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SAPE > SEC Filings for SAPE > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for SAPIENT CORP


5-Nov-2013

Quarterly Report


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

Overview

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, and non-governmental organizations. 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 highly skilled technology specialists in India, 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 nine months ended September 30, 2013 and 2012 (in thousands, except
percentages):



                                            Three Months Ended September 30,                 Increase                   Nine Months Ended September 30,                  Increase
                                               2013                   2012           Dollars       Percentage             2013                   2012            Dollars       Percentage
Service revenues                         $        323,793       $        288,467     $ 35,326               12 %    $        930,765       $        827,835     $ 102,930               12 %
Income from operations                   $         38,405       $         32,205     $  6,200               19 %    $         84,776       $         71,470     $  13,306               19 %
Net income attributable to
stockholders of Sapient Corporation      $         26,847       $         20,976     $  5,871               28 %    $         56,751       $         43,983     $  12,768               29 %

The increases in service revenues for the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012 were due primarily to higher demand for our services from new and existing customers and, to a lesser extent, revenues generated from acquisitions completed during the quarter ended December 31, 2012 ((m)Phasize, LLC and Second Story Inc.) and the quarter ended March 31, 2013 (iThink Comunica็ใo e Publicidade Ltda., or "iThink"). Changing prices did not have a material impact on the fluctuations in service revenues. The increases in income from operations and net income were primarily due to the increases in service revenues and decreases in operating expenses as a percentage of service revenues.

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 unaudited 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 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


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GAAP measures, but, rather, should be considered together with our unaudited consolidated and condensed financial statements, which are prepared in accordance with GAAP and are included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q. The following table reconciles income from operations as reported on our unaudited 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 nine months ended September 30, 2013 and 2012 (in thousands, except percentages):

                                              Three Months Ended                  Nine Months Ended
                                                September 30,                       September 30,
                                            2013              2012              2013              2012
Service revenues                         $  323,793        $  288,467        $  930,765        $  827,835

GAAP income from operations              $   38,405        $   32,205        $   84,776        $   71,470
Stock-based compensation expense              8,152             5,773            23,142            17,386
Restructuring and other related
(benefits) charges                              (28 )             (19 )           1,955              (109 )
Amortization of purchased intangible
assets                                        3,007             2,744             9,927             8,111
Acquisition costs and other related
(benefits) charges                           (1,268 )           1,121            (1,652 )           2,714
Impairment of intangible asset                  596                -              2,090                -

Non-GAAP income from operations          $   48,864        $   41,824        $  120,238        $   99,572

GAAP operating margin                          11.9 %            11.2 %             9.1 %             8.6 %
Effect of adjustments detailed above            3.2 %             3.3 %             3.8 %             3.4 %

Non-GAAP operating margin                      15.1 %            14.5 %            12.9 %            12.0 %

Please see the Results of Operations section of this Management's Discussion and Analysisfor a more detailed discussion and analysis of restructuring and other related (benefits) charges, amortization of purchased intangible assets, acquisition costs and other related (benefits) charges, and impairment of intangible asset.

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 I, Item 3, Quantitative and Qualitative Disclosures About Market Risk, of this Quarterly Report on Form 10-Q.

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 the three and nine months ended September 30, 2013 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 included in our Annual Report on Form 10-K for the year ended December 31, 2012.


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Results of Operations

Three and nine months ended September 30, 2013 compared to three and nine months
ended September 30, 2012

The following table presents the components of our unaudited consolidated and
condensed statements of operations as percentages of service revenues:



                                                  Three Months Ended              Nine Months Ended
                                                    September 30,                   September 30,
                                                 2013            2012            2013           2012
Revenues:
Service revenues                                   100.0 %        100.0 %         100.0 %        100.0 %
Reimbursable expenses                                3.4 %          3.7 %           3.6 %          3.6 %

Total gross revenues                               103.4 %        103.7 %         103.6 %        103.6 %

Operating expenses:
Project personnel expenses                          67.6 %         67.4 %          68.5 %         69.0 %
Reimbursable expenses                                3.4 %          3.7 %           3.6 %          3.6 %

Total project personnel expenses and
reimbursable expenses                               71.0 %         71.1 %          72.1 %         72.6 %
Selling and marketing expenses                       3.7 %          3.9 %           3.9 %          4.0 %
General and administrative expenses                 16.1 %         16.2 %          17.2 %         17.1 %
Restructuring and other related (benefits)
charges                                              0.0 %         (0.0 )%          0.2 %         (0.0 )%
Amortization of purchased intangible assets          0.9 %          1.0 %           1.1 %          1.0 %
Acquisition costs and other related
(benefits) charges                                  (0.4 )%         0.3 %          (0.2 )%         0.3 %
Impairment of intangible asset                       0.2 %          0.0 %           0.2 %          0.0 %

