TMCnet News
ASPECT SOFTWARE GROUP HOLDINGS LTD. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q, or this "Quarterly Report", and in conjunction with our Annual Report on Form 10-K (File No. 333-170936). This Quarterly Report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report, including, but not limited to, statements regarding the extent and timing of future revenues and expenses and customer demand, statements regarding the deployment of our products, statements regarding our reliance on third parties and other statements using words such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "intends," "may," "plans," "projects," "should," "will" and "would," and words of similar import and the negatives thereof, are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies, or the expected outcome or impact of pending or threatened litigation are forward-looking statements. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. We refer you to the "Risk Factors," "Quantitative and Qualitative Disclosures of Market Risks," and "Liquidity and Capital Resources" sections contained in this Quarterly Report, and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. We urge you to consider these factors carefully in evaluating the forward-looking statements contained in this Quarterly Report. We claim the protection of the Private Securities Litigation Reform Act of 1995 for all forward-looking statements in this report. All subsequent written or oral forward-looking statements attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements included in this Quarterly Report are made only as of the date of this Quarterly Report. We do not intend, and undertake no obligation, to update these forward-looking statements. Overview We are a global provider of customer contact and workforce optimization solutions. We help our customers build, enhance and sustain stronger relationships with their customers by uniting enterprise technologies with customer contact solutions. Through seamless, two-way communications across phone, chat, email, IVR, IM, SMS and social channels, we equip companies with the tools and technologies needed to serve today's demanding customers. Aspect solutions enable organizations to integrate customer contact and workforce optimization solutions into existing enterprise technology investments for companies looking to ensure a consistent and integrated multi-channel customer support experience while creating more productive business processes. We believe that this integrated multi-channel solution approach drives enhanced business efficiencies, fosters loyalty and grows customer value. Our customer contact and workforce optimization software can enhance business processes throughout the organization by incorporating interaction management, collaboration and other enterprise technologies. Our interaction management applications for customer contact are built on feature-rich, high-availability, next-generation platforms that fully leverage real-time communications and intelligent workflows, enabling organizations to maintain best practices while engaging consumers through the channels and devices they expect, including social media and mobile services. 18 -------------------------------------------------------------------------------- Table of Contents Financial Summary The following table sets forth the unaudited results of our operations expressed in dollars and as a percentage of net revenue for the three months ended March 31, 2014 and 2013: (Dollars in millions) Three Months Ended March 31, 2014 2013 2014 2013 Net revenues $ 107.7 $ 104.6 100 % 100 % Total cost of revenues 47.2 41.2 44 % 39 % Gross profit 60.5 63.4 56 % 61 % Operating expenses 47.4 48.9 44 % 47 % Income from operations 13.1 14.5 12 % 14 % Interest and other expense, net (18.9 ) (16.5 ) (18 )% (16 )% Loss before income taxes (5.8 ) (2.0 ) (5 )% (2 )% Provision for (benefit from) income taxes 1.6 (1.0 ) 1 % (1 )% Net loss (7.4 ) (1.0 ) (7 )% (1 )% Less: Net loss attributable to noncontrolling interest (0.3 ) - - % - % Net loss attributable to Aspect Software Group Holdings Ltd. $ (7.1 ) $ (1.0 ) (7 )% (1 )% Adjusted EBITDA Earnings before interest, taxes, depreciation and amortization, as adjusted ("Adjusted EBITDA") is used in our debt agreements to determine compliance with financial covenants and our ability to engage in certain activities, such as making certain payments. In addition to covenant compliance, our management also uses Adjusted EBITDA to assess our operating performance and to calculate performance-based cash bonuses which are tied to Adjusted EBITDA targets. Adjusted EBITDA contains other charges and gains, for which we believe adjustment is permitted under our senior secured credit agreement. Adjusted EBITDA is not a measure of our liquidity or financial performance under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of Adjusted EBITDA instead of income from operations has limitations as an analytical tool, including the failure to reflect changes in cash requirements, including cash requirements necessary to service principal or interest payments on our debt, or changes in our working capital needs. Management compensates for these limitations by relying primarily on our GAAP results and by using Adjusted EBITDA on a supplemental basis. Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure. The following is a reconciliation of income from operations to Adjusted EBITDA: (In millions) Three Months Ended March 31, 2014 2013 Change ($) Income from operations $ 13.1 $ 14.5 $ (1.4 ) Depreciation and amortization 5.5 10.2 (4.7 ) Stock based compensation 0.1 0.3 (0.2 ) Sponsor management fees 0.5 0.5 - Other (1) 5.6 2.3 3.3 Adjusted EBITDA $ 24.8 $ 27.8 $ (3.0 ) (1) These costs represent amounts that are allowed to be added back for calculation of compliance with our debt agreement covenants, including; acquisition related adjustments to revenue, strategic investment costs, legal entity rationalization, IRS audit, debt issuance, Sarbanes-Oxley compliance, foreign withholding taxes, and non-recurring charges. 