InformationWeek

May 1, 2000

Taking $tock:
Sapient Shrugs Off Market Flip-Flops
Sapient filed a strong first-quarter earnings report and is on track for a healthy boost in revenue this year

By William Schaff

William Schaff espite the recent gyrations of the tech-stock sector and the negative mind-set that has resulted, E-commerce is far from finished. A case in point is Sapient Corp. (SAPE--Nasdaq), a leader in Internet consulting and E-business offerings, which filed a positive earnings report last week. As more business initiatives include a Web-based strategy, Sapient has become the vendor of choice for the increasingly complex issues associated with E-business strategy and implementation.

The company breaks down its services into five main groups: digital business, creative, technology, experience modeling, and integrated engagement leadership. By combining technical and business backgrounds, Sapient's consultants can help create new Web business practices from old ones. The creative group works closely with other groups to create more-effective Web branding and business models.

The next step, of course, is to implement these strategies. Sapient's experience-modeling group helps clients better understand the online and offline behavior patterns of their customers, partners, and suppliers, and it can create a framework for more-effective communications with customers. The integrated engagement leadership group, aided by the technology group, helps the client execute large-scale, multidisciplinary Internet projects and lends a hand with project management.

What is Sapient's major risk? Labor, pure and simple. Given the company's growth targets, it will not only have to maintain competitive hiring practices for talent, but will also need to work extensively on training and retention. Because Sapient works on a fixed-price, fixed-time service model, the financial impact on the company could be severe if it can't hold onto the best IT professionals.

In its first quarter, ended March 31, Sapient generated revenue, on an annualized basis, of $232,000 per professional, up more than 14% over the previous quarter's figure of $203,000. The jump reflects the company's increased involvement in high-end strategy work. Billable head count rose in the quarter to 1,786 from 1,666. Utilization rates stayed at 77%, about the same as last quarter and within the company's range of 75% to 80%. Turnover was less than 15%, down slightly from 16% last quarter. This is the company's toughest challenge--keeping the turnover rate below 15%.

Sapient reported strong first-quarter cash earnings per share of 19 cents, up 53% year over year, on revenue of $100.3 million. Revenue was up 73.6% year over year from $57.8 million, and up 22.3% from $81.8 million in the previous quarter. Sales and marketing expenses were 7.9% of revenue, up from 6.9% in the same quarter last year. It has no long-term debt and almost $200 million in cash and equivalents. Average project size is about $5 million.

Sapient is expanding internationally; it has more than 200 people in Europe and plans to open offices in Asia and South America. It expects to increase international revenue to about 10% of total revenue by year's end.

Despite some investors' fear that the decline of new startups may have a negative impact on revenue, more than 80% of Sapient's revenue was generated by multinational companies. Gross margins increased to 51.6%, up from 51% in the same quarter last year. Operating margins declined slightly to 18.6% from 18.8% year over year. Wall Street analysts' consensus earnings per share for 2000 and 2001 are 83 cents and $1.16, respectively. I project Sapient's revenue for 2000 will be $445 million to $450 million, up from $277 million in 1999. There are 66.5 million shares outstanding, resulting in an equity market capitalization of more than $5 billion at the current share price of about $79.

Given the market's volatility, it's no surprise that Sapient's stock price jumped 26.2% from $60 after the earnings announcement April 24. But it's still down nearly 50% from its 52-week high of $151 on Jan. 3. The company is increasing its earnings per share at 40% to 45% per year, but it still trades at a lofty level of 65 times 2001 earnings-per-share estimates.

It's particularly interesting that Paine Webber analyst Andrew Burns revised his price target for Sapient from $130 to $135 down to $95, based on a shift from a multiple-of-revenue pricing model to a more traditional 10-year discounted cash-flow model. Maybe Wall Street is regaining its sanity after all.

William Schaff is chief investment officer at Bay Isle Financial Corp., which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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