| SAPIENT CORP Item 1A Risk Factors Risk Factors The following important factors, among others, could cause our actual business and financial 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 business, technology and other consulting services |
| The market for our consulting services and the technologies used in our solutions historically has tended to fluctuate in tandem with economic cycles — particularly those in the United States and the United Kingdom, where we earn the majority of our revenues |
| During economic cycles when many companies are experiencing financial difficulties or uncertainty, clients and potential clients may cancel or delay spending on technology and other business initiatives |
| Military actions in Iraq 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 |
| Although economic conditions in our industry have been improving in recent years, a sudden or gradual downturn in these conditions may cause large companies to cancel or delay their consulting initiatives |
| Further, if the rate of cancellations or delays significantly increases, our business, financial condition and results of operations could be materially and adversely impacted |
| Our market is 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, and clients’ internal information systems departments |
| Other competitors include interactive and traditional advertising agencies and, to a lesser extent, boutique consulting firms that maintain specialized skills and/or are geography based |
| With respect to 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 |
| 7 _________________________________________________________________ [59]Table of Contents Our international operations and Global Distributed Delivery model subject us to increased risk |
| We currently have offices in the United Kingdom, Germany, India and Canada |
| 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: • economic recessions in foreign countries; • fluctuations in currency exchange rates or impositions of restrictive currency controls; • political instability, war or military conflict; • changes in regulatory requirements; • complexities and costs in effectively managing multi-national operations and associated internal controls and procedures; • significant changes in immigration policies or difficulties in obtaining required immigration approvals for international assignments; • restrictions imposed on the import and export of technologies in countries where we operate; and • reduced protection for intellectual property in some countries |
| In particular, our GDD model depends heavily on our offices in New Delhi and Bangalore, 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 successfully utilize GDD, 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 as those in other countries where we operate |
| Any failures of these systems 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 |
| 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 business, marketing and technology consulting services has further increased the need for employees with specialized skills or significant experience in business, marketing and technology consulting, particularly at senior levels |
| We have been expanding our operations in all locations, 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 desired 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 segment revenues were dlra114 million for the year ended December 31, 2005 |
| Doing business in these foreign currencies exposes us to foreign currency risks in numerous areas, including revenues, purchases, payroll and investments |
| We also have a significant amount of 8 _________________________________________________________________ [60]Table of Contents foreign currency 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 US 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 frequently incur a significant portion of our project costs in Indian rupees and earn revenue from our clients in other currencies |
| Currently, we do not hold any derivative contracts that hedge our foreign currency risk, but we may adopt such strategies in the future |
| Our cash position includes 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 |
| We have transferred, and will continue to transfer, cash from those subsidiaries to the parent company, and to other international subsidiaries, when it is cost effective to do so |
| However, any fluctuations in foreign currency exchange rates could materially impact the availability and size of these funds for repatriation or transfer |
| 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 personnel, rent and depreciation, 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: • the contractual terms and timing of completion of projects, including achievement of certain business results; • any delays incurred in connection with projects; • the adequacy of provisions for losses and bad debts; • the accuracy of our estimates of resources required to complete ongoing projects; • loss of key highly skilled personnel necessary to complete projects; and • general economic conditions |
| We may lose money if we do not accurately estimate the costs of fixed-price engagements |
| Our failure to accurately estimate 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, fixed-time 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 increasingly 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 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 process, which could result in a fixed price that is too low and, therefore, this incorrect estimation could adversely affect our business, financial condition and results of operations |
| 9 _________________________________________________________________ [61]Table of Contents 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 by three factors, primarily: (i) the prices for our services; (ii) our consultants’ 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 the price of our securities 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, we may lose revenue or 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 |
| Some 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 definition of “recurring revenue” in 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 damages caused by unauthorized disclosures of confidential information or by our failure to remedy system failures |
| We frequently receive confidential information from our clients, including confidential customer data, that we use to develop solutions |
| If any person, including a Company employee, 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 breaches of confidentiality and defects in the applications or systems we provide, and carry insurance coverage which mitigates these liabilities in certain instances, we cannot be assured that these limitations and insurance coverages will be applicable and enforceable in all cases |
