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BroadSoft, Inc. (BSFT) Q1 2017 Earnings Call May 1, 2017 8:30 AM ET
Executives
Christopher Martin - BroadSoft, Inc.
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Michael Tessler - BroadSoft, Inc.
James Tholen - BroadSoft, Inc.
Analysts
Catharine A. Trebnick - Dougherty & Co. LLC
George C. Notter - Jefferies LLC
Jess Lubert - Wells Fargo Securities LLC
Dmitry G. Netis - William Blair & Co. LLC
Paul Silverstein - Cowen & Co. LLC
Tavis C. McCourt - Raymond James & Associates, Inc.
Rich F. Valera - Needham & Co. LLC
Will V. Power - Robert W. Baird & Co., Inc.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Operator
Good day, ladies and gentlemen, and welcome to the BroadSoft First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference, Mr. Chris Martin, Director of Investor Relations. Sir, you may begin.
Christopher Martin - BroadSoft, Inc.
Thank you, operator. Good morning, everyone, and thank you for joining us on today's conference call to discuss BroadSoft's results for the first quarter ended March 31, 2017. This call is also being broadcast live over the web and could 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 issued a press release discussing its financial results for the first quarter ended March 31, 2017. 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 condition, the plans and objectives of management for future operations, and the company's future product offerings. These forward-looking statements are not historical facts, but rather are based on BroadSoft's current expectations and beliefs and are based on information currently available to us.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including but not limited to those factors contained in the Risk Factors section of the company's Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 23, 2017.
All information provided in this conference call is as of May 1, 2017. 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 on a non-GAAP basis and have been adjusted to exclude the impact of non-cash stock-based compensation, non-cash amortization expense related to acquired intangible assets, non-cash interest expense on our convertible notes, foreign currency transaction gains and losses, and non-cash tax benefit and expense. Collectively, these items totaled $17 million in the quarter.
Also on this call, when we use the terms cost of sales, margin, 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. Mike?
Michael Tessler - BroadSoft, Inc.
Thanks, Chris. Good morning, and thank you for taking time to discuss our first quarter 2017 results. For Q1, we achieved $80 million in revenue and $0.19 in non-GAAP EPS. As you probably saw in our press release, we have modestly revised our revenue guidance for the year. Jim will provide more details on this later in our prepared remarks. I wanted to spend some time discussing some of our key business drivers and our strategic objectives for this year.
From an overall business perspective, we continue to be very excited. Our optimism stems from the many positive meetings we've had with our customers, including at various recent trade shows such as Mobile World Congress, CeBIT and Enterprise Connect. Their feedback has continued to be very positive as it's centered on a theme that they want to do more in the hosted UC space and want our help in driving that.
I'd note that the tone of the conversation has taken a positive change versus a year ago. The recent bankruptcy filings by Avaya and the growing churn the carriers are seeing in subscribers under legacy services has been an eye opener that the old status quo is crumbling and they need to sharpen their focus on growing the new UC markets that we help them serve.
I believe that our transformation projects are a reflection of this sentiment. Recall that these projects are ones in which service providers fundamentally re-architect their networks from legacy technologies to IP in order to increase flexibility and survivability, while lowering cost at the same time. Given the magnitude of these projects, the complexity level is also very high. As we've said in the past, these are large construction projects that involve lots of work on both sides, including a significant professional services effort from us.
We've been processing a number of them for a while, and some of them are in early rollout stage. But they're far from done. In recent conversations with a couple of our customers, we've learned that complexity related to back-end IT systems and customer onboarding processes will impact the pace of some of these rollouts.
But the key message I want to leave you regarding our transformation projects is that they demonstrate our strategic importance with these service provider partners and represent a significant revenue opportunity for us going forward. On the second point, as the old networks shut down, the business subscribers running on legacy services will need to migrate over. The opportunity is profound.
Based on our most recent calculations, we believe the number of business Centrex, POTS and trunking seats that our transformation customers have not yet migrated is well north of $25 million. That's a number that is well in excess of our total deployed seat count today and, in fact, is greater than the industry total multi-tenant seats delivered, and we would expect the bulk of the migration to occur over the next several years. So, you can understand the level of excitement we have from these transformation projects.
Now, I'd like to share with you our key strategic objectives for 2017. We've identified three that will guide our strategic and tactical activities for the year. As in the past, we'll provide you updates against these objectives on future earning calls. This year, our strategic objectives are expand our BroadCloud offerings and customer base, drive adoption and continue to innovate on our BroadSoft Business suite, and accelerate sell-through by leveraging our Powered by BroadSoft go-to-market programs.
Let me provide some detail regarding our execution against these objectives. On expanding our BroadCloud offering and customer base, one of our major focuses for BroadCloud in 2017 is enabling our partners to target the largely untapped mid to large enterprise customer market segment. These larger end customers have specific requirements such as support for multi-location, multi-country, as well as integration with a number of legacy systems and third-party applications. We have enhanced our BroadCloud offers to meet these needs.
In the U.S., businesses with 500 or more employees make up approximately half of the total workforce. It's a sizable market demographic of very low hosted penetration, but where there is a growing recognition of benefits of retiring premise PBX-based solutions and moving to a single cloud solution. So, we are very pleased that two of our Tier 1 service providers have chosen to launch BroadCloud-based service offers into this attractive segment. One of these carriers is focusing on multi-country large enterprises across North America and Europe. One of the key attributes of our solution is ease of deployment across many different geographies compared to legacy PBXs.
We have been working with this operator in a number of high-profile end user proof-of-concept and demonstrations and helping them build a significant pipeline of deals. Many of the deals in the pipeline are 10,000 seats and above, and several of them have already closed. One particular win was a 15,000-plus seat deal that will result in annual recurring revenue north of $1 million for us when fully deployed. There's obviously a lot of good news here, but I want to be cautious and remind you that the sales cycle for these deals is longer than for SMB customers.
The second partner is U.S. based and is initially targeting highly distributed businesses with a focus on retail. These companies want to eliminate the need for any premise-based system and move all of the intelligence to the cloud. This results in significant cost and complexity reduction and once in the cloud, they can mine their calling data to evaluate how effective their marketing campaigns have been. The service provider partner has recently launched, but has already closed a number of deals, including a nationwide retailer with over 10,000 seats.
In addition to the traditional large enterprises, we're also focused on addressing the government and education space with BroadCloud. These organizations are facing the same issues of premise-based communication products as private enterprises and are looking to go to the cloud solutions to provide more productivity to their employees at lower cost.
It's an attractive market for us, but the go-to-market is different. But our customers have a number of requirements regarding channel, security and contracts that must be met before you can start selling, which requires some upfront time and investment. I'm happy to say that one of our large carrier partners is finalizing our BroadSoft Business UC-One offering that's part of an approved GSA contract vehicle. This is a large opportunity to replace hundreds of thousands of legacy seats over time and the service provider sales team has already started building a pipeline of customer targets.
Another of our BroadCloud goals is to increase the breadth of our channels. As a result, we're pleased that ADTRAN recently selected BroadSoft to power their new cloud UC service, which is part of their ProCloud Subscription Services Suite. ADTRAN's ProCloud UC is a turnkey solution consisting of BroadCloud and ADTRAN products that their large community of resellers can bring to market. I think our ability to attract a wide variety of different channel partners that address all types of end customer demographics and verticals really speaks to the power and the flexibility of BroadCloud.
On driving adoption and continuing to innovate on our BroadSoft Business suite, we launched BroadSoft Business last year at the Connections user conference in October. Recall that BroadSoft Business is a suite of applications that encompasses our unified communications, UC-One; contact center, CC-One; and team collaboration, Team-One solutions.
These can be purchased individually, but are more powerful when bundled together. They share a common look and feel and they all leverage BroadSoft Hub, which is a cloud service that simplifies work by combining the user's communications with a broad range of cloud applications. So, everything the workers need to be productive is at their fingertips even when mobile. Mobile workers can retrieve and display relevant contextual information based on whom the user is talking to, or messaging. Hub integrates real-time communications with a number of third-party applications, such as Office 365, the Google G Suite, Salesforce, and Twitter. I'm pleased to note that we have announced the general availability of BroadSoft Hub. We're already seeing significant interest in our GA product, as its capability is a competitive differentiator.
The innovation that we're driving with our BroadSoft Business suite is being recognized by industry analysts. BroadSoft Business was named TMC's 2017 Unified Communications Product of the Year. And we were named a global leader in the Aragon Research Globe for UCC platforms. Aragon defines leaders as companies who have a comprehensive strategy aligned with the industry direction and effectively perform against those strategies.
On the customer adoption front, we're seeing good initial traction with our BroadSoft Business Team-One app. We have over 100 service providers with internal trials underway, including some of our largest customers. Service providers are clearly excited by the product. I'd note that Team-One was showcased by Vodafone at its booth at CeBIT and by Verizon at its booth at Enterprise Connect.
We've executed Team-One contracts with several Tier 2 and Tier 3 service providers. Typically, the post contract, the launch timeframe can take some time, especially with a brand-new service offering. So, we're pleased to note that our first signed customer has already started onboarding trialing customers within a month of contract signing. I think it's a testament to our go-to-market tools and content that are enabling our service provider partners to overcome the normal impediments to a quick service launch, and also clearly demonstrates the benefits of our Powered by BroadSoft program, which is a great segue to our next objective, which is accelerate sell-through by leveraging our Powered by BroadSoft go-to-market programs.
In January, we officially launched Powered by BroadSoft, our channel management program. As we shared before, it's a combination of marketing programs and co-branding efforts. We believe it's a win-win for our service provider partners and ourselves. Our service provider partners get the digital marketing content, including microsites, landing pages, case studies and blog content that enables them to quickly launch new service, drive sales lead, and increase conversion rates.
This translates to faster time to revenue, greater revenue growth potential for the service provider, which obviously has benefits for us as well. In exchange for this content, we co-branded the service provider. We believe BroadSoft is viewed as a premium ingredient brand that will foster a more favorable impression of those service providers participating in the program.
Since the official launch early this year, over 40 service providers have signed on to become active in the program with many others expressing interest and participating as well. Importantly, we've seen interest from both large and small service providers. Even our large established customers recognized the value of faster time-to-market and see the benefits of tying their brands to ours. For example, we're working closely with one of our large Tier 1 carriers to run a fully digital marketing campaign on their behalf.
Our contributions include a co-branded customer landing page and other web content combined with an outbound e-mail campaign, targeting the carrier's existing customers running on legacy services. Our service provider partners chose to work with us because they understand that we have the requisite expertise in knowing whom to target, how to target them, how to run the campaign platform, and how to use analytics to refine the campaign and drive improved results. Despite a very recent launch, there's already some early sales success from this campaign and we're going to replicate this model to other Powered by BroadSoft partners.