19-------------------------------------------------------------------------------- Table of Contents Net Revenue The following table presents the breakdown of net revenues between product, maintenance and services revenue: (In millions) Three Months Ended March 31, 2014 2013 Change ($) Product revenue $ 16.9 $ 18.2 $ (1.3 ) Maintenance revenue 61.2 66.3 (5.1 ) Services revenue 19.1 20.1 (1.0 ) Hosting & managed services revenue $ 10.5 $ - $ 10.5 Total revenue $ 107.7 $ 104.6 $ 3.1 The decline in product revenue for the three months ended March 31, 2014, when compared to the prior year is primarily related to a decline in our Unified IP revenue. We have focused our strategy on converting our Signature customers to Unified IP, targeting new logos and better leveraging Workforce Optimization up-sell opportunities to offset the impact of the runoff of our Signature volume, however, we continue to experience lengthening decision and approval cycles and many customers remain cautious with capital investments. Our Voxeo acquisition complimented our managed services offering by adding a hosted deployment alternative. Hosted offerings allow capital investment cautious customers an opportunity to delay cash outflow by switching from up front license fees to a recurring service. Over the past twelve months we have had several customers change their deployment model from on-premise to either hosted or managed services. We expect this trend to continue and we will continue to invest in these alternative deployment methods across our broad scale customer base. We have experienced reductions in our maintenance revenue when compared to the prior year as our customers consolidated due to license decommissioning resulting from agent downsizing and we also experienced competitive displacements. In some cases our customers began migrating to the competitive platform in previous years and completed the migration during 2014. In addition, lower volume of product bookings in 2014 resulted in lower first year maintenance revenue. Hosting and managed services revenue during 2014 represents the acquired Voxeo business as well as recurring revenue from customers that outsource management of their call center hardware and software to us and Aspect's hosted business. Our acquisition of Voxeo significantly enhanced our ability to support cloud, hybrid and premise-based deployments while adding a market-leading IVR and multi-channel self-service capability to our solution portfolio. We expect this revenue stream to become a more significant component of our total revenue as both prospective customers and existing customers opt for solutions requiring lower start up costs and predictable ongoing operating expenses. The decline in services revenue in the current year is primarily the result of reduced product volume as a majority of our customers also purchase installation services with their product order. Cost of Revenue The following table presents the breakdown of cost of revenues between product, maintenance and services revenue and amortization expense for acquired intangible assets: (In millions) Three Months Ended March 31, 2014 2013 Change ($) Cost of product revenue $ 5.3 $ 5.0 $ 0.3 Cost of maintenance revenue 17.5 18.2 (0.7 ) Cost of services revenue 17.4 16.7 0.7 Cost of hosting & managed services revenue 5.8 - 5.8 Amortization expense for acquired intangible assets 1.2 1.3 (0.1 ) Total cost of revenues $ 47.2 $ 41.2 $ 6.0 20-------------------------------------------------------------------------------- Table of Contents The following table presents gross profit as a percentage of related revenue: Three Months Ended March 31, 2014 2013 Change (pts) Product gross margin 68.6 % 72.5 % (3.9 ) Maintenance gross margin 71.4 % 72.5 % (1.1 ) Services gross margin 8.9 % 16.9 % (8.0 ) Hosting & managed services margin 44.8 % - % 44.8 The decline in product gross margin in 2014 is primarily related to an increase in third party costs associated with a significant Back Office Optimization deal that closed in the first quarter. In addition, our lower product revenue in 2014 affected our ability to leverage our fixed costs resulting in a lower gross margin in the current year. The deterioration in maintenance gross margin in 2014 is primarily related to lower volume. We have taken actions to reduce our costs globally to offset the volume decrease and will continue to assess our cost structure as we progress through 2014. Services gross margin deteriorated for the three months ended March 31, 2014 when compared to the prior year primarily resulting from lower volume of projects as our product revenue declined. As many of our costs are fixed, volume declines affect our ability to leverage these costs. Operating Expenses (In millions) Three Months Ended March 31, 2014 2013 Change ($) Research and development $ 14.3 $ 12.2 $ 2.1 Selling, general and administrative 31.0 29.5 1.5 Amortization expense for acquired intangible assets 2.1 7.2 (5.1 ) Total $ 47.4 $ 48.9 $ (1.5 ) The increase in research and development expenses for the three months ended March 31, 2014, is primarily related to the increased headcount from our Voxeo acquisition, severance costs related to realigning our workforce, as well as increased investment in tools to improve our development and delivery of new and enhanced solutions. The increase in selling, general and administrative expenses for the three months ended March 31, 2014 is primarily related to increased headcount resulting from our Voxeo acquisition. Amortization expense for acquired intangible assets in 2014 decreased as compared to the same period in the prior year as certain assets became fully amortized. 