Aspect Software Parent, Inc. - FORM 10-Q

Aspect Software Parent, Inc. - FORM 10-Q - May 15, 2015

Attached files

Attached files

Aspect Software Parent, Inc. Reports

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EXCEL - IDEA: XBRL DOCUMENT - Aspect Software Parent, Inc.	Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 CERTIFICATION - Aspect Software Parent, Inc.	ex311q12015.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION - Aspect Software Parent, Inc.	ex321q12015.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION - Aspect Software Parent, Inc.	ex312q12015.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2015



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 333-170936

ASPECT SOFTWARE PARENT, INC.

(Exact name of registrant as specified in its charter)



Delaware		20-3503231
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2325 E. Camelback Road, Suite 700

Phoenix, Arizona, 85016

(Address of principal executive offices) (Zip code)

Telephone Number: Telephone: (978) 250-7900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The registrant had one ordinary share outstanding as of April 30, 2015.

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TABLE OF CONTENTS



		Page
Part I	Financial Information:

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014	4

	Condensed Consolidated Statement of Shareholder's Deficit for the Three Months Ended March 31, 2015	5

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

Part II	Other Information:

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 5.	Other Information	26

Item 6.	Exhibits	26

	Signatures	28

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Aspect Software Parent, Inc.

Condensed Consolidated Balance Sheets (unaudited)



(in thousands, except par value and share amounts)	March 31, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	35,253		$	17,030
Accounts receivable, net	50,233			59,923
Receivable due from Aspect Software Group Holdings Ltd.	448			415
Deferred tax assets	3,767			3,716
Other current assets	20,842			21,505
Total current assets	110,543			102,589
Property, plant, and equipment, net	21,262			21,573
Intangible assets, net	56,037			59,480
Goodwill	751,245			751,063
Other assets	15,285			17,156
Total assets	$	954,372		$	951,861
Liabilities and deficit
Current liabilities:
Accounts payable	$	7,828		$	15,087
Current portion of long-term debt	6,095			17,094
Accrued liabilities	56,257			53,691
Deferred revenues	90,950			69,912
Total current liabilities	161,130			155,784
Deferred tax liabilities	32,619			32,619
Long-term deferred revenue	1,950			2,468
Long-term debt (1)	763,003			764,411
Other long-term liabilities	48,851			51,273
Total liabilities	1,007,553			1,006,555
Commitments and contingencies (Note 8)
Deficit:
Ordinary shares, $1.00 par value: 50,000 share authorized and 1 share issued	—			—
Additional paid-in capital	35,658			35,588
Accumulated other comprehensive loss	(4,890		)	(5,645		)
Accumulated deficit	(87,191		)	(88,269		)
Total Aspect Software Parent, Inc. deficit	(56,423		)	(58,326		)
Noncontrolling interest	3,242			3,632
Total deficit	(53,181		)	(54,694		)
Total liabilities and deficit	$	954,372		$	951,861


(1)	$50.0 million held by a related party as of March 31, 2015 and December 31, 2014.

See accompanying notes.

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Aspect Software Parent, Inc.

Condensed Consolidated Statements of Operations (unaudited)



	Three Months Ended
	March 31,
(in thousands)	2015			2014
Net revenues:
Product revenue	$	19,041		$	16,854
Recurring revenue	69,913			71,747
Services revenue	17,077			19,085
Total net revenues	106,031			107,686
Cost of revenues:
Cost of product revenue	4,303			5,329
Cost of recurring revenue	23,017			23,260
Cost of services revenue	15,149			17,392
Amortization expense for acquired intangible assets	1,214			1,224
Total cost of revenues	43,683			47,205
Gross profit	62,348			60,481
Operating expenses:
Research and development	11,712			14,287
Selling, general and administrative	27,521			31,028
Amortization expense for acquired intangible assets	2,040			2,082
Restructuring credits	(228		)	—
Total operating expenses	41,045			47,397
Income from operations	21,303			13,084
Interest and other expense, net	(18,949		)	(18,865		)
Income (loss) before income taxes	2,354			(5,781		)
Provision for income taxes	1,666			1,613
Net income (loss)	$	688		$	(7,394	)
Less: Net loss attributable to noncontrolling interest	(390		)	(292		)
Net income (loss) attributable to Aspect Software Parent, Inc.	$	1,078		$	(7,102	)

Aspect Software Parent, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)



	Three Months Ended
	March 31,
(in thousands)	2015			2014
Net income (loss)	$	688		$	(7,394	)
Change in cumulative translation adjustment	755			(312		)
Comprehensive income (loss)	1,443			(7,706		)
Comprehensive loss attributable to noncontrolling interest	(390		)	(292		)
Comprehensive income (loss) attributable to Aspect Software Parent, Inc.	$	1,833		$	(7,414	)

See accompanying notes.

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Aspect Software Parent, Inc.

Condensed Consolidated Statements of Deficit (unaudited)

(In Thousands, Except Share Amounts)



	Ordinary Shares			Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Aspect Software Parent, Inc. Shareholder's Deficit			Non-controlling Interest			Total Deficit
	Shares	Par Value		Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Aspect Software Parent, Inc. Shareholder's Deficit			Non-controlling Interest			Total Deficit
Balance at December 31, 2014	1	$	—	$	35,588	$	(5,645	)	$	(88,269	)	$	(58,326	)	$	3,632		$	(54,694	)
Net income (loss)	—	—		—		—			1,078			1,078			(390		)	688
Other comprehensive income	—	—		—		755			—			755			—			755
Stock-based compensation	—	—		70		—			—			70			—			70
Balance at March 31, 2015	1	$	—	$	35,658	$	(4,890	)	$	(87,191	)	$	(56,423	)	$	3,242		$	(53,181	)

See accompanying notes.