Also, at CeBIT, Deutsche Telekom officially launched their enterprise cloud UC offering, DeutschlandLAN CloudPBX. As part of this launch, Deutsche Telekom and BroadSoft issued a joint press release, which highlighted how the BroadSoft Business suite provides Deutsche Telekom with a complete UC offering that addresses all the market segments in Germany from two lines to thousands. This is an exciting service rollout for us and one which we've been working with Deutsche Telekom for over two years. This solution is fully FMC. Users can seamlessly integrate their T-Mobile wireless solution. Users can even integrate other mobile providers over the top, so it's an expansive service that really addresses market demands.
Deutsche Telekom has also publicly announced their aggressive position that will shut down its legacy public switched network. As a result, somewhere between 4 million to 5 million existing ISDN lines representing approximately 10 million end users will need to migrate over time.
In general, Germany represents a very interesting opportunity for us as the market conditions are pretty optimal there. It has high GDP per capita, a robust broadband infrastructure and a high penetration of mobile users that hosted penetration is still very low single digits today. We have a strong beachhead in the country as we already have 80,000 BroadCloud subscribers. But we think that with the two largest carriers in the country starting to roll out hosted BroadSoft offerings, we're prime for significant growth in UC subscribers over the next couple of years.
In summary, we've made good progress in Q1 to best position ourselves to capitalize on this secular market opportunity in front of us. We've got lots of work left, but we are laying the groundwork to extend our leadership position in the UC-as-a-service space.
With that, let me turn the call over to Jim.
James Tholen - BroadSoft, Inc.
Thanks, Michael, and good morning, everyone. I want to first review our Q1 results and then discuss our guidance for Q2 and the rest of the year.
Total revenue in the first quarter was $80 million, up 9% from the year ago period. Billings were $73 million, up 12%. We achieved Q1 non-GAAP EPS of $0.19 a share.
On software, license revenue for the quarter was $28 million, down 11% year-over-year. Software license billings in the quarter were $26 million, flat with Q1 last year. Subscription and maintenance support was $41 million, up 23% year-over-year. Of the $41 million, maintenance support revenue was $26 million, up 20% year-over-year; and SaaS revenue was $15 million, up 25% versus the year ago period and 6% sequentially. Professional services and other revenue was $12 million, up 26% year-over-year.
Now, moving on to costs and margins. For Q1, we had gross margin of 73% versus 76% in the year ago period. We achieved year-over-year gross margin improvement in both software and professional services. However, this was offset by a greater percentage of revenue from our lower-margin SaaS and professional services business.
We achieved operating margin of 8% relative to 16% in the prior year period, which was pretty consistent, if not, a bit better than our internal expectations. Operating expenses in the quarter totaled $52 million, up $8 million year-over-year with the primary driver being increased head count growth, both organic and through acquisition.
Our expectation for Q2 2017 is that cost of sales plus OpEx will grow in the approximately $2.5 million to $3 million range from Q1 2017, with the majority of the growth occurring in OpEx.
On the balance sheet, cash, cash equivalents and investments totaled $376 million at the end of the first quarter. Accounts receivable of $96 million were down from $122 million in Q4, and deferred revenue decreased sequentially to $102 million. Both declines were in line with normal seasonal patterns. Net cash from operations was a strong $19 million in the quarter.
Now, let me turn to guidance for Q2 and the rest of the year. I do want to provide some context first. We continue to feel very bullish about our business and our market opportunity. We have a very strong position in the market selling to and through the service providers and other channel partners, which we believe are and will be the preferred channel to SMB and, increasingly, large enterprises in major markets across the globe. Competitively, we feel we are as strong and well positioned as ever.
Having said that, I think 2017 on a revenue basis will end up a little lighter than we had originally forecast. So, we are bringing our revenue expectations down a bit for the year. Specifically, we are now guiding annual revenue to be in the $380 million to $390 million range. We expect EPS to remain, as we had previously guided, in the $2.20 to $2.50 a share range.
For Q2, we anticipate revenue of $84 million to $88 million, and EPS between $0.20 and $0.32. The two big drivers of the revenue change are professional services and our BroadCloud SaaS business. Specifically, we are lowering professional services revenue expectations to around the $70 million range. We are seeing some impact from the rollout speed of some of the transformation projects, especially in the timing of revenue and follow-on engagement.
In general, we expect to be a little cautious in forecasting professional services for the remainder of 2017. And we are lowering SaaS expectations to $63 million to $65 million. As Mike mentioned, we have a number of exciting new BroadCloud service launches happening, including those targeting large enterprise users. The sales cycle for our existing service provider customers onboarding new, often larger enterprise customers and our onboarding of new service providers are taking longer than we had expected.
I do think we will exit this year with momentum in BroadCloud, as our existing service provider customers accelerate and these newer implementations begin to hit their stride. I think, in particular, that 2018 could be a big year for BroadCloud in government and large enterprise with large, often multinational implementation.
For software revenue and contract, we continue to forecast that we will be within our forecasted range of 7% to 10% growth. We are forecasting solid growth in sell-in in the second half from our service provider customers. Sell-through in our major geographies remain strong. We think we are on track to hit or exceed 3 million new hosted sell-through lines. We do expect our software revenue to be pretty back-end loaded, given the anticipated timing of deals with pretty sizable increases in software revenue in both Q3 and Q4.
Turning to expenses and profitability, I think it's important to note that we're not changing our expectations regarding EPS for the year. We plan on maintaining our previous dollar profit targets. We'll continue to invest in our top priorities, but we'll back off of any additional substantive expense growth for the rest of the year.
In conclusion, I think the longer-term outlook remains very bright for us. We lead a market that is large and very underpenetrated. I think we will exit 2017 well and believe that we will see increasing software volumes in the transformation deals and acceleration with BroadCloud in 2018 and beyond. As Mike mentioned, we expect our transformation customers to replace legacy business POTS and Centrex lines over the next several years that in total significantly exceed our deployed hosted lines to date.
With that, operator, we will open up the call for questions.
Question-and-Answer Session
Operator
Thank you. And our first question comes from the line of Catharine Trebnick of Dougherty. Your line is now open.
Catharine A. Trebnick - Dougherty & Co. LLC
Oh, hi. Catharine Trebnick here. Hey, Jim, can you provide more color on what the challenges are for why the license line is not really growing as fast as we think it should be? Thank you.
James Tholen - BroadSoft, Inc.
Well, Catharine, as we said, we're maintaining our guidance view on software and I think we'll – I mean, I think it's going to be a solid software year. I guess, the ins and outs, sell-through looks really quite good worldwide. And so, that's always been an important barometer for us. As Mike mentioned on a few of these very large transformation projects, there's a little bit of a slowdown in the pace of deployment and that's driving some – we had expectations that we'd do better in software on the transformation projects at the end of the year. So, that's a little lighter.
At the same time, it's kind of a portfolio effect from the rest of the company. The U.S., and particularly in Europe, I think software is looking really pretty good. And I think for rest of the year, especially outside the U.S. – U.S. will be fine, but we are being impacted on these transformation projects. Outside the U.S., I think software will look pretty solid. So, the yin and yang is transformation projects slip, but other parts of the business doing well and I think all in we're comfortable maintaining the software view.
Catharine A. Trebnick - Dougherty & Co. LLC
One other question is, last quarter you talked on the inventory had tightened up. Are you still seeing that overall and any difference in the U.S. versus Europe or Asia Pac? Thanks.
James Tholen - BroadSoft, Inc.
Yeah. I'd say inventory looks pretty much worldwide consistent with where we were at the end of the year.
Catharine A. Trebnick - Dougherty & Co. LLC
All right. https://newtoy457.weebly.com/railworks-ts2015-west-highland-line-extension-route.html. I'll come back later. Thank you.
Operator
Thank you. And our next question comes from the line of George Notter of Jefferies. Your line is now open.
George C. Notter - Jefferies LLC
Hey there. Thanks very much, guys. I wanted to come back to the transformation projects. It sounds like from what you said they're slowing down in terms of the pace of your – I don't know, I guess, installation of those customers and their pace on selling through into projects. Looking back, I mean, it seems to me you guys have been pretty cautious historically in talking about transformation projects and timing of revenue. And I guess I had assumed that also these would roll out more slowly. I guess I'm wondering what's really changed this quarter versus last quarter, or last year when you think about the timing of these projects. Just intuitively, what's going on there? Thanks.
Michael Tessler - BroadSoft, Inc.
Hey, George. It's Mike. I think what we learned and let me explain and provide a little bit more color on the transformation that, lots of different projects, lots of different geographies, lots of different levels of complexities. So, the prepared remarks were kind of generalized.
I think what we heard from a number of our customers in the last few months is that specifically with the conversion parts of the transformation projects that there has been some issues with regards to customer activation and kind of the overall kind of activation journey migrating customers from legacy to our platform. And some of these, you can only really catch once you start doing some initial launches or initial migrations, let me say. And so, we've been working and guiding our customers on how we could potentially help them. A lot of this happens to be in their back-end IT systems or a number of migration systems. So, sometimes, there's not much we can do. And so, that's kind of the real, let me say, the net change or learning that we've discovered in the last 60 to 90 days.
I think, generally, we see kind of the – when we describe some of the transformation projects as being a combination of kind of initially net new and then migration, the net new stuff seems – because it has less complexity, those are progressing. But the migrations that we had thought would occur near the back end of this year will probably slip into 2018. So, some of these customers – as I said, some of the challenges will get fixed quickly, some will take a little longer, there's kind of a wide variety of them. But generally, when we rolled it all up, we think that we'll see some slip into 2018.
George C. Notter - Jefferies LLC
Got it. I also wanted to ask about BroadCloud. Any changes in terms of how you guys are pricing BroadCloud or incentivizing customers to move over from BroadWorks? Anything new to talk to there would be great?
Michael Tessler - BroadSoft, Inc.
So, I think that generally, what's happening is the customers are looking at BroadCloud from a number of different perspectives. So, some customers are looking at using BroadCloud for new market segments. Both of the BroadCloud enterprise customers I've talked about in the prepared remarks are actually existing customers who have decided to use BroadCloud in these new market segments. So, I think there's a range of some customers looking at continuing software, some looking at kind of hybrid deployment, some software, some cloud, and some looking at using cloud and software depending on market segments. And so, there's kind of a wide variety of different strategies that our customers are using.
We're not, say, financially incenting customers. I think customers are realizing that more and more of our innovation, our new products like Team-One and CC-One are cloud-only products. They see the differentiators like BroadSoft Hub also being cloud-only deployed products and are starting to kind of work with us on migrating their deployments and their integrations to cloud.
George C. Notter - Jefferies LLC
Got it. Thank you.
Michael Tessler - BroadSoft, Inc.
Thanks, George.
Operator
Thank you. And our next question comes from the line of Jess Lubert of Wells Fargo Securities. Your line is now open.
Jess Lubert - Wells Fargo Securities LLC
Hi, guys. A couple of questions. First, maybe I was just hoping for a little more detail with respect to some of the factors that are driving the revision to the BroadCloud outlook, how you're feeling about the competitive environment because it feels like end market conditions are still fairly healthy. So, I just kind of wanted to understand some of the key factors driving the revision there.