Total operating expenses                            91.5 %         92.5 %          94.5 %         95.0 %

Income from operations                              11.9 %         11.2 %           9.1 %          8.6 %
Interest and other income, net                       0.4 %          0.3 %           0.4 %          0.5 %

Income before income taxes                          12.3 %         11.5 %           9.5 %          9.1 %
Provision for income taxes                           4.0 %          4.2 %           3.4 %          3.8 %

Net income                                           8.3 %          7.3 %           6.1 %          5.3 %
Less: Net loss attributable to
noncontrolling interest                             (0.0 )%          -             (0.0 )%          -

Net income attributable to stockholders of
Sapient Corporation                                  8.3 %          7.3 %           6.1 %          5.3 %

Service Revenues

The following table presents service revenues by industry sector for the three
months ended September 30, 2013 and 2012 (in millions, except percentages):



                                          Three Months Ended September 30,                      Increase
Industry Sector                             2013                     2012              Dollars         Percentage
Consumer, Travel & Automotive         $          133.0         $          121.1       $    11.9                 10 %
Financial Services                               100.5                     93.7             6.8                  7 %
Government, Health & Education                    33.6                     29.7             3.9                 13 %
Energy Services                                   27.4                     22.5             4.9                 22 %
Technology & Communications                       29.3                     21.5             7.8                 36 %

Total service revenues                $          323.8         $          288.5       $    35.3                 12 %

See Service Revenues by Operating Segment below for discussion of service revenues by reportable segment and industry sector. Service revenues in the United States increased 19%, while international service revenues increased 1%. In constant currency terms, total service revenues increased 13% in the three months ended September 30, 2013 compared to the same period in 2012.

Utilization, which represents the percentage of our delivery personnel's time spent on billable client work, was 72% for the three months ended September 30, 2013, compared to 73% for the same period in 2012. Our average delivery personnel peoplecount for the three months ended September 30, 2013 increased 12% compared to the same period in 2012, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, increased by 2% for the three months ended September 30, 2013 compared to the same period in 2012, based on our needs in specialized areas for certain client contracts.

Our five largest clients, in the aggregate, accounted for 16% of our service revenues for the three months ended September 30, 2013, compared to 21% for the same period in 2012. For the three months ended September 30, 2013 and 2012, no individual client accounted for more than 10% of our service revenues. Long-term and retainer revenues represented 50% of our total service revenues for the three months ended September 30, 2013, compared to 55% for the same period in 2012. 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.


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The following table presents service revenues by industry sector for the nine months ended September 30, 2013 and 2012 (in millions, except percentages):

                                           Nine Months Ended September 30,                     Increase
Industry Sector                             2013                     2012             Dollars         Percentage
Consumer, Travel & Automotive         $          384.8         $          362.5       $   22.3                  6 %
Financial Services                               290.8                    247.9           42.9                 17 %
Government, Health & Education                    95.9                     85.8           10.1                 12 %
Energy Services                                   84.0                     65.2           18.8                 29 %
Technology & Communications                       75.3                     66.4            8.9                 13 %

Total service revenues                $          930.8         $          827.8       $  103.0                 12 %

See Service Revenues by Operating Segment below for discussion of service revenues by reportable segment and industry sector. Service revenues in the United States increased 15%, while international service revenues increased 8%. In constant currency terms, total service revenues increased 13% in the nine months ended September 30, 2013 compared to the same period in 2012.

Utilization, which represents the percentage of our delivery personnel's time spent on billable client work, was 72% for the nine months ended September 30, 2013 and 2012. Our average delivery personnel peoplecount for the nine months ended September 30, 2013 increased 11% compared to the same period in 2012, which was in line with service revenue growth. Contractor and consultant usage, measured by expense, increased by 7% for the nine months ended September 30, 2013 compared to the same period in 2012, based on our needs in specialized areas for certain client contracts.

Our five largest clients, in the aggregate, accounted for 18% of our service revenues for the nine months ended September 30, 2013, compared to 21% for the same period in 2012. For the nine months ended September 30, 2013 and 2012, no individual client accounted for more than 10% of our service revenues. Long-term and retainer revenues represented 52% of our total service revenues for the nine months ended September 30, 2013 and 2012.

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 the three and nine months ended September 30, 2013 and 2012 (in thousands, except percentages):

                                        Three Months Ended September 30,                                Percentage
                                         2013                     2012               Increase            Increase
Project personnel expenses          $       218,977          $       194,543        $    24,434                  13 %
Project personnel expenses as a
percentage of service revenues                   68 %                     67 %          1 point

                                        Nine Months Ended September 30,             Increase /          Percentage
                                         2013                     2012              (Decrease)           Increase
Project personnel expenses          $       637,258          $       570,895        $    66,363                  12 %
Project personnel expenses as a
percentage of service revenues                   68 %                     69 %         (1 point )

The increases in project personnel expenses for the three and nine months ended September 30, 2013 were 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. To a lesser extent, project personnel expenses increased due to the three acquisitions we completed during the quarters ended December 31, 2012 and March 31, 2013. For the three months ended September 30, 2013, compensation and benefit expenses increased $18.4 million, due to the 12% increase in average peoplecount and additional compensation and benefit expenses as a result of the aforementioned acquisitions. Contractor and consultant expense increased $0.4 million as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expense increased $2.3 million based on client project needs. Other project personnel expenses increased, in the aggregate, by $3.3 million.

