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SAPE > SEC Filings for SAPE > Form 10-Q on 7-May-2014All Recent SEC Filings

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Form 10-Q for SAPIENT CORP


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Restatement of Previously Issued Financial Statements As discussed further in Note 15, Restatement, in the Notes to Unaudited Consolidated and Condensed Financial Statements included in Part I, Item 1, Unaudited Consolidated and Condensed Financial Statements, of this Quarterly Report on Form 10-Q, we have restated our consolidated financial statements for the years ended December 31, 2012 and 2011 and our unaudited quarterly financial information for each of the quarters in the year ended December 31, 2012 and for the first three quarters in the year ended December 31, 2013.
For information regarding our controls and procedures, see Part I, Item 4, Controls and Procedures, of this Quarterly Report on Form 10-Q. Overview
We help clients identify and act upon opportunities to improve their business performance by capitalizing on changes, disruptions, or opportunities that exist in their business or industry. 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 that 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. 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 have established and continuously promote a strong corporate culture based on our "strategic context" - purpose, core company values, vision, goals and client value proposition - which is critical to our success. Our value proposition includes helping clients tell their stories through seamless experiences across brand communications, digital engagement, and omni-channel commerce. Our value proposition also includes offering 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. In addition, our value proposition refers to our organizational strategy of helping clients identify and act upon opportunities to improve their business performance by capitalizing on changes, disruptions, or opportunities that exist in their business or industry. Summary of Results of Operations
The following table presents a summary of our results of operations for the three months ended March 31, 2014 and 2013 (in thousands, except percentages):
                                             Three months ended March 31,                Increase
                                                2014               2013           Dollars      Percentage
                                                                As Restated
Service revenues                          $       341,541     $     292,638     $  48,903           17 %
Income from operations                    $        19,836     $      11,222     $   8,614           77 %
Net income attributable to stockholders   $        13,625     $       5,915     $   7,710          130 %
of Sapient Corporation

The increases in service revenues for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 were due primarily to higher demand for our services from new and existing customers, and, to a lesser extent, revenues


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generated from acquisitions completed during the quarters ended March 31, 2014 and December 31, 2013. The increase in income from operations was due to the increase in service revenues and decreases in general and administrative expenses as a percentage of service revenue. Net income attributable to Sapient Corporation increased due to the foregoing as well as a lower effective tax rate.
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 income from operations, 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 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 months ended March 31, 2014 and 2013 (in thousands, except percentages):

                                                                  Three months ended March 31,
                                                                    2014                 2013
                                                                                     As Restated
Service revenues                                              $      341,541       $      292,638
GAAP income from operations                                   $       19,836       $       11,222
Stock-based compensation expense                                       7,967                7,156
Restructuring and other related (benefits) charges                        (7 )              2,014
Amortization of purchased intangible assets                            3,219                3,657
Acquisition costs and other related charges                              382                  900
Impairment of intangible asset                                             -                1,494
Other (1)                                                              2,815                    -
Non-GAAP income from operations                               $       34,212       $       26,443
GAAP operating margin                                                    5.8 %                3.8 %
Effect of adjustments detailed above                                     4.2 %                5.2 %
Non-GAAP operating margin                                               10.0 %                9.0 %

(1) In the three months ended March 31, 2014, we incurred a $2.8 million one-time project personnel expense charge to reimburse employees for costs incurred as part of a restructuring of a global travel program. As this is unrelated to current operations, and neither comparable to prior periods nor predictive of future results, we have excluded it from the non-GAAP income from operations in evaluating management performance. 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 (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.


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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 months ended March 31, 2014 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 in Part II, Item 7, on Form 10-K for the year ended December 31, 2013.