Michael Tessler - BroadSoft, Inc.
Well, I think, first of all, when you look at cloud – I think when you look at end user market conditions as you mentioned and cloud, I mean you have to look at our combined businesses of software and cloud, because we're serving that end user market in a combination and we're obviously transforming, as I just answered before, some of our customers from software to cloud. So, that's a little bit of – and we continue in that end user market to deploy, as Jim mentioned in his remarks, our expectation is that we'll deploy 3 million plus seats in the year. That's a significantly larger number than anybody else in the market. So, we continue to see very good end user demand for our products. There's obviously a mix of fulfillment, some software and some cloud.
Specifically, on the cloud side, let's say, as Jim remarked, I think some of the channels that we've turned up are taking a little longer to get to full stride, full production, not so much technically, but kind of sales, marketing and getting their machinery going than we originally had expected. Some of the expectations around government and federal are a little bit more back-end loaded than we had originally forecasted for the year.
And I think the third thing that's impacting that SaaS number, cloud number, is that some of the channels, as I mentioned in my remarks, are attacking large enterprises. And large enterprises, just by their rollout nature, just take a lot longer, the scheduling and planning of those rollouts are a little longer than SMB. And so, we've tuned our cloud model to adjust for those changes in the customer mix.
Jess Lubert - Wells Fargo Securities LLC
Helpful. And then just on the transformation side, can you help us understand where some of the big operators who launched live service last year, I think, AT&T, Verizon, Rogers, Vodafone, how those services are going, tracking relative to plan? And then, just to kind of clarify on the transformation side, to what extent does your outlook for license growth of 7% to 10% this year, does that embed that some of these big operators start to port users over onto these platforms, or is that not something you're assuming this year and that's more of a 2018 event?
Michael Tessler - BroadSoft, Inc.
Let me answer the transformation a little bit and then I'll hand over to Jim. I think that, generally, what we're seeing with the transformation customers is – I think, what's a good way to look at it is kind of the net new market launches. Typically, almost every one of our transformation customers has gone out with a kind of net new approach and then looking really at a phase two on migrating legacy-based customers. I think we see the first phase going fairly well in the marketplace. You've mentioned a number of customers. Some are doing – have stronger deployments and some have a little less strong, so kind of a mixed portfolio kind of as expected.
I think the challenge that a number of our customers have found is, in the porting, migration of their legacy bases, which we thought would start really at the end of this year for a number of reasons look like it'll get pushed out into 2018. And again, most of that happens around the overall kind of customer journey, migration journey, and changes required in back-end activation, billing, order management systems that are obviously quite complex. So, I think that's kind of the way to look at the overall transformation. I'll hand over to Jim to kind of talk about the numbers.
James Tholen - BroadSoft, Inc.
Yeah. So, we had had an expectation for software near the end of the year in our revenue and billings software numbers from these moves to the legacy base. And as Michael said, our expectation is that effectively those have slipped. The good news is kind of portfolio effect across the business, I think, elsewhere, we're seeing nice strength in the software business, especially around hosted. And I think Europe, as an example, a lot of momentum in Europe. And so, I think second half will really look good. Rest of the year, I think North America outside of the transformation projects will look solid. So, I think that kind of on a weighted average basis, we're pretty comfortable with software, but the mix on non-transformation will be higher.
Jess Lubert - Wells Fargo Securities LLC
And then maybe if I can just squeeze one last one in. On a past call, you suggested you had an eight-figure software deal that was expected to hit this year. Can you update us on how that's tracking and when that revenue is likely to flow through the model?
James Tholen - BroadSoft, Inc.
Yeah. So, yeah, that's part and parcel of a contract that we originally signed Q3 of last year. And the billings and revenue for that for this year will be in the second half.
Jess Lubert - Wells Fargo Securities LLC
Thanks, guys.
Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Dmitry Netis of William Blair. Your line is now open.
Dmitry G. Netis - William Blair & Co. LLC
Okay. Thank you very much, gentlemen. A couple of questions. Is it fair to say the outage at AT&T that they have seen couple of – I think it was last month, early last month, is that what potentially made them reconsider the timing of those customer migrations and your rev rec essentially on the license side of things and that's what's really causing the push-out here into 2018?
Michael Tessler - BroadSoft, Inc.
I don't want to address the particular event, but no.
Dmitry G. Netis - William Blair & Co. LLC
Okay. But can you address the outage and what that caused essentially in your model, if anything at all?
Michael Tessler - BroadSoft, Inc.
I think the customer outage at AT&T, non-attributable to BroadSoft, also had no impact on our business.
Dmitry G. Netis - William Blair & Co. LLC
Okay. Thanks, Mike. And then, on the inventory levels, are you seeing inventory tightening further here or where is the inventory sitting at the moment? And now that sort of the guidance has been updated, is there enough licenses still out there for – I suppose there are, otherwise those big customers would be coming back to you for new licenses. So, what is the situation in terms of inventory?
James Tholen - BroadSoft, Inc.
Sure. Yeah. So, inventory, actually a little tighter at the end of Q1 than it was at the end of the year. So, sell-through continues to be a little north of sell-in, which is sort of good at several levels. I'd say that on a general basis across the globe, inventories are tighter than they had been and where we have some high inventory, it's concentrated in a couple of customers. And, obviously, we're not assuming for those few customers who bought the software for 2017.
Dmitry G. Netis - William Blair & Co. LLC
Okay. And then last question, Jim, just to sort of pick your brain on the visibility there in the second half. I understand it's a pretty big ramp now heading into the second half. You've always done well in the second half, so there is track record of doing so. But if you could rank maybe three things that gives you confidence that the numbers would work out the way you think they would, you had mentioned that there's less of a transformational activity in the back half of the year, and that's always been a sort of a strong driver for you. So, if that isn't the case now, what are the three things that may be driving the confidence level for second half?
James Tholen - BroadSoft, Inc.
Sure. Yeah. So, as you know, we forecast bottoms up. So, we're pretty meticulous on our rigor on our forecast process around customers. And so, that's the basis of the view. We align that with our expectations of revenue recognition and particularly larger chunks of software orders from our customer base. And so, I think Jess had asked that question about the large contracts. So, as an example, we know that on one particular customer that we're getting sizable software in the second half, and that will flow through revenue.
Even though we've had some delay on some of these transformation projects, there's still ongoing delivery and revenue events on several. And again, that'll help drive the revenue number. So, I think, again, after our rest-of-year scrub, we get that the trajectory, especially in software for the second half, looks like quite a bit of growth and right now, we're comfortable with it.
Dmitry G. Netis - William Blair & Co. LLC
Okay. Thank you very much, guys.
Michael Tessler - BroadSoft, Inc.
Thanks, Dmitry.
Operator
Thank you. And our next question comes from the line of Paul Silverstein of Cowen. Your line is now open.
Paul Silverstein - Cowen & Co. LLC
Yeah. Several questions. I hope you all will indulge me. First off, the regional mix, Jim, can you share that with us?
James Tholen - BroadSoft, Inc.
Yeah. It was about 60% U.S., a little north of 30% EMEA and then 9% or 10% rest of world.
Paul Silverstein - Cowen & Co. LLC
All right. And given your comments earlier about resting down expenses in order to hit your EPS guidance off the reduced revenue forecast, does that mean operating leverage has been pushed out again? I think previously you had said that no leverage this year, but you were driving from the leverage next year. The direct question is, what should we expect – I know next year is a long way off, but what should we expect in terms of eventual operating leverage in the model?
James Tholen - BroadSoft, Inc.
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Yeah. So, we've said long-term model 22% to 25%. John's nodding, so that's good. And we continue to expect that. I think one of the – or the two keys on that are renewed software growth. And I think when you look at the magnitude of software from these transformation projects once they start replacing their legacy basis, that will help. And then the second is leverage from more growth in SaaS. So, we're not guiding to next year, but I think those trends should appear more obviously as we go into 2018 than I think we're seeing this year.
Paul Silverstein - Cowen & Co. LLC
All right. And I recognize that there have been a number of questions already on revenue. But stepping back, trying to get the big picture here. If I go back to last year, you all were talking about unexpected delays in revenue related to software on the big transformation deals. And I'm trying to discern to what extent your commentary today is new and different in terms of your understanding of the onboarding issues from these big transformation deals? And going back to the question that was asked, but I didn't hear any answer to, a cynic would say this isn't onboarding issues or other issues, this is competition. There's a lot more competition in the marketplace today, where the Microsoft or now Amazon coming in, even allowing for the fact that it's going to take a while before that service really becomes robust.
And you've got Slack and all these other – Twilio, Cisco Spark. And I recognize then all these are directly competitive. But the direct question is, to what extent are you being impacted by competition? And to what extent is, will you share with us truly new and different relative to previous commentary?
Michael Tessler - BroadSoft, Inc.
So, let me take on the competition part. I think, first of all, as we've said, when you look at the total number of seats that we're delivering to the marketplace, both in software and cloud, we're significantly, by a significant margin, larger than anybody else in this cloud communications arena. I think while there's lots of noise around the edges in competition, nothing has really changed.
Microsoft makes a lot of noise, but they have no real deployments in the kind of communications side, the enterprise telephony side. All these other little apps flowing around really, again, don't really address the core telephony requirements that businesses have, and where we and our partners have traditional strength. And so, I don't really think that we're worried. We continue to watch and monitor and obviously look at our competitors every day. But I don't think that – I don't believe the competitive environment has changed since the last time we have updated you guys.
On the – is this information new, I could tell you information is new. I've sat with the customers myself. I think as we – as they and we started to migrate some legacy customers, things in the journey just started to kind of pop up that this – we're not optimal. And they and us are in full flight to fix those issues with regards to the migration of customers. When you look at the size of the migrations, you're not selling 10 seats at a time. You're doing millions of lines of migration. These have to be extremely smooth and without any customer hiccups. And I think that's where you're seeing the new information.
And you only really get to experience it once you're ready to go and you start migrating the first few customers and you realize, hey, this isn't going really well, there's some hiccups. The installation issue, the box doesn't install well, et cetera. This is not atypical from any large, very, very large network rollout that any carrier does. Often, these things take a number of cycles when you're dealing with very large migrations of millions of lines. And so, this is absolutely a kind of new information and a new experience that we're trying to resolve.
Paul Silverstein - Cowen & Co. LLC
I appreciate. I'll pass it on. Thank you.
James Tholen - BroadSoft, Inc.
Thank you.
Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Tavis McCourt of Raymond James. Your line is now open.
Tavis C. McCourt - Raymond James & Associates, Inc.
Hey, guys. Thanks for taking my question. Jim, just a housekeeping first. What was cash flow from operations and capital spending in the quarter? And then, any expectations for the full year on those two metrics would be helpful?
