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SAPE > SEC Filings for SAPE > Form 10-Q on 7-Aug-2012All Recent SEC Filings

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Form 10-Q for SAPIENT CORP


7-Aug-2012

Quarterly Report


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

Overview

We help clients transform in the areas of business, marketing, and technology and succeed in an increasingly complex marketplace. We market our services through three primary business units - SapientNitro, Sapient Global Markets, and Sapient Government Services - positioned at the intersection of marketing, business and technology. SapientNitro, one of the world's largest independent digitally-led, integrated marketing services firms, provides multi-channel marketing and commerce services that span brand and marketing strategy, digital/broadcast/print advertising creative, web design and development, e-commerce, media planning and buying, and emerging platforms, such as social media and mobile. Through SapientNitro we offer a complete, multi-channel marketing and commerce solution that strengthens relationships between our clients' customers and their brands. For simplicity of operations, SapientNitro also includes our traditional IT consulting services, which are currently, and are expected to remain, less than 10% of our total revenues. Sapient Global Markets provides business and IT strategy, process and system design, program management, custom development and package implementation, systems integration and outsourced services to financial services and energy services market leaders. A core focus area within Sapient Global Markets is trading and risk management, to which we bring more than 15 years of experience and a globally integrated service in derivatives processing. Sapient Government Services provides consulting, technology, and marketing services to U.S. governmental agencies and non-governmental organizations ("NGOs"). Focused on driving long-term change and transforming the citizen experience, we use technology to help our clients become more accessible, transparent and effective.

Founded in 1990 and incorporated in Delaware in 1991, we maintain a strong global presence with offices around the world. We utilize our proprietary Global Distributed Delivery ("GDD") model in support of our SapientNitro and Sapient Global Markets segments. Our GDD model enables us to provide high-quality, cost-effective solutions under accelerated assignment schedules. By engaging India's highly skilled technology specialists, we can provide services at lower total costs as well as offer a continuous delivery capability resulting from time differences between India and the countries we serve. We also employ our GDD model to provide application management services.

Summary of Results of Operations

The following table presents a summary of our results of operations for the
three and six months ended June 30, 2012 and 2011 (in thousands, except
percentages):



                                  Three Months Ended                                                    Six Months Ended
                                       June 30,                   Increase / (Decrease)                     June 30,                   Increase / (Decrease)
                                  2012          2011           Dollars             Percentage          2012          2011          Dollars            Percentage
Service revenues                $ 278,989     $ 254,616     $      24,373                   10 %     $ 539,611     $ 495,956     $     43,655                    9 %
Income from operations          $  24,305     $  23,130     $       1,175                    5 %     $  40,418     $  41,618     $     (1,200 )                 (3 )%

Net income $ 14,680 $ 15,204 $ (524 ) (3 )% $ 24,162 $ 27,362 $ (3,200 ) (12 )%

The increases in service revenues for the three and six months ended June 30, 2012 were due to increases in demand for our services in 2012 compared to 2011, and to a lesser extent, revenues generated from the two acquisitions completed during the three months ended September 30, 2011.

Non-GAAP Financial Measures

In our quarterly earnings press releases and conference calls, we discuss two key measures that are not calculated according to generally accepted accounting principles ("GAAP"). The first non-GAAP measure is operating income, as reported on our consolidated and condensed statements of operations, excluding certain expenses and benefits, which we refer to as "non-GAAP income from operations". The second measure calculates non-GAAP income from operations as a percentage of reported services revenues, which we refer to as "non-GAAP operating margin". Management believes that these non-GAAP measures help illustrate underlying trends in our business. We use these measures to establish budgets and operational goals (communicated internally and externally), manage our business, and evaluate our performance. We exclude certain expenses and benefits from non-GAAP income from operations that we believe are not reflective of these underlying business trends and are not useful measures in determining our operational performance and overall business strategy. Because our reported non-GAAP financial measures are not calculated according to GAAP, these measures may not necessarily be comparable to GAAP or similarly described non-GAAP measures reported by other companies within our industry. Consequently, our non-GAAP financial measures should not be evaluated in isolation or supplant comparable GAAP measures, but, rather, should be considered together with our consolidated and condensed financial statements, which are prepared according to GAAP. The following table reconciles income from operations as reported on our consolidated and condensed statements of operations to non-GAAP income from operations and GAAP operating margin to non-GAAP operating margin for the three and six months ended June 30, 2012 and 2011 (in thousands, except percentages):


