UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

 

 

Commission file number: 0-28074

Sapient Corporation

(Exact name of registrant as specified in its charter)

 

 

617-621-0200

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of June 30, 2009 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $697 million based on the closing sale price as reported on the Nasdaq Global Select Stock Market. Solely for purposes of the foregoing calculation, “affiliates” are deemed to consist of each officer and director of the registrant, and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive proxy statement for the 2010 Annual Meeting of Stockholders, which document will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year to which this Form 10-K relates, are incorporated by reference into Items 10 through 14 of Part III of this Form 10-K.

 

 

SAPIENT CORPORATION

 

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2009

 

TABLE OF CONTENTS

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in this Annual Report, including those related to our cash and liquidity resources and our cash expenditures related to dividend payments and restructuring, as well as any statements other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives are forward-looking statements. When used in this Annual Report, the words “will,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue reliance on our forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. In addition, any forward-looking statements represent our expectation only as of the day this Annual Report was first filed with the Securities and Exchange Commission (“SEC”) and should not be relied on as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

PART I

 

 

General

 

Sapient Corporation (“Sapient” or the “Company”) ¹ is a global services company that helps clients leverage marketing and technology to transform their businesses. We provide the following services that enable our clients to gain a competitive advantage and succeed in a customer-centric, digitally-led world.

 

SapientNitro (formerly Sapient Interactive and Nitro Ltd.) provides brand and marketing strategy, creative work, web design and development, emerging media expertise and traditional advertising services. Through this group, we combine multi-channel marketing and commerce, and the technology that binds them, to influence customer behavior across the spectrum of our clients’ communication channels, resulting in deeper, more meaningful relationships between customers and brands.

 

Sapient Global Markets is a premier provider of services to leaders in today’s financial and commodity markets. We provide a full range of capabilities to help our clients grow and enhance their businesses, create robust and transparent infrastructure, manage operating costs, and foster innovation throughout their organizations. Our integrated capabilities include advisory services, analytics, technology, and business process solutions. We also apply unique methodologies in program management, technology development and process outsourcing to enable our clients to take advantage of opportunities, and meet the challenges present, in today’s dynamic market and regulatory landscapes.

 

Sapient Government Services is a leading provider of consulting, technology, and marketing services to a wide array of U.S. governmental agencies. Focused on driving long-term change and transforming the citizen experience, we use technology to help agencies become more accessible and transparent. With a track record of delivering mission-critical solutions and the ability to leverage commercial best practices, we serve as trusted advisors to government agencies such as the Federal Bureau of Investigation, Library of Congress, National Institutes of Health and United States Department of Homeland Security.

 

Founded in 1990 and incorporated in Delaware in 1991, Sapient maintains a strong global presence with offices and over 7,000 employees in the United States, Canada, the United Kingdom, Germany, the Netherlands, Russia, Switzerland, Sweden, Singapore, Australia, China and India. Our headquarters and executive offices are located at 131 Dartmouth Street, Boston, Massachusetts 02116, and our telephone number is (617) 621-0200. Our stock trades on the Nasdaq Global Select Market under the symbol “SAPE.” Our Internet address is http://www.sapient.com. Material contained on our website is not incorporated by reference into this Annual Report.

 

Our clients consist of leading Global 2000 and other companies within the following industries in which we have extensive expertise (our “Representative Industries”): financial services, technology and communications, consumer and travel, energy services, government,health and education and automotive and industrial. We also provide services to federal, state and local government clients within the U.S. and to provincial and other governmental entities in Canada and Europe.

 

Integral to our service capabilities is our Global Distributed Delivery (“GDD”) model, which enables us to perform services on a continuous basis, through client teams located in North America, Europe, the Asia-Pacific region and India. Our GDD model involves a single, coordinated effort between development teams in a remote location (typically highly skilled business, technology, and creative specialists in our Gurgaon, Bangalore, and Noida India offices) and development and client teams in North America, Europe and the Asia-Pacific region. To work effectively in this globally distributed environment, we have developed extensive expertise and processes in coordinating project management and implementation efforts among the various development teams that we deploy to enable continuous project work. Through our GDD model, we believe that we deliver greater value to our clients at a competitive cost and in an accelerated timeframe. In addition to solution design and implementation, most of our long-term engagement and outsourcing relationships leverage our longstanding GDD execution model.

 

 

¹ Unless the context otherwise requires, references in this Annual Report to “Sapient,” the “company,” “we,” “us” or “our” refer to Sapient Corporation and its wholly-owned subsidiaries.

We derive Recurring Revenues from several client relationships. Recurring Revenues are revenue contracts with a duration equal to or greater than twelve months in which the client has committed spending levels (which are cancelable) to us or has chosen us as an exclusive provider of certain services. In 2009, Recurring Revenues represented 44% of our global services revenues, compared to Recurring Revenues of 43% in 2008 and 44% in 2007. Further, in 2009 our five largest clients accounted for approximately 21% of our revenues in the aggregate and approximately 24% and 26% of our revenues in the aggregate in 2008 and 2007, respectively. In 2007, one client Sprint Nextel, accounted for more than 10% of our revenues, and no client accounted for 10% or more of our revenues either in 2008 or 2009.

 

We provide our services under both fixed-price and time and materials contracts. We price our work based on established rates that vary according to our professionals’ experience levels, roles and geographic locations.

 

Under our time and materials arrangements, we charge for our actual time and expenses incurred on an engagement. These arrangements may include an estimated fee range or a cap on our total fees. Under the latter circumstances, we assume the risk that we have correctly estimated the timeframe and level of effort required to complete any deliverables within the allotted fee cap.

 

In fixed-price contracts, we charge a fixed amount based on our anticipated total level of effort required for a project. For these arrangements, we similarly assume the risk of estimating correctly the scope of work and required resources for the applicable project. While we undertake rigorous project management throughout an engagement to ensure we deliver the project on time and on budget, we may recognize losses or lower profitability on capped arrangements or fixed-price contracts if we do not successfully manage these risks. These risks are magnified for large projects — which are increasingly part of our business — and multi-staged projects in which we perform our scope and labor estimates, and fix the total project price from inception through implementation, at an early stage of an engagement.

 

Segment Information

 

Throughout 2009, we managed and measured our business geographically through three business units. In North America, we operated our North America and Government Services business units. Through our Europe business unit, we delivered services in the United Kingdom, Germany, the Netherlands, Russia, Singapore, Sweden, Switzerland, Australia, China and India. Further information about these operating segments is located in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 19 in the Notes to Consolidated Financial Statements included in this Annual Report. For a presentation of the financial information about the geographic areas in which we conducted our business in 2009, please see Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 19 in the Notes to Consolidated Financial Statements included in this Annual Report. The principal risks and uncertainties facing our business, operations and financial condition are discussed in Part I, Item 1A in this Annual Report.

 

Each business unit includes professionals based locally and, with respect to SapientNitro and Sapient Global Markets, professionals also based in our India offices. Within each business unit, we focus our sales and delivery efforts on clients within our Representative Industries. Through this global, Representative Industries focus, we have developed an extensive understanding of our clients’ markets that enables us to skillfully address the market dynamics and business opportunities that our clients face. This understanding also enables us to identify and focus on critical areas to help our clients grow, perform, and innovate.

 

Beginning the first quarter of 2010, we have been realigning our business units and internal reporting systems to better align our services with our business and operational strategy. We expect to complete the realignment of our business units in the first quarter of 2010 and begin reporting our future results of operations based on the following operating segments: SapientNitro, Sapient Global Markets and Sapient Government Services.

 

Acquisitions

 

In the past few years we have acquired certain businesses to enhance and/or complement our service offerings.

 

On July 1, 2009, we acquired 100% of the outstanding shares of NITRO Group Ltd. (“Nitro”), a global advertising network operating across North America, Europe, Australia and Asia. The acquisition added

approximately 300 employees. We acquired Nitro to leverage its traditional advertising services with our digital commerce and marketing technology services.

 

On August 6, 2008, we acquired 100% of the outstanding shares of Derivatives Consulting Group Limited (“DCG”), a London-based international financial advisory firm that is a provider of derivatives consulting and outsourcing services to investment banks, hedge funds, asset managers and commercial banking clients. DCG is a leader in partnering with the financial services industry to provide derivative operations metrics and respond to the industry’s operational challenges. The DCG acquisition added approximately 200 employees and globally integrated services to our Global Markets practice, while expanding our trading and risk management capabilities in derivatives processing, local and offshore operations support, operations benchmarking and technology services.

 

Our Services

 

SapientNitro

 

SapientNitro services include brand and marketing strategy, award-winning creative work, web design and development, and emerging media expertise to solve our clients’ most challenging business problems. We integrate creative marketing concepts with technology tools and platforms designed to generate new customers and increase customer demand, create profitable customer relationships and build brand awareness and loyalty. SapientNitro services consist of integrated marketing and creative services; website and interactive development; traditional advertising; media planning and buying; strategic planning and marketing analytics; commerce technologies; and business applications.

 

Integrated Marketing and Creative Services

 

We conceive, design, develop and deliver seamlessly integrated, highly measurable multi-channel marketing and commerce experiences that are as efficient as they are engaging. Our marketing and creative services consist of:

 

 

Our strategic and creative capabilities span the entire spectrum of interactive and traditional media and include paid and natural search advertising; targeted email advertising campaigns; third party banner advertisement campaigns; print and television advertising; and viral marketing initiatives.

 

Web & Interactive Development

 

We conceive, develop and implement world class, award-winning websites for our clients. Our services include user interface design and development; site design and development; custom application development; user research and testing; content management and technology development and implementation, and quality assurance testing.

 

Traditional Advertising

 

We integrate our interactive marketing services with award-winning off-line media capabilities. Our services include brand strategy, copywriting, advertising creative, and production for print, radio, and television campaigns. By combining the best of traditional advertising with an expansive mix of interactive and emerging technology expertise, our traditional advertising not only creates and engineers highly relevant experiences, it helps accelerate business growth and fuels brand advocacy by eliminating the operational silos that often block business success.