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Results of Operations
Three months ended March 31, 2014 compared to three months ended March 31, 2013
The following table presents the components of our unaudited consolidated and
condensed statements of operations as percentages of service revenues:
                                                                 Three months ended March 31,
                                                                    2014              2013
                                                                                   As Restated
Revenues:
Service revenues                                                    100.0  %           100.0  %
Reimbursable expenses                                                 3.4  %             3.5  %
Total gross revenues                                                103.4  %           103.5  %
Operating expenses:
Project personnel expenses                                           71.6  %            70.9  %
Reimbursable expenses                                                 3.4  %             3.5  %
Total project personnel expenses and reimbursable expenses           75.0  %            74.4  %
Selling and marketing expenses                                        4.6  %             4.0  %
General and administrative expenses                                  17.0  %            18.5  %
Restructuring and other related (benefits) charges                      -  %             0.7  %
Amortization of purchased intangible assets                           0.9  %             1.3  %
Acquisition costs and other related charges                           0.1  %             0.3  %
Impairment of intangible asset                                          -  %             0.5  %
Total operating expenses                                             97.6  %            99.7  %
Income from operations                                                5.8  %             3.8  %
Interest income                                                       0.6  %             0.5  %
Interest expense                                                     (0.2 )%            (0.2 )%
Other income, net                                                     0.1  %               -  %
Income before income taxes                                            6.3  %             4.1  %
Provision for income taxes                                            2.3  %             2.1  %
Net income                                                            4.0  %             2.0  %
Less: Net loss attributable to noncontrolling interest                  -  %               -  %
Net income attributable to stockholders of Sapient Corporation        4.0  %             2.0  %

Service Revenues
Our service revenues for the three months ended March 31, 2014 and 2013 were as
follows (in thousands, except percentages):
                         Three months ended March 31,                   Increase
                            2014                    2013         Dollars     Percentage
                                                As Restated
Service revenues $       341,541               $     292,638    $ 48,903         17 %

The increase in service revenues for the three months ended March 31, 2014 was 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 quarters ended March 31, 2014 and December 31, 2013. Compared geographically to 2013, the three months ended March 31, 2014 service revenues in the United States increased 15%, while international service revenues increased 19%. In constant currency terms, service revenues increased 16% in the three months ended March 31, 2014 as compared to 2013.
Our average delivery personnel people count for the three months ended March 31, 2014 increased 12% compared to the same period in 2013. Utilization, which represents the percentage of our delivery personnel's time spent on billable client work,


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was 73% for the three months ended March 31, 2014, compared to 71% for the same period in 2013. Contractor and consultant usage, measured by expense, increased by 28% for the three months ended March 31, 2014 compared to the same period in 2013, based on our needs in specialized areas for certain client contracts. These factors contributed to our 17% increase in service revenues in the three months ended March 31, 2014 compared to the same period in 2013.
No individual client accounted for more than 10% of our service revenues for the three months ended March 31, 2014 and 2013. Our five largest clients, in the aggregate, accounted for 17% of our service revenues for the three months ended March 31, 2014, compared to 21% for the same period in 2013. 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. Long-term and retainer revenues represented 47% of our total service revenues for the three months ended March 31, 2014, compared to 55% for the same period in 2013.
The following table presents service revenues by industry sector for the three months ended March 31, 2014 and 2013 (in thousands, except percentages):

                                             Three months ended March 31,            Increase / (Decrease)
                                                2014               2013             Dollars         Percentage
Industry Sector                                                 As Restated
Consumer, Travel & Automotive             $       147,119     $     122,908     $     24,211             20  %
Financial Services                                105,885            93,644           12,241             13  %
Government, Health & Education                     40,864            29,264           11,600             40  %
Energy Services                                    30,797            26,337            4,460             17  %
Technology & Communications                        16,876            20,485           (3,609 )          (18 )%
Total service revenues                    $       341,541     $     292,638     $     48,903             17  %

See Service Revenues by Reportable Segment below for discussion of service revenues by reportable segment and industry sector. 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 months ended March 31, 2014 and 2013 (in thousands, except percentages):

                                              Three months ended March 31,                          Percentage
                                                2014                 2013            Increase        Increase
                                                                 As Restated
Project personnel expenses                $      244,569       $      207,423     $     37,146           18 %
Project personnel expenses as a
percentage of service revenues                      71.6 %               70.9 %     0.7 points

The increase in project personnel expenses for the three months ended March 31, 2014 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. To a lesser extent, project personnel expenses increased due to the two acquisitions we completed during the quarters ended March 31, 2014 and December 31, 2013. For the three months ended March 31, 2014, compensation and benefit expenses increased $24.8 million, due to the 12% increase in average delivery peoplecount and additional compensation and benefit expenses as a result of the aforementioned acquisitions, and the one-time charge to reimburse employees for costs incurred as part of a restructuring of a global travel program. Contractor and consultant expense increased $7.0 million as our need for contractors and consultants in specialized areas for certain client contracts increased. Travel expense increased $2.7 million based on client project needs. Other project personnel expenses increased, in the aggregate, by $2.6 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 months ended March 31, 2014 and 2013 (in thousands, except percentages):
                                             Three Months Ended March 31,                        Percentage
                                                2014               2013           Increase        Increase
                                                                As Restated
Selling and marketing expenses            $      15,585       $      11,749     $     3,836           33 %
Selling and marketing expenses as a
percentage of service revenues                      4.6 %               4.0 %    0.6 points