                                               Three Months Ended               Six Months Ended
                                                    June 30,                        June 30,
                                              2012            2011            2012            2011
Service revenues                            $ 278,989       $ 254,616       $ 539,611       $ 495,956

GAAP income from operations                 $  24,305       $  23,130       $  40,418       $  41,618
Stock-based compensation expense                6,465           5,343          11,613           9,219
Restructuring and other related
(benefits) charges                                (14 )           (56 )           (90 )         5,586
Amortization of purchased intangible
assets                                          2,745           1,288           5,367           2,561
Acquisition costs and other related
charges                                           468             223           1,593             223
Stock-based compensation review and
restatement benefit                                -               -               -           (3,500 )

Non-GAAP income from operations             $  33,969       $  29,928       $  58,901       $  55,707

GAAP operating margin                             8.7 %           9.1 %           7.5 %           8.4 %
Effect of adjustments detailed above              3.5 %           2.7 %           3.4 %           2.8 %

Non-GAAP operating margin                        12.2 %          11.8 %          10.9 %          11.2 %

During the first quarter of 2011, we received insurance recovery proceeds of $3.5 million as reimbursement for expenses incurred in 2006 and 2007 relating to the stock option review and restatement. When the expenses were originally incurred, they were excluded from our non-GAAP income from operations. Similarly, the $3.5 million benefit has been excluded from non-GAAP income from operations for the six months ended June 30, 2011. Please see the "Results of Operations" section of this Management's Discussion and Analysis for a more detailed discussion and analysis of restructuring and other related charges, amortization of purchased intangible assets, and acquisition costs and other related charges.

When important to management's analysis, operating results are compared in "constant currency terms", a non-GAAP financial measure that excludes the effect of foreign currency exchange rate fluctuations. The effect of rate fluctuations is excluded by translating the current period's local currency service revenues and expenses into U.S. dollars at the average exchange rates of the prior period of comparison. For a discussion of our exposure to exchange rates, see Item 3, "Quantitative and Qualitative Disclosures About Market Risk".

Summary of Critical Accounting Policies; Significant Judgments and Estimates

We have identified the accounting policies which are critical to understanding our business and our results of operations. Management believes that there have been no significant changes during 2012 to the items disclosed in our summary of critical accounting policies, significant judgments and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

Three and six months ended June 30, 2012 compared to the three and six months
ended June 30, 2011

The following table presents the components of net income included in our
consolidated and condensed statements of operations as percentages of service
revenues:

--------------------------------------------------------------------------------
                                                Three Months Ended                Six Months Ended
                                                     June 30,                         June 30,
                                               2012             2011            2012            2011
Revenues:
Service revenues                                 100.0 %         100.0 %         100.0 %         100.0 %
Reimbursable expenses                              3.6 %           4.3 %           3.5 %           3.9 %

Total gross revenues                             103.6 %         104.3 %         103.5 %         103.9 %

Operating expenses:
Project personnel expenses                        68.9 %          69.4 %          69.6 %          69.3 %
Reimbursable expenses                              3.6 %           4.3 %           3.5 %           3.9 %

