Sapient Reports Second Quarter 2014 Results

Second Quarter Service Revenues Up 15.2% Compared to Second Quarter 2013

Non-GAAP Income from Operations Up 13.6% Compared to Second Quarter 2013

BOSTON--(BUSINESS WIRE)--Sapient (NASDAQ: SAPE) today reported the following financial results for the second quarter ended June 30, 2014:

• Service revenues were $362.2 million compared to $314.3 million in the second quarter of 2013, an increase of $47.9 million, or 15.2%. On a constant currency basis, revenues increased 13.8% over the second quarter of 2013.
• GAAP income from operations was $35.3 million, or 9.8% of service revenues, compared to $33.5 million, or 10.7% of service revenues, in the second quarter of 2013.
• Non-GAAP income from operations increased 13.6% to $49.2 million, or 13.6% of service revenues, compared to $43.3 million, or 13.8% of service revenues, in the second quarter of 2013.
• GAAP diluted net income per share was $0.16, compared to $0.16 in the second quarter of 2013.
• Non-GAAP diluted net income per share was $0.23, compared to $0.21 in the second quarter of 2013.

“We are very pleased with the results we’ve posted in the first half of 2014 despite the challenging economic environment,” said Sapient Chief Executive Officer and Co-Chairman Alan J. Herrick. “However, our near-term profitability is being adversely impacted by foreign exchange and higher expenses as we continue to strengthen our processes related to global people mobility and compliance. Nevertheless, all three business units are well positioned in their respective markets and we remain confident in Sapient’s growth prospects.”

In the second quarter of 2014, the company generated cash from operations of $25.5 million, compared to $49.8 million in the second quarter of 2013. As of June 30, 2014, the company had cash, cash equivalents, restricted cash and marketable securities of $289.2 million. Days sales outstanding was 71 days for the second quarter of 2014, unchanged from 71 days in the first quarter of 2014 and up from 62 days in the second quarter of 2013.

Outlook

Sapient management provided the following guidance:

• For the third quarter ending September 30, 2014, service revenues are expected to be in the range of $350 million to $360 million.
• Third quarter 2014 non-GAAP income from operations is expected to be in the range of $44 million to $50 million.

Webcast and Conference Call

Sapient will host a discussion of its second quarter results at 4:30 p.m. ET today, which will be broadcast live on the Internet. The dial-in information for the conference call is:

US: [phone]
International: [phone]

To access the live webcast of the event, please click on the link below:

http://sape.client.shareholder.com/events.cfm

In addition, a re-broadcast of the webcast will be available in the investors section of www.sapient.com.

Non-GAAP Financial Measures

Sapient provides non-GAAP financial measures to complement reported GAAP results. Management believes these measures help illustrate underlying trends in the company's business and uses the measures to establish budgets and operational goals, communicated internally and externally, for managing the company’s business and evaluating its performance. The company anticipates that it will continue to report both GAAP and certain non-GAAP financial measures in its financial results, including non-GAAP results that exclude stock-based compensation expense, restructuring and other related charges (benefits), amortization of purchased intangible assets, acquisition costs and other related charges (benefits), impairment of intangible assets and any other items identified as non-GAAP in the Company’s publicly filed financial statements on Forms 10-K and 10-Qs. In addition, the company may present service revenues in constant currency terms, which excludes the effect of currency fluctuations between the U.S. dollar and the functional currency of the entity in which the revenue was transacted. The effect is excluded by translating the current period's local currency service revenues into U.S. dollars using the average local currency exchange rates that were in effect during the prior period of comparison. Because the company’s reported non-GAAP financial measures are not calculated according to GAAP, these measures are not comparable to GAAP and may not necessarily be comparable to similarly described non-GAAP measures reported by other companies within the company’s industry. Consequently, Sapient’s non-GAAP financial measures should not be evaluated in isolation or supplant comparable GAAP measures, but, rather, should be considered together with its consolidated financial statements, which are prepared according to GAAP.