Media Planning and Buying

 

We help our clients design and implement media and customer channel planning and buying strategies and purchase and arrange for placement of our clients’ advertisements in the media. Our media planning and buying services include media strategy development, website search engine marketing, email marketing, online advertising, viral and social media marketing, emerging channels marketing (e.g., online video, mobile technologies, social networking), gaming (placing advertisements in online games and creating “advergames”), real-time reporting and optimizing of the success of campaigns, and integration of our customers’ media spending strategy with their other marketing initiatives.

 

Strategic Planning & Marketing Analytics

 

We provide our clients a broad array of strategic planning services that are intended to maximize returns on their marketing initiatives investments. We combine our deep business and technology expertise to analyze how products, brands and consumers interact and the role that current and emerging technologies play in this relationship. Additionally, we apply expertise in marketing analytics to collect, analyze and report on online consumer behavior, and assist our clients to develop successful online marketing strategies and campaigns. Our array of strategic planning and marketing analytics services includes brand strategy development, consumer and market research (primary and secondary), advertising message content and medium strategy development, internet and blogosphere analytics (researching and analyzing what social networking websites and blogs say about our clients) and coordination, and management of mixed media (e.g., online and print media).

 

Commerce Technologies

 

We apply our substantial knowledge and expertise in marketing technologies to help our clients achieve their business goals. We offer our clients BridgeTrack^®, a proprietary advertising campaign tracking and measurement software application that enables customers to measure the effectiveness of an online campaign in real-time and, in turn, improve results at the earliest possible phase of their campaigns by re-allocating marketing dollars across those marketing channels that are generating the best return on investment. BridgeTrack generates real-time reporting and optimization of advertising campaigns across multiple media channels, including advertising via email, website displays/banner ads and internet natural search advertising. Through BridgeTrack, our clients see how consumers react to their online marketing campaigns — whether, for example, consumers ultimately decide to buy the client’s offerings, even if the consumers make a purchase at a later date. Our marketing technologies services, in addition to BridgeTrack, include e-commerce platform selection and implementation, selection and implementation of advertising campaign management systems, application integration and research and implementation of emerging technologies.

 

We also devise content, collaboration, commerce and IT strategies that improve our clients’ competitive position and performance, as well as the value they realize from their IT portfolio. We apply our substantial expertise in diverse technologies and our understanding of each client’s business issues to design solutions that align, and create a roadmap for the achievement of, the client’s business objectives. Our areas of content, collaboration, commerce and IT strategy expertise include:

 

 

Business Applications

 

Our substantial industry expertise and understanding of our clients’ customers, partners, competitors and processes enable us to rapidly define user requirements and gain alignment among client executives, chief marketing officers, chief information officers, chief technology officers and other client decision makers

concerning the design of mission-critical business applications. Additionally, we apply our expertise in business processes, enabling technologies and applications, and user-centered design to create and implement business and technology solutions that achieve substantial returns on our clients’ IT investments. We maintain expertise in both custom software development and working with existing software suites, such as application integration packages, content management and delivery systems, customer relationship management software and order management systems. Our primary areas of software development expertise are:

 

 

We have many years of experience working with technologies that can improve our clients’ businesses, including, more than 13 years of experience with wireless technologies; more than 15 years of experience with Internet solutions; more than 17 years of experience integrating package applications with legacy systems; and more than 18 years of experience with client/server and UNIX solutions. More recently, we have been an implementer of technologies such as Microsoft.NET, Web Services, SAP, and Business Process Management platforms. We combine this technology expertise with our design skills and our deep understanding of user needs to ensure that our client solutions are effectively adopted by their intended audiences.

 

Sapient Global Markets

 

Sapient Global Markets operates in key centers relevant to the global financial and commodity markets, including New York, London, Geneva, Amsterdam, Singapore, Chicago, Boston, Toronto, Houston and Calgary. We also operate large technology development and operations outsourcing centers in Gurgaon, Noida and Bangalore, India.

 

Advisory Services

 

Advisory Services studies and develops best practices in business processes, technology architecture and program management to develop industry-leading solutions throughout the trade and client management lifecycle in our clients’ businesses. Our business analysts, system architects, designers, and program managers are, in many cases, former practitioners and, thus, apply real-world experience when customizing solutions for our clients. We focus on the following core capabilities within Advisory Services:

 

 

Analytics

 

Our Analytics group comprises some of the industry’s leaders in areas such as portfolio valuation and benchmarking as well as assessing market, credit and operational risk management techniques. Key engagements of this group have included; helping value and manage our client’s remaining portfolios following one of the greatest bank failures in history; and benchmarking the trade lifecycle processes of the largest investment banks in the world in support of their commitments to operational excellence made to the U.S. Federal Reserve. Our current offerings include:

 

 

 

 

Technology

 

Our Technology practice, in conjunction with our Advisory Services group, designs, develops, integrates, supports and tests software solutions for the most critical functions of today’s market participants. Our capabilities range from custom software development to third-party system integration to the establishment of customized offshore development centers for our clients. We also maintain core teams specializing in all of today’s most relevant technology platforms and uniquely instill these teams with industry-leading business knowledge to insure that we create technology solutions with the full context of the business environment embedded into our solutions. Our specific capabilities include:

 

 

Process Solutions

 

Our Process Solutions group designs, implements, executes and enables offshore delivery of some of the most difficult trading and risk management processes within the global markets arena. Bolstered by our 2008 acquisition of the London-based DCG, Process Solutions is unique in the global markets industry for its combination of deep industry expertise, customized outsourcing methodology and ability to innovate solutions to some of the day’s most pressing trade management issues. Representative work includes master agreement negotiation, confirmation reconciliation, settlement calculation, collateral management, and clearing. Further, Process Solutions has worked at the center of several of the largest bank mergers in recent history, developing and implementing plans for integrating two entities into one.

 

Additionally, in 2009, we launched a major initiative to take our industry-leading onshore process capabilities and offer the same solutions to our clients leveraging our offshore capabilities in India. We developed a unique methodology for transitioning these processes, and several of our clients have begun transitioning substantial portions of their processes offshore to our offices in Gurgaon and Bangalore. Our expertise in complex areas such as derivatives has enabled our clients to consider higher-order processes for outsourcing than previously possible. Further, by co-locating our technology and process activities in India for a single client, we have been developing important new solutions and capabilities for our clients, including the automation of complex processes in a single, unified environment.

 

We pride ourselves on our record of attracting, training and retaining the highest quality professionals available in the market. In 2006 we developed the unique “Institute of Trading and Risk Management,” a four-month course for incoming staff designed to provide grounding in the processes and technologies supporting the clients and industries we serve. This deep commitment to people and our unique “People Strategy” has given us one of the highest employee retention rates in the industry and is routinely a hallmark of customer feedback and clearly linked to our consistently high customer satisfaction scores.

 

Sapient Government Services

 

Sapient Government Services offers a robust suite of high-value services including program planning and governance; technology development and integration; strategic communications and process engineering. Our services help U.S. Government agencies align stakeholders, programs, and systems in support of mission integration, while driving successful change and creating a culture of continuous improvement.

 

Program Planning and Governance

 

We perform strategic planning, enterprise architecture development, program management, and IT governance services for large-scale, multi-vendor initiatives to ensure on-time, on-budget delivery of solutions that provide the right results for our clients.

 

Technology Development and Integration

 

We rapidly prototype new solutions and integrate critical business processes and information for our clients. Through systems engineering, we rationalize IT infrastructures to reduce cost and complexity while retiring legacy infrastructures, streamlining existing systems, and incorporating the best commercial products.

 

Strategic Communications

 

We develop communications strategies that align our clients’ stakeholders and business users’ buy-in to ensure their needs are considered in program and system design. We conduct our propriety Fusion workshops to validate the clients’ proposed approach, gather requirements, and design effective project roadmaps. Additionally, we provide marketing services to convert business users into program advocates and ensure high, sustained adoption of new processes and tools.

Process Engineering

 

We provide knowledge management, mission needs analysis, and requirements and design services to enable business users to streamline their business processes, tools, and metrics; enhance productivity and effectiveness; and enable continuous improvement. We also employ our expertise in process management to streamline our clients’ critical business processes, thereby reducing waste and optimizing efficiency.

 

Alliances

 

We focus on building the right results for our clients’ businesses. To support this focus, we work closely with alliance partners to develop industry leading solutions that we can deliver to meet our clients’ needs. We have established global partnerships with industry leaders including Art Technology Group, IBM, Microsoft, Google and Oracle and have a skilled knowledge base in their products to help our clients solve their business challenges through technology. Further, we have formed Centers of Excellence, comprising dedicated, globally distributed teams with deep application knowledge and a proven track record in implementing solutions based on Sapient’s strategic partner technologies. Through our expert knowledge and commitment to collaboration, we help our clients identify and implement faster the right solutions at lower overall costs.

 

Our alliances with leading technology and services companies help us rapidly deliver high-performance business and technology solutions. We frequently recommend the use of pre-engineered components from our alliance partners to deliver the rapid business value clients need. Our alliance relationships, and the solutions that we derive from these relationships, are structured in a manner to ensure that we deliver to our clients solutions that will be sustainable and provide long-term value.

 

We also collaborate with our partners to selectively target specific markets and opportunities to offer quality repeatable solutions, frameworks and components that speed deployment and time-to-value for our customers. Additionally, our alliance partners provide us advance information and access to their product road maps to ensure that our technology solutions are more cost-effective to build and maintain over the long-term.

 

We continue to actively build relationships and strategic alliances with technology and other consulting companies, including packaged technology vendors. These relationships focus on a wide range of joint activities, including working on client engagements, evaluating and recommending the other party’s technology and other solutions to customers, and training and transferring knowledge regarding the other party’s solutions. We believe that these relationships and strategic alliances enable us to provide better delivery and value to our existing clients and attract new clients through referrals.

 

The Sapient Approach

 

Our unique consulting methodology, Sapient Approach, is designed to address the biggest problems that most companies face when pursuing business-enabling technology and other projects: the majority of projects never finish, are completed late or over budget, lack promised capabilities, or contain unused functionality. We employ a collaborative, agile/lean-based delivery approach, in which we develop and release in an iterative manner usable components of a deliverable, thus enabling our clients to review, validate and commence use of work product throughout the life cycle of a project, rather than await the end of the project to realize the project’s full benefits.

