Overview

The Company

We help clients leverage marketing and technology to transform their businesses, enabling them to anticipate, navigate and leverage change to gain a competitive advantage and succeed in an increasingly connected, customer-centric environment. 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 is a new breed of agency which helps clients tell their stories through seamless experiences across brand communications, digital engagement, and omni-channel commerce. SapientNitro offers services including integrated marketing and creative services, web and interactive development, traditional advertising, media planning and buying, strategic planning and marketing analytics, multi-channel commerce strategy and solutions including a significant focus on mobile, and content and asset management strategies and solutions. 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 technology services including integrated advisory, program management, analytics, technology and operations services to leaders in banking, investment management, energy and commodity industries, as well as to governments. 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, nonprofit organizations ("NPOs"), and non-governmental organizations ("NGOs"). Focused on driving long-term change and transforming the citizen experience, we use technology, marketing services and communications 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 perform services on a continuous basis through global client teams and 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 years ended December 31, 2012 and 2011 (in thousands, except percentages):

                            Year Ended December 31,             Increase / (Decrease)
                              2012            2011           Dollars           Percentage
 Service revenues         $  1,121,010     $ 1,021,083     $     99,927                 10 %
 Income from operations   $    104,107     $   104,077     $         30                  0 %
 Net income               $     65,241     $    72,676     $     (7,435 )              (10 )%

The increase in service revenues for the year ended December 31, 2012 was primarily due to increases in client demand in our SapientNitro and Sapient Global Markets business units, and the full-year impact of the two acquisitions we completed during the third quarter of 2011. Income from operations was essentially unchanged, as increased service revenues were largely offset by similar increases in operating expenses. Net income decreased due to lower interest and other income (net), and a higher provision for income taxes in 2012 as compared to 2011.

The following table presents a summary of our results of operations for the years ended December 31, 2011 and 2010 (in thousands, except percentages):

                               Year Ended December 31,                 Increase
                                  2011            2010         Dollars       Percentage
    Service revenues         $    1,021,083     $ 823,511     $ 197,572               24 %
    Income from operations   $      104,077     $  63,498     $  40,579               64 %
    Net income               $       72,676     $  42,678     $  29,998               70 %

The increase in service revenues for the year ended December 31, 2011 was primarily due to increases in demand for our services in all three of our primary business units, and to a lesser extent, the impact of the two acquisitions we completed during the third quarter of 2011. The increases in income from operations and net income were primarily due to the increase in service revenues, coupled with our management of project personnel, sales and marketing, and general and administrative expenses, all of which decreased as a percentage of service revenues in 2011 as compared to 2010.

Please see our Results of Operations section for additional discussion and analysis of these items.

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 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 the 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 financial statements, which are prepared in accordance with GAAP and included in Part II, Item 8, Financial Statements

and Supplementary Data, of this Annual Report on Form 10-K. The following table reconciles income from operations as reported on our consolidated statements of operations to non-GAAP income from operations, and GAAP operating margin to non-GAAP operating margin, for 2012, 2011 and 2010 (in thousands, except percentages):

                                                           Year Ended December 31,
                                                  2012               2011              2010
Service revenues                               $ 1,121,010        $ 1,021,083        $ 823,511

GAAP income from operations                    $   104,107        $   104,077        $  63,498
Stock-based compensation expense                    23,795             19,256           18,156
Restructuring and other related charges                394              6,507              414
Amortization of purchased intangible
assets                                              11,052              6,813            5,448
Acquisition costs and other related
charges                                              4,354              1,861              111
Stock-based compensation review and
restatement benefits                                     -             (3,500 )           (301 )

Non-GAAP income from operations                $   143,702        $   135,014        $  87,326

GAAP operating margin                                  9.3 %             10.2 %            7.7 %
Effect of adjustments detailed above                   3.5 %              3.0 %            2.9 %

Non-GAAP operating margin                             12.8 %             13.2 %           10.6 %

Non-GAAP income from operations increased in 2012 compared to 2011, and in 2011 compared to 2010, primarily due to the increases in reported GAAP income from operations and increases in non-GAAP items. During 2011 and 2010, we received insurance recovery proceeds of $3.5 million and $0.3 million, respectively, as reimbursement for expenses incurred in 2006 and 2007 relating to a review of stock option grant practices and the related restatement. When the expenses were originally incurred, they were excluded from our non-GAAP income from operations. Similarly, these benefits have been excluded from non-GAAP income from operations in 2011 and 2010.

