ASPECT TELECOMMUNICATIONS CORP (ASPT)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I - Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and
Management's Discussion and Analysis in the Company's 1998 Annual Report to Shareholders.
Overview
Aspect Telecommunications Corporation (Aspect or the Company) is a provider of integrated software suites designed to enable companies to deliver responsive and cost-effective customer service using call center solutions to interact with their customers via voice, data, the Internet, and e-mail. Aspect also consults, trains, and delivers systems integration services to help organizations effectively plan, integrate, and manage call centers. The Company markets its products and services worldwide to enterprises in a broad array of industries including financial services, government, health care, retailing, technology, telecommunications, and transportation.
In May 1998, the Company completed the acquisition of Voicetek Corporation (Voicetek), a leading supplier of interactive voice
response (IVR) and Intelligent Networks (IN) applications, based in Chelmsford, Massachusetts. The transaction was intended to augment Aspect customer premise IVR product offerings, strengthen the Company's position in the network service provider marketplace, and extend the Company's original equipment manufacturers (OEM) sales channel capabilities. The transaction was accounted for as a purchase. The Company paid approximately $72 million in cash for all Voicetek common and preferred shares outstanding and converted all outstanding Voicetek options into options to purchase approximately 450,000 shares of Aspect common stock with a fair value of approximately $11 million plus transaction costs of approximately $3 million, and assumed certain operating assets and liabilities. The Company recorded a one-time charge of $10 million in the second quarter of 1998 for purchased in-process technology related to two development projects that had not reached technological feasibility, had no alternative future use, and for which successful development was uncertain. The conclusion that each in-process development effort, or any material subcomponent, had no alternative future use was reached in consultation with engineering personnel from both Aspect and Voicetek.
In August 1998, the Company completed a private placement of approximately $150 million ($490 million principal amount at maturity)
of zero coupon convertible subordinated debentures (convertible subordinated debentures) due 2018. The convertible subordinated
debentures are priced at a yield to maturity of 6% per annum and are convertible into Aspect common stock anytime prior to maturity at
a conversion rate of 8.713 share per $1,000 principal amount. Holders can require Aspect to repurchase the debentures on August 10, 2003, August 10, 2008 and August 10, 2013, for cash, or at the election of Aspect, for Aspect common stock, if certain conditions are met. The debentures are not secured by any Aspect assets and are subordinated in right of payment to all of Aspect senior indebtedness and effectively subordinated to the debt of Aspect subsidiaries. On October 30, 1998, the Company filed a registration statement with
the Securities and Exchange Commission to register the debentures and shares of Aspect Common Stock issuable upon conversion for resale. The registration statement was declared effective on February 2, 1999.
Except for historical information contained herein, the matters discussed in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities and Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and are made under the safe-harbor provisions thereof. Such forward-looking
statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. See
"Business Environment and Risk Factors" discussed in the Company's Annual Report and Form 10-K
ASPECT TELECOMMUNICATIONS CORPORATION
for the fiscal year ended December 31, 1998. Readers are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly release the results of
any revision to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Results of Operations
Net Revenues
Total revenues decreased by 12% to $100.1 million for the first quarter of 1999 from $113.5 million for the first quarter of 1998.
Product revenues for the first quarter of 1999 were $51.2 million, a decrease of 34% from product revenues of $77.3 million for the first quarter of 1998 primarily due to a decline in revenue from sales of new call center systems and add-ons in the United States, partially offset by revenue associated with Voicetek. International product revenues in the first quarter of 1999 decreased modestly from the first quarter of the prior year reflecting increased revenue in Germany offset by a decline in the United Kingdom.
Customer support revenues for the first quarter of 1999 were $48.9 million, an increase of 35% over support revenues of $36.1 million
for the same period of 1998. Growth in customer support revenues resulted primarily from increases in maintenance revenues as a result
of the growth in the Company's installed base, including the installed base added through acquisitions and expanded revenue from consulting and systems integration projects in North America. Customer support revenues include fees for providing contractually agreed-upon system service and maintenance (which typically commence twelve months from the date a system is installed and, accordingly, are primarily affected by growth in the installed base); installation of products; systems integration revenues; and other support services.