 

While this delivery approach provides clients the most value and return on investment in the shortest possible time period, it also minimizes project risk because discrete pieces of work are tested and accepted throughout the project. By contrast to traditional consulting services methods that require heavy up-front investment in time and effort to define all possible requirements, our agile/lean-based methodology uses actual development to evaluate and improve the design as the project progresses. This means that unnecessary steps or features are identified and eliminated early in the design and implementation process, dramatically reducing overall project cost.

 

Sapient Approach also enables us to commit to delivering our solutions within the price and schedule that we have promised to our clients, and to create solutions that bring together business, user and technology requirements to solve our clients’ business problems. We design these solutions to deliver tangible business value to clients, including increased revenues, reduced costs and more effective use of assets.

Additionally, Sapient Approach enables flexibility in selecting the process standardization and continuous improvement models that work best for each client. Our teams regularly incorporate Six Sigma, Capability Maturity Model Integration^® (CMMI), International Standards Organization (ISO) and Information Technology Infrastructure Library (ITIL) processes to ensure that appropriate rigor, discipline and accountability are built into each project. By employing these industry-leading techniques, our teams establish an enduring environment of process improvement that enables organizational capabilities essential to sustaining competitive business advantage.

 

Strategic Context, People and Culture

 

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 unwavering attention to our strategic context has enabled us to adapt and thrive in a fast-changing market, as we strive to build a great company that has a long-lasting impact on the world. Our passion for client success — evidenced by our ability to foster collaboration, drive innovation and solve challenging problems — is the subject of case studies on leadership and organizational behavior used by MBA students at both Harvard and Yale business schools.

 

To foster and encourage the realization of our strategic context, we reward teamwork and evaluate our people’s performance, and promote people, based on their adoption of and adherence to our strategic context. In addition, we conduct an intensive orientation program to introduce new hires to our culture and values, and conduct internal communications and training initiatives that define and promote our culture and values.

 

As of December 31, 2009 we had 7,052 full-time employees, consisting of 6,037 project personnel, 939 general and administrative personnel and 76 sales and marketing personnel. None of our employees is subject to a collective bargaining agreement. We believe that we have good relationships with our employees.

 

Selling and Marketing

 

Our global marketing team strives to build greater brand awareness and drive client acquisition, retention and loyalty in all markets in which we operate. We conduct marketing activities at the company, industry and service levels across SapientNitro, Sapient Global Markets and Sapient Government Services.

 

Our dedicated team drives globally integrated initiatives including, but not limited to, the following: developing and implementing an overall global marketing and brand strategy for Sapient; executing thought leadership campaigns; sponsoring focused multi-client events; cultivating media and industry analyst relations; conducting market research and analysis; sponsoring and participating in targeted industry conferences, award shows and events; creating marketing assets and materials to assist client-development teams with lead generation; and publishing our web site, http://www.sapient.com.  

 

We organize our sales professionals primarily along industry lines. We believe that the industry and geographic focus of our sales professionals enhances their knowledge and expertise in these industries and generates additional client engagements.

 

Competition

 

The markets for the services we provide are highly competitive. We believe that we compete principally with large systems consulting and implementation firms, traditional and interactive advertising and marketing agencies, offshore consulting and outsourcing companies, and clients’ internal IT departments. To a lesser extent, we compete with boutique consulting firms that maintain specialized skills and/or are geographically focused. With respect to our Government Services business unit, we both compete and partner with large defense contractors.

 

We believe that the principal competitive factors in our markets include: ability to solve business problems; ability to provide creative concepts and solutions; expertise and talent with advanced technologies; global scale; expertise in delivering complex projects through teams located in globally distributed geographies; availability of resources; quality and speed of delivery; price of solutions; industry knowledge; technology-enabled marketing expertise; understanding of user experience; and sophisticated project and program management capability.

We also believe that we compete favorably when considering these factors and that our ability to deliver business innovation and outstanding value to our clients on time and on budget, our GDD model, and our successful track record in doing so, distinguish us from our competitors.

 

Intellectual Property Rights

 

We rely upon a combination of trade secrets, nondisclosure and other contractual arrangements, and copyright and trademark laws to protect our proprietary consulting methodology, custom-developed software and other rights. We enter into confidentiality agreements with our employees, subcontractors, vendors, professionals and clients, and limit access to and distribution of our proprietary information.

 

Our services involve the development of business, technology and marketing solutions for specific client engagements. Ownership of these solutions is the subject of negotiation and is frequently assigned to the client, although we often retain ownership of certain development tools and may be granted a license to use the solutions for certain purposes. Certain of our clients have prohibited us from marketing for specified periods of time or to specified third parties the solutions we develop for them, and we anticipate that certain of our clients will demand similar or other restrictions in the future.

 

Where to Find More Information

 

We make our public filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports, available free of charge at our website, http://www.sapient.com, as soon as reasonably practicable after we file such materials with the SEC. We also make available on our website reports filed by our executive officers, directors and holders of more than 10% of our common stock, on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available in the “Investors” portion of our web site, under the link “SEC Filings,” and on the SEC’s web site, http://www.sec.gov. You may also read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

 

Risk Factors

 

The following important factors, among others, could cause our actual business, financial condition and future results to differ materially from those contained in forward-looking statements made in this Annual Report or presented elsewhere by management from time to time.

 

Our business, financial condition and results of operations may be materially impacted by economic conditions and related fluctuations in customer demand for marketing, business, technology and other consulting services.

 

The market for our consulting services and the technologies used in our solutions historically has tended to fluctuate with economic cycles — particularly those cycles in the United States and Europe, where we earn the majority of our revenues. During economic cycles in which many companies are experiencing financial difficulties or uncertainty, clients and potential clients may cancel or delay spending on marketing, technology and other business initiatives. Our efforts to down-size, when necessary, in a manner intended to mirror downturned economic conditions could be delayed and costly. A downturn could result in a reduced demand for our services, project cancellations or delays, lower revenues and operating margins resulting from price reduction pressures for our services, and payment and collection issues with our clients. Any of these events could materially and adversely impact our business, financial condition and results of operations.

 

Our markets are highly competitive and we may not be able to continue to compete effectively.

 

The markets for the services we provide are highly competitive. We believe that we compete principally with large systems consulting and implementation firms, offshore outsourcing companies, interactive and traditional

advertising agencies, and clients’ internal information systems departments. To a lesser extent, other competitors include boutique consulting firms that maintain specialized skills and/or are geography based. Regarding our Government Services practice, we both compete and partner with large defense contractors. Some of our competitors have significantly greater financial, technical and marketing resources, and generate greater revenues and have greater name recognition, than we do. Often, these competitors offer a larger and more diversified suite of products and services than we offer. These competitors may win client engagements by significantly discounting their services in exchange for a client’s promise to purchase other goods and services from the competitor, either concurrently or in the future. If we cannot keep pace with the intense competition in our marketplace, our business, financial condition and results of operations will suffer.

 

Our international operations and Global Distributed Delivery (“GDD”) model subject us to increased risk.

 

We have offices throughout the world. Our international operations are a significant percentage of our total revenues, and our GDD model is a key component of our ability to deliver our services successfully. Our international operations are subject to inherent risks, including:

 

 

In particular, our GDD model depends heavily on our offices in Gurgaon, Bangalore and Noida, India. Any escalation in the political or military instability in India or Pakistan or the surrounding countries, or a business interruption resulting from a natural disaster, such as an earthquake, could hinder our ability to use GDD successfully and could result in material adverse effects to our business, financial condition and results of operations. Furthermore, the delivery of our services from remote locations causes us to rely on data, phone, power and other networks which are not as reliable in India as those in other countries where we operate. Any failures of these systems, or any failure of our systems generally, could affect the success of our GDD model. Remote delivery of our services also increases the complexity and risk of delivering our services, which could affect our ability to satisfy our clients’ expectations or perform our services within the estimated time frame and budget for each project. Changes to government structure or policies in countries in which we operate could negatively impact our operations if such changes were to limit or cease any benefits that may currently be available to us. For example, although the Indian government has historically offered generous tax incentives to induce foreign companies to base operations in India, new taxes have been introduced in recent years that partially offset those benefits. On April 1, 2009 the income-tax incentive of one of our Software Technology Parks (“STPs”) Units in India expired. Beginning April 1, 2011, the income-tax incentives applicable to our other two STPs Units in India are scheduled to expire. In addition, in 2009 we established a new India unit which is eligible for a five year, 100% tax holiday. This expiration of incentives may adversely affect our cost of operations and increase the risk of delivering our services on budget for client projects. Expiration of benefits provided to us by having operations based in India could have a material adverse effect on our business, financial condition and results of operations.

Our business, financial condition and results of operations may be materially impacted by military actions, global terrorism, natural disasters and political unrest.

 

Military actions in Iraq, Afghanistan and elsewhere, global terrorism, natural disasters and political unrest are among the factors that may adversely impact regional and global economic conditions and, concomitantly, client investments in our services. In addition to the potential impact of any of these events on the business of our clients, these events could pose a threat to our global operations and people. Specifically, our people and operations in India could be impacted if the recent rise in civil unrest, terrorism and conflicts with bordering countries in India were to increase significantly. As a result, significant disruptions caused by such events could materially and adversely affect our business, financial condition and results of operations.

 

If we do not attract and retain qualified professional staff, we may be unable to perform adequately our client engagements and could be limited in accepting new client engagements.

 

Our business is labor intensive, and our success depends upon our ability to attract, retain, train and motivate highly skilled employees. The improvement in demand for marketing and business and technology consulting services has further increased the need for employees with specialized skills or significant experience in marketing, business and technology consulting, particularly at senior levels. We have been expanding our operations, and these expansion efforts will be highly dependent on attracting a sufficient number of highly skilled people. We may not be successful in attracting enough employees to achieve our expansion or staffing plans. Furthermore, the industry turnover rates for these types of employees are high, and we may not be successful in retaining, training and motivating the employees we attract. Any inability to attract, retain, train and motivate employees could impair our ability to manage adequately and complete existing projects and to bid for or accept new client engagements. Such inability may also force us to increase our hiring of expensive independent contractors, which may increase our costs and reduce our profitability on client engagements. We must also devote substantial managerial and financial resources to monitoring and managing our workforce and other resources. Our future success will depend on our ability to manage the levels and related costs of our workforce and other resources effectively.