The increase in selling and marketing expenses for the three months ended March 31, 2014 was due to increases of $2.0 million in compensation expenses relating to an increase in average peoplecount, $0.3 million in travel expenses, $0.5 million in contractor expenses, and $0.7 million in trade show expenses. 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 functions, and depreciation and occupancy expenses. The following table presents general and administrative expenses for the three months ended March 31, 2014 and 2013 (in thousands, except percentages):

                                             Three Months Ended March 31,          Increase /
                                                2014               2013            (Decrease)       Percentage Increase
                                                                As Restated
General and administrative expenses       $      57,957       $      54,179     $        3,778              7 %
General and administrative expenses as a
percentage of service revenues                     17.0 %              18.5 %     (1.5) points

The increase in general and administrative expenses for the three months ended March 31, 2014 was due to the following factors:
compensation and benefit expenses increased by $4.0 million, primarily due to an increase in average people count;

facilities expense increased by $1.2 million, primarily due to office space expansions in several locations during 2013;

audit and tax fees increased $1.2 million primarily due to the work associated with the restatement of our consolidated financial statements and other related work as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013;

currency gains resulted in a decrease to general and administrative expenses of $1.4 million;

other general and administrative expenses decreased, in the aggregate, by $1.2 million.

Amortization of Purchased Intangible Assets During the three months ended March 31, 2014 and 2013, purchased intangible assets consisted of non-compete and non-solicitation agreements, customer lists, intellectual property, backlog, and tradenames acquired in business combinations. Amortization of purchased intangible assets was $3.2 million for the three months ended March 31, 2014, compared to $3.7 million for the three months ended March 31, 2013. The decrease in amortization expense was primarily due to the full amortization of the gross carrying amount of several intangible assets, partially offset by increased amortization expense for new intangible assets acquired in the three months ended March 31, 2014 and December 31, 2013. 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


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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 $0.4 million and $0.9 million for the three months ended March 31, 2014 and 2013, respectively. The decrease of $0.5 million was primarily due to a decrease in third-party costs related to the evaluation of potential targets and the completion of acquisition.
We recorded contingent consideration liabilities as the result of our acquisitions of La Comunidad and iThink during 2013, (m)Phasize, LLC during 2012, and D&D Holdings Limited ("DAD") during 2011, and we expect to record quarterly remeasurements of the fair value of these liabilities until they are settled at various points in time through 2017. Acquisition costs and other related charges recorded in the three months ended March 31, 2014 and 2013 included benefits of less than $0.1 million and $0.3 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.
Impairment of Intangible Asset
As of March 31, 2013, we performed an impairment review of the customer list intangible asset obtained in our acquisition of Nitro in 2009. The impairment review was triggered by certain legacy Nitro customers having notified us of their intentions to cease or reduce purchases of our services. In the first step of the March 31, 2013 impairment review, the carrying value of the asset exceeded the undiscounted net cash flows expected to be generated by the asset, indicating that the carrying value was not recoverable. In the second step, the impairment amount of $1.5 million was determined as the amount by which the asset's carrying amount exceeded its fair value, which was estimated using a discounted cash flow approach.
In estimating the undiscounted future net cash flows expected to be generated by this intangible asset, management considered the following factors: actual customer attrition rates since the acquisition date; expected future attrition rates; estimated undiscounted net cash flows generated by the intangible asset since the acquisition date; estimated undiscounted net cash flows expected to be generated by the intangible asset over its remaining expected useful life; and the expected remaining useful life of the intangible asset. In the course of these impairment reviews, we considered multiple future scenarios and the expected likelihood of those scenarios occurring, based on the information which was known to management at the times the reviews were performed. These impairment reviews involved the use of significant judgment by management, and different judgments could yield different results. The net book value of the Nitro customer list intangible asset was $0.3 million as of March 31, 2014. Interest Income, Interest Expense, and Other Income, Net Interest income, interest expense, and other income, net, consists primarily of . . .

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