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Aspect Software Parent, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)



	Three Months Ended
	March 31,
(in thousands)	2015			2014
Cash flows from operating activities:
Net income (loss)	$	688		$	(7,394	)
Reconciliation of net income (loss) to net cash and cash equivalents provided by operating activities:
Depreciation	2,374			2,191
Amortization expense for acquired intangible assets	3,254			3,306
Non-cash interest expense	1,819			1,587
Non-cash compensation expense	70			64
Increase to accounts receivable allowances	451			605
Deferred income taxes	(92		)	1,142
Changes in operating assets and liabilities:
Accounts receivable	8,228			631
Receivable due from Aspect Software Group Holdings Ltd.	(33		)	(44		)
Other current assets and other assets	257			(1,990		)
Accounts payable	(7,082		)	(710		)
Accrued liabilities and other liabilities	1,202			(1,539		)
Deferred revenues	21,838			18,330
Net cash and cash equivalents provided by operating activities	32,974			16,179
Cash flows from investing activities:
Purchases of property and equipment	(2,134		)	(2,430		)
Net cash and cash equivalents used in investing activities	(2,134		)	(2,430		)
Cash flows from financing activities:
Repayment of borrowings	(12,525		)	(16,100		)
Proceeds received from capital contribution	—			4
Net cash and cash equivalents used in financing activities	(12,525		)	(16,096		)
Effect of exchange rate changes on cash	(92		)	(275		)
Net change in cash and cash equivalents	18,223			(2,622		)
Cash and cash equivalents:
Beginning of period	17,030			26,694
End of period	$	35,253		$	24,072
Supplemental disclosure of cash flow information
Cash paid for interest	$	8,844		$	9,510
Cash paid for income taxes	$	823		$	1,553

See accompanying notes.

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Aspect Software Parent, Inc.

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1—DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND RECENT ACCOUNTING STANDARDS

Description of Business

Aspect Software Parent, Inc. (together with its subsidiaries, “Aspect Software” or the “Company”), a subsidiary of Aspect Software Group Holdings Ltd., a Cayman Islands company, provides customer engagement solutions such as; unified interaction management, workforce optimization, and back-office solutions to improve the customer experience. The Company’s technologies streamline and enhance customer-facing business processes by optimizing workflows across multiple communication channels and automating smarter business processes across the contact center and related functions. The Company offers the business and technology expertise to help its customers build, enhance and sustain relationships with their customers by bringing enterprise technologies like customer relationship management ("CRM") and content management together with unified multi-channel communications and effective people management to enrich customer interactions.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, the financial information reflects all adjustments, consisting of adjustments of a normal recurring nature necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented. The results of operations for the three months ended March 31, 2015, are not necessarily indicative of the results to be expected for the full year or any future periods. For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2014, included in the Annual Report on Form 10-K. All intercompany amounts related to the Company's consolidated subsidiaries have been eliminated in consolidation.

Recent Accounting Standards

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The updated standard requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for periods beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. ASU 2015-03 should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The adoption of ASU No. 2015-03 will result in the reclassification of debt issuance costs currently classified in other current assets and long-term assets to be offset against the carrying value of the Company's debt.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). This ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification by: i) placing more emphasis on risk of loss when determining a controlling financial interest; ii) reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (“VIE”); and iii) changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. ASU No. 2015-02 is effective for periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The adoption of this standard is not expected to have a material impact on the Company's Consolidated Financial Statements.

In January 2015, the FASB issued ASU No. 2015-01 - Income Statement - Extraordinary and Unusual Items ("ASU 2015-01"), which eliminates the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have an impact on the Company's Consolidated Financial Statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the

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financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of this standard is not expected to have a material impact on the Company's Consolidated Financial Statements.

In June 2014, the FASB issued ASU No. 2014-12 - Compensation - Stock Compensation ("ASU 2014-12") which provides guidance that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period is a performance condition. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost for such an award would be recognized over the required service period, if it is probable that the performance condition will be achieved. ASU 2014-12 is effective for all entities for annual periods beginning after December 15, 2015 and interim periods within those annual periods. ASU 2014-12 should be applied on a prospective basis to awards that are granted or modified on or after the effective date. The adoption of this standard is not expected to have an impact on the Company's Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). While the standard supersedes existing revenue recognition guidance, it closely aligns with current GAAP. Under the new standard, revenue is recognized at the time a good or service is transferred to a customer for the amount of consideration received for that specific good or service. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the method of adoption and the effect that implementation of this update will have on its Consolidated Financial Statements upon adoption.

There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries. None of the updates are expected to a have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 2—REVENUE RECOGNITION

The Company derives its revenue from (i) product revenues, which typically include perpetual software licenses and hardware, (ii) recurring revenues comprised of (a) maintenance revenues, which include software license updates and product support, and (b) hosting and managed services revenues, which include subscription fees for access to and use of our on-demand applications and (iii) services revenues, which include installation, consulting and education. Revenues have been derived from sales to end users through the Company's direct sales force, distributors and resellers.

The Company recognizes revenue from the sale of software licenses and hardware (the “Product”) when persuasive evidence of an arrangement exists, the Product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is probable. Revenue recognition for software licenses with multiple-element arrangements generally requires recognition of revenue using the residual method. Under the residual method, the portion of the total arrangement fee attributable to undelivered elements is deferred based upon its vendor-specific objective evidence (“VSOE”) of fair value, or the stated amount if higher, and subsequently recognized as the service is delivered. The difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements, which is generally Product.

Certain of the Company's multiple-element arrangements include software and hardware components that function together to deliver the product's essential functionality. When these software and non-software elements are sold together, the Company believes the arrangements meet the scope exception in Accounting Standards Codification 985-605, Software Revenue Recognition, (“ASC 985-605") because of (i) the infrequency of the tangible product's sale without a software element, (ii) the degree of integration between the tangible product and the software element, which is considered significant and (iii) the non-software element of the tangible product's substantive contributions to the tangible product's essential functionality. For these multiple-element arrangements, the Company allocates the total arrangement fee to all deliverables based on a selling price hierarchy. The selling price for a deliverable is based on VSOE, if available, third party evidence (“TPE"), if VSOE is not available, or estimated selling price (“ESP”), if neither VSOE nor TPE is available. The Company generally expects that it will not be able to establish TPE due to the nature of the products sold and the markets in which it competes, and therefore relies upon VSOE or ESP in allocating the arrangement's arrangement fee. Once the arrangement fee has been allocated to each deliverable, revenue is recognized as each item is delivered.

VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. The Company has established VSOE for support and maintenance services, certain professional services, and education services.

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ESP reflects the Company's best estimate of what the selling prices of elements would be if they were sold regularly on a standalone basis. ESP is based upon all reasonably available information including both market data and conditions and entity-specific factors. These factors include market trends and competitive conditions, product maturity, differences related to geography, distribution channel, deal size, and cumulative customer purchases. The Company has established ESP for software licenses, hardware and subscriptions and reviews them annually or more frequently when a significant change in the Company's business or selling practices occurs.

Delivery generally occurs when the Product is delivered to a common carrier at the Company's loading dock unless title and risk of loss transfers upon delivery to the customer. In sales transactions through a distributor or reseller, the Company generally recognizes revenues upon shipment to the distributor, reseller or identified end user, as applicable.

At the time of the Product sale, the Company assesses whether the fee associated with the revenue transaction is fixed or determinable and whether collection is probable. The assessment of whether the fee is fixed or determinable is based in part on the payment terms associated with the transaction. If any portion of a fee is due beyond the Company's normal payment terms, the Company evaluates the specific facts and circumstances to determine if the fee is fixed or determinable. If it is determined that the fee is not fixed or determinable, the Company recognizes revenue as the fees become due. If the Company determines that collection of a fee is not probable, then the Company will defer the entire fee and recognize revenue upon receipt of cash.

Product revenue for software licenses sold on a perpetual basis, along with hardware, is recognized at the inception of the arrangement, presuming all other relevant revenue recognition criteria are met. Product revenue for software sold on a non-perpetual basis (Rental or Term) is recognized ratably over the license term.

In connection with the sale of its software licenses, the Company sells support and maintenance services, which are recognized ratably over the term of the arrangement, typically one year. Under support and maintenance services, customers receive unspecified software product upgrades, maintenance and patch releases during the term, as well as internet and telephone access to technical support personnel.

Many of the Company's software arrangements also include professional services for consulting and implementation sold under separate agreements. Professional services revenue from these arrangements is generally accounted for separately from the software license because the services qualify as a separate element under ASC 985-605. The more significant factors considered in determining whether professional services revenue should be accounted for separately include (i) the nature of the services and whether they are essential to the functionality of the licensed product, (ii) the degree of risk, (iii) the availability of services from other vendors, (iv) the timing of payments and (v) the impact of milestones or acceptance criteria on the realizability of the software license fee. Professional services revenue under these arrangements, as well as when sold on a standalone basis, is generally recognized as the services are performed.

The Company recognizes revenue associated with education as these services are performed.

Hosting and managed services revenue reflects subscription and other recurring revenues which includes fees for access rights to software solutions offered under a subscription-based delivery model where the users do not take possession of the software. Under this model, the software applications are hosted by us or by a third party and the customer accesses and uses the software on an as-needed basis over the internet or via a dedicated line. The underlying arrangements typically (i) include a single fee for the service that is billed monthly, quarterly or annually, (ii) cover a period from 12 to 36 months and (iii) do not provide the customer with an option to take delivery of the software at any time during or after the subscription term. Hosting revenues are recognized ratably over the subscription term beginning on the commencement dates of each contract, which is the date the Company's hosting and managed services are made available to the customer. Professional services revenue for consulting or training services, when sold with hosted offerings, are accounted for separately if they have standalone value to the customer. The Company believes its professional services have standalone value because those services are sold separately by us and similar services are sold by other vendors. In addition, the Company’s hosted offerings have standalone value as such offerings are often sold separately.

Deferred revenues primarily represent payments received from customers for software licenses and updates, hardware, product support, installation services, educational services and hosting prior to satisfying the revenue recognition criteria related to those payments.The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable hosting and managed services agreements. Deferred revenue that will be recognized during the succeeding twelve month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.

The Company records its estimate for customer returns or other customer allowances as a reduction in revenues. In determining the Company’s revenue reserve estimate, and in accordance with internal policy, the Company relies on historical data and known returned goods in transit. These factors, and unanticipated changes in the economic and industry environment, could cause the Company’s return estimates to differ from actual results.

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NOTE 3—EQUITY

Stock-based compensation expense is reflected within the Company’s condensed consolidated statements of operations as follows (in thousands):



	Three Months Ended
	March 31,
	2015		2014
Cost of services	$	9	$	14
Research and development	15		23
Selling, general and administrative	46		27
Total	$	70	$	64

NOTE 4—FAIR VALUE

Financial Assets and Liabilities Recorded at Fair Value

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of March 31, 2015 (in thousands):



	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	35,253	$	35,253	$	—	$	—

The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value as of December 31, 2014 (in thousands):



	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)
Assets
Cash and cash equivalents	$	17,030	$	17,030	$	—	$	—

Financial Assets and Liabilities Not Recorded at Fair Value

The estimated fair values of the amounts borrowed under the Company's debt obligations were based on a Level 2 input using quotes from third-party banks for the Company's debt which is subject to infrequent transactions (i.e. a less active market). As of March 31, 2015 and December 31, 2014, the Company's first lien credit facility had a fair value of approximately $447.6 million and $448.5 million, respectively. As of March 31, 2015 and December 31, 2014, the Company's senior second lien notes had a fair value of approximately $278.4 million and $302.4 million, respectively.