And I guess, I don't want to kick a sleeping dog here, but I just want to make sure I understand, the change in the revenue outlook for this year is largely related to BroadCloud and professional services. So, Mike, when you say there's been some transformational deals that are rolling slower, are those revenues that would have been recognized in professional services, or are those license software revenues that will then get pushed into 2018, but there are some other offsets going better in software licenses and that's why your overall software license revenue doesn't change?
Michael Tessler - BroadSoft, Inc.
I think you answered your question. Yes. So, the software, as Jim mentioned, we didn't have huge anticipations for the software, but some of that in the portfolio of transformation and normal business gets – we're seeing a stronger normal business and a little bit less transformation expectations near the end of the year because of these delays.
I think you're correct, the change in the guidance is a function of two things, one of them being pro services and the other one being the adjustment to the cloud number. On the pro services side, I'd say, half of that is a delay in revenue recognition of a project, and then the other side of that is just delays in some of the add-on pro services projects around transformation. So, that's kind of the mix of the pro services challenges.
I'll hand over to Jim to answer your other questions.
James Tholen - BroadSoft, Inc.
Yeah. So, Tavis, cash flow – net cash provided by operating activities was a little north of $19 million in the quarter. CapEx was $5.3 million. We really don't guide those for the year. I'd expect overall that we do as well or better this year than we did last year. And there was a little more – definitely more CapEx in Q1 than it would be – if we normalize it per year, I think that's too high. We'll be closer to what we did last year as opposed to taking Q1 and multiplying it by four. That was particularly around some capital on our schedule implementations for BroadCloud which, as we said, we expect to get quite a bit of growth from.
Tavis C. McCourt - Raymond James & Associates, Inc.
Great. And, Mike, if you could – if I could do a quick follow-up on your comments, and I know 2018 is a long way away and revenue rec is always tricky on these large contracts. But maybe if you could frame it in terms of overall activity in terms of transitioning legacy customers over to the BroadSoft platform, would you expect the level of activity to be greater in 2018 versus 2017?
Michael Tessler - BroadSoft, Inc.
Yeah. I think what we're – I'd say generally I think across – I'm scanning across the customers that I interact with, that most of them have gone through their initial soft launch around migration, identified the issues and are now in kind of the remediation mode of those issues. And so, my expectation would be is that that migrations would start in 2018. Again, wide variety covering all the customers. But through the year, we would start seeing migrations of the legacy base into our platforms.
Tavis C. https://vehicleclever.weebly.com/blog/mac-os-high-sierra-dmg-download-mega. McCourt - Raymond James & Associates, Inc.
Great. Thanks very much.
Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Rich Valera of Needham & Company. Your line is now open.
Rich F. Valera - Needham & Co. LLC
Thank you. Another question on inventory levels. Back at your Analyst Day late last year, you showed some bar charts showing your estimated customer inventory levels. And in that chart, your estimate for the 2016 inventory levels looked materially lower than where you were in 2014, which might have led some to believe that's sort of an acceptable level, and we wouldn't expect it to much drop from there. But you talked about inventory dropping again in 1Q. So, I guess the question is, where do you think inventory bottoms and are you expecting further inventory declines for the balance of this year, which will create more of a headwind in the sell-in or sell-through dynamic?
James Tholen - BroadSoft, Inc.
Yeah, Rich. So this is kind of third inventory question, so let me just make sure I'm clear. So, the inventory levels were pretty close to the end of the year when we had talked about those inventory levels tightening, as you alluded to, and I think when Catharine asked, I said they're essentially the same. Technically, they're down a little bit, but pretty modestly. So, I think, to me, it's a bit of the new normal. So, it's, as you said, demonstrably lower than on a proportional basis than we were in 2014. And, again, I think pretty consistent, a little bit down. The other thing to note – so I don't foresee substantive tightening generally.
As I did mention in the call, there are a couple of customers that do seem to have a bit of inventory. And so, that is a overhang from getting new software orders from those couple of customers, and they're a pretty good customers of ours. So, our expectation in the rest of the year for those couple of customers is that we won't see appreciable software ordering activity.
Rich F. Valera - Needham & Co. LLC
But can you say in aggregate, what you would expect from an inventory perspective? It sounds like you expect some headwinds with those couple of customers. But is there, maybe, puts and takes that make it in aggregate sort of neutral, or is it you're still expecting a bit of a headwind from reductions in inventory this year?
James Tholen - BroadSoft, Inc.
No, no. I think in aggregate, as I said, I think we're at the new normal. I don't expect to see further appreciable tightening. I think it's – yeah, I think it's the new normal, Rich.
Rich F. Valera - Needham & Co. LLC
Got it. And just another question on your Powered by BroadSoft comments, I think these were Mike's comments. But you talked about doing a fairly extensive digital ad campaign for one of the customers in that campaign. And I guess I'm trying to understand sort of how that transaction works, sort of what you get from the customer for that. Obviously, if I'm a customer, I think I'd be pretty happy to have someone else spend money to do an ad campaign for my product. But is there a quid pro quo there? What do you get for doing that ad campaign for your customer for essentially paying for your customers' marketing spend?
Michael Tessler - BroadSoft, Inc.
Yeah. I mean, so first of all – this is Mike, because of the – so, what we're doing is we're doing digital marketing and we're using the power of the bigger customers that have very large existing customer base. So, it's not like we're spending a tremendous amount of money buying leads or those kind of things. What we're really doing is working side by side with the carrier and running the digital outbounds campaigns.
Obviously, what we gain from it is we gain complete – very tight control over the quality of the message. And we're typically doing those campaigns for our BroadCloud customers driving demand into our service. So, that's really the benefit. What we're trying to do with the Powered by BroadSoft program is, in general, assist all of our customers to increase their sales yield, growing more subscribers onto our platform.
Rich F. Valera - Needham & Co. LLC
Okay. That's helpful color. Thanks, gentlemen.
Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Will Power of Baird. Your line is now open.
Will V. Power - Robert W. Baird & Co., Inc.
Great. Thanks. Yes. I guess a couple of questions. You referenced the announcements from Deutsche Telekom back in March, and Deutsche Telekom's laid out some aggressive long-term plans. Is that something from a timing perspective that we should expect to ramp in the back half of this year, or is that longer term, say, 2018 plus?
Michael Tessler - BroadSoft, Inc.
I don't want to get into the specifics of one customer. I'm not really capable of talking about that particular customer without their approval. So, I think, generally, as I said, I think all of our transformation – or most of our transformation I'd say, (59:25), that most of our customers are in market with what I would call net new. I think what you'll see from Deutsche Telekom and others is a beginning of that migration businesses some time in 2018.
Will V. Power - Robert W. Baird & Co., Inc.
Okay. And then I want to come back. You made some comments earlier on, or I think Mike did on CC-One and Team-One, and I think 100-plus trials or a number of trials on those products. Are those products being bundled today actively or are they being sold separately? Just trying to understand that dynamic. And is there any source of pushback you're getting from customers that would keep those from moving from a trial phase to a better revenue generation phase?
Michael Tessler - BroadSoft, Inc.
So, the remarks I made were specifically on Team-One where we've seen a very large internal trial activity, the 100-plus service providers. I think that the service providers, in general, are quite interested in this new product in the enterprise messaging and team workspaces. I think there the internal trials are really helpful for them to really understand the product, how to use it, how to sell it, how to communicate it, how to position it, pricing and so on. You have to realize those 100 service providers span a fair amount of geography. So, we're trialing Team-One in a fairly large number of geographies with that product. And we're starting to see some of them actually go to market, start pushing the product from internal trial to service launch.
Generally, right now, the initial discussions have been selling Team-One as a stand-alone, although we have a number of dialogues with a number of carriers about potentially bundling Team-One with UC-One. And so, that's kind of the – I'd say that's early indicator and some thinking about potentially bundling those two offers into one.
We're seeing on the CC-One side, we've really – we talked about this a little bit before. We spent a significant portion of last year really retooling our go-to-market into enabling our service providers to sell a contact center. It's a bit more complex to sell. It's a bit more – requires some specialization, requires some skills, some knowledge. And we have launched, with a number of that we've seen some initial sell-through through the SPs that we have onboarded to CC-One.
Typically, today the CC-One product is being sold separately from UC-One. But again, we're in a discussion with a number of carriers about really focusing the sales approach or the sales segmentation on those customers that would like both the UC and contact center product fully integrated and sold as such. We can do that. But we're just starting to go to those go-to-market discussions with a number of operators. So, I'd say that we're – today, we're seeing all three apps being sold somewhat independently, obviously, with the benefits of integration and a number of dialogues with a number of our customers about potential bundling of those products as we go forward.
Will V. Power - Robert W. Baird & Co., Inc.
Okay. Thank you.
Michael Tessler - BroadSoft, Inc.
You're welcome.
Operator
Thank you. And our next question comes from the line of Vijay Bhagavath of Deutsche Bank. Your line is now open.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Yeah. Thanks. Yeah. Hi, Mike, Jim.
Michael Tessler - BroadSoft, Inc.
Hey, there.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Yeah. Hi. Yeah. I just have a bigger picture question here which is, have you cycled through most of your network transformation projects here in the U.S. and is the focus now mostly on repeat business over the next year or two? And then any thoughts, Jim, on exiting potentially underperforming portfolio and then leveraging M&A for future growth? Thanks.
Michael Tessler - BroadSoft, Inc.
So, I'm not sure I totally understood what you meant by cycling through. I'd say that the majority.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Like, are those projects mostly behind you? Yeah. Thanks.
Michael Tessler - BroadSoft, Inc.
Oh, no. No. No. As we've said, the transformation business globally, we're really in the first – I'll use baseball, the first inning of a very long game both domestically, both in North America and internationally. And we believe that we'll continue to see transformation pick up around the world as everybody is going to eventually shut down their legacy switched networks and move to all IP. We're obviously the vendor of choice for those projects. We have the most experienced, the most feature functionality, the most knowledge in those transformation projects. So, we're very early on both here and around the world.
James Tholen - BroadSoft, Inc.
Yeah. And, Vijay, I wasn't sure exactly what you meant by transitioning out of underperforming areas. I mean, I think, again, our perspective is that we have businesses that fortunately have very high profit margins with great gross margins, we're really at the beginning of the market like the – it's all about TAM capture to me. And that's really global. We think we have the most effective channel path to customers again globally. So, I'm not sure what we would cycle out of from a portfolio rebalancing that we would use M&A to replace.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Okay. Yeah. We can follow up offline. Thank you.
James Tholen - BroadSoft, Inc.
Okay. Okay. Got it.
Operator
Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Michael Tessler for closing remarks.
Michael Tessler - BroadSoft, Inc.
Thanks, everybody, and thank you for being on the call today and for your continued support. We look forward to updating you on our progress in the coming months, and have a great day. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.
BroadSoft, Inc. (BSFT) Q1 2017 Earnings Call May 1, 2017 8:30 AM ET
Executives
Christopher Martin - BroadSoft, Inc.