Total project personnel expenses and
reimbursable expenses                             72.5 %          73.7 %          73.1 %          73.2 %
Selling and marketing expenses                     4.0 %           4.0 %           4.0 %           4.1 %
General and administrative expenses               17.2 %          16.9 %          17.6 %          16.6 %
Restructuring and other related
(benefits) charges                                (0.0 )%         (0.0 )%         (0.0 )%          1.1 %
Amortization of purchased intangible
assets                                             1.0 %           0.5 %           1.0 %           0.5 %
Acquisition costs and other related
charges                                            0.2 %           0.1 %           0.3 %           0.0 %

Total operating expenses                          94.9 %          95.2 %          96.0 %          95.5 %

Income from operations                             8.7 %           9.1 %           7.5 %           8.4 %
Interest and other income, net                     0.4 %           0.5 %           0.5 %           0.5 %

Income before income taxes                         9.1 %           9.6 %           8.0 %           8.9 %
Provision for income taxes                         3.8 %           3.6 %           3.5 %           3.4 %

Net income                                         5.3 %           6.0 %           4.5 %           5.5 %

Service Revenues

Service revenues for the three and six months ended June 30, 2012 and 2011 were
as follows (in thousands, except percentages):



                               Three Months Ended
                                    June 30,                            Percentage
                               2012          2011        Increase        Increase
          Service revenues   $ 278,989     $ 254,616     $  24,373               10 %

                                Six Months Ended
                                    June 30,                            Percentage
                               2012          2011        Increase        Increase

Service revenues $ 539,611 $ 495,956 $ 43,655 9 %

The following table presents service revenues by industry sector for the three months ended June 30, 2012 and 2011 (in millions, except percentages):

                                               Three Months Ended
                                                    June 30,                     Increase / (Decrease)
Industry Sector                                2012            2011          Dollars             Percentage
Consumer, Travel & Automotive               $    125.1        $  93.9       $     31.2                    33 %
Financial Services                                82.3           83.7             (1.4 )                  (2 )%
Government, Health & Education                    28.4           27.3              1.1                     4 %
Technology & Communications                       22.5           30.4             (7.9 )                 (26 )%
Energy Services                                   20.7           19.3              1.4                     7 %

Total service revenues                      $    279.0        $ 254.6       $     24.4                    10 %

The increases noted above were the result of increases in demand for our services in these industry sectors. The decreases in the Financial Services and Technology & Communications sectors were the result of decreases in demand for our services in those sectors. In constant currency terms, service revenues increased 11% compared to the same period in 2011.

Utilization, which represents the percentage of our delivery personnel's time spent on billable client work, was 73% for the three months ended June 30, 2012, compared to 71% for the same period in 2011. Our average delivery personnel peoplecount for the three months ended June 30, 2012 increased 6% compared to the same period in 2011, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, decreased by 5% for the three months ended June 30, 2012 compared to the same period in 2011, based on our needs in specialized areas for certain client contracts.

Our five largest clients, in the aggregate, accounted for approximately 21% of our service revenues for the three months ended June 30, 2012, unchanged from the same period in 2011. For the three months ended June 30, 2012 and 2011, no single client accounted for more than 10% of our service revenues. Long-Term and Retainer Revenues represented 51% of our service revenues for the three months ended June 30, 2012, compared to 46% for the same period in 2011. Long-Term and Retainer Revenues are revenues from contracts with durations of at least twelve months, and from applications management and long-term support assignments, which are cancelable.


The following table presents service revenues by industry sector for the six months ended June 30, 2012 and 2011 (in millions, except percentages):

                                                Six Months Ended
                                                    June 30,                     Increase / (Decrease)
Industry Sector                                2012           2011           Dollars              Percentage
Consumer, Travel & Automotive                $   241.3       $ 175.6       $       65.7                    37 %
Financial Services                               154.3         163.8               (9.5 )                  (6 )%
Government, Health & Education                    56.2          53.3                2.9                     5 %
Technology & Communications                       44.9          62.6              (17.7 )                 (28 )%
Energy Services                                   42.9          40.7                2.2                     5 %

Total service revenues                       $   539.6       $ 496.0       $       43.6                     9 %

The increases noted above were the result of increases in demand for our services in these industry sectors. The decreases in the Financial Services and Technology & Communications sectors were the result of decreases in demand for our services in those sectors. In constant currency terms, service revenues increased 10% compared to the same period in 2011.

