News Column

ASPECT SOFTWARE PARENT, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 14, 2014

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 the Annual Report for Aspects Software Group Holdings Ltd.'s 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. 19



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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 and six months ended June 30, 2014 and 2013: (Dollars in millions) Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 2014 2013 2014 2013 Net revenues $ 107.6$ 100.3 100 % 100 % $ 215.3$ 205.0 100 % 100 % Total cost of revenues 46.9 40.0 44 % 40 % 94.1 81.2 44 % 40 % Gross profit 60.7 60.3 56 % 60 % 121.2 123.8 56 % 60 % Operating expenses 48.0 50.2 45 % 50 % 95.4 99.1 44 % 48 % Income from operations 12.7 10.1 12 % 10 % 25.8 24.7 12 % 12 % Interest and other expense, net (19.0 ) (15.6 ) (18 )% (16 )% (37.9 ) (32.1 ) (18 )% (16 )% Loss before income taxes (6.3 ) (5.5 ) (6 )% (5 )% (12.1 ) (7.4 ) (6 )% (4 )% Provision for (benefit from) income taxes (2.0 ) (0.1 ) (2 )% - % (0.4 ) (1.1 ) - % (1 )% Net loss (4.3 ) (5.4 ) (4 )% (5 )% (11.7 ) (6.3 ) (5 )% (3 )% Less: Net loss attributable to noncontrolling interest (0.5 ) - - % - % (0.7 ) - - % - % Net loss attributable to Aspect Software Parent, Inc. $ (3.8 )$ (5.4 ) (4 )% (9 )% $ (11.0 )$ (6.3 ) (5 )% (3 )% 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 June 30, Six Months Ended June 30, 2014 2013 Change ($) 2014 2013 Change ($) Income from operations $ 12.7$ 10.1$ 2.6$ 25.8$ 24.7$ 1.1 Depreciation and amortization 5.6 10.6 (5.0 ) 11.1 20.8 (9.7 ) Stock based compensation 0.1 0.1 - 0.1 0.4 (0.3 ) Sponsor management fees 0.5 0.5 - 1.0 1.0 - Other (1) 9.4 3.3 6.1 15.1 5.5 9.6 Adjusted EBITDA $ 28.3$ 24.6$ 3.7$ 53.1$ 52.4$ 0.7 (1) These costs represent amounts that are allowed to be added back for



calculation of compliance with our debt agreement covenants, including but

not limited to; 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. The holders of Aspect Software Holdings Ltd.'s shares contributed

approximately $7.0 million of cash to solve a potential covenant deficiency

by adding equity to Adjusted EBITDA. The three and six months ended June 30, 2014 include $6.6 million as a result of the equity cure. 20



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Net Revenue The following table presents the breakdown of net revenues between product, maintenance and services revenue:

(In millions) Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 Change ($) 2014 2013 Change ($) Product revenue $ 12.9$ 13.9$ (1.0 )$ 29.8$ 32.1$ (2.3 ) Maintenance revenue 62.7 65.5 (2.8 ) 123.9 131.9 (8.0 ) Services revenue 20.9 20.9 - 40.0 41.0 (1.0 ) Hosting & managed services revenue $ 11.1 $ - $ 11.1$ 21.6 $ - $ 21.6 Total revenue $ 107.6$ 100.3$ 7.3$ 215.3$ 205.0$ 10.3 The decline in product revenue for both the three and six month periods ended June 30, 2014, when compared to the prior year periods is primarily related to lower Unified IP product revenue. During the current year we have had several deals slip out of the quarter. Our strategy has been focused 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 in some cases we experienced competitive displacement. In many of these instances, 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. Our hosting and managed services deals typically include a service ramp up schedule of six or more months before the customer reaches their monthly committed booking level. This can result in a considerable conversion lag between bookings and revenue. We are expanding our data center capabilities and coverage areas and we are focused on ease of implementation to accelerate the earnings process for these deals. The decline in services revenue for the six months ended June 30, 2014, compared to the prior year period 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 June 30,



Six Months Ended June 30,

2014 2013 Change ($) 2014 2013 Change ($) Cost of product revenue $ 3.9$ 4.6$ (0.7 )$ 9.2$ 9.5$ (0.3 ) Cost of maintenance revenue 16.0 16.8 (0.8 ) 33.5 35.0 (1.5 ) Cost of services revenue 19.6 17.3 2.3 37.0 34.0 3.0 Cost of hosting & managed services revenue 6.2 - 6.2 12.0 - 12.0 Amortization expense for acquired intangible assets 1.2 1.3 (0.1 ) 2.4 2.7 (0.3 ) Total cost of revenues $ 46.9$ 40.0$ 6.9$ 94.1$ 81.2$ 12.9 21



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The following table presents gross profit as a percentage of related revenue:

Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 Change (pts) 2014 2013 Change (pts) Product gross margin 69.8 % 67.6 % 2.2 69.1 % 70.4 % (1.3 ) Maintenance gross margin 74.5 % 74.4 % 0.1 73.0 % 73.5 % (0.5 ) Services gross margin 6.2 % 17.2 % (11.0 ) 7.5 % 17.1 % (9.6 ) Hosting & managed services margin 43.6 % - % 43.6 44.9 % - % 44.9 Product gross margin improved in the three month period ended June 30, 2014 compared to the prior year period primarily related to increased sales of our legacy Signature products in the current year quarter. These legacy product sales are in run-off therefore the cost basis is negligible resulting in a higher margin. The decline in product gross margin in the six month period ended June 30, 2014 when compared to the prior year 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 significantly in both the three and six month periods ended June 30, 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. Hosting and managed services margins reflect the significant investments that we have made in our Voxeo, Zipwire and managed services product offerings. Given the lag in conversion of bookings to revenue, we expect these margins to improve as our customers ramp up their service levels and we continue to grow this business. Operating Expenses (In millions) Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 Change ($) 2014 2013 Change ($) Research and development $ 12.4$ 11.6$ 0.8$ 26.7$ 23.9$ 2.8 Selling, general and administrative 33.5 31.1 2.4 64.5 60.5 4.0 Amortization expense for acquired intangible assets 2.1 7.5 (5.4 ) 4.2 14.7 (10.5 ) Total $ 48.0$ 50.2$ (2.2 )$ 95.4$ 99.1$ (3.7 ) The increase in research and development expenses for the three and six months ended June 30, 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 and six months ended June 30, 2014 is primarily additional costs resulting from our Voxeo and Bright Pattern acquisitions. In addition, we increased our investment in our global sales kick off program and our Aspect Customer Experience events during the second quarter of 2014. 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. 22



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Interest and Other Expense, Net The components of interest and other expense, net, were as follows: (In millions)

Three Months Ended June 30, Six Months Ended June 30, 2014 2013 Change ($) 2014 2013 Change ($)



Interest expense, net $ 18.8$ 16.3$ 2.5

$ 37.9$ 32.7$ 5.2 Exchange rate (gain) loss (0.2 ) (0.5 ) 0.3 (0.1 ) (0.3 ) 0.2 Other expense (income) , net - (0.2 ) 0.2 0.1 (0.3 ) 0.4 Total interest and other expense, net $ 18.6$ 15.6$ 3.0$ 37.9$ 32.1$ 5.8 Interest expense for the three and six months ended June 30, 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 and six months ended June 30, 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 June 30,



Six Months Ended June 30,

2014 2013 Change 2014 2013 Change Benefit from income taxes $ (2.0 )$ (0.1 )$ (1.9 )$ (0.4 )$ (1.1 )$ 0.7 Effective tax rate 31.5 % 1.5 % 30.0 pts



3.2 % 14.9 % (11.7 ) pts

Our income tax benefit was $2.0 million and $0.4 million for the three and six months ended June 30, 2014, respectively compared to an income tax benefit of $0.1 million and $1.1 million for the three and six months ended June, 2013, respectively. Our tax 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. We account for income taxes in accordance with ASC 740, Accounting for Income Taxes. Under ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. We are required, at the end of each interim reporting period, to make our best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if we are unable to make a reliable estimate of our annual effective tax rate, the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. The precision required in estimating the annual effective tax rate is such that it is not practical for us to make a reliable estimate for this purpose. Therefore, we have appropriately provided for income tax based on the actual effective tax rate for the year to date results. 23



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LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased by $6.1 million to $20.6 million at June 30, 2014 from $26.7 million at December 31, 2013. Our existing cash balance generated by operations and borrowings available under our credit facilities have served as our primary sources of short-term liquidity. On August 7, 2014, the holders of certain of Aspect Software Group Holdings Ltd.'s shares contributed approximately $7.0 million of cash to solution a covenant deficiency by adding equity to Adjusted EBITDA. Our Credit Agreement allows no more than two equity cures in any trailing four quarter period. Based on our current level of operations, we believe that our existing cash balance, cash flows generated from operations, borrowings available under our credit facilities and continued support from our shareholders, if needed, will be adequate to meet our liquidity needs for at least the next 12 months A condensed statement of cash flows for the six months ended June 30, 2014 and 2013 follows: (In millions) Six Months Ended June 30, 2014 2013 Net cash (used for) provided by: Net loss $ (11.7 )$ (6.3 ) Adjustments to net loss for non-cash items 16.6



22.2

Changes in operating assets and liabilities 9.3 4.6 Operating activities 14.2 20.5 Investing activities (6.3 ) (7.8 ) Financing activities (13.2 ) (10.0 ) Effect of exchange rate changes (0.8 ) (0.6 ) Net change in cash and cash equivalents (6.1 )



2.1

Cash and cash equivalents at beginning of period 26.7



80.8

Cash and cash equivalents at end of period $ 20.6$ 82.9

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 primarily represents our investments in our hosting data centers, revitalization of our office spaces and equipment purchases. In addition, net cash used in investing activities for the six months ended June 30, 2013 included our $1.9 million investment in eg solutions plc. ("eg"), a back office optimization software company in the United Kingdom. Net Cash Used In Financing Activities Net cash used in financing activities for both periods presented primarily represents scheduled quarterly principal payments to our first-lien lenders. Debt Covenants We were in compliance with all of our financial debt covenants as of June 30, 2014. Off-Balance Sheet Arrangements In the Annual Report of Aspect Software Group Holdings Ltd. 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 24



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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 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 half 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 the Annual Report of Aspect Software Group Holdings Ltd. on Form 10-K (File No. 333-170936). There are no differences between the critical accounting policies of Aspect Software Group Holdings Ltd. and Aspect Software Parent, Inc. Item 3. Quantitative and Qualitative Disclosure of Market Risks During the first half 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 the Annual Report of Aspect Software Group Holdings Ltd. 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 June 30, 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 June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 25



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