For the nine months ended September 30, 2013, compensation and benefit expenses increased $51.8 million, due to the 11% increase in average peoplecount and additional compensation and benefit expenses as a result of the aforementioned acquisitions. Contractor and consultant expense increased $4.3 million as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expense increased $4.7 million based on client project needs. Other project personnel expenses increased, in the aggregate, by $5.6 million.


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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 the
three and nine months ended September 30, 2013 and 2012 (in thousands, except
percentages):



                                      Three Months Ended September 30,                                 Percentage
                                       2013                      2012                Increase           Increase
Selling and marketing
expenses                          $        11,968           $        11,221         $      747                   7 %
Selling and marketing
expenses as a percentage of
service revenues                                4 %                       4 %         0 points

                                       Nine Months Ended September 30,                                 Percentage
                                       2013                      2012                Increase           Increase
Selling and marketing
expenses                          $        36,754           $        33,146         $    3,608                  11 %
Selling and marketing
expenses as a percentage of
service revenues                                4 %                       4 %         0 points

The increase in selling and marketing expenses for the three months ended September 30, 2013 was primarily due to increases of $0.6 million in compensation and benefit expenses (relating to an increase in average peoplecount) and $0.3 million in travel expense. These increases were partially offset by a decrease of $0.3 million in tradeshow expenses. Other selling and marketing expenses increased, in the aggregate, by $0.1 million.

The increase in selling and marketing expenses for the nine months ended September 30, 2013 was primarily due to increases of $1.7 million in compensation and benefit expenses (relating to an increase in average peoplecount), $0.9 million in travel expense, and $0.8 million in tradeshow expenses. These increases were partially offset by a decrease of $0.4 million in contractor and consultant expense. Other selling and marketing expenses increased, in the aggregate, by $0.6 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 functions, and depreciation and occupancy expenses. The following table presents general and administrative expenses for the three and nine months ended September 30, 2013 and 2012 (in thousands, except percentages):

                                         Three Months Ended September 30,                              Percentage
                                          2013                     2012               Increase          Increase
General and administrative
expenses                             $        52,136          $        46,652        $    5,484                 12 %
General and administrative
expenses as a percentage of
service revenues                                  16 %                     16 %        0 points

                                         Nine Months Ended September 30,                               Percentage
                                          2013                     2012               Increase          Increase
General and administrative
expenses                             $       159,657          $       141,608        $   18,049                 13 %
General and administrative
expenses as a percentage of
service revenues                                  17 %                     17 %        0 points


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The increase in general and administrative expenses for the three months ended September 30, 2013 was due to the following factors:

• compensation and benefit expenses increased by $2.4 million, primarily due to an increase in stock-based compensation expense, and to a lesser extent, increases in salary expense;

• the net impact of hedging gains and losses resulted in an increase in general and administrative expenses of $1.6 million, as net losses of $1.0 million were recorded in the three months ended September 30, 2013, compared to net gains of $0.6 million in the three months ended September 30, 2012;

• facilities expense increased by $0.9 million, primarily due to rent expense on additional leased properties;

• consultant expense increased by $0.8 million;

• depreciation expense increased by $0.5 million, primarily due to the acceleration of depreciation of certain leasehold improvement and leased building assets as part of office moves and expansions during fiscal year 2012 and the nine months ended September 30, 2013;

• these increases were partially offset by the net impact of currency gains, which resulted in a decrease in general and administrative expenses of $0.9 million; and

• other general and administrative expenses increased, in the aggregate, by $0.2 million.

The increase in general and administrative expenses for the nine months ended September 30, 2013 was due to the following factors:

• compensation and benefit expenses increased by $6.4 million, primarily due to an increase in stock-based compensation expense, and to a lesser extent, increases in salary expense;

• the net impact of currency gains and losses resulted in an increase in general and administrative expenses of $1.6 million, as net losses of $0.7 million were recorded in the nine months ended September 30, 2013, compared to net gains of $0.9 million in the nine months ended September 30, 2012;

• depreciation expense increased by $2.7 million, primarily due to the acceleration of depreciation of certain leasehold improvement and leased building assets as part of office moves and expansions during fiscal year 2012 and the nine months ended September 30, 2013;

• the net impact of hedging gains and losses resulted in an increase in general and administrative expenses of $2.4 million, as net losses of $1.7 . . .

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