Utilization, which represents the percentage of our delivery personnel's time spent on billable client work, was 72% for the six months ended June 30, 2012, compared to 71% for the same period in 2011. Our average delivery personnel peoplecount for the six months ended June 30, 2012 increased 7% compared to the same period in 2011, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, decreased by 8% for the six months ended June 30, 2012 compared to the same period in 2011, based on our needs in specialized areas for certain client contracts.

Our five largest clients, in the aggregate, accounted for approximately 21% of our service revenues for the six months ended June 30, 2012, compared to 20% for the same period in 2011. For the six months ended June 30, 2012 and 2011, no single client accounted for more than 10% of our service revenues. Long-Term and Retainer Revenues represented 50% of our service revenues for the six months ended June 30, 2012, compared to 47% for the same period in 2011. Long-Term and Retainer Revenues are revenues from contracts with durations of at least twelve months, and from applications management and long-term support assignments, which are cancelable.

Project Personnel Expenses

Project personnel expenses consist primarily of salaries and employee benefits for personnel dedicated to client projects, contractors and consultants and other direct expenses incurred to complete assignments that were not reimbursed by the client. These costs represent the most significant expenses we incur in providing our services. The following tables present project personnel expenses for the three and six months ended June 30, 2012 and 2011 (in thousands, except percentages):

                                              Three Months Ended
                                                   June 30,                                  Percentage
                                            2012             2011            Increase         Increase
Project personnel expenses                $ 192,214        $ 176,739        $   15,475                 9 %
Project personnel expenses as a
percentage of service revenues                   69 %             69 %        0 points

                                               Six Months Ended
                                                   June 30,                                  Percentage
                                            2012             2011            Increase         Increase
Project personnel expenses                $ 375,585        $ 343,415        $   32,170                 9 %
Project personnel expenses as a
percentage of service revenues                   70 %             69 %        1 point

The increase for the three months ended June 30, 2012 was a result of our service revenue growth, as we increased delivery personnel peoplecount and certain other direct expenses in order to support the increase in demand for our services. Compensation expenses increased $16.5 million, due to the 6% increase in average peoplecount. Contractor and consultant expense decreased $1.0 million as our need for contractors and consultants in specialized areas for certain client contracts decreased. Travel costs decreased $0.7 million. Other project personnel expenses increased, in the aggregate, $0.7 million.

The increase for the six months ended June 30, 2012 was a result of our service revenue growth, as we increased delivery personnel peoplecount and certain other direct expenses in order to support the increase in demand for our services. Compensation expenses increased $36.0 million, due to the 7% increase in average peoplecount. Contractor and consultant expense decreased $3.5 million as our need for contractors and consultants in specialized areas for certain client contracts decreased. Other project personnel expenses decreased, in the aggregate, $0.3 million.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of salaries, employee benefits
and travel expenses of selling and marketing personnel, and promotional
expenses. The following tables present selling and marketing expenses for the
three and six months ended June 30, 2012 and 2011 (in thousands, except
percentages):

--------------------------------------------------------------------------------
                                               Three Months Ended
                                                    June 30,                                  Percentage
                                              2012             2011           Increase         Increase
Selling and marketing expenses              $  11,230        $ 10,316        $      914                 9 %
Selling and marketing expenses as a
percentage of service revenues                      4 %             4 %        0 points

                                                Six Months Ended
                                                    June 30,                                  Percentage
                                              2012             2011           Increase         Increase
Selling and marketing expenses              $  21,925        $ 20,472        $    1,453                 7 %
Selling and marketing expenses as a
percentage of service revenues                      4 %             4 %        0 points

The increase for the three months ended June 30, 2012 was due to an increase of $0.9 million in compensation expense, relating to an increase in peoplecount, and an increase of $0.4 million in travel expense. Other selling and marketing expenses decreased, in the aggregate, $0.4 million.