Safe Harbor Statement

This press release contains forward-looking statements – in particular, the financial guidance for the third quarter of 2014, including expected service revenues and expected non-GAAP income from operations, the impact of foreign exchange and higher expenses relating to global mobility on the company’s near-term profitability, and the expected positioning of the company’s business units and the company’s growth prospects – that involve a number of risks and uncertainties. All forward looking statements are based upon current expectations and beliefs and various assumptions. Actual results could differ materially from management’s expectations and the forward-looking statements contained in this release. A number of factors could cause actual events to differ materially from those indicated, including, without limitation: the continued acceptance of the company’s services; a reduction in the demand for the company’s services in light of the current economic environment; the company’s ability to accurately set fees for and complete its current and future client projects on a timely basis, successfully manage risks associated with its international operations (including risks relating to foreign currency and global mobility compliance), manage its growth and projects effectively, successfully integrate and achieve anticipated benefits from acquisitions, and continue to attract and retain high-quality employees; and other risks and uncertainties as set forth in the company’s filings with the SEC, including without limitation the most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made, and the company undertakes no obligation to update any forward-looking statements for any reason, including to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of anticipated or unanticipated events or circumstances, except as required by law.

About Sapient

Sapient is a global services company that helps 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. The company operates three business units that enable clients to gain a competitive advantage and succeed in an increasingly digital world. SapientNitro, Sapient Global Markets and Sapient Government Services fuse insight, creativity and technology to drive innovation and to help clients navigate complex business problems. Our approach is the subject of case studies used by MBA programs at Harvard and Yale. The company has operations in The Americas, Europe, and Asia-Pacific. For more information, visit www.sapient.com.

Sapient is a registered service mark of Sapient Corporation.

Sapient Corporation
Consolidated and Condensed Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
				As Restated						As Restated
Revenues:
Service revenues	$	362,187		$	314,334		$	703,728		$	606,972
Reimbursable expenses		16,576			12,273			28,211			22,618
Total gross revenues		378,763			326,607			731,939			629,590
Operating expenses:
Project personnel expenses		246,386			212,213			490,955			419,635
Reimbursable expenses		16,576			12,273			28,211			22,618
Total project personnel expenses and reimbursable expenses		262,962			224,486			519,166			442,253
Selling and marketing expenses		15,172			12,953			30,757			24,703
General and administrative expenses		59,548			53,696			117,505			107,875
Restructuring and other related charges (benefits)		1,871			(31	)		1,864			1,983
Amortization of purchased intangible assets		3,822			3,263			7,041			6,920
Acquisition costs and other related charges (benefits)		46			(1,284	)		428			(384	)
Impairment of intangible asset		—			—			—			1,494
Total operating expenses		343,421			293,083			676,761			584,844
Income from operations		35,342			33,524			55,178			44,746
Interest income		2,053			1,570			4,009			3,076
Interest expense		(820	)		(666	)		(1,488	)		(1,360	)
Other income, net		101			296			471			356
Income before income taxes		36,676			34,724			58,170			46,818
Provision for income taxes		13,431			11,972			21,336			18,197
Net income		23,245			22,752			36,834			28,621
Less: Net loss attributable to noncontrolling interest		(41	)		(41	)		(77	)		(87	)
Net income attributable to stockholders of Sapient Corporation	$	23,286		$	22,793		$	36,911		$	28,708
Basic net income per share attributable to stockholders of Sapient Corporation	$	0.16		$	0.16		$	0.26		$	0.21
Diluted net income per share attributable to stockholders of Sapient Corporation	$	0.16		$	0.16		$	0.26		$	0.20
Weighted average common shares		141,850			138,791			141,135			138,112
Weighted average dilutive common share equivalents		2,202			4,110			2,652			4,446
Weighted average common shares and dilutive common share equivalents		144,052			142,901			143,787			142,558