Michael Tessler - BroadSoft, Inc.
James Tholen - BroadSoft, Inc.
Analysts
Catharine A. Trebnick - Dougherty & Co. LLC
George C. Notter - Jefferies LLC
Jess Lubert - Wells Fargo Securities LLC
Dmitry G. Netis - William Blair & Co. LLC
Paul Silverstein - Cowen & Co. LLC
Tavis C. McCourt - Raymond James & Associates, Inc.
Rich F. Valera - Needham & Co. LLC
Will V. Power - Robert W. Baird & Co., Inc.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Operator
Good day, ladies and gentlemen, and welcome to the BroadSoft First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference, Mr. Chris Martin, Director of Investor Relations. Sir, you may begin.
Christopher Martin - BroadSoft, Inc.
Thank you, operator. Good morning, everyone, and thank you for joining us on today's conference call to discuss BroadSoft's results for the first quarter ended March 31, 2017. This call is also being broadcast live over the web and could 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 issued a press release discussing its financial results for the first quarter ended March 31, 2017. 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 condition, the plans and objectives of management for future operations, and the company's future product offerings. These forward-looking statements are not historical facts, but rather are based on BroadSoft's current expectations and beliefs and are based on information currently available to us.
The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including but not limited to those factors contained in the Risk Factors section of the company's Form 10-K for the year ended December 31, 2016, which was filed with the SEC on February 23, 2017.
All information provided in this conference call is as of May 1, 2017. 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 on a non-GAAP basis and have been adjusted to exclude the impact of non-cash stock-based compensation, non-cash amortization expense related to acquired intangible assets, non-cash interest expense on our convertible notes, foreign currency transaction gains and losses, and non-cash tax benefit and expense. Collectively, these items totaled $17 million in the quarter.
Also on this call, when we use the terms cost of sales, margin, 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. Mike?
Michael Tessler - BroadSoft, Inc.
Thanks, Chris. Good morning, and thank you for taking time to discuss our first quarter 2017 results. For Q1, we achieved $80 million in revenue and $0.19 in non-GAAP EPS. As you probably saw in our press release, we have modestly revised our revenue guidance for the year. Jim will provide more details on this later in our prepared remarks. I wanted to spend some time discussing some of our key business drivers and our strategic objectives for this year.
From an overall business perspective, we continue to be very excited. Our optimism stems from the many positive meetings we've had with our customers, including at various recent trade shows such as Mobile World Congress, CeBIT and Enterprise Connect. Their feedback has continued to be very positive as it's centered on a theme that they want to do more in the hosted UC space and want our help in driving that.
I'd note that the tone of the conversation has taken a positive change versus a year ago. The recent bankruptcy filings by Avaya and the growing churn the carriers are seeing in subscribers under legacy services has been an eye opener that the old status quo is crumbling and they need to sharpen their focus on growing the new UC markets that we help them serve.
I believe that our transformation projects are a reflection of this sentiment. Recall that these projects are ones in which service providers fundamentally re-architect their networks from legacy technologies to IP in order to increase flexibility and survivability, while lowering cost at the same time. Given the magnitude of these projects, the complexity level is also very high. As we've said in the past, these are large construction projects that involve lots of work on both sides, including a significant professional services effort from us.
We've been processing a number of them for a while, and some of them are in early rollout stage. But they're far from done. In recent conversations with a couple of our customers, we've learned that complexity related to back-end IT systems and customer onboarding processes will impact the pace of some of these rollouts.
But the key message I want to leave you regarding our transformation projects is that they demonstrate our strategic importance with these service provider partners and represent a significant revenue opportunity for us going forward. On the second point, as the old networks shut down, the business subscribers running on legacy services will need to migrate over. The opportunity is profound.
Based on our most recent calculations, we believe the number of business Centrex, POTS and trunking seats that our transformation customers have not yet migrated is well north of $25 million. That's a number that is well in excess of our total deployed seat count today and, in fact, is greater than the industry total multi-tenant seats delivered, and we would expect the bulk of the migration to occur over the next several years. So, you can understand the level of excitement we have from these transformation projects.
Now, I'd like to share with you our key strategic objectives for 2017. We've identified three that will guide our strategic and tactical activities for the year. As in the past, we'll provide you updates against these objectives on future earning calls. This year, our strategic objectives are expand our BroadCloud offerings and customer base, drive adoption and continue to innovate on our BroadSoft Business suite, and accelerate sell-through by leveraging our Powered by BroadSoft go-to-market programs.
Let me provide some detail regarding our execution against these objectives. On expanding our BroadCloud offering and customer base, one of our major focuses for BroadCloud in 2017 is enabling our partners to target the largely untapped mid to large enterprise customer market segment. These larger end customers have specific requirements such as support for multi-location, multi-country, as well as integration with a number of legacy systems and third-party applications. We have enhanced our BroadCloud offers to meet these needs.
In the U.S., businesses with 500 or more employees make up approximately half of the total workforce. It's a sizable market demographic of very low hosted penetration, but where there is a growing recognition of benefits of retiring premise PBX-based solutions and moving to a single cloud solution. So, we are very pleased that two of our Tier 1 service providers have chosen to launch BroadCloud-based service offers into this attractive segment. One of these carriers is focusing on multi-country large enterprises across North America and Europe. One of the key attributes of our solution is ease of deployment across many different geographies compared to legacy PBXs.
We have been working with this operator in a number of high-profile end user proof-of-concept and demonstrations and helping them build a significant pipeline of deals. Many of the deals in the pipeline are 10,000 seats and above, and several of them have already closed. One particular win was a 15,000-plus seat deal that will result in annual recurring revenue north of $1 million for us when fully deployed. There's obviously a lot of good news here, but I want to be cautious and remind you that the sales cycle for these deals is longer than for SMB customers.
The second partner is U.S. based and is initially targeting highly distributed businesses with a focus on retail. These companies want to eliminate the need for any premise-based system and move all of the intelligence to the cloud. This results in significant cost and complexity reduction and once in the cloud, they can mine their calling data to evaluate how effective their marketing campaigns have been. The service provider partner has recently launched, but has already closed a number of deals, including a nationwide retailer with over 10,000 seats.
In addition to the traditional large enterprises, we're also focused on addressing the government and education space with BroadCloud. These organizations are facing the same issues of premise-based communication products as private enterprises and are looking to go to the cloud solutions to provide more productivity to their employees at lower cost.
It's an attractive market for us, but the go-to-market is different. But our customers have a number of requirements regarding channel, security and contracts that must be met before you can start selling, which requires some upfront time and investment. I'm happy to say that one of our large carrier partners is finalizing our BroadSoft Business UC-One offering that's part of an approved GSA contract vehicle. This is a large opportunity to replace hundreds of thousands of legacy seats over time and the service provider sales team has already started building a pipeline of customer targets.
Another of our BroadCloud goals is to increase the breadth of our channels. As a result, we're pleased that ADTRAN recently selected BroadSoft to power their new cloud UC service, which is part of their ProCloud Subscription Services Suite. ADTRAN's ProCloud UC is a turnkey solution consisting of BroadCloud and ADTRAN products that their large community of resellers can bring to market. I think our ability to attract a wide variety of different channel partners that address all types of end customer demographics and verticals really speaks to the power and the flexibility of BroadCloud.
On driving adoption and continuing to innovate on our BroadSoft Business suite, we launched BroadSoft Business last year at the Connections user conference in October. Recall that BroadSoft Business is a suite of applications that encompasses our unified communications, UC-One; contact center, CC-One; and team collaboration, Team-One solutions.
These can be purchased individually, but are more powerful when bundled together. They share a common look and feel and they all leverage BroadSoft Hub, which is a cloud service that simplifies work by combining the user's communications with a broad range of cloud applications. So, everything the workers need to be productive is at their fingertips even when mobile. Mobile workers can retrieve and display relevant contextual information based on whom the user is talking to, or messaging. Hub integrates real-time communications with a number of third-party applications, such as Office 365, the Google G Suite, Salesforce, and Twitter. I'm pleased to note that we have announced the general availability of BroadSoft Hub. We're already seeing significant interest in our GA product, as its capability is a competitive differentiator.
The innovation that we're driving with our BroadSoft Business suite is being recognized by industry analysts. BroadSoft Business was named TMC's 2017 Unified Communications Product of the Year. And we were named a global leader in the Aragon Research Globe for UCC platforms. Aragon defines leaders as companies who have a comprehensive strategy aligned with the industry direction and effectively perform against those strategies.
On the customer adoption front, we're seeing good initial traction with our BroadSoft Business Team-One app. We have over 100 service providers with internal trials underway, including some of our largest customers. Service providers are clearly excited by the product. I'd note that Team-One was showcased by Vodafone at its booth at CeBIT and by Verizon at its booth at Enterprise Connect.
We've executed Team-One contracts with several Tier 2 and Tier 3 service providers. Typically, the post contract, the launch timeframe can take some time, especially with a brand-new service offering. So, we're pleased to note that our first signed customer has already started onboarding trialing customers within a month of contract signing. I think it's a testament to our go-to-market tools and content that are enabling our service provider partners to overcome the normal impediments to a quick service launch, and also clearly demonstrates the benefits of our Powered by BroadSoft program, which is a great segue to our next objective, which is accelerate sell-through by leveraging our Powered by BroadSoft go-to-market programs.
In January, we officially launched Powered by BroadSoft, our channel management program. As we shared before, it's a combination of marketing programs and co-branding efforts. We believe it's a win-win for our service provider partners and ourselves. Our service provider partners get the digital marketing content, including microsites, landing pages, case studies and blog content that enables them to quickly launch new service, drive sales lead, and increase conversion rates.
This translates to faster time to revenue, greater revenue growth potential for the service provider, which obviously has benefits for us as well. In exchange for this content, we co-branded the service provider. We believe BroadSoft is viewed as a premium ingredient brand that will foster a more favorable impression of those service providers participating in the program.
Since the official launch early this year, over 40 service providers have signed on to become active in the program with many others expressing interest and participating as well. Importantly, we've seen interest from both large and small service providers. Even our large established customers recognized the value of faster time-to-market and see the benefits of tying their brands to ours. For example, we're working closely with one of our large Tier 1 carriers to run a fully digital marketing campaign on their behalf.
Our contributions include a co-branded customer landing page and other web content combined with an outbound e-mail campaign, targeting the carrier's existing customers running on legacy services. Our service provider partners chose to work with us because they understand that we have the requisite expertise in knowing whom to target, how to target them, how to run the campaign platform, and how to use analytics to refine the campaign and drive improved results. Despite a very recent launch, there's already some early sales success from this campaign and we're going to replicate this model to other Powered by BroadSoft partners.