On February 4, 2013 the Company purchased 1,712,392 ordinary shares of eg solutions plc. ("eg"), a back office optimization software company in the United Kingdom at a cost of approximately £1.25 million, or $1.9 million. The Company concurrently entered into a reseller agreement which grants Aspect the right to market and distribute eg's products and services in all territories with exclusivity rights in all territories other than Europe, Middle East and Africa. The Company must achieve minimum annual revenue targets to maintain the exclusivity rights and was issued a conditional warrant to purchase up to 400,000 shares ,which is approximately 2% of its current outstanding equity, at a price of 0.79 pence per share based upon annual revenue levels within the first two years of the agreement. In addition, during 2014 the Company issued a convertible loan note to eg of approximately £0.55 million plus interest at an annual rate of 10%, which was converted to 435,945 shares at a price of 0.50 pence per share in the first quarter of 2015. The Company recorded the acquired shares at cost and has accounted for this investment under the equity method. Under this method, the Company recorded a reduction in the investment of less than $0.1 million in the first quarter of 2014 for its proportionate share of eg’s net loss based on the most recently available financial statements.

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NOTE 5—GOODWILL

Changes in the carrying amount of goodwill are as follows (in thousands):



Balance as of December 31, 2014	$	751,063
Foreign currency translation	182
Balance as of March 31, 2015	$	751,245

NOTE 6—INCOME TAXES

The Company’s income tax expense was $1.7 million and $1.6 million for the three months ended March 31, 2015 and 2014, respectively. The Company’s tax expense in each period differs from the amount resulting from applying statutory rates primarily due to foreign operations in lower tax jurisdictions, tax reserve adjustments, and valuation allowance adjustments.

The Company’s total unrecognized tax benefits were approximately $35.4 million as of March 31, 2015. The amount of unrecognized tax benefits could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expires without assessment from the relevant tax authorities. The Company believes that it is reasonably possible that there could be a reduction in unrecognized tax benefits during the next 12 months of approximately $1.9 million.

NOTE 7—RESTRUCTURING

Components of the restructuring accrual were as follows (in thousands):



	Consolidation of Facilities Costs
Balance as of December 31, 2014	$	3,046
Adjustments for estimate revisions	(228		)
Interest accretion	(13		)
Payments	(345		)
Balance as of March 31, 2015	$	2,460

Restructuring adjustments during the three months ended March 31, 2015, primarily reflect revisions to prior year charges related to vacating excess capacity office space in certain facilities in the United States.

NOTE 8—CONTINGENCIES

Litigation

The Company, from time to time, is party to litigation arising in the ordinary course of its business. Management does not believe that the outcome of these claims will have a material adverse effect on the consolidated financial condition of the Company based on the nature and status of proceedings at this time.

At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. Legal costs are expensed as incurred.

NOTE 9—RELATED PARTY TRANSACTIONS

The Company incurred advisory fees from Holdings' majority shareholder totaling $0.5 million for the three months ended March 31, 2015 and 2014. The fees related to management and advisory services rendered in connection with a consulting agreement entered into by both parties. The advisory fees are included in general and administrative expenses in the accompanying condensed consolidated statements of operations, with a related accrued expense amount of $3.5 million and $3.0 million as of March 31, 2015 and December 31, 2014, respectively.

As of March 31, 2015 and December 31, 2014, approximately $50.0 million of the second lien credit facility was held by a corporation owned by certain of Holdings' shareholders. The Company had accrued interest expense of approximately $2.0 million and $0.7 million related to certain of Holdings' shareholders' second lien credit facility holdings as of March 31, 2015 and December 31, 2014, respectively. The Company did not make interest payments on the second lien credit facility in the first quarter of 2015 or 2014.

In March 2014, the majority shareholder of Aspect Software Group Holdings Ltd. acquired LiveVox, Inc. (“LiveVox”) a

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leading provider of cloud contact center solutions. The Company concurrently entered into a strategic partnership with LiveVox

which initially focuses on a joint go to market between the companies. Aspect and LiveVox will cross-license and cross-sell

each other’s products to better serve current and new customers. The companies will leverage the scale of both organizations to

optimize efficiencies in network and telecommunications infrastructure. The Company’s Chief Executive Officer, Stewart

Bloom, was appointed to the board of directors of LiveVox. There were no amounts recorded in the accompanying condensed consolidated statements of operations or condensed consolidated balance sheet during the three month periods ended March 31, 2015 or 2014 related to this partnership.

NOTE 10—SUBSEQUENT EVENTS

The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized

subsequent events requiring disclosure.

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NOTE 11—SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIALS

The Company’s debt issued in May 2010 is fully and unconditionally and jointly and severally guaranteed by Aspect Software Parent, Inc. and each of its domestic subsidiaries. Aspect Software Inc. is the issuer of the Company’s debt. Each of the guarantor subsidiaries is 100% owned, directly or indirectly by Aspect Software Parent, Inc. The following represents the supplemental condensed financial information of Aspect Software Parent, Inc. and its guarantor and non-guarantor subsidiaries, as of March 31, 2015 and December 31, 2014, and for the three months ended March 31, 2015 and 2014.

Supplemental Condensed Consolidating Balance Sheet (unaudited)

March 31, 2015



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	8,538		$	26,715	$	—		$	35,253
Accounts receivable, net	62,663			58,250		(70,680		)	50,233
Receivable due from Aspect Software Group Holdings Ltd.	448			—		—			448
Deferred tax assets	1,807			1,960		—			3,767
Other current assets	15,997			4,845		—			20,842
Total current assets	89,453			91,770		(70,680		)	110,543
Property, plant, and equipment, net	18,043			3,219		—			21,262
Intangible assets, net	48,049			7,988		—			56,037
Goodwill	714,795			36,450		—			751,245
Investment in subsidiaries	77,750			—		(77,750		)	—
Other assets	6,035			9,250		—			15,285
Total assets	$	954,125		$	148,677	$	(148,430	)	$	954,372
Liabilities and deficit
Current liabilities:
Accounts payable	$	49,955		$	28,553	$	(70,680	)	$	7,828
Current portion of long-term debt	6,095			—		—			6,095
Accrued liabilities	46,311			9,946		—			56,257
Deferred revenues	66,987			23,963		—			90,950
Total current liabilities	169,348			62,462		(70,680		)	161,130
Deferred tax liabilities	31,525			1,094		—			32,619
Long-term deferred revenue	1,362			588		—			1,950
Long-term debt	763,003			—		—			763,003
Other long-term liabilities	42,068			6,783		—			48,851
Total liabilities	1,007,306			70,927		(70,680		)	1,007,553
Total Aspect Software Parent, Inc. deficit	(53,181		)	74,508		(77,750		)	(56,423		)
Noncontrolling interest	—			3,242		—			3,242
Total deficit	(53,181		)	77,750		(77,750		)	(53,181		)
Total liabilities and deficit	$	954,125		$	148,677	$	(148,430	)	$	954,372