Sapient Corporation
Consolidated and Condensed Balance Sheets
(In thousands)
(Unaudited)
	June 30, 2014		December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	281,137	$	337,630
Marketable securities		6,309		5,870
Restricted cash, current portion		42		69
Accounts receivable, net of allowance for doubtful accounts		210,114		184,174
Unbilled revenues		116,449		85,436
Prepaid expenses and other current assets		71,165		54,516
Total current assets		685,216		667,695
Restricted cash, net of current portion		1,664		2,019
Property and equipment, net		96,535		85,898
Purchased intangible assets, net		30,252		27,508
Goodwill		152,706		149,142
Other assets		27,716		18,386
Total assets	$	994,089	$	950,648
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,772	$	30,410
Accrued expenses		79,306		65,348
Accrued compensation		83,798		99,004
Income taxes payable		7,030		18,439
Deferred revenues		28,246		29,866
Total current liabilities		232,152		243,067
Other long term liabilities		126,054		117,568
Total liabilities		358,206		360,635
Noncontrolling interest subject to put provisions		748		784
Total Sapient Corporation stockholders' equity		635,135		589,229
Total liabilities and stockholders' equity	$	994,089	$	950,648

Sapient Corporation
Consolidated and Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Cash flows from operating activities:
Net income	$	23,245		$	22,752		$	36,834		$	28,621
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Deferred income taxes		(696	)		2,155			(2,251	)		277
Unrealized loss on financial instruments		408			1,045			21			771
(Gain) loss recognized on disposition of fixed assets		(12	)		248			(50	)		1,010
Realized gain on investments		(111	)		—			(209	)		—
Depreciation expense		7,691			6,553			14,830			13,568
Amortization of purchased intangible assets		3,822			3,263			7,041			6,920
Loss recognized on sale of available-for-sale marketable securities		—			28			—			28
Impairment of intangible asset		—			—			—			1,494
Stock-based compensation expense		8,127			7,834			16,094			14,990
Excess tax benefits from exercise and release of stock-based awards		(3,870	)		(1,006	)		(4,028	)		(1,469	)
Non-cash restructuring charges		—			—			—			146
Changes in operating assets and liabilities, excluding impact of acquisitions:
Accounts receivable		(17,400	)		1,240			(18,724	)		11,221
Unbilled revenues		2,807			(2,664	)		(25,753	)		(21,023	)
Prepaid expenses and other current assets		(6,920	)		(964	)		(18,977	)		(4,078	)
Other assets		(386	)		(306	)		(521	)		(179	)
Accounts payable		473			5,512			1,508			5,162
Accrued compensation		(6,401	)		2,680			(32,663	)		(20,782	)
Deferred revenues		(1,561	)		(5,554	)		(6,121	)		(5,914	)
Accrued expenses		7,625			1,998			15,511			1,133
Income taxes payable		10,030			2,629			(7,597	)		4,353
Other long-term liabilities		(1,323	)		2,347			8,075			4,134
Net cash provided by (used in) operating activities		25,548			49,790			(16,980	)		40,383
Cash flows from investing activities:
Purchases of property and equipment and cost of internally developed software		(11,708	)		(11,363	)		(22,370	)		(17,759	)
Proceeds from sale of property and equipment		12			—			39			—
Cash paid for acquisitions of businesses, net of cash acquired		(312	)		(45	)		(12,812	)		(4,993	)
Cash paid for asset acquisitions		(1,500	)		—			(1,500	)		—
Sales of marketable securities classified as available-for-sale		—			1,372			—			1,372
Purchases of marketable securities classified as available-for-sale		—			(151	)		—			(251	)
Cash paid for acquisition of cost method investment		—			—			(5,526	)		(200	)
Cash received (paid) on financial instruments, net		230			(100	)		172			77
Change in restricted cash balances		368			1,486			373			3,515
Net cash used in investing activities		(12,910	)		(8,801	)		(41,624	)		(18,239	)
Cash flows from financing activities:
Excess tax benefits from exercise and release of stock-based awards		3,870			1,006			4,028			1,469
Proceeds from issuance of common stock under stock plans		2,212			931			2,288			1,960
Payment of acquisition date fair value contingent consideration		(3,466	)		—			(3,466	)		—
Repurchases of common stock		(4,564	)		—			(4,564	)		—
Net cash (used in) provided by financing activities		(1,948	)		1,937			(1,714	)		3,429
Effect of exchange rate changes on cash and cash equivalents		1,155			(7,453	)		3,825			(10,088	)
Net increase (decrease) in cash and cash equivalents		11,845			35,473			(56,493	)		15,485
Cash and cash equivalents at beginning of period		269,292			214,050			337,630			234,038
Cash and cash equivalents at end of period	$	281,137		$	249,523		$	281,137		$	249,523