 

We earn revenues, incur costs and maintain cash balances in multiple currencies, and currency fluctuations affect our financial results.

 

We have significant international operations, and we frequently earn our revenues and incur our costs in various foreign currencies. Our international service revenues were $285.8 million for 2009. Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenues and receivables, purchases, payroll and investments. We also have a significant amount of foreign currency operating income and net asset exposures. Certain foreign currency exposures, to some extent, are naturally offset within an international business unit, because revenues and costs are denominated in the same foreign currency, and certain cash balances are held in U.S. dollar denominated accounts. However, due to the increasing size and importance of our international operations, fluctuations in foreign currency exchange rates could materially impact our financial results. Our GDD model also subjects us to increased currency risk because we incur a significant portion of our project costs in Indian rupees and earn revenue from our clients in other currencies. While we have entered into foreign currency offsetting option positions that allow the Company partially to hedge certain short-term translation exposures in Indian rupee and British pound sterling currency, and may in the future enter into foreign currency exchanges swaps and purchases as well as sales of foreign currency options, we will continue to experience foreign currency gains and losses in certain instances where it is not possible or cost effective to hedge foreign currencies. There is no guarantee that such hedging activity will be effective or that our financial condition will not be negatively impacted by the currency exchange rate fluctuations of the Indian rupee versus the U.S. dollar. Costs for our delivery of services, including labor, could increase as a result of the decrease in value of the U.S. dollar against the Indian rupee, affecting our reported results.

 

Our cash positions include amounts denominated in foreign currencies. We manage our worldwide cash requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be accessed. The repatriation of cash balances from certain of our subsidiaries outside the United States could have adverse tax consequences and be limited by foreign currency exchange controls. However, those balances are generally available without legal restrictions to fund ordinary business operations. Any fluctuations in foreign

currency exchange rates, or changes in local tax laws, could materially impact the availability and size of these funds for repatriation or transfer.

 

Due to our current inability to sell certain of our Auction Rate Securities (“ARS”), the securities may experience additional declines in value, and funds associated with the securities may be inaccessible for more than 12 months, which may have a material adverse impact to our financial condition.

 

Our marketable securities portfolio, which totaled, at amortized cost, $17.9 million as of December 31, 2009, included ARS investments with an amortized cost of $16.4 million from various issuers collateralized by student loans. ARS investments are principally investments with long-term contractual maturities but with interest rates that are reset every seven to thirty-five days by auctions. At the end of each reset period, investors can sell or continue to hold the securities at par. In 2008 our ARS investments experienced failed auctions that limited the liquidity of these investments. Due to our inability to sell these securities at auction, on November 5, 2008, we accepted an offer from UBS AG (“UBS”), one of our investment brokers through whom we purchased the aforementioned $16.4 million of ARS. The offer grants us the right to sell to UBS our $16.4 million of ARS position, at cost, at any time during a two-year period beginning June 30, 2010 (the “Put Right”).

 

We may be unable to liquidate our ARS investments, and there is no guarantee UBS will be able to redeem the Put Right on or after June 30, 2010. Should we not be able to liquidate these investments in the future, our lack of access to the underlying value could have a material impact on our income and results in operations.

 

We have significant fixed operating costs, which may be difficult to adjust in response to unanticipated fluctuations in revenues.

 

A high percentage of our operating expenses, particularly salary expense, rent, depreciation expense and amortization of intangible assets, are fixed in advance of any particular quarter. As a result, an unanticipated decrease in the number or average size of, or an unanticipated delay in the scheduling for, our projects may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations for that quarter.

 

An unanticipated termination or decrease in size or scope of a major project, a client’s decision not to proceed with a project we anticipated or the completion during a quarter of several major client projects could require us to maintain underutilized employees and could have a material adverse effect on our business, financial condition and results of operations. Our revenues and earnings may also fluctuate from quarter to quarter because of such factors as:

 

 

Our profits may decrease and/or we may incur significant unanticipated costs if we do not accurately estimate the costs of fixed-price engagements.

 

Approximately 42% of our projects are based on fixed-price contracts, rather than contracts in which payment to us is determined on a time and materials or other basis. Our failure to estimate accurately the resources and schedule required for a project, or our failure to complete our contractual obligations in a manner consistent with the project plan upon which our fixed-price contract was based, could adversely affect our overall profitability and could have a material adverse effect on our business, financial condition and results of operations. We are consistently entering into contracts for large projects that magnify this risk. We have been required to commit

unanticipated additional resources to complete projects in the past, which has occasionally resulted in losses on those contracts. We will likely experience similar situations in the future. In addition, we may fix the price for some projects at an early stage of the project engagement, which could result in a fixed price that is too low. Therefore, any changes from our original estimates could adversely affect our business, financial condition and results of operations.

 

Our profitability will be adversely impacted if we are unable to maintain our pricing and utilization rates as well as control our costs.

 

Our profitability derives from and is impacted primarily by three factors, primarily: (i) the prices for our services; (ii) our professionals’ utilization or billable time, and (iii) our costs. To achieve our desired level of profitability, our utilization must remain at an appropriate rate, and we must contain our costs. Should we reduce our prices in the future as a result of pricing pressures, or should we be unable to achieve our target utilization rates and costs, our profitability could be adversely impacted and our stock price could decline materially.

 

We partner with third parties on certain complex engagements in which our performance depends upon, and may be adversely impacted by, the performance of such third parties.

 

Certain complex projects may require that we partner with specialized software or systems vendors or other partners to perform our services. Often in these circumstances, we are liable to our clients for the performance of these third parties. Should the third parties fail to perform timely or satisfactorily, our clients may elect to terminate the projects or withhold payment until the services have been completed successfully. Additionally, the timing of our revenue recognition may be affected or we may realize lower profits if we incur additional costs due to delays or because we must assign additional personnel to complete the project. Furthermore, our relationships with our clients and our reputation generally may suffer harm as a result of our partners’ unsatisfactory performance.

 

Our clients could unexpectedly terminate their contracts for our services.

 

Most of our contracts can be canceled by the client with limited advance notice and without significant penalty. A client’s termination of a contract for our services could result in a loss of expected revenues and additional expenses for staff that were allocated to that client’s project. We could be required to maintain underutilized employees who were assigned to the terminated contract. The unexpected cancellation or significant reduction in the scope of any of our large projects, or client termination of one or more recurring revenue contracts (see explanation of “Recurring Revenues” in Part I, Item 1, above), could have a material adverse effect on our business, financial condition and results of operations.

 

We may be liable to our clients for substantial damages caused by our unauthorized disclosures of confidential information, breaches of data security, failure to remedy system failures or other material contract breaches.

 

We frequently receive confidential information from our clients, including confidential customer data that we use to develop solutions. If any person, including one of our employees, misappropriates client confidential information, or if client confidential information is inappropriately disclosed due to a breach of our computer systems, system failures or otherwise, we may have substantial liabilities to our clients or client customers.

 

Further, many of our projects involve technology applications or systems that are critical to the operations of our clients’ businesses and handle very large volumes of transactions. If we fail to perform our services correctly, we may be unable to deliver applications or systems to our clients with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance. While we have taken precautionary actions to create redundancy and back-up systems, any such failures by us could result in claims by our clients for substantial damages against us.

 

Although we attempt to limit the amount and type of our contractual liability for our breaches of confidentiality or data security, defects in the applications or systems we deliver or other material contract breaches that we may commit during the performance of our services (collectively, “Contract Breaches”), in certain circumstances we agree to unlimited liability for Contract Breaches. Additionally, while we carry insurance that is intended to

mitigate our liabilities for such Contract Breaches, we cannot be assured that our insurance coverages will be applicable and enforceable in all cases, or sufficient to cover substantial liabilities that we may incur. Further, we cannot be assured that contractual limitations on liability will be applicable and enforceable in all cases. Accordingly, even if our insurance coverages or contractual limitations on liability are found to be applicable and enforceable, our liability to our clients for Contract Breaches could be material in amount and affect our business, financial condition and results of operations. Moreover, such claims may harm our reputation and cause us to lose clients.

 

Our services may infringe the intellectual property rights of third parties, and create liability for us as well as harm our reputation and client relationships.

 

The services that we offer to clients may infringe the intellectual property (“IP”) rights of third parties and result in legal claims against our clients and Sapient. These claims may damage our reputation, adversely impact our client relationships and create liability for us. Moreover, although we generally agree in our client contracts to indemnify the clients for expenses or liabilities they incur as a result of third party IP infringement claims associated with our services, the resolution of these claims, irrespective of whether a court determines that our services infringed another party’s IP rights, may be time-consuming, disruptive to our business and extraordinarily costly. Finally, in connection with an IP infringement dispute, we may be required to cease using or developing certain IP that we offer to our clients. These circumstances could adversely impact our ability to generate revenue as well as require us to incur significant expense to develop alternative or modified services for our clients.

 

We may be unable to protect our proprietary methodology.

 

Our success depends, in part, upon our proprietary methodology and other IP rights. We rely upon a combination of trade secrets, nondisclosure and other contractual arrangements, and copyright and trademark laws to protect our proprietary rights. We enter into confidentiality agreements with our employees, contractors, vendors and clients, and limit access to and distribution of our proprietary information. We cannot be certain that the steps we take in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our IP rights.

 

Our stock price is volatile and may result in substantial losses for investors.

 

The trading price of our common stock has been subject to wide fluctuations, particularly in the second half of 2008 and the first half of 2009. Our trading price could continue to be subject to wide fluctuations in response to:

 

 

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. The commencement of this type of litigation against us could result in substantial costs and a diversion of management’s attention and resources.

 

Our former Chairmen and Chief Executive Officers have significant voting power and may effectively control the outcome of any stockholder vote.

 

Jerry A. Greenberg, our former Co-Chairman of the Board of Directors and Chief Executive Officer of the Company, and J. Stuart Moore, our former Co-Chairman of the Board of Directors and Co-Chief Executive Officer and current member of our Board of Directors, own, in the aggregate, approximately 22% of our outstanding common stock as of February 16, 2010. As a result, they have the ability to substantially influence and may effectively control the outcome of corporate actions requiring stockholder approval, including the election of

directors. This concentration of ownership may also have the effect of delaying or preventing a change in control of Sapient, even if such a change in control would benefit other investors.