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Supplemental Condensed Consolidating Balance Sheet (unaudited)

December 31, 2014



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	2,124		$	14,906	$	—		$	17,030
Accounts receivable, net	71,021			65,701		(76,799		)	59,923
Receivable due from Aspect Software Group Holdings Ltd.	415			—		—			415
Deferred tax assets	1,808			1,908		—			3,716
Other current assets	16,496			5,009		—			21,505
Total current assets	91,864			87,524		(76,799		)	102,589
Property, plant, and equipment, net	18,146			3,427		—			21,573
Intangible assets, net	50,855			8,625		—			59,480
Goodwill	714,795			36,268		—			751,063
Investment in subsidiaries	67,041			—		(67,041		)	—
Other assets	8,166			8,990		—			17,156
Total assets	$	950,867		$	144,834	$	(143,840	)	$	951,861
Liabilities and deficit
Current liabilities:
Accounts payable	$	59,718		$	32,168	$	(76,799	)	$	15,087
Current portion of long-term debt	17,094			—		—			17,094
Accrued liabilities	39,423			14,268		—			53,691
Deferred revenues	52,045			17,867		—			69,912
Total current liabilities	168,280			64,303		(76,799		)	155,784
Deferred tax liabilities	28,988			3,631		—			32,619
Long-term deferred revenue	1,571			897		—			2,468
Long-term debt	764,411			—		—			764,411
Other long-term liabilities	42,311			8,962		—			51,273
Total liabilities	1,005,561			77,793		(76,799		)	1,006,555
Total Aspect Software Parent, Inc. deficit	(54,694		)	63,409		(67,041		)	(58,326		)
Noncontrolling interest	—			3,632		—			3,632
Total deficit	(54,694		)	67,041		(67,041		)	(54,694		)
Total liabilities and deficit	$	950,867		$	144,834	$	(143,840	)	$	951,861

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Supplemental Condensed Consolidating Statement of Operations (unaudited)

For the Three Months Ended March 31, 2015



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net revenues	$	75,634		$	34,665		$	(4,268	)	$	106,031
Cost of revenues	33,638			14,313			(4,268		)	43,683
Gross profit	41,996			20,352			—			62,348
Operating expenses:
Research and development	8,852			2,860			—			11,712
Selling, general and administrative	20,185			7,336			—			27,521
Amortization expense for acquired intangible assets	1,790			250			—			2,040
Restructuring (credits) charges	(228		)	—			—			(228		)
Total operating expenses	30,599			10,446			—			41,045
Income from operations	11,397			9,906			—			21,303
Interest and other income (expense), net	(16,480		)	(2,469		)	—			(18,949		)
(Loss) income before income taxes	(5,083		)	7,437			—			2,354
Provision for income taxes	722			944			—			1,666
Equity in earnings of subsidiaries	6,883			—			(6,883		)	—
Net income	1,078			6,493			(6,883		)	688
Less: Net loss attributable to noncontrolling interest	—			(390		)	—			(390		)
Net income attributable to Aspect Software Parent, Inc.	$	1,078		$	6,883		$	(6,883	)	$	1,078

For the Three Months Ended March 31, 2014



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net revenues	$	72,943		$	39,257		$	(4,514	)	$	107,686
Cost of revenues	34,685			17,034			(4,514		)	47,205
Gross profit	38,258			22,223			—			60,481
Operating expenses:
Research and development	11,274			3,013			—			14,287
Selling, general and administrative	20,834			10,194			—			31,028
Amortization expense for acquired intangible assets	1,792			290			—			2,082
Total operating expenses	33,900			13,497			—			47,397
Income from operations	4,358			8,726			—			13,084
Interest and other income (expense), net	(16,040		)	(2,825		)	—			(18,865		)
(Loss) income before income taxes	(11,682		)	5,901			—			(5,781		)
Provision for income taxes	894			719			—			1,613
Equity in earnings of subsidiaries	5,474			—			(5,474		)	—
Net (loss) income	(7,102		)	5,182			(5,474		)	(7,394		)
Less: Net loss attributable to noncontrolling interest	—			(292		)	—			(292		)
Net (loss) income attributable to Aspect Software Parent, Inc.	$	(7,102	)	$	5,474		$	(5,474	)	$	(7,102	)

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Supplemental Condensed Consolidating Statement of Comprehensive Income (Loss) (unaudited)

For the Three Months Ended March 31, 2015



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations			Consolidated
Net income	$	1,078		$	6,493		$	(6,883	)	$	688
Change in cumulative translation adjustment	(627		)	1,397			(15		)	755
Comprehensive income	451			7,890			(6,898		)	1,443
Comprehensive loss attributable to noncontrolling interest	—			(390		)	—			(390		)
Comprehensive income attributable to Aspect Software Parent, Inc.	$	451		$	8,280		$	(6,898	)	$	1,833

For the Three Months Ended March 31, 2014



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries		Eliminations			Consolidated
Net (loss) income	$	(7,102	)	$	5,182	$	(5,474	)	$	(7,394	)
Change in cumulative translation adjustment	(335		)	7		16			(312		)
Comprehensive (loss) income	$	(7,437	)	$	5,189	$	(5,458	)	$	(7,706	)
Comprehensive loss attributable to noncontrolling interest	—			—		(292		)	(292		)
Comprehensive (loss) income attributable to Aspect Software Parent, Inc.	$	(7,437	)	$	5,189	$	(5,166	)	$	(7,414	)

