Broad Momentum for BroadSoft
Will BroadSoft be a 'Top 3' communications company?
In physics, momentum is defined as the product of mass and velocity. If we take this definition and apply it to BroadSoft, we can use the company's base of 600+ service provider partners as the mass and the redoubled efforts BroadSoft and its partners are putting into the market as velocity. Clearly BroadSoft's market momentum is increasing.
For readers who don't know BroadSoft well, the company is the global leader in cloud-based voice communications seats. It claims 33 million seats total, 14 million of which it categorizes as business seats. A business seat differs from a basic voice seat in that it delivers more functionality, which may include unified communications capabilities along with conferencing.
Like its cloud communications competitors, BroadSoft has seen sizeable revenue growth. The chart below shows both the company's revenues and net income (GAAP basis) since 2006.
You could reasonably ask why net income has not increased when revenue has grown by double digits. The answer is that cloud communications companies are in a frenzy trying to grab market share, with the belief that market share is far more important than net income. Hence, R&D, sales/marketing, and general and administrative expenses are seeing double-digit growth as well.
If you look at publicly traded competitors 8x8 and RingCentral, which are also growing rapidly, you'll see that they have shown net losses of $7.1 million and $32.1 million, respectively. The point is that although BroadSoft is growing, it is still trying to do it profitably. You can reflect on whether market share gain in the face of significant loss is the right way to go. ShoreTel has focused on market share at the expense of profitability for some time, and some would argue that it is a distressed property right now.
In recent months, I have had the opportunity of looking very closely at a number of UC solutions, including those from Cisco and Microsoft (discussed at Enterprise Connect 2016) as well as BroadSoft's UC-One offering. Cisco Jabber, Microsoft Skype for Business, and BroadSoft UC-One all have similar UC capabilities, each supporting IM/presence, voice, screen sharing, and multiparty video conferencing. With access to accounts for all three, I have reached the following conclusion: While there are clearly some minor differences among them, each environment provides excellent UC functionality.
One of the interesting advantages BroadSoft may have in a mobile-first world is the integration mobile carriers can do with the BroadSoft platform. The recently announced One Talk mobile capability from Verizon Wireless is a prime example (see recent No Jitter post, "Verizon One Talk: UC Mobility Without an App").
Verizon has deployed BroadWorks as a VoLTE/IMS telephony application server in its VoLTE network as a critical piece of its market-differentiated One Talk solution. One Talk calls are anchored in Verizon's mobile cloud and this enables the PBX capabilities on the mobile device as an integral part of the service.
One Talk comes in two options: One Talk Dialer and One Talk Mobile App. In the first case, the One Talk Dialer adds various business features to a compatible device's native dialer (available on select smartphones from Verizon Wireless). With the One Talk Dialer, your Verizon Wireless phone number will be the same as your One Talk phone number. Other associated devices will share the same One Talk business number. For example, Verizon Wireless offers a desk phone (which must be purchased from Verizon Wireless), and calls to the mobile number are also routed to this desk phone. The desk phone is connected to an IP network; this call is an over-the-top (OTT) VoIP call, but it uses the mobile number and is anchored in the mobile network.
With the One Talk Mobile App, your personal device will have two mobile phone numbers, one will be from your mobile carrier of choice and the other will be your One Talk business number. In order to access One Talk features and use the One Talk business number, users will use the One Talk Mobile App to place and receive calls. This version of One Talk is similar to other OTT applications in that calls made to and from the device using the business number are VoIP calls.
I am unaware of mobile carriers that offer this level of PBX functionality in the mobile handset based on competing offers from Cisco, Microsoft, 8x8, RingCentral, and others. Even the well-received AT&T RingCentral Office@Hand is not as tightly integrated into the mobile experience.