 

We are dependent on our key employees.

 

Our success depends in large part upon the continued services of a number of key employees. Our employment arrangements with key personnel provide that employment is terminable at will by either party. The loss of the services of any of our key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, if our key employees resign from Sapient to join a competitor or to form a competing company, the loss of such personnel and any resulting loss of existing or potential clients to any such competitor could have a material adverse effect on our business, financial condition and results of operations. Although, to the extent permitted by law, we require our employees to sign agreements prohibiting them from joining a competitor, forming a competing company or soliciting our clients or employees for certain periods of time, we cannot be certain that these agreements will be effective in preventing our key employees from engaging in these actions or that courts or other adjudicative entities will substantially enforce these agreements.

 

We may be unable to achieve anticipated benefits from acquisitions.

 

The anticipated benefits from any acquisitions that we may undertake might not be achieved. For example, if we acquire a company, we cannot be certain that clients of the acquired business will continue to conduct business with us, or that employees of the acquired business will continue their employment or integrate successfully into our operations and culture. The identification, consummation and integration of acquisitions and joint ventures require substantial attention from management. The diversion of management’s attention, as well as any difficulties encountered in the integration process, could have an adverse impact on our business, financial condition and results of operations. Further, we may incur significant expenses in completing any such acquisitions, and we may assume significant liabilities, some of which may be unknown at the time of such acquisition.

 

The failure to successfully and timely implement certain financial system changes to improve operating efficiency and enhance our reporting controls could harm our business.

 

In parallel with the foregoing operational process redesign and role transition activities, we have implemented and continue to install several upgrades and enhancements to our financial systems. We expect these initiatives to enable us to achieve greater operating and financial reporting efficiency and also enhance our existing control environment through increased levels of automation of certain processes. Failure to successfully execute these initiatives in a timely, effective and efficient manner could result in the disruption of our operations, the inability to comply with our Sarbanes-Oxley obligations and the inability to report our financial results in a timely and accurate manner.

 

A failure to maintain effective internal controls over financial reporting could have a material adverse impact on the Company.

 

We are required to maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. We may in the future identify material weaknesses in our internal control over financial reporting. Further, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, regardless of the adequacy of such controls. Should we fail either to maintain adequate internal controls or implement required new or improved controls, our business and results of operations could be harmed, we may be unable to report properly or timely the results of our operations, and investors could lose faith in the reliability of our financial statements. Consequently, the price of our securities may be adversely and materially impacted.

 

Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.

 

Our effective tax rate could be adversely impacted by several factors, some of which are outside our control, incuding:

 

 

 

In the ordinary course of our business, many transactions occur where the ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide provision for income taxes. Although we believe our tax estimates are reasonable, the final determination could be materially different from our historical tax provisions and accruals.

 

 

None.

 

 

Our headquarters and principal administrative, finance, selling and marketing operations are located in approximately 32,000 square feet of leased office space in Boston, Massachusetts. We also lease offices in other parts of the United States and in Canada, Europe, Asia and Australia. We do not own any material real property. Substantially all of our office space is leased under long-term leases with varying expiration dates.

 

 

We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We are subject to various legal claims that have arisen in the course of our business and that have not been fully adjudicated in which the damages claimed under such actions, in the aggregate, total approximately $3.1 million as of December 31, 2009. We have accrued at December 31, 2009 approximately $0.5 million related to certain of these items. We intend to defend these matters vigorously, however the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts that we have accrued.

 

In the opinion of management, we do not have a potential liability related to any current legal proceedings or claims that would individually or in the aggregate have a material adverse effect on our financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should several of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

 

 

None.

PART II

 

 

Market Price of Common Stock

 

Our common stock is quoted on the Nasdaq Global Select Stock Market under the symbol “SAPE.” The following table sets forth, for the periods indicated, the high and low intraday sale prices for our common stock.

 

 

The following graph compares the cumulative five-year total stockholder return on our common stock from December 31, 2004 through December 31, 2009, with the cumulative five-year total return, during the equivalent period, on the (i) NASDAQ Composite Index and (ii) Dow Jones US Technology Index. The comparison assumes the investment of $100 on December 31, 2004 in our common stock and in each of the comparison indices and, in each case, assumes reinvestment of all dividends.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Sapient Corporation, The NASDAQ Composite Index
And The Dow Jones US Technology Index

 

 

 

 

On February 16, 2010, the last reported sale price of our common stock was $8.38 per share. As of February 16, 2010, there were approximately 479 holders of record of our common stock and approximately 11,097 beneficial holders of our common stock.

 

On February 18, 2010 we declared a special dividend of $0.35 per share for all shareholders as of the record date of March 1, 2010, payable on March 15, 2010. In addition, we declared a special dividend equivalent payment of $0.35 per Restricted Stock Unit (“RSU”) for all outstanding RSU awards as of March 1, 2010, to be paid in shares when the awards vest. If an RSU does not vest, the dividend is forfeited.

 

Issuer Purchases of Equity Securities

 

We did not make any purchases during the three months ended December 31, 2009.

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and management’s discussion and analysis of financial condition and results of operations included elsewhere in this Annual Report. The balance sheet data at December 31, 2009 and 2008 and the statement of operations data for each of the three years ended December 31, 2009, 2008 and 2007 are derived from the audited consolidated financial statements for such years, included elsewhere in this Annual Report. The statement of operations data set forth below for the years ended December 31, 2006 and 2005 and the balance sheet data set forth below at December 31, 2007, 2006 and 2005 are derived from our consolidated financial statements not included in the annual report and are presented herein on an unaudited basis.

 

 

 

 

 

 

Overview

 

The Company

 

Sapient Corporation (“Sapient” or the “Company”), a global services firm, helps clients compete, evolve and grow in an increasingly complex marketplace. We market our services through two primary areas of focus — SapientNitro and Sapient Global Markets — positioned at the intersection of marketing, business and technology. Sapient, one of the world’s largest independent interactive marketing agencies, provides brand and marketing strategy, creative work, web design and development and emerging media expertise through its SapientNitro services. We also provide traditional advertising capabilities, offering a complete, multi-channel marketing and commerce solution for clients. Sapient provides business and information technology (“IT”) strategy, process and system design, program management, custom development and package implementation, systems integration and outsourced services, including testing, maintenance and support through Sapient Global Markets. Through our Trading and Risk Management (“TRM”) practice, a core focus area within Sapient Global Markets, we bring more than 15 years of experience to fully service trading and risk enterprises. With our 2008 acquisition of Derivatives Consulting Group Ltd. (“DCG”), a leading provider of derivatives consulting and outsourcing services, we added a globally integrated service in derivatives processing to our TRM practice capabilities.

 

During 2009 (the twelve months ended December 31, 2009), we continued to utilize our India-based effort on our Global Distributed Delivery (“GDD”) projects. Our billable days or level of effort incurred by our Indian people as a percentage of total Company billable days decreased three points to 58% for 2009 compared to 61% in 2008 (the twelve months ended December 31, 2008). Our proprietary GDD methodology enables us to provide high-quality, cost-effective solutions under accelerated project 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 methodology to provide application management services.

 

Founded in 1990 and incorporated in Delaware in 1991, Sapient maintains a strong global presence with 7,052 worldwide employees as of December 31, 2009 in offices in the United States, Canada, the United Kingdom, Germany, the Netherlands, Russia, Sweden, Switzerland, Singapore, Australia, China and India.

 

Summary of Results of Operations

 

With the global economic downturn that began in the latter half of 2008 and continued into 2009, we faced a challenging environment of economic contraction in many of the industries and geographies in which we operate.

Our service revenues for 2009 were $638.9 million compared to $662.4 million in 2008, a 4% decrease. The decrease in our service revenues was primarily due to pricing pressures, and in the first half of 2009, a decrease in demand for our services compared to 2008. Revenue also decreased due to currency fluctuations. These decreases were partially offset by incremental service revenues from our Nitro and DCG acquisitions. Nitro’s and DCG’s results of operations are reflected in ours as of their acquisition dates, July 1, 2009 and August 6, 2008, respectively.

 

Our operating income was $40.4 million for 2009 compared to $64.6 million in 2008. The decrease in operating income is primarily due to lower margins. Margins (service revenues less project personnel expenses) decreased in 2009 compared to 2008 primarily due to pricing pressures on our service revenues, causing them to increase as a percentage of revenues. The increases in restructuring expenses, amortization expense and acquisition costs were offset by decreases in selling and marketing expenses and general and administrative expenses. Our net income for 2009 was $88.1 million compared to $62.5 million in 2008. The main reason for the increase in net income was the benefit of $58.3 million from the release of our valuation allowance on our U.S. deferred tax assets. Despite reduced operating income in 2009 compared to 2008, we have achieved recent sustained profitability in the U.S. and this was the primary reason we released the valuation allowance on our U.S. deferred tax assets. Excluding this benefit, the decrease in net income compared to 2008 was primarily due to the decrease in operating income, a decrease in interest and other income and a higher tax rate in 2009 compared to 2008. Please see our Results of Operations section for our discussion and analysis of these items.

 

Our service revenues were $662.4 million for 2008, a 21% increase from service revenues of $546.4 million compared to 2007. The growth in service revenues in 2008 was due to an increase in demand for our services from new and existing clients and, to a lesser extent, incremental service revenues from our DCG acquisition.

 

Our operating income was $64.6 million for 2008 compared to $18.3 million in 2007 (the twelve months ended December 31, 2007). The increase was the result of multiple factors including: an increase in service revenues, operational performance improvement, and a decrease in costs and expenses incurred related to our review of (and restatement resulting from) our historical stock-based compensation practices, partially offset by greater compensation costs. Our net income for 2008 was $62.5 million compared to $15.2 million in 2007. This increase in net income was a result of the same factors that caused an increase in our operating income.