Supplemental Condensed Consolidating Statement of Cash Flows (unaudited)

For the Three Months Ended March 31, 2015



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations		Consolidated
Operating activities:
Net cash provided by (used in ) operating activities	$	20,791		$	12,183		$	—	$	32,974
Investing activities:
Purchases of property and equipment	$	(1,852	)	$	(282	)	$	—	$	(2,134	)
Net cash used in investing activities	(1,852		)	(282		)	—		(2,134		)
Financing activities:
Repayment of borrowings	(12,525		)	—			—		(12,525		)
Net cash used in by financing activities	(12,525		)	—			—		(12,525		)
Effect of exchange rate changes on cash	—			(92		)	—		(92		)
Net change in cash and cash equivalents	6,414			11,809			—		18,223
Cash and cash equivalents:
Beginning of period	2,124			14,906			—		17,030
End of period	$	8,538		$	26,715		$	—	$	35,253

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Supplemental Condensed Consolidating Statement of Cash Flows (unaudited)

For the Three Months Ended March 31, 2014



(in thousands)	Issuer / Guarantor Subsidiaries			Non-guarantor Subsidiaries			Eliminations		Consolidated
Operating activities:
Net cash provided by operating activities	$	18,092		$	(1,913	)	$	—	$	16,179
Investing activities:
Purchases of property and equipment	(2,009		)	(421		)	—		(2,430		)
Net cash used in investing activities	(2,009		)	(421		)	—		(2,430		)
Financing activities:
Repayment of borrowings	(16,100		)	—			—		(16,100		)
Proceeds received from capital contribution	4								4
Net cash provided by financing activities	(16,096		)	—			—		(16,096		)
Effect of exchange rate changes on cash	—			(275		)	—		(275		)
Net change in cash and cash equivalents	(13		)	(2,609		)	—		(2,622		)
Cash and cash equivalents:
Beginning of period	3,764			22,930			—		26,694
End of period	$	3,751		$	20,321		$	—	$	24,072

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Results and Trends in Q1 2015

The following table sets forth certain key performance indicators for the three months ended March 31, 2015 and 2014:



(Dollars in millions)	Three Months Ended March 31,
	2015		2014		Change ($)			Constant Currency ($)
Net revenues	$	106.0	$	107.7	$	(1.7	)	$	0.7
Adjusted EBITDA	26.8		24.8		2.0			2.1

On a constant currency basis, both our revenue and Adjusted EBITDA improved for the three months ended March 31, 2015 when compared to the prior year period. Weakening foreign currencies, primarily in Europe and Latin America, reduced our reported revenues and expenses for the first quarter of 2015 by approximately $2.6 million and $2.5 million, respectively, when comparing reported results to the prior year quarter. While we expect our customers' deployment preference to continue to shift to cloud from on premise, we are optimistic about our product revenue results for the first quarter of 2015. We added 29 new customer brands to our portfolio in the first quarter of 2015 contributing $3.6 million of bookings. Our cloud business continues to grow, with the first quarter of 2015 delivering our strongest quarter to date for revenue.

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We have identified certain items that management uses as performance indicators to manage our business, including revenue and Adjusted EBITDA, and we describe these items further below.

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, 2015 and 2014:



(Dollars in millions)	Three Months Ended March 31,
	2015			2014			Change ($)			Constant Currency ($)
Net revenues	$	106.0		$	107.7		(1.7		)	0.7
Total cost of revenues	43.7			47.2			(3.5		)	(2.3		)
Gross profit	62.3			60.5			1.8			3.0
Operating expenses	41.0			47.4			(6.4		)	(5.1		)
Income from operations	21.3			13.1			8.2			8.1
Interest and other expense, net	(18.9		)	(18.9		)	—			—
Income (loss) before income taxes	2.4			(5.8		)	8.2			8.1
Provision for income taxes	1.7			1.6			0.1			0.1
Net income (loss)	0.7			(7.4		)	8.1			8.0
Less: Net loss attributable to noncontrolling interest	(0.4		)	(0.3		)	(0.1		)	(0.1		)
Net income (loss) attributable to Aspect Software Parent, Inc.	$	1.1		$	(7.1	)	$	8.2		$	8.1

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,
	2015			2014			Change ($)
Income from operations	$	21.3		$	13.1		$	8.2
Depreciation and amortization	5.6			5.5			0.1
Stock based compensation	0.1			0.1			—
Sponsor management fees	0.5			0.5			—
Severance costs	0.7			3.1			(2.4		)
Cost savings initiatives	—			3.3			(3.3		)
Facilities restructuring charges & adjustments	(0.2		)	—			(0.2		)
Acquisition related costs & adjustments	—			0.3			(0.3		)
Other ⁽¹⁾	(1.2		)	(1.1		)	(0.1		)
Adjusted EBITDA	$	26.8		$	24.8		$	2.0

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(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 & adjustments.

Net Revenue

The following table presents the breakdown of net revenues:



(In millions)	Three Months Ended March 31,
	2015		2014		Change ($)			Constant Currency ($)
Product revenue	$	19.0	$	16.9	$	2.1		$	2.6
Recurring revenue	69.9		71.7		(1.8		)	(0.5		)
Services revenue	17.1		19.1		(2.0		)	(1.4		)
Total revenue	$	106.0	$	107.7	$	(1.7	)	$	0.7

Product

Our product revenue is comprised of software sales that are installed on a customer's premise. The increase in product revenue year-over-year is primarily attributed to improved conversion rates for our qualified pipeline. During the first quarter of 2015, we added 29 new customers contributing $3.6 million to bookings. Partially offsetting these items were weakening foreign currencies which reduced our product revenue by $0.5 million for the three months ended March 31, 2015.

