Why BroadSoft Shares Slumped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of BroadSoft plunged nearly 25% during intraday trading after the IP-based communications services specialist not only reported disappointing third quarter results, but also issued weak forward guidance.

So what: Quarterly revenue increased 7% year over year to $42.9 million, while non-GAAP net income fell 19% over the same period to $0.29 per share. For reference, analysts on average were looking for non-GAAP earnings of $0.30 per share on sales of $45.16 million.

In addition, BroadSoft said it expects fourth quarter revenue of $47 million to $53 million, with non-GAAP earnings of $0.34 to $0.49. Unfortunately, not even the high end either range met forward estimates, which called for adjusted earnings of $0.51 per share on sales of $54.85 million.

Now what: BroadSoft CFO Jim Tholen said: "We believe our longer-term outlook remains positive although we have some short-term concerns about the service provider spending environment in the fourth quarter. We continue to believe that we are very well-positioned to take advantage of the secular trend of enterprise communications moving to the cloud."

That's fair enough, but considering shares were trading at a premium of around 20 times next year's estimated earnings before today's plunge, it's hard to blame investors for taking a step back until BroadSoft can prove this weakness will be short-lived. At the same time, if that does turn out to be the case and with shares currently sitting at a much more reasonable 15 times next year's estimates, patient investors who take advantage of the pullback could stand to reap the rewards down the road.

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The article Why BroadSoft Shares Slumped originally appeared on Fool.com.

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