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 call “non-GAAP income from operations”. The second measure calculates non-GAAP income from operations as a percentage of reported services revenues, which we call “non-GAAP operating margin”. We believe that non-GAAP measures help illustrate underlying trends in our business, and use the measures to establish budgets and operational goals, communicated internally and externally, for managing our business and evaluating our performance. We exclude certain expenses from our non-GAAP operating income that we believe are not reflective of these underlying business trends or useful measures for determining our operational performance and overall business strategy. The following table reconciles income from operations as reported on our consolidated statements of operations to non-GAAP income from operations and non-GAAP operating margin for 2009, 2008 and 2007. Please see our Results of Operations section for a more detailed discussion and analysis of the excluded items.

 

 

During 2009, $285.8 million of our service revenues and $335.0 million of our operating expenses were denominated in foreign currencies. Due to the significant appreciation of the U.S. dollar that began in the second half of 2008, our service revenues and operating expenses for 2009 were significantly affected when compared to 2008. As a result, our discussion and analysis of our results of operations will include, when important to management’s analysis, a comparison in “constant currency terms” which excludes the effect of the U.S. dollar’s appreciation, a non-GAAP measure. The effect is excluded by translating the current period’s constant currency service revenues and expenses into U.S. dollars at the average exchange rates of the prior period of comparison. For a discussion of our exposure to exchange rates see “Item 7a. Quantitative and Qualitative Disclosures About Market Risk”.

 

Summary of Critical Accounting Policies; Significant Judgments and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ substantially from our estimates.

A summary of those accounting policies, significant judgments and estimates that we believe are most critical to fully understanding and evaluating our financial results is set forth below. This summary should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report.

 

Revenue Recognition

 

We recognize revenue from the provision of professional services, digital marketing services and offline printing and production services arrangements with our clients when persuasive evidence of an arrangement exists, services or product have been provided to the customer, the fee is fixed or determinable and collectability is reasonably assured. In instances where the customer, at its discretion, has the right to reject the services or product prior to final acceptance, revenue is deferred until such acceptance occurs.

 

We recognize revenues from our fixed-price and time-and-materials technology implementation consulting contracts using the percentage-of-completion method. We use the percentage-of-completion method because the nature of the services provided in these contracts are similar to contracts that are required to use the percentage-of-completion per generally accepted accounting principles, like services provided by engineers and architects, for example. Revenues generated from fixed-price and time-and-materials non-technology implementation contracts, except for support and maintenance contracts, are recognized based upon a proportional performance model Our percentage-of-completion method and our proportional performance method of accounting calculate revenue based on the percentage-of-labor incurred to estimated total labor. This method is used because reasonably dependable estimates of the revenues and labor applicable to various stages of an arrangement can be made, based on historical experience and milestones set in the contract. Revenue from time-and-materials contracts is recognized as services are provided. In situations where time-and-materials contracts require deliverables and provide for a ceiling on fees that can be charged, the arrangement is recognized as time-and-materials are incurred unless calculated fees are estimated to exceed the ceiling, in which case revenue recognition is based on the proportional performance method. Revenues generated from staff augmentation, support and maintenance contracts are recognized ratably over the arrangement’s term.

 

Our project delivery and business unit finance personnel continually review labor incurred and estimated total labor, which may result in revisions to the amount of recognized revenue under an arrangement. Certain arrangements provide for revenue to be generated based upon the achievement of certain performance standards. Revenue related to achieving such performance standards is recognized when such standards are achieved. Revenue related to the achievement of performance standards was immaterial for any of the periods presented in our consolidated financial statements.

 

Revenues from contracts with multiple elements are allocated based on the fair value of the elements. For these arrangements, we evaluate all deliverables in each arrangement to determine whether they represent separate units of accounting. Fair value is determined based on reliable evidence of the fair value of each deliverable. When fair value exists for the undelivered unit but not for the delivered unit, the residual method is used. Revenues are recognized in accordance with generally accepted accounting principles for the separate elements when the services have value on a stand-alone basis, when fair value of the separate elements exists and, in arrangements that include a general right of refund relative to the delivered element, performance of the undelivered element is considered probable and substantially under our control. This evaluation is performed at the inception of the arrangement and as each item in the arrangement is delivered. The evaluation involves significant judgments regarding the nature of the services and deliverables being provided, whether these services and deliverables can reasonably be divided into the separate units of accounting and the fair value of the separate elements determined.

 

Revenues related to our digital marketing media sales are recorded as the net amount of our gross billings less pass-through expenses charged to a client. In most cases, the amount that is billed to clients significantly exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses such as production and media costs. We are required to assess whether the agency or the third-party supplier is the primary obligor. We evaluate the terms of our client agreements as part of this assessment. In addition, we give appropriate consideration to other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor. Because we broadly operate as an advertising agency based on our primary

lines of business and given the industry practice to generally record revenue on a net versus gross basis, we believe that there must be strong evidence in place to overcome the presumption of net revenue accounting. Accordingly, we record revenue net of pass-through charges when we believe the key indicators of the business suggest we generally act as an agent on behalf of our clients in our primary lines of business. In those businesses where the key indicators suggest we act as a principal, we record the gross amount billed to the client as revenue.

 

Our marketing services, including access to our BridgeTrack software application, help our clients optimize their cross platform marketing effectively to track behavior and improve conversion rates through data-driven analysis. These services are provided in exchange for monthly retainer fees and license fees and are recognized as the monthly services are provided.

 

Revenue from offline printing and production services are recognized at the time title of the related items transfers to our customers, provided that all other revenue recognition criteria have been met.

 

If we do not accurately estimate the resources required or the scope of work to be performed for an arrangement or we do not manage the project properly within the planned time period, then we may recognize a loss on the arrangement. Provisions for estimated losses on uncompleted arrangements are made on an arrangement-by-arrangement basis and are recognized in the period in which such losses are identified. We have committed unanticipated additional resources to complete projects in the past, which has resulted in lower than anticipated profitability or losses on those arrangements. We expect that we will experience similar situations in the future. In addition, we may fix the price for some projects at an early stage of the process, which could result in a fixed-price that is too low and, therefore, a corrected estimation could adversely affect our business, financial condition and results of operations.

 

We recognize revenue for services when collection from the client is reasonably assured, and our fees are fixed or determinable, provided that all other revenue recognition criteria have been met. We establish billing terms at the time project deliverables and milestones are agreed. Our normal payment terms are thirty days from invoice date. Revenues recognized in excess of the amounts invoiced to clients are classified as unbilled revenues. Amounts invoiced to clients in excess of revenue recognized are classified as deferred revenues. Our project delivery and business unit finance personnel continually monitor timely payments from our clients and assess any collection issues.

 

Valuation and Impairment of Investments and/or Marketable Securities and Other Financial Assets

 

Assessing whether a decline in value in available-for-sale securities is other-than-temporary requires us to assess whether we intend to sell the security and if it would be more likely than not that we would be required to sell the available-for-sale security before its cost can be recovered, for reasons such as contractual obligations or working capital needs. Also, we have to assess whether cost of the available-for-sale security will be recovered regardless of intent and/or requirement to sell. This assessment requires us to evaluate, among other factors: the duration of the period that, and extent to which, the fair value is less than cost basis, the financial health of the business outlook for the issuer, including industry and sector performance, operational and financing cash flow factors and overall market conditions and trends. Assessing the above factors involves inherent uncertainty. Accordingly, declines in fair value, if recorded, could be materially different from the actual market performance of marketable securities in our portfolio, if, among other things, relevant information related to our marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment.

 

Effective January 1, 2008 we adopted new accounting standard stating that valuation techniques used to measure fair value under the current fair value standard must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

 

 

Accounting for Income Taxes

 

We record income taxes under the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carry forwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences, operating losses, or tax credit carry forwards are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We are required to establish a valuation allowance based on whether realization of deferred tax assets are considered to be more likely than not. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. We reinvest certain earnings of foreign operations indefinitely and, accordingly, we do not provide for income taxes that could result from the remittance of such earnings. When we can no longer assert indefinite reinvestment of foreign earnings we must provide for income taxes on these amounts.

 

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

 

We record interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2009 and 2008, interest and penalties accrued were approximately $1.6 million and $1.1 million, respectively.

 

Valuation of Long-Lived Assets and Goodwill

 

Long-lived assets are reviewed for impairment on a regular basis for the existence of facts and circumstances that may suggest that the carrying amount of an asset, or group of assets, may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated undiscounted future cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value. Determining the fair value of long-lived assets includes significant judgment by management, and different judgments could yield different results. We assess the useful lives and possible impairment of long - lived assets when an event occurs that may trigger such a review. Factors we consider important which could trigger an impairment review include, but are not limited to:

 

 

Determining whether a triggering event has occurred includes significant judgment from management.

 

The goodwill impairment test requires us to identify reporting units and to determine estimates of the fair value of our reporting units as of the date we test for impairment. Assets and liabilities, including goodwill, were allocated to reporting units based on factors such as specific identification and percentage of revenue. To conduct a goodwill impairment test, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value. Management estimates the fair value of the Company’s reporting units using the income approach, via discounted cash flow valuation models which include, but are not limited to, assumptions such as a “risk-free” rate of return on an investment, the weighted average cost of capital of a market participant, and future revenue, operating margin, working capital and capital expenditure trends. We performed the annual assessment of our goodwill during the fourth quarter of 2009 and determined that the estimated fair values of our reporting units significantly exceed their carrying value and, therefore, goodwill was not impaired. We complete goodwill impairment analyses at least annually, or more frequently when events and circumstances, like the ones mentioned above, occur indicating that the recorded goodwill may be impaired. Determining fair value of reporting units and goodwill includes significant judgment by management and different judgments could yield different results.

 

Costs Incurred to Develop Computer Software for Internal Use

 

The Company capitalizes the costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation and testing. Costs incurred for internal use computer software during the preliminary project stage and through post-implementation stages of internal use computer software are expensed as incurred. The capitalization and ongoing assessment of recoverability of development cost requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life. Capitalized software is included in property and equipment and is depreciated over its estimated life, which is typically three years.