Recurring



(In millions)	Three Months Ended March 31,
	2015		2014		Change ($)			Constant Currency ($)
Cloud revenue	$	14.0	$	10.5	$	3.5		$	3.7
Core maintenance revenue	39.8		39.1		0.7			1.8
Signature maintenance revenue	16.1		22.1		(6.0		)	(6.0		)
Total recurring revenue	$	69.9	$	71.7	$	(1.8	)	$	(0.5	)

Cloud revenue is comprised of hosting and managed service revenue. Our Cloud revenue and new bookings increased by 33% and 48%, respectively, for the three months ended March 31, 2015 when compared to the prior year period. We expect this revenue stream to continue 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 expanded our data center capabilities and coverage areas and we are focused on ease of implementation to accelerate the earnings process for these deals.

On a constant currency basis, our Core maintenance revenue would have been $1.1 million higher for the three months ended March 31, 2015. Our Core maintenance revenue increased on a year-over-year basis as we experienced growth in Voxeo and WFO on premise upsell opportunities. Substantially all of our customers subscribe to maintenance when purchasing our on premise solutions.

Our Signature maintenance revenue decreased during the three months ended March 31, 2015, when compared to the prior year periods as we migrated many of these customers to on premise or cloud Unified IP solutions. Additionally, we have experienced some customer consolidation due to license decommissioning resulting from agent downsizing.

As our business continues to shift from on premise deployment to the cloud, our off balance sheet contracted unbilled revenue balance will continue to grow. The deferred revenue balance on our consolidated balance sheet does not represent the total contract value of annual or multi-year, non-cancelable hosting and managed services agreements. Contracted unbilled revenue represents future billings under our hosting and managed services agreements that have not been invoiced and, accordingly, are not recorded in deferred revenue. The following schedule outlines our contractual on balance sheet and off balance sheet amounts that we expect to recognize as revenue as well as an estimate for minute usage revenue for our cloud customers which is based on historical activity.

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(In millions)	Three Months Ended March 31,
	2015		2014		Change ($)
Deferred revenue - on balance sheet	$	92.9	$	99.7	$	(6.8	)
Contracted unbilled revenue - off balance sheet	69.8		58.0		11.8
Anticipated minute usage revenue - off balance sheet	21.3		15.4		5.9
Total	$	184.0	$	173.1	$	17.7

Our typical cloud contract length is between 12 and 36 months. We expect that the amount of contracted unbilled revenue will change from period to period for several reasons, including the specific timing and duration of large customer hosting and managed services agreements, varying billing cycles of these agreements, the specific timing of customer renewals, foreign currency fluctuations, the timing of when contracted unbilled revenue is to be recognized, and changes in customer financial circumstances.

Services

Services revenue is comprised of consulting, implementation and education revenue. On a constant currency basis, our services revenue would have been $0.6 million higher for the three months ended March 31, 2015. The remaining decline in services revenue year-over-year is primarily the result of the timing of our product revenue volume closing as our revenue from customers purchasing installation services lags their product order. In an effort to deliver a services revenue stream that is less dependent on the timing of premise software installations, our services team offers engagements in a consultancy role to partner with customers and prospective customers to design great customer experiences and run more efficient customer service support centers.

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,
	2015		2014		Change ($)			Constant Currency ($)
Cost of product revenue	$	4.3	$	5.3	$	(1.0	)	$	(0.8	)
Cost of recurring revenue	23.1		23.3		(0.2		)	0.3
Cost of services revenue	15.1		17.4		(2.3		)	(1.8		)
Amortization expense for acquired intangible assets	1.2		1.2		—			—
Total cost of revenues	$	43.7	$	47.2	$	(3.5	)	$	(2.3	)

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



	Three Months Ended March 31,
	2015		2014		Change (pts)		Constant Currency (pts)
Product gross margin	77.4	%	68.6	%	8.8		8.2
Recurring gross margin	67.1	%	67.5	%	(0.4	)	(0.5	)
Services gross margin	11.7	%	8.9	%	2.8		2.6

Product

As the composition of our product revenue has continued to shift from Signature to our Core solutions our product gross margins benefited from these solutions having considerably less hardware costs, which results in more favorable gross margins.

Recurring



(Dollars in millions)	Three Months Ended March 31,
	2015		2014		Change		Constant Currency (pts)
Cloud gross margin	47.0	%	44.8	%	2.2	pts	1.8
Maintenance gross margin	72.1	%	71.4	%	0.7	pts	0.6

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Cloud gross margins for the three months ended March 31, 2015, improved primarily as a result of volume growth. We will continue to invest in this business in advance of revenue generation and expect these margins to improve with volume growth.

Maintenance gross margins for the three months ended March 31, 2015, were favorably impacted by workforce redistributions that occurred in 2014 to ultimately reduce overall costs and better deliver service to our customers. Excluding the impact of these actions, maintenance gross margins were relatively consistent.

Services

During 2014 we redesigned the structure of our professional services organization to realign, invest and hire the skill sets necessary to better meet customer experience expectations and improve utilization. These actions resulted in additional one-time separation costs during the three months ended March 31, 2014 which had an unfavorable impact on gross margins. Over the past six months we have made significant progress in growing our project backlog, improving our realized billing rate and increasing our stand-alone services opportunities to reduce our dependency on product bookings.

Amortization

Amortization expense for acquired intangible assets was consistent when comparing the three months ended March 31, 2015 to the prior year period.

Operating Expenses



(In millions)	Three Months Ended March 31,
	2015			2014		Change ($)			Constant Currency
Research and development	$	11.7		$	14.3	$	(2.6	)	$	(2.4	)
Selling, general and administrative	27.5			31.0		(3.5		)	(2.4		)
Amortization expense for acquired intangible assets	2.0			2.1		(0.1		)	(0.1		)
Restructuring credits	(0.2		)	—		(0.2		)	(0.2		)
Total	$	41.0		$	47.4	$	(6.4	)	$	(5.1	)

Research & Development

The decrease in research and development expenses in the three months ended March 31, 2015, compared to the prior year period is primarily related to realizing the benefits of cost reduction initiatives executed in the prior year which included workforce adjustments to lower cost geographies as well as reduced overall headcount in this function.