Gross Margin on Product Revenues
Product gross margin was 65.3% for the first quarter of 1999 compared to 68.5% for the first quarter of 1998. The decline in product gross margin from 1998 to 1999 primarily reflects the increased proportional impact of amortization and other fixed production costs due to decreased revenue, as well as an increased mix of revenue from third party products included as part of system integration projects in the most recent quarter (which typically have lower margins). On a forward-looking basis, the Company expects that the following factors, among others, could have a material impact on product gross margins: the shift in the Company's business focus to becoming a provider of customer relationship solutions; variations in the mix and volume of products sold; the channel of distribution; the portion of systems revenues related to accounts purchasing multiple systems; the mix and level of third-party product included as part of systems integration projects; the results of recently acquired subsidiaries; and cross-licensing or royalty arrangements with third parties.
Gross Margin on Customer Support Revenues
Customer support gross margin was 27.1% for the first quarter of 1999 compared to 33.1% for the first quarter of 1998. The decrease in customer support margins between the periods reflects customer support revenues not growing proportionately with the costs associated with providing the related services, in particular costs associated with consulting and systems integration projects. On a forward-looking basis, the Company anticipates that customer support margins will fluctuate from period to period due to fluctuations in customer support revenues (since many of the costs of providing customer support do
ASPECT TELECOMMUNICATIONS CORPORATION
not vary proportionately with customer support revenues), ongoing efforts to expand the Company's customer support infrastructure and
fluctuations in the level of consulting and systems integration revenue.
Research and Development Expenses
Research and development (R&D) expenses were $19.5 million for the first quarter of 1999, an increase of 52% over $12.8 million for
the first quarter of 1998. R&D expenditures reflect the Company's ongoing efforts to remain competitive through both new product
development and expanded features for existing products. The increases across the period presented reflect increased staffing, associated
infrastructure costs, and the inclusion of Voicetek's R&D expenses in 1999, including amortization costs associated with developed and core technology intangible assets. As a percentage of net revenues, R&D spending was 19% for the first quarter of 1999 compared to 11% for the first quarter of 1998. Excluding amortization of acquired intangible assets, R&D expenses were $18.4 million for the first quarter of 1999 while the same period of 1998 did not include similar expenses. The Company continues to believe that significant investment in R&D is required to remain competitive and anticipates, on a forward-looking basis, that such expenses in 1999 will increase in absolute dollars, although such expenses as a percentage of net revenues may fluctuate between periods.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $45.9 million for the first quarter of 1999, an increase of 48% over $31.1 million in the first quarter of 1998. The increase between these two periods was primarily caused by increased staffing levels, infrastructure expansion, and increased amortization expenses related to the acquisition of Voicetek, partially offset by a decline in legal
expenses. SG&A expenses as a percentage of net revenues were 46% for the first quarter of 1999 and 27% for the first quarter of 1998.
Excluding amortization of acquired intangible assets, SG&A expenses were $43.1 million and $30.1 million for the first quarters of 1999
and 1998, respectively. The Company anticipates, on a forward-looking basis, that SG&A expenses will continue to increase in absolute dollars for 1999, when compared with 1998, although such expenses as a percentage of net revenues may fluctuate between periods.
Net Interest Income (Expense)
Net interest expense was $219,000 for the three months ended March 31, 1999 compared to net interest income of $1.4 million for the three months ended March 31, 1998. This decline resulted from interest expense associated with the issuance of approximately $150 million of convertible subordinated debentures in August 1998 (approximately $156 million in principal and accrued interest at March 31, 1999), the utilization of cash associated with the Company's stock repurchase program and generally lower interest rates earned on invested cash.
Income Taxes
The Company's effective tax rate was a benefit of 30% for the first three months of 1999 compared with a provision of 38% in the same period of 1998. The rate in 1999 is lower primarily due to the nondeductible goodwill amortization from prior years' acquisitions
which reduces the amount of tax benefit that can be recognized in a loss period. The Company has sufficient prior year taxable income
to allow recognition of the tax benefit.
Liquidity and Capital Resources
At March 31, 1999, the Company's principal source of liquidity consisted of cash, cash equivalents, and short-term investments totaling $208.7 million, which represented 38% of total assets. The primary sources
ASPECT TELECOMMUNICATIONS CORPORATION
of cash for the first three months of 1999 were cash provided by operating activities of $23.8 million and proceeds from the issuance of common stock under various stock plans of $3.5 million.
The primary uses of cash for the first three months of 1999 were net purchases of short-term investments of $5.4 million, $9.8 million
used for the stock repurchase program, $5.1 million for the purchase of property and equipment, and $1.4 million for payments on a note payable.
At March 31, 1999, the Company's outstanding borrowings, including current portions of notes payable, totaled $158 million, and comprised $156 million of convertible subordinated debentures and $1.9 million remaining on a $4.5 million note payable incurred in connection with the acquisition of TCS in 1995. Payment of the remaining balance is being delayed pending resolution of various tax matters relating to periods prior to the Company's acquisition of TCS.