 

Restructuring and Other Related Charges

 

From time to time we establish exit plans for restructuring activities which require that we make estimates as to the nature, timing and amount of the exit costs that we specifically identified. The consolidation of facilities requires us to make estimates, which included contractual rental commitments or lease buy-outs for office space vacated and related costs, offset by estimated sub-lease income. We review on a regular basis our sub-lease assumptions and lease buy-out assumptions. These estimates include lease buy-out costs, anticipated sublease rates, other terms and conditions in sub-lease contracts, and the timing of these sub-lease arrangements. If the rental markets continue to change, our lease buy-out, sub-lease and space requirement assumptions may not be accurate and it is possible that changes in these estimates could materially affect our financial condition and results of operations. Our sub-lease income estimates are sensitive to the level of sub-lease rent anticipated and the timing of sub-lease commencement. If the estimated sub-lease dates were to be delayed by six months, based on our current estimates, we would potentially have to recognize an additional $0.3 million in our consolidated statement of operations for restructuring and other related charges. A 10% reduction in our sublease rate would have resulted in additional charges of approximately $0.1 million as of the end of 2009.

 

Contingent Liabilities

 

We have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We are subject to various legal claims totaling approximately $3.1 million and various administrative audits, each of which have arisen in the ordinary course of our business. We have an accrual at December 31, 2009 of approximately $0.5 million related to certain of these items. We intend to defend these matters vigorously, although the ultimate outcome of these items is uncertain and the potential loss, if any, may be significantly higher or lower than the amounts we have accrued.

Accounting for Acquisitions

 

We account for acquisitions completed after December 31, 2008 using the acquisition method. The acquisition method requires us to recognize and measure identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquired entity. Our accounting for acquisitions involves significant judgments and estimates primarily, but not limited to: the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenues and cash flows, the fair value of other acquired assets and assumed liabilities, including potential contingencies, and the useful lives and, as applicable, the reporting unit, of the assets. The impact of prior or future acquisitions on our financial position or results of operations may be materially impacted by the change in or initial selection of assumptions and estimates.

 

Acquisitions completed prior to January 1, 2009 are accounted for using the purchase method. The purchase method and acquisition method are similar in many aspects, though the two most significant changes, as it pertains to our financial statements, are how the purchase method accounts for contingent consideration and transaction costs. Under the purchase method, contingent consideration is only recorded in the period in which the consideration is earned as goodwill in that period. Under the acquisition method we are required to estimate the fair value of contingent consideration as an assumed liability on the acquisition date by estimating the amount of the consideration and probability of the contingencies being met. This estimate is recorded as goodwill on the acquisition date and its value is assessed at each reporting date. Any subsequent change to the estimated fair value is reflected in earnings and not in goodwill. Under the purchase method we were able to record transaction costs related to the completion of the acquisition as goodwill. Under the acquisition method we are required to expense these costs as they are incurred. These costs are reflected in “acquisition costs and other related charges” on our consolidated statement of operations.

 

Off-Balance Sheet Arrangements

 

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements.

Results of Operations

 

The following table sets forth items included in our consolidated statements of operations as a percentage of service revenues of:

 

 

Years Ended December 31, 2009 and 2008

 

Service Revenues

 

Our service revenues for 2009 and 2008 were as follows:

 

 

Our service revenues decreased $23.5 million, or 4%, in U.S. dollars in 2009 compared to 2008. Service revenues were $670.1 million in constant currency terms, a 1% increase compared to 2008. The increase in constant currency terms was due to incremental revenues from our Nitro and DCG acquisitions, offset by pricing pressures and, to a lesser extent, a decrease in demand for our services, primarily in our North America segment (see Results by Operating Segment).

The following table compares our 2009 service revenues by industry sector to 2008 (in millions, except percentages):

 

 

The following table compares our 2009 service revenues by industry sector, in constant currency terms, to the same period in 2008 (in millions, except percentages):

 

 

The increases in the Financial Services and Consumer and Travel sectors were primarily due to incremental revenues from our DCG and Nitro acquisitions, respectively. The increase in the Government, Health and Education sector was due to an increase in demand in the U.S. in our Government Services segment, offset by pricing pressures. The decreases in other sector revenues were due to pricing pressures, and to a lesser extent, a decrease in demand for our services, primarily in our North America segment.

 

Utilization represents the percentage of our project personnel’s time spent on billable client work. Our 2009 utilization was 77%, a one point decrease from our 2008 utilization of 78%. Our 2009 average project personnel peoplecount remained relatively flat compared to 2008. Contractors and consultant usage, measured by expense, increased 4% compared to 2008. In constant currency terms, we increased our use of contractors and consultants by 8% in 2009 compared to 2008 as our need for contractors and consultants in specialized areas for certain client contracts increased.

 

Our five largest customers, in the aggregate, accounted for 21% of our service revenues in 2009 compared to 24% in 2008. No customer accounted for more than 10% of our service revenues for 2009 and 2008. Recurring revenues are revenue contracts with the duration equal to or greater than twelve months in which the client has committed spending levels, which are cancelable, to us or has chosen us as an exclusive provider of certain services. Our recurring revenues were 44% and 43% for 2009 and 2008, respectively.

Project Personnel Expenses

 

Project personnel expenses consist principally of salaries and employee benefits for personnel dedicated to client projects, independent contractors and direct expenses incurred to complete projects that were not reimbursed by the client. These expenses represent the most significant costs we incur in providing our services.

 

 

Project personnel expenses remained flat in 2009 compared to 2008. Excluding a decrease of $24.6 million in expenses due to currency fluctuations, project personnel expenses, in constant currency terms, increased $24.9 million, or 6%. This increase was due to multiple factors. Compensation expense increased $11.7 million, though average personnel peoplecount remained constant in 2009 compared to 2008. The reason for the increase is due to an increase in non-India project personnel, whose compensation costs are higher than our India project personnel. Average peoplecount in total remained constant due to a decrease in India project personnel as part of our 2009 restructure event (see Restructuring and Other Related Charges). Other increases were: (i) contractor and consultant expense increased $5.1 million as our need for contractors and consultants in specialized areas for certain client contracts increased, (ii) stock-based compensation expense increased $1.5 million due to an increased number of grants made to project personnel compared to 2008, (iii) other project personnel expenses increased $0.9 million and (iv) project personnel expense increased $13.0 million as a result of the Nitro acquisition. These increases were offset by a decrease of $5.3 million in travel expenses and a $1.9 million decrease in equipment expenses. Travel expenses decreased due to a concerted effort to manage these costs and equipment expenses decreased due to non-recurring, project specific expenses incurred in 2008. Project personnel expenses increased as a percentage of revenue due to pricing pressures on our service revenues.

 

Selling and Marketing Expenses

 

Selling and marketing expenses consist principally of salaries, employee benefits and travel expenses of selling and marketing personnel, and promotional expenses.

 

 

Selling and marketing expenses decreased $4.3 million in 2009 compared to 2008. Selling and marketing compensation expenses decreased $5.7 million and stock-based compensation expenses decreased $1.9 million, primarily due to a decrease in selling and marketing peoplecount. Other selling and marketing expenses also decreased $0.5 million. These decreases were offset by an increase in consultant usage and related travel expenses of $3.0 million and incremental expenses of $0.8 million due to the Nitro acquisition.

General and Administrative Expenses

 

General and administrative expenses relate principally to salaries and employee benefits associated with our management, legal, finance, information technology, hiring, training and administrative groups, and depreciation and occupancy expenses.

 

 

General and administrative expenses decreased $5.2 million in 2009 compared to 2008. Excluding a decrease of $5.7 million of expenses due to currency fluctuations, general and administrative expense, in constant currency terms, increased $0.5 million. The increase was due to: (i) incremental expense of $8.3 million due to the Nitro acquisition and (ii) $2.8 million less in currency transaction gains as we recorded a $0.3 million currency loss in 2009 compared to a $2.5 million gain in 2008. These increase were offset by: (i) a $5.0 million decrease in compensation expenses, (ii) a $3.1 million decrease, in the aggregate, of professional fees, employment agency fees and travel expenses as we made a concerted effort to manage these costs, (iii) a decrease of $1.6 million in other general and administrative expenses primarily due to a $0.9 million reimbursement of expenses related to our stock-option restatement in 2007 and a $0.8 million decrease in realized and unrealized losses on hedge positions in 2009 compared to 2008, and (iv) a decrease of $0.8 million in stock-based compensation expense. General and administrative expenses decreased as a percentage of revenue as a result of the foregoing.

 

Restructuring and Other Related Charges

 

2009 — Restructure Event

 

In February 2009, in response to the impact of current global economic conditions on our demand environment, we implemented a restructuring plan to reduce our peoplecount. As a result, 392 employees were terminated in connection with this restructuring plan and we recorded restructuring charges of $2.0 million. These charges consisted of $1.9 million in employee cash severance payments and the remaining charges consisted of outplacement assistance fees and other associated costs. Of the $2.0 million restructuring charge, $1.8 million was recorded in our North America operating segment. The remaining charges were not recorded to a segment because they impacted areas of the business that supported the business units and are reflected in the reconciling items section in Results by Operating Segment.

 

2001, 2002, 2003 — Restructure Events

 

As a result of the decline in the demand for advanced technology consulting services that began in 2000, we restructured our workforce and operations in 2001, 2002 and 2003. These charges were not recorded to a segment because they impacted areas of the business that supported the business units, but are included in reconciling items section in Results by Operating Segment. The restructuring consisted of ceasing operations and consolidating or closing excess offices. Estimated costs for the consolidation of facilities included contractual rental commitments or lease buy-outs for office space vacated and related costs, offset by estimated sublease income.

 

We recorded net restructuring and other related charges of approximately $2.6 million in 2009 principally as a result of a change in estimated sub-lease income associated with two previously restructured leases, the last of which ends in 2011.

 

We recorded net restructuring and other related charges of $0.2 million in 2008 principally related to two items. The first involved recording a restructuring charge associated with a change of estimated operating expenses to be incurred in connection with three previously restructured leases. Based on this change of estimate, we estimated that future operating expenses would exceed its prior estimate by approximately $0.7 million. The second item was the result of a restructuring benefit of approximately $0.5 million in the first half of 2008 associated with the re-occupation of approximately 3,900 square feet of previously restructured space in our Munich, Germany

office. The restructuring accrual for this space was initially established in 2002 and the contractual lease term for the office space ends on December 31, 2011. Since 2002 and up until the second half of 2008, the demand for advanced technology consulting services had improved; therefore we decided to re-occupy this previously restructured space. The $0.5 million has been recognized as operating rent expense over the remaining contractual lease term, which ends on December 31, 2011.