Also, at CeBIT, Deutsche Telekom officially launched their enterprise cloud UC offering, DeutschlandLAN CloudPBX. As part of this launch, Deutsche Telekom and BroadSoft issued a joint press release, which highlighted how the BroadSoft Business suite provides Deutsche Telekom with a complete UC offering that addresses all the market segments in Germany from two lines to thousands. This is an exciting service rollout for us and one which we've been working with Deutsche Telekom for over two years. This solution is fully FMC. Users can seamlessly integrate their T-Mobile wireless solution. Users can even integrate other mobile providers over the top, so it's an expansive service that really addresses market demands.
Deutsche Telekom has also publicly announced their aggressive position that will shut down its legacy public switched network. As a result, somewhere between 4 million to 5 million existing ISDN lines representing approximately 10 million end users will need to migrate over time.
In general, Germany represents a very interesting opportunity for us as the market conditions are pretty optimal there. It has high GDP per capita, a robust broadband infrastructure and a high penetration of mobile users that hosted penetration is still very low single digits today. We have a strong beachhead in the country as we already have 80,000 BroadCloud subscribers. But we think that with the two largest carriers in the country starting to roll out hosted BroadSoft offerings, we're prime for significant growth in UC subscribers over the next couple of years.
In summary, we've made good progress in Q1 to best position ourselves to capitalize on this secular market opportunity in front of us. We've got lots of work left, but we are laying the groundwork to extend our leadership position in the UC-as-a-service space.
With that, let me turn the call over to Jim.
James Tholen - BroadSoft, Inc.
Thanks, Michael, and good morning, everyone. I want to first review our Q1 results and then discuss our guidance for Q2 and the rest of the year.
Total revenue in the first quarter was $80 million, up 9% from the year ago period. Billings were $73 million, up 12%. We achieved Q1 non-GAAP EPS of $0.19 a share.
On software, license revenue for the quarter was $28 million, down 11% year-over-year. Software license billings in the quarter were $26 million, flat with Q1 last year. Subscription and maintenance support was $41 million, up 23% year-over-year. Of the $41 million, maintenance support revenue was $26 million, up 20% year-over-year; and SaaS revenue was $15 million, up 25% versus the year ago period and 6% sequentially. Professional services and other revenue was $12 million, up 26% year-over-year.
Now, moving on to costs and margins. For Q1, we had gross margin of 73% versus 76% in the year ago period. We achieved year-over-year gross margin improvement in both software and professional services. However, this was offset by a greater percentage of revenue from our lower-margin SaaS and professional services business.
We achieved operating margin of 8% relative to 16% in the prior year period, which was pretty consistent, if not, a bit better than our internal expectations. Operating expenses in the quarter totaled $52 million, up $8 million year-over-year with the primary driver being increased head count growth, both organic and through acquisition.
Our expectation for Q2 2017 is that cost of sales plus OpEx will grow in the approximately $2.5 million to $3 million range from Q1 2017, with the majority of the growth occurring in OpEx.
On the balance sheet, cash, cash equivalents and investments totaled $376 million at the end of the first quarter. Accounts receivable of $96 million were down from $122 million in Q4, and deferred revenue decreased sequentially to $102 million. Both declines were in line with normal seasonal patterns. Net cash from operations was a strong $19 million in the quarter.
Now, let me turn to guidance for Q2 and the rest of the year. I do want to provide some context first. We continue to feel very bullish about our business and our market opportunity. We have a very strong position in the market selling to and through the service providers and other channel partners, which we believe are and will be the preferred channel to SMB and, increasingly, large enterprises in major markets across the globe. Competitively, we feel we are as strong and well positioned as ever.
Having said that, I think 2017 on a revenue basis will end up a little lighter than we had originally forecast. So, we are bringing our revenue expectations down a bit for the year. Specifically, we are now guiding annual revenue to be in the $380 million to $390 million range. We expect EPS to remain, as we had previously guided, in the $2.20 to $2.50 a share range.
For Q2, we anticipate revenue of $84 million to $88 million, and EPS between $0.20 and $0.32. The two big drivers of the revenue change are professional services and our BroadCloud SaaS business. Specifically, we are lowering professional services revenue expectations to around the $70 million range. We are seeing some impact from the rollout speed of some of the transformation projects, especially in the timing of revenue and follow-on engagement.
In general, we expect to be a little cautious in forecasting professional services for the remainder of 2017. And we are lowering SaaS expectations to $63 million to $65 million. As Mike mentioned, we have a number of exciting new BroadCloud service launches happening, including those targeting large enterprise users. The sales cycle for our existing service provider customers onboarding new, often larger enterprise customers and our onboarding of new service providers are taking longer than we had expected.
I do think we will exit this year with momentum in BroadCloud, as our existing service provider customers accelerate and these newer implementations begin to hit their stride. I think, in particular, that 2018 could be a big year for BroadCloud in government and large enterprise with large, often multinational implementation.
For software revenue and contract, we continue to forecast that we will be within our forecasted range of 7% to 10% growth. We are forecasting solid growth in sell-in in the second half from our service provider customers. Sell-through in our major geographies remain strong. We think we are on track to hit or exceed 3 million new hosted sell-through lines. We do expect our software revenue to be pretty back-end loaded, given the anticipated timing of deals with pretty sizable increases in software revenue in both Q3 and Q4.
Turning to expenses and profitability, I think it's important to note that we're not changing our expectations regarding EPS for the year. We plan on maintaining our previous dollar profit targets. We'll continue to invest in our top priorities, but we'll back off of any additional substantive expense growth for the rest of the year.
In conclusion, I think the longer-term outlook remains very bright for us. We lead a market that is large and very underpenetrated. I think we will exit 2017 well and believe that we will see increasing software volumes in the transformation deals and acceleration with BroadCloud in 2018 and beyond. As Mike mentioned, we expect our transformation customers to replace legacy business POTS and Centrex lines over the next several years that in total significantly exceed our deployed hosted lines to date.
With that, operator, we will open up the call for questions.
Question-and-Answer Session
Operator
Thank you. And our first question comes from the line of Catharine Trebnick of Dougherty. Your line is now open.
Catharine A. Trebnick - Dougherty & Co. LLC
Oh, hi. Catharine Trebnick here. Hey, Jim, can you provide more color on what the challenges are for why the license line is not really growing as fast as we think it should be? Thank you.
James Tholen - BroadSoft, Inc.
Well, Catharine, as we said, we're maintaining our guidance view on software and I think we'll – I mean, I think it's going to be a solid software year. I guess, the ins and outs, sell-through looks really quite good worldwide. And so, that's always been an important barometer for us. As Mike mentioned on a few of these very large transformation projects, there's a little bit of a slowdown in the pace of deployment and that's driving some – we had expectations that we'd do better in software on the transformation projects at the end of the year. So, that's a little lighter.
At the same time, it's kind of a portfolio effect from the rest of the company. The U.S., and particularly in Europe, I think software is looking really pretty good. And I think for rest of the year, especially outside the U.S. – U.S. will be fine, but we are being impacted on these transformation projects. Outside the U.S., I think software will look pretty solid. So, the yin and yang is transformation projects slip, but other parts of the business doing well and I think all in we're comfortable maintaining the software view.
Catharine A. Trebnick - Dougherty & Co. LLC
One other question is, last quarter you talked on the inventory had tightened up. Are you still seeing that overall and any difference in the U.S. versus Europe or Asia Pac? Thanks.
James Tholen - BroadSoft, Inc.
Yeah. I'd say inventory looks pretty much worldwide consistent with where we were at the end of the year.
Catharine A. Trebnick - Dougherty & Co. LLC
All right. I'll come back later. Thank you.
Operator
Thank you. And our next question comes from the line of George Notter of Jefferies. Your line is now open.
George C. Notter - Jefferies LLC
Hey there. Thanks very much, guys. I wanted to come back to the transformation projects. It sounds like from what you said they're slowing down in terms of the pace of your – I don't know, I guess, installation of those customers and their pace on selling through into projects. Looking back, I mean, it seems to me you guys have been pretty cautious historically in talking about transformation projects and timing of revenue. And I guess I had assumed that also these would roll out more slowly. I guess I'm wondering what's really changed this quarter versus last quarter, or last year when you think about the timing of these projects. Just intuitively, what's going on there? Thanks.
Michael Tessler - BroadSoft, Inc.
Hey, George. It's Mike. I think what we learned and let me explain and provide a little bit more color on the transformation that, lots of different projects, lots of different geographies, lots of different levels of complexities. So, the prepared remarks were kind of generalized.
I think what we heard from a number of our customers in the last few months is that specifically with the conversion parts of the transformation projects that there has been some issues with regards to customer activation and kind of the overall kind of activation journey migrating customers from legacy to our platform. And some of these, you can only really catch once you start doing some initial launches or initial migrations, let me say. And so, we've been working and guiding our customers on how we could potentially help them. A lot of this happens to be in their back-end IT systems or a number of migration systems. So, sometimes, there's not much we can do. And so, that's kind of the real, let me say, the net change or learning that we've discovered in the last 60 to 90 days.
I think, generally, we see kind of the – when we describe some of the transformation projects as being a combination of kind of initially net new and then migration, the net new stuff seems – because it has less complexity, those are progressing. But the migrations that we had thought would occur near the back end of this year will probably slip into 2018. So, some of these customers – as I said, some of the challenges will get fixed quickly, some will take a little longer, there's kind of a wide variety of them. But generally, when we rolled it all up, we think that we'll see some slip into 2018.
George C. Notter - Jefferies LLC
Got it. I also wanted to ask about BroadCloud. Any changes in terms of how you guys are pricing BroadCloud or incentivizing customers to move over from BroadWorks? Anything new to talk to there would be great?
Michael Tessler - BroadSoft, Inc.
So, I think that generally, what's happening is the customers are looking at BroadCloud from a number of different perspectives. So, some customers are looking at using BroadCloud for new market segments. Both of the BroadCloud enterprise customers I've talked about in the prepared remarks are actually existing customers who have decided to use BroadCloud in these new market segments. So, I think there's a range of some customers looking at continuing software, some looking at kind of hybrid deployment, some software, some cloud, and some looking at using cloud and software depending on market segments. And so, there's kind of a wide variety of different strategies that our customers are using.
We're not, say, financially incenting customers. I think customers are realizing that more and more of our innovation, our new products like Team-One and CC-One are cloud-only products. They see the differentiators like BroadSoft Hub also being cloud-only deployed products and are starting to kind of work with us on migrating their deployments and their integrations to cloud.
George C. Notter - Jefferies LLC
Got it. Thank you.
Michael Tessler - BroadSoft, Inc.
Thanks, George.
Operator
Thank you. And our next question comes from the line of Jess Lubert of Wells Fargo Securities. Your line is now open.
Jess Lubert - Wells Fargo Securities LLC
Hi, guys. A couple of questions. First, maybe I was just hoping for a little more detail with respect to some of the factors that are driving the revision to the BroadCloud outlook, how you're feeling about the competitive environment because it feels like end market conditions are still fairly healthy. So, I just kind of wanted to understand some of the key factors driving the revision there.