Like Cisco HCS partners, BroadSoft partners set their own prices for the services based on the markets they serve. This is proving to be a critical factor in determining whether a channel will ultimately be successful or not. In addition, it turns out that the cost of customer acquisition, which is highly impacted by churn, is key when computing channel margins, and partners that can set their own prices can assure that their pricing models provide sufficient margins for business success.
In recent months, BroadSoft has made strategic acquisitions of Intellinote and Transera, which are filling gaps in the company's product portfolio (see related posts, "Team Collaboration Piques Providers' Interest" and "UCaaS/CCaaS Consolidation: BroadSoft Acquires Transera"). While I'm not a contact center analyst, per se, Transera seems to offer a good contact center product, and its real-time analytics and routing capabilities seem to mesh well with emerging world of big data and Internet of Things. What I can say is that Intellinote is far more capable than the team workspace products offered by some of the other major companies in our industry, including Cisco Spark. Yes, Spark has better video integration, but Intellinote is a much more functional environment for team collaboration. BroadSoft's biggest challenges with these two products will be 1) integrating them with BroadWorks, and 2) helping partners managing hybrid cloud offerings in which the partner hosts voice and BroadSoft hosts contact center and team workspace offerings.
Many organizations look to the Gartner Magic Quadrant as one input on which solution to consider. Of the 16 vendors covered in the Gartner Magic Quadrant for Unified Communications as a Service for 2016, five of them (AT&T, BT, Orange Business Services, Vonage, and Verizon) license technology from BroadSoft. One implication is that although these service providers rebrand the solution, it is still BroadSoft underneath, and as the subscription bases for these vendors increase so does BroadSoft's subscription count. This is a very healthy market position to occupy.
Now, not everything is easy sailing for BroadSoft. For example, Microsoft, RingCentral, Fuze, 8x8, and others sell direct to customers. As competition for cloud communications increases, pricing will decrease, and margins will shrink. The question is one of whether a channel model as opposed to direct sales will provide enough margin to continue to attract partners.
Many of BroadSoft's partners do bundle a number of other services with their BroadSoft-based voice licenses. For example, the Vonage 10-K states that ARPU for a business seat is $45.52 and that the company has 580,000 business seats. So, you would have expected Vonage Business revenue to be approximately $26 million in Q2 2016. However, it actually was $78 million. Thus, for every business license sold, Vonage Business makes approximately twice that amount in other services packaged around the voice license. Hence, good partners can creatively bundle additional products and services with voice communications that will make up for losses in voice services revenue. However, price compression is going to be a concern lurking in the background.
In a related issue, BroadSoft is not a well-known enterprise brand because the company's partners private-label the service. Although it is powerful in the carrier market, most enterprises will never have heard of BroadSoft. Furthermore, even if you do know about BroadSoft, finding a partner can sometimes be difficult (there is no "Find a Partner" button on BroadSoft's website as there is on Cisco's, for example).
Verizon Wireless's One Talk is an excellent solution, one whose time has really arrived; however, in areas where cellular coverage is spotty, it may be a problem. Verizon supports Wi-Fi calling, which can help. But Wi-Fi calling can still have some issues. One I have noticed is that sometimes calls latch on to a poor Wi-Fi network even when LTE is available. Also, what happens when you travel overseas? With a mobile VoIP client, location really doesn't matter as long as you have a good Wi-Fi connection. With a One Talk-like service, location will matter a lot. Chances are that people will revert to Skype or FaceTime, or some other capability when traveling abroad.
In conclusion, I like the momentum BroadSoft and its partners have generated. I think the company needs some work on process and execution as it continues to focus heavily on sales and marketing. As analysts, we are sometimes asked, "Which companies do you think will be the big winners?" Well, clearly Cisco and Microsoft have to be referenced. And Mitel is in the mix given its size through acquisition, plus it, too, has a cloud service. I do think BroadSoft is in an excellent position to remain among the top three or four cloud communications companies as the move to cloud and hosted communications services advances.
Editor's note: This updated version of the original post includes clarification on Verizon Wireless's One Talk offering and how it works.