Selling, General & Administrative

The decrease in selling, general and administrative expenses in the three months ended March 31, 2015, compared to the prior year period is primarily related to realizing the benefits of cost reduction initiatives executed in the prior year which included workforce adjustments to lower cost geographies as well as reduced overall headcount in these functions. In addition, lower variable compensation costs and the favorable impact of foreign currencies weakening against the United States dollar resulted in lower expenses in the current year.

Amortization Expense for Acquired Intangible Assets

Amortization expense for acquired intangible assets was consistent when comparing the three months ended March 31, 2015 to the prior year period.

Restructuring Credits

Restructuring credits during the three months ended March 31, 2015, primarily reflect adjustments to prior year charges related to vacating excess capacity office space in certain facilities in the United States.

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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 March 31,
	2015		2014			Change ($)
Interest expense, net	$	18.8	$	19.1		$	(0.3	)
Exchange rate loss (gain)	0.2		(0.3		)	0.5
Other expense, net	—		0.1			(0.1		)
Total interest and other expense, net	$	19.0	$	18.9		$	0.1

Interest expense for the three months ended March 31, 2015, decreased as compared to the prior year period due to lower debt levels resulting from scheduled principal payments.

For the three months ended March 31, 2015, we experienced an exchange rate gain primarily due to the strengthening of the United States dollar against foreign currencies. For the three months ended March 31, 2014, we experienced an exchange rate loss primarily due to weakening 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,
	2015			2014			Change
Provision for income taxes	$	1.7		$	1.6		$	0.1
Effective tax rate	70.8		%	(27.9		)%	98.7		pts

The Company’s tax expense in each period differs from the amount resulting from applying statutory rates primarily due to foreign operations in lower tax jurisdictions, tax reserve adjustments, and valuation allowance adjustments.

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LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents increased by $11.2 million to $35.3 million at March 31, 2015 from $24.1 million at March 31, 2014. Our existing cash balance generated by operations and borrowings available under our credit facilities have served as our primary sources of short-term liquidity. 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 three months ended March 31, 2015 and 2014 follows:



(In millions)	Three Months Ended March 31,
	2015			2014
Net cash provided by (used for):
Net loss	$	0.7		$	(7.4	)
Adjustments to net loss for non-cash items	7.9			8.9
Changes in operating assets and liabilities	24.4			14.7
Operating activities	33.0			16.2
Investing activities	(2.1		)	(2.4		)
Financing activities	(12.5		)	(16.1		)
Effect of exchange rate changes	(0.1		)	(0.3		)
Net change in cash and cash equivalents	18.3			(2.6		)
Cash and cash equivalents at beginning of period	17.0			26.7
Cash and cash equivalents at end of period	$	35.3		$	24.1

Net Cash Provided by Operating Activities

The increase in net cash provided by operating activities was primarily due to improved operating results and strong quarterly collections of our annual maintenance renewals in the current year. Our days sales outstanding metric improved from 51 days for the first quarter of 2014 to 43 days for the first quarter of 2015.

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.

Net Cash Used In/Provided By Financing Activities

Financing cash flow activities for both periods presented primarily represents activities related to our debt. In the current year net cash used in financing activities reflects scheduled quarterly principal payments to our first-lien lenders and repayment of our revolver.

Debt Covenants

We were in compliance with all of our financial debt covenants as of March 31, 2015.

Off-Balance Sheet Arrangements

In the Annual Report on Form 10-K, 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, 2015.

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 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.

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During the first three months of 2015, 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.

Item 3. Quantitative and Qualitative Disclosure of Market Risks

During the first three months of 2015, 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, 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, 2015 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, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 8 to the Condensed Consolidated Financial Statements included in our Quarterly Report, which is incorporated by reference herein.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. In addition to the information provided in this report, please refer to the Risk Factors section included the Annual Report of Aspect Software Parent, Inc. on Form 10-K (File No. 333-170936), for a more complete discussion regarding certain factors that could materially affect our business, financial condition or future results.

Item 5. Other Information

(a) On May 14, 2015, the Board of Directors (the “Board”) of Aspect Software Inc. (the “Company”), a wholly-owned subsidiary of Aspect Software Parent, Inc. (the “Registrant”), appointed Rishi Chandna as a new director of the Company. Mr. Chandna has served as a Principal at Golden Gate Capital, a majority shareholder of the Registrant’s sole shareholder Aspect Software Group Holdings Ltd. since 2002. At Golden Gate Capital, Mr. Chandna focuses on investments in the broader technology sector with an emphasis on software and technology services. Prior to joining Golden Gate Capital, Mr. Chandna worked as an Associate Consultant in the Los Angeles office of Bain and Company. Previously, Mr. Chandna worked at Parnassus Investments, a San Francisco-based mutual fund. Mr. Chandna has an MBA from Harvard Business School and a BA in Economics from the University of California, Berkeley.

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Item 6. Exhibits

The following exhibits are filed or furnished as part of this quarterly report on Form 10-Q:




Exhibit No.		Description

31.1*		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**		Certification of Principal Financial Officer and Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS***		XBRL Instance Document

101.SCH***		XBRL Taxonomy Extension Schema Document

101.CAL***		XBRL Calculation Linkbase Document

101.DEF***		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB***		XBRL Label Linkbase Document

101.PRE***		XBRL Taxonomy Presentation Linkbase Document



*	Filed herewith



**	Furnished herewith



***	XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




Date: May 15, 2015	ASPECT SOFTWARE PARENT, INC.

	By:	/s/ Robert J. Krakauer
		Robert J. Krakauer, Executive Vice President and Chief Financial Officer

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