The increase for the six months ended June 30, 2012 was due to an increase of $1.3 million in compensation expense, relating to an increase in peoplecount, and an increase of $0.7 million in travel expense. Other selling and marketing expenses decreased, in the aggregate, $0.5 million.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative functions, and depreciation and occupancy expenses. The following tables present general and administrative expenses for the three and six months ended June 30, 2012 and 2011 (in thousands, except percentages):

                                              Three Months Ended
                                                   June 30,                                   Percentage
                                             2012             2011           Increase          Increase
General and administrative expenses        $  48,041        $ 42,976        $    5,065                 12 %
General and administrative expenses as
a percentage of service revenues                  17 %            17 %        0 points

                                               Six Months Ended
                                                   June 30,                                   Percentage
                                             2012             2011           Increase          Increase
General and administrative expenses        $  94,813        $ 82,081        $   12,732                 16 %
General and administrative expenses as
a percentage of service revenues                  18 %            17 %        1 point

The increase for the three months ended June 30, 2012 was due to an increase of $2.6 million in facilities expenses, due to office space expansions in several locations during 2011 and the first six months of 2012, and an increase of $2.4 million in compensation expenses, due to a 13% increase in average general and administrative peoplecount. These increases were partially offset by an increase of $0.4 million in currency transaction gains. Other general and administrative expenses increased, in the aggregate, $0.5 million.

The increase for the six months ended June 30, 2012 was due to an increase of $4.6 million in facilities expenses, due to office space expansions in several locations during 2011 and the first six months of 2012, and an increase of $4.2 million in compensation expenses, due to a 14% increase in average general and administrative peoplecount. In addition, the six months ended June 30, 2011 included a benefit of $3.5 million relating to insurance recovery proceeds received as reimbursement of expenses incurred in 2006 and 2007 relating to the stock option review and restatement, while the six months ended June 30, 2012 included no such benefits. These increases were partially offset by the impact of hedging gains and losses, which resulted in a decrease of $0.5 million, as net gains of $0.1 million were recorded in the six months ended June 30, 2012, compared to net losses of $0.4 million in the six months ended June 30, 2011. Other general and administrative expenses increased, in the aggregate, $0.9 million.

Restructuring and Other Related (Benefits) Charges

Restructuring and other related (benefits) charges were $(14,000) and $(0.1) million for the three months ended June 30, 2012 and 2011, respectively. The benefits recorded in both periods were related to changes in the estimated costs to be incurred in connection with previously restructured office leases.

Restructuring and other related (benefits) charges were $(0.1) million and $5.6 million for the six months ended June 30, 2012 and 2011, respectively. The benefits recorded in the six months ended June 30, 2012 were related to changes in estimated future costs to be incurred in connection with two previously restructured office leases. Net restructuring charges of $5.6 million for the six months ended June 30, 2011 consisted primarily of a charge of $5.7 million which was recorded in the first quarter of 2011. This charge was related to cash and other termination benefits for two former Nitro executives whose positions were made redundant, as well as the re-positioning of a portion of our SapientNitro business in Australia from traditional advertising capabilities to digitally-led capabilities. This charge consisted of $1.1 million of cash severance and other associated termination benefits, and a $4.6 million non-cash charge related to the acceleration of unrecognized compensation expense for stock-based awards.


Amortization of Purchased Intangible Assets

Purchased intangible assets consist of customer lists and customer relationships, non-compete and non-solicitation agreements, intellectual property and tradenames acquired in business combinations. Amortization of purchased intangible assets was $2.7 million and $5.4 million for the three and six months ended June 30, 2012, respectively, compared to $1.3 million and $2.6 million for the three and six months ended June 30, 2011, respectively. The increases in expense were due to the impact of new intangible assets recorded in acquisitions which occurred during the three months ended September 30, 2011.

. . .

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