Please see the Results of Operations section 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 exchange 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 Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of this Annual Report on Form 10-K.

Results of Operations

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

                                                             Year Ended December 31,
                                                    2012               2011               2010
Revenues:
Service revenues                                      100.0 %            100.0 %            100.0 %
Reimbursable expenses                                   3.6 %              4.1 %              4.9 %

Total gross revenues                                  103.6 %            104.1 %            104.9 %

Operating expenses:
Project personnel expenses                             68.2 %             67.7 %             68.5 %
Reimbursable expenses                                   3.6 %              4.1 %              4.9 %

Total project personnel expenses and
reimbursable expenses                                  71.8 %             71.8 %             73.4 %
Selling and marketing expenses                          4.0 %              3.8 %              4.7 %
General and administrative expenses                    17.1 %             16.8 %             18.3 %
Restructuring and other related charges                 0.0 %              0.6 %              0.1 %
Amortization of purchased intangible
assets                                                  1.0 %              0.7 %              0.7 %
Acquisition costs and other related
charges                                                 0.4 %              0.2 %              0.0 %

Total operating expenses                               94.3 %             93.9 %             97.2 %

Income from operations                                  9.3 %             10.2 %              7.7 %
Interest income, net                                    0.3 %              0.5 %              0.5 %
Other income, net                                       0.1 %              0.1 %              0.0 %

Income before income taxes                              9.7 %             10.8 %              8.2 %
Provision for income taxes                              3.9 %              3.7 %              3.0 %

Net income                                              5.8 %              7.1 %              5.2 %

Years Ended December 31, 2012 and 2011

Service Revenues

Our service revenues for 2012 and 2011 were as follows (in thousands, except percentages):

Year Ended December 31, Percentage 2012 2011 Increase Increase Service revenues $ 1,121,010 $ 1,021,083 $ 99,927 10 %

The increase in service revenues for the year ended December 31, 2012 was primarily due to increases in client demand in our SapientNitro and Sapient Global Markets business units, and the full-year impact of the two acquisitions we completed during the third quarter of 2011. Compared geographically to 2011, 2012 service revenues in the United States increased 10%, while international service revenues increased 9%. In constant currency terms, service revenues increased 11%.

The following table presents our service revenues by industry sector for 2012 and 2011 (in millions, except percentages):

                                           Year Ended December 31,                   Increase / (Decrease)
Industry Sector                           2012                 2011              Dollars              Percentage
Consumer, Travel & Automotive         $      485.8         $      390.0        $       95.8                    25 %
Financial Services                           345.1                318.7                26.4                     8 %
Government, Health & Education               116.0                113.3                 2.7                     2 %
Energy Services                               88.5                 81.7                 6.8                     8 %
Technology & Communications                   85.6                117.4               (31.8 )                 (27 )%

Total service revenues                $    1,121.0         $    1,021.1        $       99.9                    10 %

See Service Revenues by Operating Segment below for discussion of service revenues by operating segment and industry sector.

Utilization, which represents the percentage of our delivery personnel's time spent on billable client work, was 73% for 2012, a two-point increase from our 2011 utilization of 71%. Our 2012 average delivery personnel peoplecount increased 7% compared to 2011, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, increased 1% compared to 2011 as our need for contractors and consultants in specialized areas for certain client contracts increased.