 

Amortization of Purchased Intangible Assets

 

During 2009 and 2008, amortization of intangible assets consisted primarily of non-compete and non-solicitation agreements, customer lists, an SAP license agreement and tradenames acquired in business combinations. Amortization expense related to intangible assets was $5.1 million in 2009 compared to $2.7 million in 2008. The increase in expense was due to the amortization of intangible assets acquired in the Nitro and DCG acquisitions.

 

Acquisition Costs and Other Related Charges

 

On January 1, 2009, we began accounting for business combinations using the acquisition method which requires acquisition related costs to be expensed as incurred. These costs include expenses associated with third-party professional services we incur related to our evaluation process of potential acquisition opportunities and other related charges. Though we may incur acquisition costs and other related charges it is not indicative that any transaction will be consummated. Acquisition costs and other related expenses were $3.0 million for 2009. The majority of these expenses were incurred as a result of the Nitro acquisition.

 

Interest and Other Income

 

Interest and other income is derived primarily from investments in U.S. government securities, corporate debt securities, auction rate securities, commercial paper, time deposits, and money market funds.

 

 

Interest and other income decreased $3.9 million in 2009 compared to 2008. The decrease was primarily due to a decrease of $2.9 million in interest income due to lower interest rates and a more conservative investment strategy in 2009 compared to 2008. Other income decreased $1.0 million due to a number of non-recurring items that were recorded as income during the three months ended March 31, 2008.

 

Provision for Income Taxes and Benefit From Release of Valuation Allowance

 

Our income tax provision is primarily related to foreign, federal alternative minimum tax and state tax obligations and, in 2009, the release of our valuation allowance on our U.S. deferred tax assets (discussed below). Our effective income tax rate for 2009 was (102%) as a result of releasing our valuation allowance on our U.S. deferred tax assets. The releases of the valuation allowance resulted in a benefit of $58.3 million. Excluding this benefit our income tax provision for 2009 was $13.7 million compared to $9.2 million for 2008. The increase, in both dollars and as a percentage of profit before income taxes, was due to the income tax effect of a royalty fee arrangement completed in the fourth quarter of 2009 between the Company and one of its foreign subsidiaries.

 

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. At December 31, 2008 all of our U.S. deferred tax assets had a full valuation allowance of $112.1 million. Based upon our operating results for the years immediately preceding and through December 31, 2009, as well as an assessment of our expected future results of operations in the U.S., at December 31, 2009, we determined that it had become more likely than not that we would realize a substantial portion of our deferred tax assets in the U.S. As a result, we released $58.3 million of valuation allowances on our U.S. deferred tax assets.

Certain state tax net operating loss carry forwards, as well as a portion of the net operating loss carry forwards relating to certain stock based compensation deductions remain with a valuation allowance recorded against them at December 31, 2009. We continue to believe that deferred tax assets in Germany, Canada, United Kingdom, Australia and India are more likely than not to be realized and, therefore, no valuation allowance has been recorded against these assets.

 

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction and as a result of acquisitions.

 

Results by Operating Segment

 

We have discrete financial data by operating segments available based on our method of internal reporting, which disaggregates our operations. Operating segments are defined as components of the Company for which separate financial information is available to manage resources and evaluate performance.

 

We do not allocate certain marketing and general and administrative expenses to our business unit segments because these activities are managed separately from the business units. We do allocate certain marketing and general and administrative expenses to our Government Services business unit as these activities are managed within that business unit. We allocated $1.8 million of our 2009 restructuring activities to our North America segment. We did not allocate the remaining $0.2 million in costs associated with our 2009 restructuring event, nor costs associated with our 2001, 2002 and 2003 restructuring events across all operating segments for internal measurement purposes, given that the substantial majority of these restructuring costs impacted areas of the business that supported the business units and, specifically in the case of our 2001, 2002 and 2003 events, were related to the initiative to reengineer general and administrative activities and the consolidation of facilities. Management does not allocate stock-based compensation to the segments for the review of results for the Chief Operating Decision Maker (“CODM”). Asset information by operating segment is not reported to, or reviewed by the CODM, and therefore, the Company has not disclosed asset information for each operating segment.

 

Beginning in 2009 we began reporting to the CODM certain general and administrative expenses that were previously allocable to North America and Europe operating expenses as centrally managed functions. As a result, $30.6 million and $10.3 million of general and administrative expenses for 2008 for North America and Europe, respectively, were reclassified to centrally managed functions to conform to the current presentation. In addition, $3.8 million of service revenues and $1.1 million of operating income for 2008 were reclassified from our Europe segment to the North America segment to conform to current presentation. In 2010, we realigned our internal reporting structure (see Item 1. “Business”). Beginning in 2010 we will report our results by operating segment, including prior periods, under the following segments: SapientNitro, Sapient Global Markets and Sapient Government Services.

 

The tables below present the service revenues and income before income taxes attributable to these operating segments for the periods presented.

 

 

 

 

 

 

 

Service Revenues by Operating Segments

 

Our North America service revenues decreased by 9% in U.S. dollars in 2009 compared to 2008. In constant currency terms, service revenues were $377.9 million, a decrease of 8% compared to 2008. The decrease in constant currency terms was primarily due to pricing pressures and, to a lesser extent, a decrease in demand in certain industry sectors, offset by incremental revenue from the Nitro acquisition.

 

The following table compares our 2009 North America service revenues by industry sector to 2008 (in millions, except percentages):

 

The following table compares our 2009 North America service revenues by industry sector, in constant currency terms, to 2008 (in millions, except percentages):

 

 

The increase in service revenues in the Consumer and Travel is primarily due to incremental revenue from the Nitro acquisition. The decrease in service revenues in the other industry sectors is due to pricing pressures and a decrease in demand for our services compared to 2008, offset by incremental service revenues in the Financial Services sector from the DCG acquisition.

 

North America utilization was 77% in 2009 compared to 75% in 2008. Average project personnel peoplecount decreased 1% compared to 2008, primarily due to the 2009 restructuring event. Contractors and consultant usage, measured by expense, increased 4% compared to 2008. In constant currency terms, we increased our use of contractors and consultants by 7% in 2009 compared to 2008 as our need for contractors and consultants in specialized areas for certain client contracts increased.

 

Our Europe service revenues increased by 3% in U.S. dollars in 2009 compared to 2008. In constant currency terms, service revenues were $256.5 million, an increase of 16% compared to 2008. The increase in constant currency terms was primarily due incremental revenue from the DCG and Nitro acquisitions, and to a lesser extent, an increase in demand for our services in certain industry sectors, offset by pricing pressures and, to a lesser extent, a decrease in demand in certain industry sectors compared to 2008.

 

The following table compares our 2009 Europe service revenues by industry sector to 2008 (in millions, except percentages):

 

The following table compares our 2009 Europe service revenues by industry sector, in constant currency terms, to 2008 (in millions, except percentages):

 

 

The increase in service revenues in the Consumer and Travel and Automotive sectors is due to incremental revenue from the Nitro acquisition. The increase in service revenues in the Energy Services and Government, Health and Education sectors is due to an increase in demand compared to 2008. The increase in the Financial Services sector is primarily due to incremental revenue from the DCG acquisition. The decrease in the Technology and Communications sector is due to pricing pressures and a decrease in demand compared to 2008.

 

Europe utilization was 78% in 2009 compared to 77% in 2008. Average project personnel peoplecount decreased 3% compared to 2008. Contractors and consultant usage, measured by expense, decreased 4% compared to 2008. In constant currency terms, though, we increased our use of contractors and consultants by 11% in 2009 compared to 2008 primarily due to a full year of DCG contractor and consultants expense in 2009.

 

Service revenues for our Government Services segment increased by 27% in 2009 compared to 2008 due to an increase in demand for our services in this sector. This increase in demand contributed to the 35% increase in average project personnel peoplecount in 2009 compared to 2008. Utilization increased to 91% in 2009 compared to 88% in 2008. Usage of contractors and consultants also increased 69% due to the increase in demand for our services in this sector.

 

Operating Income by Operating Segments

 

Our North America segment experienced a decrease in operating income of $28.6 million, or 22%, in 2009 compared to 2008. The decrease in operating income is due to pricing pressures on our service revenues in North America and a decrease in demand for our services. In addition, we had incremental costs associated with the 2009 restructure event.

 

Our Europe segment experienced an increase in operating income of $2.8 million, or 3%, in 2009 compared to 2008. The increase is due to our management of direct expenses as direct expenses increased $4.1 million compared to an increase of $6.9 million in service revenues.

 

Our Government Services sector experienced an increase in operating income of $1.5 million, or 17%, in 2009 compared to 2008. The increase is due to our management of direct expenses as direct expenses increased $6.0 million compared to an increase of $7.5 million in service revenues.

Years Ended December 31, 2008 and 2007

 

Service Revenues

 

Our service revenues for 2008 and 2007 were as follows:

 

 

Service revenues increased 23% in constant currency terms compared to the 21% increase in U.S. dollars. The decrease of 2 percentage points in constant currency terms is due to the appreciation of the U.S. dollar against the major foreign currencies, in which we earn revenue abroad, primarily in the second half of 2008. The year-over-year increase in our service revenues is primarily due to an increase in demand for our services during 2008 from clients across the majority of key sectors, and to a lesser extent, incremental service revenues from our August 6, 2008 acquisition of DCG, which operates in the Financial Services sector.

 

The following table compares our 2008 service revenues by industry sector to 2008 (in millions, except percentages):

 

 

The increased demand supported our average project personnel peoplecount increase of 14% for the twelve 2008 compared to 2007. Average utilization for 2008 was 78%, a five point increase compared to 73%, the average utilization for 2007. Our recurring revenues decreased to 43% of our service revenues for, 2008 compared to 44% in 2007. Recurring revenues are revenue contracts with duration equal to or greater than twelve months in which the client has committed spending levels, which are cancelable, to us or have chosen us as an exclusive provider of certain services.

 

In 2007, our five largest clients accounted for approximately 26% of our revenues in the aggregate and one client, Sprint Nextel, accounted for 10% of such revenues.

 

Project Personnel Expenses