The Company believes, on a forward-looking basis, that its cash, cash equivalents, short-term investments, and anticipated cash flow from operations will be sufficient to meet the Company's presently anticipated cash requirements during at least the next twelve months.
Year 2000 and Proximate Dates
The information provided below constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000 Readiness Disclosure Act.
Many computer systems are expected to experience problems handling dates around the Year 2000 (Y2K). Described below are the actions we have taken or plan to take to address the potential problems that could result as systems attempt to handle dates around the millennium.
State of Readiness: The Company's Y2K activities include the following phases: gathering data and taking inventory; testing systems and
products to discover or confirm Y2K compliance; execution of remediation activities to fix non-compliant products and systems; and
ongoing monitoring and testing of products and systems. The major business areas impacted are as follows:
. Products and Installations: The Company is visiting customers to install Y2K solutions and has furnished test facilities and equipment
to allow customers to verify compliance. The Company believes that substantially all of the Company's products are Y2K compliant, or
that upgrades available to make them Y2K compliant.
. Procurement: The Company has surveyed the Y2K readiness of critical and sole- source suppliers. The Company is monitoring these critical suppliers and will continue to follow up with them on their Y2K readiness. Risk assessments and contingency plans are being prepared for critical suppliers.
. Manufacturing: Certain of the Company's manufacturing is outsourced to two primary suppliers and the Company is monitoring their Y2K readiness. The Company's assembly and test equipment is scheduled for ongoing upgrades to Y2K compliant configurations through September 1999. The Company's primary manufacturing application software has been upgraded to a version that has successfully passed Y2K testing.
. Information Technology Systems: The Company has conducted a survey of its information technology hardware and software and has a Y2K project team focusing on testing and remediation of necessary components. The Company expects that substantially all nonY2K
compliant hardware and software will be upgraded or replaced by September 1999.
. Facilities and Infrastructure: An assessment of the Y2K readiness of owned and leased assets was substantially completed in January
1999. The Company is currently confirming compliance status and upgrading components as necessary. The Company anticipates that
substantially all non-Y2K compliant facilities components will be upgraded or replaced by September 1999.
ASPECT TELECOMMUNICATIONS CORPORATION
Costs: The estimated costs of Y2K compliance efforts are not expected to be material to the Company.
Risks: Many computer systems are expected to experience problems handling dates around the year 2000. The Company believes the
most reasonably likely worst case Y2K scenarios include the following:
. Customers could change their buying patterns in a number of ways, including accelerating or delaying purchases of, or replacement of,
the Company's products and services.
. The Company could experience a disruption in service to its customers as a result of the failure of third party products, including the
following:
-Third party products which are non-compliant and are incorporated into the Company's products could cause such products to fail;
-A breakdown in telephone, e-mail, voicemail, Web or file transfer programs could impact the responsiveness of the Company's help
desk;
-Y2K problems at a number of the Company's suppliers including banks, telephone companies and transport and mail services could have a pervasive impact on business as a whole; and/or
-Product features that rely on date parameters, such as scheduled operating procedures and operating reports, could malfunction.
The Company's products may not contain all of the necessary date code or other changes to operate in the Y2K. Any failure of such products to perform could result in:
. Claims and lawsuits against the Company;
. Significantly impaired customer satisfaction resulting in customers withholding cash owed to the Company and delaying or canceling orders; and/or
. Managerial and technical resources being diverted away from product development and other business activities.
Any of the above stated consequences, in addition to others that management cannot yet foresee, could have a significant adverse
impact on the Company's business, operating results or financial condition.
Contingency Plans: The Company is currently developing contingency plans for critical business processes, suppliers, and systems. The
Company presently anticipates that contingency plans will be complete by October 1999. Once contingency plans are implemented, however, management cannot be certain that such plans will prevent significant Y2K problems from occurring.
ASPECT TELECOMMUNICATIONS CORPORATION
Item 3. Quantitative and Qualitative Disclosures About Financial Market Risk
Reference is made to the information appearing under the caption "Quantitative and Qualitative Disclosures About Financial Market
Risk" on pages F-11 through F-12 of the Registrant's 1998 Annual Financial Report to Shareholders attached as an appendix to the
Registrant's 1999 Proxy Statement, which information is hereby incorporated by reference.
ASPECT TELECOMMUNICATIONS CORPORATION |