Our five largest clients, in the aggregate, accounted for 21% of our service revenues in 2012, compared to 19% in 2011. No individual client accounted for more than 10% of our service revenues for 2012 and 2011. Long-Term and Retainer Revenues represented 52% and 48% of our total service revenues for 2012 and 2011, respectively. 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 compensation and employee benefits for personnel dedicated to client assignments, contractors and consultants and other direct expenses incurred to complete assignments that were not reimbursed by the client. These expenses represent the most significant costs we incur in providing our services. The following table presents project personnel expenses for 2012 and 2011 (in thousands, except percentages):

                                          Year Ended December 31,                               Percentage
                                         2012                 2011             Increase          Increase
Project personnel expenses           $    764,843         $    691,041        $   73,802                 11 %
Project personnel expenses as a
percentage of service revenues                 68 %                 68 %        0 points

The increase in project personnel expenses in 2012 was a direct result of our service revenue growth as we increased delivery personnel peoplecount, use of contractors and consultants and certain other direct expenses in order to fulfill the increase in demand for our services. Compensation expenses increased $66.5 million, primarily due to the 7% increase in delivery personnel peoplecount and the impact of annual compensation rate increases and promotions. Contractor and consultant expense increased $0.4 million, as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expenses, which can fluctuate based on specific client project needs, decreased $1.8 million. Other project personnel expenses increased, in the aggregate, by $8.7 million.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of compensation, employee
benefits and travel expenses of selling and marketing personnel, and promotional
expenses. The following table presents selling and marketing expenses for 2012
and 2011 (in thousands, except percentages):



                                          Year Ended December 31,                               Percentage
                                         2012                 2011             Increase          Increase
Selling and marketing expenses       $     44,661         $     39,025        $    5,636                 14 %
Selling and marketing expenses
as a percentage of service
revenues                                        4 %                  4 %        0 points

The increase in selling and marketing expenses was due to increases of $2.3 million in travel expenses, $1.7 million in compensation expenses (relating to an increase in selling and marketing peoplecount), $0.7 million in trade show expenses, and $0.6 million in consultant costs relating to selling and marketing initiatives. Other selling and marketing expenses increased, in the aggregate, by $0.3 million.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and
employee benefits associated with our management, legal, finance, information
technology, hiring, training and administrative groups, and depreciation and
occupancy expenses. The following table presents general and administrative
expenses for 2012 and 2011 (in thousands, except percentages):



                                         Year Ended December 31,                                Percentage
                                         2012                 2011             Increase          Increase
General and administrative
expenses                             $    191,599         $    171,759        $   19,840                 12 %
General and administrative
expenses as a percentage of
service revenues                               17 %                 17 %        0 points

The increase in general and administrative expenses was primarily due to the following factors:

• compensation expenses increased $6.8 million due to a 10% increase in average general and administrative peoplecount and the impact of annual compensation rate increases and promotions;

• facilities expenses increased $4.5 million, primarily due to office space expansions in several locations during 2011 and 2012;

• depreciation expense increased $2.6 million, primarily due to the impact of leasehold improvement assets purchased in recent years in connection with our expansions of office space in several locations;

• health insurance costs increased $1.7 million due to increases in company-wide peoplecount and insurance rate increases;

• the net impact of foreign currency gains and losses resulted in an increase in general and administrative expenses of $1.2 million, as net gains of $0.4 million were recorded in 2012, compared to net gains of $1.6 million in 2011; and

• 2011 included a benefit of $3.5 million relating to insurance recovery proceeds received as reimbursement for expenses incurred during a review of stock option grant practices and the related restatement in 2006 and 2007, while 2012 included no similar benefits.

These increases were partially offset by the net impact of hedging gains and losses, which resulted in a decrease in general and administrative expenses of $1.2 million, as net losses totaling less than $0.1 million were recorded in 2012, compared to net losses of $1.2 million in 2011.

Other general and administrative expenses increased, in the aggregate, $0.7 million.

