from a product standpoint it was very much a hosted quarter.
Trunking was fine but hosted really led the charge. Look, from a predictability standpoint SaaS helps, the growth in maintenance helps but I think on a quarter-by-quarter regional perspective you’re going to see movement – that’s just the nature of our model.
Overall we’re very happy with the quarter, very happy with the guide for Q4 so I think there’s depth in the demand that makes us feel good about that business.
Paul Silverstein – Cowen and Company
Jim, on that visibility, predictability question, and I apologize if you and Mike got into this earlier, but can you just remind us on the typical – I know it varies but on the typical initial orders, initial revenue from your typical customer and follow-on, what the historical pattern has been in terms of that follow-on revenue relative to the initial revenue flow?
Jim Tholen
Well it does vary, Paul, but I would say it hasn’t changed appreciably over time. I would generally characterize it as a relatively small initial order, sometimes with the Tier Ones you get a bit more; and where you have a balance more of services than software on that initial order.
And depending on implementation cycles you’re 12 to 24 months until you get that second order, but once you get that second order you’re in a reorder rate cycle and it’s somewhat dependent on carrier on the attributes of that and obviously their sell through. But you have, the norm would be somewhere around two orders per year per carrier that are really in production.
Some order for a year in advance, others order quarterly so there’s a bit of a mix.
Paul Silverstein – Cowen and Company
Jim, last question: can you phrase that in dollar terms, in terms of what the follow-on dollars have been relative to the initial?
Jim Tholen
Yes. The follow-on generally are in aggregate much larger than the initial.
[laughter]
Paul Silverstein – Cowen and Company
[laughs] Alright, I’ll leave it at that. Thanks, guys.
Operator
And I’m not showing any further questions. I’d like to turn the conference back over to our host.
Michael Tessler
Thanks. Again, thank you for being on the call today and for your continued support.
We look forward to updating you on progress in the coming months. Have a great day.
Operator
Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.