Michael Tessler - BroadSoft, Inc.
Well, I think, first of all, when you look at cloud – I think when you look at end user market conditions as you mentioned and cloud, I mean you have to look at our combined businesses of software and cloud, because we're serving that end user market in a combination and we're obviously transforming, as I just answered before, some of our customers from software to cloud. So, that's a little bit of – and we continue in that end user market to deploy, as Jim mentioned in his remarks, our expectation is that we'll deploy 3 million plus seats in the year. That's a significantly larger number than anybody else in the market. So, we continue to see very good end user demand for our products. There's obviously a mix of fulfillment, some software and some cloud.
Specifically, on the cloud side, let's say, as Jim remarked, I think some of the channels that we've turned up are taking a little longer to get to full stride, full production, not so much technically, but kind of sales, marketing and getting their machinery going than we originally had expected. Some of the expectations around government and federal are a little bit more back-end loaded than we had originally forecasted for the year.
And I think the third thing that's impacting that SaaS number, cloud number, is that some of the channels, as I mentioned in my remarks, are attacking large enterprises. And large enterprises, just by their rollout nature, just take a lot longer, the scheduling and planning of those rollouts are a little longer than SMB. And so, we've tuned our cloud model to adjust for those changes in the customer mix.
Jess Lubert - Wells Fargo Securities LLC
Helpful. And then just on the transformation side, can you help us understand where some of the big operators who launched live service last year, I think, AT&T, Verizon, Rogers, Vodafone, how those services are going, tracking relative to plan? And then, just to kind of clarify on the transformation side, to what extent does your outlook for license growth of 7% to 10% this year, does that embed that some of these big operators start to port users over onto these platforms, or is that not something you're assuming this year and that's more of a 2018 event?
Michael Tessler - BroadSoft, Inc.
Let me answer the transformation a little bit and then I'll hand over to Jim. I think that, generally, what we're seeing with the transformation customers is – I think, what's a good way to look at it is kind of the net new market launches. Typically, almost every one of our transformation customers has gone out with a kind of net new approach and then looking really at a phase two on migrating legacy-based customers. I think we see the first phase going fairly well in the marketplace. You've mentioned a number of customers. Some are doing – have stronger deployments and some have a little less strong, so kind of a mixed portfolio kind of as expected.
I think the challenge that a number of our customers have found is, in the porting, migration of their legacy bases, which we thought would start really at the end of this year for a number of reasons look like it'll get pushed out into 2018. And again, most of that happens around the overall kind of customer journey, migration journey, and changes required in back-end activation, billing, order management systems that are obviously quite complex. So, I think that's kind of the way to look at the overall transformation. I'll hand over to Jim to kind of talk about the numbers.
James Tholen - BroadSoft, Inc.
Yeah. So, we had had an expectation for software near the end of the year in our revenue and billings software numbers from these moves to the legacy base. And as Michael said, our expectation is that effectively those have slipped. The good news is kind of portfolio effect across the business, I think, elsewhere, we're seeing nice strength in the software business, especially around hosted. And I think Europe, as an example, a lot of momentum in Europe. And so, I think second half will really look good. Rest of the year, I think North America outside of the transformation projects will look solid. So, I think that kind of on a weighted average basis, we're pretty comfortable with software, but the mix on non-transformation will be higher.
Jess Lubert - Wells Fargo Securities LLC
And then maybe if I can just squeeze one last one in. On a past call, you suggested you had an eight-figure software deal that was expected to hit this year. Can you update us on how that's tracking and when that revenue is likely to flow through the model?
James Tholen - BroadSoft, Inc.
Yeah. So, yeah, that's part and parcel of a contract that we originally signed Q3 of last year. And the billings and revenue for that for this year will be in the second half.
Jess Lubert - Wells Fargo Securities LLC
Thanks, guys.
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Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Dmitry Netis of William Blair. Your line is now open.
Dmitry G. Netis - William Blair & Co. LLC
Okay. Thank you very much, gentlemen. A couple of questions. Is it fair to say the outage at AT&T that they have seen couple of – I think it was last month, early last month, is that what potentially made them reconsider the timing of those customer migrations and your rev rec essentially on the license side of things and that's what's really causing the push-out here into 2018?
Michael Tessler - BroadSoft, Inc.
Outlook Toolbar Missing
I don't want to address the particular event, but no.
Dmitry G. Netis - William Blair & Co. LLC
Okay. But can you address the outage and what that caused essentially in your model, if anything at all?
Michael Tessler - BroadSoft, Inc.
I think the customer outage at AT&T, non-attributable to BroadSoft, also had no impact on our business.
Dmitry G. Netis - William Blair & Co. LLC
Okay. Thanks, Mike. And then, on the inventory levels, are you seeing inventory tightening further here or where is the inventory sitting at the moment? And now that sort of the guidance has been updated, is there enough licenses still out there for – I suppose there are, otherwise those big customers would be coming back to you for new licenses. So, what is the situation in terms of inventory?
James Tholen - BroadSoft, Inc.
Sure. Yeah. So, inventory, actually a little tighter at the end of Q1 than it was at the end of the year. So, sell-through continues to be a little north of sell-in, which is sort of good at several levels. I'd say that on a general basis across the globe, inventories are tighter than they had been and where we have some high inventory, it's concentrated in a couple of customers. And, obviously, we're not assuming for those few customers who bought the software for 2017.
Dmitry G. Netis - William Blair & Co. LLC
Okay. And then last question, Jim, just to sort of pick your brain on the visibility there in the second half. I understand it's a pretty big ramp now heading into the second half. You've always done well in the second half, so there is track record of doing so. But if you could rank maybe three things that gives you confidence that the numbers would work out the way you think they would, you had mentioned that there's less of a transformational activity in the back half of the year, and that's always been a sort of a strong driver for you. So, if that isn't the case now, what are the three things that may be driving the confidence level for second half?
James Tholen - BroadSoft, Inc.
Sure. Yeah. So, as you know, we forecast bottoms up. So, we're pretty meticulous on our rigor on our forecast process around customers. And so, that's the basis of the view. We align that with our expectations of revenue recognition and particularly larger chunks of software orders from our customer base. And so, I think Jess had asked that question about the large contracts. So, as an example, we know that on one particular customer that we're getting sizable software in the second half, and that will flow through revenue.
Even though we've had some delay on some of these transformation projects, there's still ongoing delivery and revenue events on several. And again, that'll help drive the revenue number. So, I think, again, after our rest-of-year scrub, we get that the trajectory, especially in software for the second half, looks like quite a bit of growth and right now, we're comfortable with it.
https://newtoy457.weebly.com/blog/rad-studio-xe-4-crack-keygen-torrent. Dmitry G. Netis - William Blair & Co. LLC
Okay. Thank you very much, guys.
Michael Tessler - BroadSoft, Inc.
Microsoft Toolbar Disappeared
Thanks, Dmitry.
Operator
Thank you. And our next question comes from the line of Paul Silverstein of Cowen. Your line is now open.
Paul Silverstein - Cowen & Co. LLC
Yeah. Several questions. I hope you all will indulge me. First off, the regional mix, Jim, can you share that with us?
James Tholen - BroadSoft, Inc.
Yeah. It was about 60% U.S., a little north of 30% EMEA and then 9% or 10% rest of world.
Paul Silverstein - Cowen & Co. LLC
All right. And given your comments earlier about resting down expenses in order to hit your EPS guidance off the reduced revenue forecast, does that mean operating leverage has been pushed out again? I think previously you had said that no leverage this year, but you were driving from the leverage next year. The direct question is, what should we expect – I know next year is a long way off, but what should we expect in terms of eventual operating leverage in the model?
James Tholen - BroadSoft, Inc.
Yeah. So, we've said long-term model 22% to 25%. John's nodding, so that's good. And we continue to expect that. I think one of the – or the two keys on that are renewed software growth. And I think when you look at the magnitude of software from these transformation projects once they start replacing their legacy basis, that will help. And then the second is leverage from more growth in SaaS. So, we're not guiding to next year, but I think those trends should appear more obviously as we go into 2018 than I think we're seeing this year.
Paul Silverstein - Cowen & Co. LLC
All right. And I recognize that there have been a number of questions already on revenue. But stepping back, trying to get the big picture here. If I go back to last year, you all were talking about unexpected delays in revenue related to software on the big transformation deals. And I'm trying to discern to what extent your commentary today is new and different in terms of your understanding of the onboarding issues from these big transformation deals? And going back to the question that was asked, but I didn't hear any answer to, a cynic would say this isn't onboarding issues or other issues, this is competition. There's a lot more competition in the marketplace today, where the Microsoft or now Amazon coming in, even allowing for the fact that it's going to take a while before that service really becomes robust.
And you've got Slack and all these other – Twilio, Cisco Spark. And I recognize then all these are directly competitive. But the direct question is, to what extent are you being impacted by competition? And to what extent is, will you share with us truly new and different relative to previous commentary?
Michael Tessler - BroadSoft, Inc.
So, let me take on the competition part. I think, first of all, as we've said, when you look at the total number of seats that we're delivering to the marketplace, both in software and cloud, we're significantly, by a significant margin, larger than anybody else in this cloud communications arena. I think while there's lots of noise around the edges in competition, nothing has really changed.
Microsoft makes a lot of noise, but they have no real deployments in the kind of communications side, the enterprise telephony side. All these other little apps flowing around really, again, don't really address the core telephony requirements that businesses have, and where we and our partners have traditional strength. And so, I don't really think that we're worried. We continue to watch and monitor and obviously look at our competitors every day. But I don't think that – I don't believe the competitive environment has changed since the last time we have updated you guys.
On the – is this information new, I could tell you information is new. I've sat with the customers myself. I think as we – as they and we started to migrate some legacy customers, things in the journey just started to kind of pop up that this – we're not optimal. And they and us are in full flight to fix those issues with regards to the migration of customers. When you look at the size of the migrations, you're not selling 10 seats at a time. You're doing millions of lines of migration. These have to be extremely smooth and without any customer hiccups. And I think that's where you're seeing the new information.
And you only really get to experience it once you're ready to go and you start migrating the first few customers and you realize, hey, this isn't going really well, there's some hiccups. The installation issue, the box doesn't install well, et cetera. This is not atypical from any large, very, very large network rollout that any carrier does. Often, these things take a number of cycles when you're dealing with very large migrations of millions of lines. And so, this is absolutely a kind of new information and a new experience that we're trying to resolve.
Paul Silverstein - Cowen & Co. LLC
I appreciate. I'll pass it on. Thank you.
James Tholen - BroadSoft, Inc.
Thank you.
Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Tavis McCourt of Raymond James. Your line is now open.
Tavis C. McCourt - Raymond James & Associates, Inc.
Hey, guys. Thanks for taking my question. Jim, just a housekeeping first. Installer app on identifié mac. What was cash flow from operations and capital spending in the quarter? And then, any expectations for the full year on those two metrics would be helpful?