Restructuring and Other Related Charges

Restructuring and other related charges were $0.4 million and $6.5 million in 2012 and 2011, respectively. The net charges recorded in 2012 included $0.5 million of cash and other termination benefits for 15 employees in Australia whose positions were made redundant, net of $(0.1) million of benefits relating to changes in estimated future costs to be incurred in connection with two previously restructured office leases. The net charges recorded in 2011 consisted of the following:

• $5.7 million 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;

• $0.9 million related to the consolidation of our New York City operations into one office space;

• $0.3 million related to future payments owed to us under a sub-lease of a previously restructured office space which are no longer expected to be collected; and

• net benefits of $(0.4) million related to changes in the estimated operating expenses to be incurred and sub-lease income to be received in connection with previously restructured leases.

Amortization of Purchased Intangible Assets

During 2012 and 2011, purchased intangible assets consisted of non-compete and non-solicitation agreements, customer lists, intellectual property, and tradenames acquired in business combinations. Amortization expense related to intangible assets increased from $6.8 million in 2011 to $11.1 million in 2012, primarily due to the full-year impact of the two acquisitions we completed during the third quarter of 2011, and, to a lesser extent, the impact of the two acquisitions we completed during the fourth quarter of 2012.

Acquisition Costs and Other Related Charges

Acquisition costs and other related charges include expenses associated with third-party professional services we utilize related to the evaluation of potential targets and the execution of successful acquisitions. Although we may incur costs to evaluate targets, the related potential transaction(s) may never be consummated. Acquisition costs and other related charges also include changes in the fair value of contingent consideration liabilities recorded as the result of acquisitions. These liabilities must be measured at fair value on the acquisition date, and until these liabilities are settled, they must be remeasured to fair value each reporting period, with the changes included in earnings. Acquisition costs and other related charges were $4.4 million and $1.9 million for 2012 and 2011, respectively. The increase of $2.5 million was due to a $1.8 million increase in remeasurements of the fair value of contingent consideration liabilities, and a $0.7 million increase in third-party costs related to the evaluation of potential targets and the completion of acquisitions.

We recorded contingent consideration liabilities as the result of our acquisitions of D&D Holdings Limited ("DAD") during 2011 and (m)Phasize, LLC during 2012, and we expect to record quarterly remeasurements of the fair value of these liabilities until they are settled at various points in time through 2014. Acquisition costs and other related charges recorded in 2012 and 2011 included expenses of $2.4 million and $0.6 million, respectively, relating to the remeasurement of the fair value of these contingent consideration liabilities. We may also continue to incur additional acquisition costs and other related charges in future periods resulting from the evaluation of potential acquisition targets.

Interest Income, net

Interest income is derived from investments in U.S. government securities, bank time deposits, and money market funds. Interest expense consists primarily of imputed interest on rent payments for leased properties of

which we are considered the owner for accounting purposes. The following table presents interest income, net for 2012 and 2011 (in thousands, except percentages):

Year Ended December 31, Percentage 2012 2011 Decrease Decrease Interest income, net $ 3,735 $ 5,748 $ (2,013 ) (35 )%

Interest income, net decreased in 2012 as compared to 2011 primarily due to lower interest income relating to lower average balances of our interest-bearing foreign currency holdings of cash, cash equivalents and marketable securities, and due to interest expense relating to the two "build-to-suit" properties in India which we occupied during 2012.

Provision for Income Taxes

The provision for income taxes was $43.5 million and $37.7 million for 2012 and 2011, respectively. Income tax is related to foreign, federal and state tax obligations. The increase in our provision for income taxes was primarily due to changes in the mix of jurisdictional profits, provisions for uncertain tax positions, and the decrease in the deferred tax liability from unremitted foreign earnings in 2011.

Deferred tax assets are to be reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2012, a valuation allowance is maintained against deferred tax assets associated with certain state net operating loss carryforwards. We also maintain a valuation allowance against our deferred tax assets in Switzerland, but believe that deferred tax assets in various other foreign jurisdictions are . . .