21-------------------------------------------------------------------------------- Table of Contents Interest and Other Expense, Net The components of interest and other expense, net, were as follows: (In millions) Three Months Ended March 31, 2014 2013 Change ($) Interest expense, net $ 19.1 $ 16.4 $ 2.7 Exchange rate (gain) loss (0.3 ) 0.2 (0.5 ) Other expense (income) , net 0.1 (0.1 ) 0.2Total interest and other expense, net $ 18.9 $ 16.5 $ 2.4 Interest expense for the three months ended March 31, 2014 increased as compared to the prior year period due to increased debt levels resulting from $85.0 million of delayed draw term loan and $25.0 million of issued second lien notes to fund the Voxeo acquisition. For the three months ended March 31, 2014 as compared to the prior year periods, we experienced an exchange rate gain primarily due to the strengthening of the United States dollar against foreign currencies. Income Taxes The following table presents benefit from income taxes and the effective tax rate: (Dollars in millions) Three Months Ended March 31, 2014 2013 Change Provision for (benefit from) income taxes $ 1.6 $ (1.0 ) $ 2.6 Effective tax rate (27.7 )% 51.4 % (79.1 ) pts Our income tax expense was $1.6 million for the three months ended March 31, 2014 compared to an income tax benefit of $1.0 million for the three months ended March 31, 2013. Our tax expense (benefit) in each period differs from the amount resulting from applying statutory rates primarily due to foreign operations in lower tax jurisdictions, tax reserve adjustments, valuation allowance adjustments and benefits recorded for tax credits. 22 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $2.6 million to $25.6 million at March 31, 2014 from $28.2 million at December 31, 2013. Our existing cash balance generated by operations and borrowings available under our credit facilities are our primary sources of short-term liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next 12 months. A condensed statement of cash flows for the three months ended March 31, 2014 and 2013 follows: (In millions) Three Months Ended March 31, 2014 2013 Net cash (used for) provided by: Net income (loss) $ (7.4 ) $ (1.0 ) Adjustments to net loss for non-cash items 8.9 10.1 Changes in operating assets and liabilities 14.7 12.1 Operating activities 16.2 21.2 Investing activities (2.4 ) (3.2 ) Financing activities (16.1 ) - Effect of exchange rate changes (0.3 ) (1.6 ) Net change in cash and cash equivalents (2.6 ) 16.4 Cash and cash equivalents at beginning of period 28.2 82.4 Cash and cash equivalents at end of period $ 25.6 $ 98.8 Net Cash Provided by Operating Activities The decrease in net cash provided by operating activities was primarily due to lower cash flows from our annual maintenance renewals primarily resulting from agent downsizing, license decommissioning and competitive displacements. Net Cash Used In Investing Activities Net cash used in investing activities for the thee months ended March, 2013 primarily consisted of our $1.9 million investment in eg solutions plc. ("eg"), a back office optimization software company in the United Kingdom. Net cash used in investing activities for the three months ended March 31, 2014 also included $2.4 million of capital expenditures compared to $1.4 million in the prior year. This additional investment in 2014 is primarily related to the our investment in an updated ERP system as well as an initiative to revitalize our existing office space. Net Cash Used In Financing Activities Net cash used in financing activities for the three months ended March 31, 2014 primarily represented scheduled principal payments to our first-lien lenders of $6.1 million and a $10.0 million repayment to our revolving credit line. Debt Covenants We were in compliance with all of our financial debt covenants as of March 31, 2014. Off-Balance Sheet Arrangements In our Annual Report on Form 10-K (333-170936), we included a discussion of our off-balance sheet arrangements under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Off-Balance Sheet Arrangements." There have been no significant changes to our off-balance sheet arrangements since December 31, 2014. Critical Accounting Policies Our financial statements are prepared in accordance with Generally Accepted Accounting Principles ("GAAP") in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates on an on-going basis. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from the estimates used. Our actual results have generally not differed materially from our estimates. However, we monitor such 23 -------------------------------------------------------------------------------- Table of Contents differences and, in the event that actual results are significantly different from those estimated, we disclose any related impact on our results of operations, financial position and cash flows. During the first three months of 2014, there were no significant changes to our critical accounting policies and estimates. For a complete discussion of all other critical accounting policies, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K (File No. 333-170936). Item 3. Quantitative and Qualitative Disclosure of Market Risks During the first three months of 2014, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosures of Market Risks" in our Annual Report on Form 10-K (File No. 333-170936), for a more complete discussion of the market risks we encounter. Item 4. Controls and Procedures Disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of March 31, 2014 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 24 -------------------------------------------------------------------------------- Table of Contents |