And I guess, I don't want to kick a sleeping dog here, but I just want to make sure I understand, the change in the revenue outlook for this year is largely related to BroadCloud and professional services. So, Mike, when you say there's been some transformational deals that are rolling slower, are those revenues that would have been recognized in professional services, or are those license software revenues that will then get pushed into 2018, but there are some other offsets going better in software licenses and that's why your overall software license revenue doesn't change?
Michael Tessler - BroadSoft, Inc.
I think you answered your question. Yes. So, the software, as Jim mentioned, we didn't have huge anticipations for the software, but some of that in the portfolio of transformation and normal business gets – we're seeing a stronger normal business and a little bit less transformation expectations near the end of the year because of these delays.
I think you're correct, the change in the guidance is a function of two things, one of them being pro services and the other one being the adjustment to the cloud number. On the pro services side, I'd say, half of that is a delay in revenue recognition of a project, and then the other side of that is just delays in some of the add-on pro services projects around transformation. So, that's kind of the mix of the pro services challenges.
I'll hand over to Jim to answer your other questions.
James Tholen - BroadSoft, Inc.
Yeah. So, Tavis, cash flow – net cash provided by operating activities was a little north of $19 million in the quarter. CapEx was $5.3 million. We really don't guide those for the year. I'd expect overall that we do as well or better this year than we did last year. And there was a little more – definitely more CapEx in Q1 than it would be – if we normalize it per year, I think that's too high. We'll be closer to what we did last year as opposed to taking Q1 and multiplying it by four. That was particularly around some capital on our schedule implementations for BroadCloud which, as we said, we expect to get quite a bit of growth from.
Tavis C. McCourt - Raymond James & Associates, Inc.
Great. And, Mike, if you could – if I could do a quick follow-up on your comments, and I know 2018 is a long way away and revenue rec is always tricky on these large contracts. But maybe if you could frame it in terms of overall activity in terms of transitioning legacy customers over to the BroadSoft platform, would you expect the level of activity to be greater in 2018 versus 2017?
Michael Tessler - BroadSoft, Inc.
Yeah. I think what we're – I'd say generally I think across – I'm scanning across the customers that I interact with, that most of them have gone through their initial soft launch around migration, identified the issues and are now in kind of the remediation mode of those issues. And so, my expectation would be is that that migrations would start in 2018. Again, wide variety covering all the customers. But through the year, we would start seeing migrations of the legacy base into our platforms.
Tavis C. McCourt - Raymond James & Associates, Inc.
Great. Thanks very much.
Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Rich Valera of Needham & Company. Your line is now open.
Rich F. Valera - Needham & Co. LLC
Thank you. Another question on inventory levels. Back at your Analyst Day late last year, you showed some bar charts showing your estimated customer inventory levels. And in that chart, your estimate for the 2016 inventory levels looked materially lower than where you were in 2014, which might have led some to believe that's sort of an acceptable level, and we wouldn't expect it to much drop from there. But you talked about inventory dropping again in 1Q. So, I guess the question is, where do you think inventory bottoms and are you expecting further inventory declines for the balance of this year, which will create more of a headwind in the sell-in or sell-through dynamic?
James Tholen - BroadSoft, Inc.
Yeah, Rich. So this is kind of third inventory question, so let me just make sure I'm clear. So, the inventory levels were pretty close to the end of the year when we had talked about those inventory levels tightening, as you alluded to, and I think when Catharine asked, I said they're essentially the same. Technically, they're down a little bit, but pretty modestly. So, I think, to me, it's a bit of the new normal. So, it's, as you said, demonstrably lower than on a proportional basis than we were in 2014. And, again, I think pretty consistent, a little bit down. The other thing to note – so I don't foresee substantive tightening generally.
As I did mention in the call, there are a couple of customers that do seem to have a bit of inventory. And so, that is a overhang from getting new software orders from those couple of customers, and they're a pretty good customers of ours. So, our expectation in the rest of the year for those couple of customers is that we won't see appreciable software ordering activity.
Rich F. Valera - Needham & Co. LLC
But can you say in aggregate, what you would expect from an inventory perspective? It sounds like you expect some headwinds with those couple of customers. But is there, maybe, puts and takes that make it in aggregate sort of neutral, or is it you're still expecting a bit of a headwind from reductions in inventory this year?
James Tholen - BroadSoft, Inc.
No, no. I think in aggregate, as I said, I think we're at the new normal. I don't expect to see further appreciable tightening. I think it's – yeah, I think it's the new normal, Rich.
Rich F. Valera - Needham & Co. LLC
Got it. And just another question on your Powered by BroadSoft comments, I think these were Mike's comments. But you talked about doing a fairly extensive digital ad campaign for one of the customers in that campaign. And I guess I'm trying to understand sort of how that transaction works, sort of what you get from the customer for that. Obviously, if I'm a customer, I think I'd be pretty happy to have someone else spend money to do an ad campaign for my product. But is there a quid pro quo there? What do you get for doing that ad campaign for your customer for essentially paying for your customers' marketing spend?
Michael Tessler - BroadSoft, Inc.
Yeah. I mean, so first of all – this is Mike, because of the – so, what we're doing is we're doing digital marketing and we're using the power of the bigger customers that have very large existing customer base. So, it's not like we're spending a tremendous amount of money buying leads or those kind of things. What we're really doing is working side by side with the carrier and running the digital outbounds campaigns.
Obviously, what we gain from it is we gain complete – very tight control over the quality of the message. And we're typically doing those campaigns for our BroadCloud customers driving demand into our service. So, that's really the benefit. What we're trying to do with the Powered by BroadSoft program is, in general, assist all of our customers to increase their sales yield, growing more subscribers onto our platform.
Rich F. Valera - Needham & Co. LLC
Okay. That's helpful color. Thanks, gentlemen.
Michael Tessler - BroadSoft, Inc.
Thank you.
Operator
Thank you. And our next question comes from the line of Will Power of Baird. Your line is now open.
Will V. Power - Robert W. Baird & Co., Inc.
Great. Thanks. Yes. I guess a couple of questions. You referenced the announcements from Deutsche Telekom back in March, and Deutsche Telekom's laid out some aggressive long-term plans. Is that something from a timing perspective that we should expect to ramp in the back half of this year, or is that longer term, say, 2018 plus?
Michael Tessler - BroadSoft, Inc.
I don't want to get into the specifics of one customer. I'm not really capable of talking about that particular customer without their approval. So, I think, generally, as I said, I think all of our transformation – or most of our transformation I'd say, (59:25), that most of our customers are in market with what I would call net new. I think what you'll see from Deutsche Telekom and others is a beginning of that migration businesses some time in 2018.
Will V. Power - Robert W. Baird & Co., Inc.
Microsoft Outlook Toolbar Missing
Okay. And then I want to come back. You made some comments earlier on, or I think Mike did on CC-One and Team-One, and I think 100-plus trials or a number of trials on those products. Are those products being bundled today actively or are they being sold separately? Just trying to understand that dynamic. And is there any source of pushback you're getting from customers that would keep those from moving from a trial phase to a better revenue generation phase?
Michael Tessler - BroadSoft, Inc.
So, the remarks I made were specifically on Team-One where we've seen a very large internal trial activity, the 100-plus service providers. I think that the service providers, in general, are quite interested in this new product in the enterprise messaging and team workspaces. I think there the internal trials are really helpful for them to really understand the product, how to use it, how to sell it, how to communicate it, how to position it, pricing and so on. You have to realize those 100 service providers span a fair amount of geography. So, we're trialing Team-One in a fairly large number of geographies with that product. And we're starting to see some of them actually go to market, start pushing the product from internal trial to service launch.
Generally, right now, the initial discussions have been selling Team-One as a stand-alone, although we have a number of dialogues with a number of carriers about potentially bundling Team-One with UC-One. And so, that's kind of the – I'd say that's early indicator and some thinking about potentially bundling those two offers into one.
We're seeing on the CC-One side, we've really – we talked about this a little bit before. We spent a significant portion of last year really retooling our go-to-market into enabling our service providers to sell a contact center. It's a bit more complex to sell. It's a bit more – requires some specialization, requires some skills, some knowledge. And we have launched, with a number of that we've seen some initial sell-through through the SPs that we have onboarded to CC-One.
Typically, today the CC-One product is being sold separately from UC-One. But again, we're in a discussion with a number of carriers about really focusing the sales approach or the sales segmentation on those customers that would like both the UC and contact center product fully integrated and sold as such. We can do that. But we're just starting to go to those go-to-market discussions with a number of operators. So, I'd say that we're – today, we're seeing all three apps being sold somewhat independently, obviously, with the benefits of integration and a number of dialogues with a number of our customers about potential bundling of those products as we go forward.
Will V. Power - Robert W. Baird & Co., Inc.
Okay. Thank you.
Michael Tessler - BroadSoft, Inc.
You're welcome.
Operator
Thank you. And our next question comes from the line of Vijay Bhagavath of Deutsche Bank. Your line is now open.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Yeah. Thanks. Yeah. Hi, Mike, Jim.
Michael Tessler - BroadSoft, Inc.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Yeah. Hi. Yeah. I just have a bigger picture question here which is, have you cycled through most of your network transformation projects here in the U.S. and is the focus now mostly on repeat business over the next year or two? And then any thoughts, Jim, on exiting potentially underperforming portfolio and then leveraging M&A for future growth? Thanks.
Michael Tessler - BroadSoft, Inc.
So, I'm not sure I totally understood what you meant by cycling through. I'd say that the majority.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Like, are those projects mostly behind you? Yeah. Thanks.
Michael Tessler - BroadSoft, Inc.
Oh, no. No. No. As we've said, the transformation business globally, we're really in the first – I'll use baseball, the first inning of a very long game both domestically, both in North America and internationally. And we believe that we'll continue to see transformation pick up around the world as everybody is going to eventually shut down their legacy switched networks and move to all IP. We're obviously the vendor of choice for those projects. We have the most experienced, the most feature functionality, the most knowledge in those transformation projects. So, we're very early on both here and around the world.
James Tholen - BroadSoft, Inc.
Yeah. And, Vijay, I wasn't sure exactly what you meant by transitioning out of underperforming areas. I mean, I think, again, our perspective is that we have businesses that fortunately have very high profit margins with great gross margins, we're really at the beginning of the market like the – it's all about TAM capture to me. And that's really global. We think we have the most effective channel path to customers again globally. So, I'm not sure what we would cycle out of from a portfolio rebalancing that we would use M&A to replace.
Vijay Bhagavath - Deutsche Bank Securities, Inc.
Okay. Yeah. We can follow up offline. Thank you.
James Tholen - BroadSoft, Inc.
Okay. Okay. Got it.
Operator
Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Mr. Michael Tessler for closing remarks.
Michael Tessler - BroadSoft, Inc.
Thanks, everybody, and thank you for being on the call today and for your continued support. We look forward to updating you on our progress in the coming months, and have a great day. Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.