Sapient Corporation
Unaudited Reconciliation of Non-GAAP Financial Measures
(In thousands, except per share amounts)
	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
				As Restated						As Restated
Service revenues	$	362,187		$	314,334		$	703,728		$	606,972
GAAP income from operations	$	35,342		$	33,524		$	55,178		$	44,746
Stock-based compensation expense		8,127			7,834			16,094			14,990
Restructuring and other related charges (benefits)		1,871			(31	)		1,864			1,983
Amortization of purchased intangible assets		3,822			3,263			7,041			6,920
Acquisition costs and other related charges (benefits)		46			(1,284	)		428			(384	)
Impairment of intangible asset		—			—			—			1,494
Other (1)		—			—			2,815			—
Non-GAAP income from operations	$	49,208		$	43,306		$	83,420		$	69,749
GAAP operating margin		9.8	%		10.7	%		7.8	%		7.4	%
Effect of adjustments detailed above		3.8	%		3.1	%		4.1	%		4.1	%
Non-GAAP operating margin		13.6	%		13.8	%		11.9	%		11.5	%
GAAP net income attributable to stockholders of Sapient Corporation	$	23,286		$	22,793		$	36,911		$	28,708
Stock-based compensation expense, net of tax		5,190			5,030			10,290			9,615
Restructuring and other related charges (benefits), net of tax		1,282			(8	)		1,278			1,351
Amortization of purchased intangible assets, net of tax		2,677			2,449			5,013			5,197
Acquisition costs and other related charges (benefits), net of tax		21			(892	)		(272	)		(284	)
Impairment of intangible asset, net of tax		—			—			—			1,133
Other, net of tax (1)		—			—			1,807			—
Non-GAAP net income attributable to stockholders of Sapient Corporation	$	32,456		$	29,372		$	55,027		$	45,720
GAAP basic income per share attributable to stockholders of Sapient Corporation	$	0.16		$	0.16		$	0.26		$	0.21
Effect of adjustments detailed above		0.07			0.05			0.13			0.12
Non-GAAP basic income per share attributable to stockholders of Sapient Corporation	$	0.23		$	0.21		$	0.39		$	0.33
GAAP and Non-GAAP weighted average common shares		141,850			138,791			141,135			138,112
GAAP diluted income per share attributable to stockholders of Sapient Corporation	$	0.16		$	0.16		$	0.26		$	0.20
Effect of adjustments noted above and change in dilution noted below		0.07			0.05			0.12			0.12
Non-GAAP diluted income per share attributable to stockholders of Sapient Corporation	$	0.23		$	0.21		$	0.38		$	0.32
GAAP and Non-GAAP weighted average common shares and dilutive common share equivalents		144,052			142,901			143,787			142,558

(1) In the six months ended June 30, 2014, we incurred a $2.8 million one-time 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 or predictive of future results, we have chosen to exclude it from the non-GAAP income from operations in evaluating management performance. The Company recorded this expense in "Project Personnel Expenses" in the unaudited consolidated and condensed statement of operations.