| Even if these limitations and insurance coverages are found to be applicable and enforceable, our liability to our clients for these types of claims could be material in amount and affect our business, financial condition and results of operations |
| Additionally, such claims may harm our reputation and cause us to lose clients |
| 10 _________________________________________________________________ [62]Table of Contents 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 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 rights |
| We enter into confidentiality agreements with our employees, subcontractors, vendors, consultants 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 intellectual property rights |
| Our business model focuses heavily on delivering measurable business results for our clients, and increasingly we are aligning our interests with our client’s interests by putting a portion of our fees at risk, dependent on our client’s attainment of the business value we promised |
| In 2005, we recognized approximately dlra400 thousand of revenue by achieving previously agreed upon measurable business results |
| Our inability to deliver the business value that we have promised on a project could materially affect the profitability of that project, because we typically will incur the same level of project costs regardless of whether the promised business value is attained |
| We could also experience delays in revenue recognition or payment because the measurement of business value is often complex and may involve a verification process between us and our client |
| As a result, our failure to deliver the business value that we promise to our clients could materially affect our business, financial condition and results of operations |
| The trading price of our common stock has been subject to wide fluctuations |
| Our trading price could continue to be subject to wide fluctuations in response to: • quarterly variations in operating results and achievement of key business metrics by us or our competitors; • changes in operating results estimates by securities analysts; • any differences between our reported results and securities analysts’ published or unpublished expectations; • announcements of new contracts or service offerings made by us or our competitors; • announcements of acquisitions or joint ventures made by us or our competitors; and • general economic or stock market conditions |
| 11 _________________________________________________________________ [63]Table of Contents 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 co-Chairmen and co-CEOs have significant voting power and may effectively control the outcome of any stockholder vote |
| Jerry A Greenberg and J Stuart Moore, our Co-Chairmen of the Board of Directors and Co-Chief Executive Officers, own approximately 34prca of our outstanding common stock in the aggregate |
| 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, including Messrs |
| Greenberg and Moore |
| Our employment arrangements with Messrs |
| Greenberg and Moore and with our other 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 |
| Furthermore, for those employees whom we involuntarily terminated in connection with our restructuring actions, we have waived the non-competition clause of their agreements in exchange for releases of claims |
| We granted these waivers only in connection with the restructuring actions, and our general practice is not to waive the non-competition obligations of departing employees |
| We may be unable to achieve anticipated benefits from acquisitions and joint ventures |
| The anticipated benefits from any acquisitions or joint ventures 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 |
| If we do not effectively improve our operational and financial processes and systems, our ability to achieve efficiencies and cost savings may be delayed and our results of operations may be adversely impacted |
| In 2005, we implemented upgrades to our financial and human resource software systems to improve our organizational processes and efficiency, and accommodate our anticipated growth in 2006 and beyond |
| Additionally, to streamline our G&A infrastructure and costs as a percentage of revenue, and ensure that the Company can appropriately scale as our business expands, we are redesigning many operational processes and transitioning certain internal, non-billable roles to our India office |
| The activities principally relate to finance, human resources and certain IT functions, and will result in the elimination of certain G&A jobs in the United States, United Kingdom, Germany and Canada |
| If we do not timely, efficiently and effectively upgrade or 12 _________________________________________________________________ [64]Table of Contents replace systems, redesign processes and implement the preceding role transitions as our business requires, we may be unable to support our growth effectively or realize cost savings as quickly as expected and maintain effective internal controls over financial reporting |
| Additionally, the quality of our services may decline pending the successful completion of these initiatives |
| Consequently, our results of operations may be adversely impacted |
| 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 |
| In our Annual Report on Form 10-K for the year ended December 31, 2004 and in our quarterly reports on Form 10-Q for the first, second and third fiscal quarters of 2005, management reported that a material weakness existed in the Company’s internal control over financial reporting related to the Company’s lack of a sufficient complement of senior financial accounting and reporting personnel possessing competencies commensurate with the company’s financial reporting requirements |
| As described more fully in Item 9A of this Annual Report, this material weakness has been remediated as of December 31, 2005 |
| We may from time to time 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 |
| Our corporate governance provisions may deter a financially attractive takeover attempt |
| Provisions of our charter and by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including a transaction in which stockholders would receive a premium for their shares |
| These provisions include the following: • our Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences of and issue shares of preferred stock; • any action that may be taken by stockholders must be taken at an annual or special meeting and may not be taken by written consent; • stockholders must comply with advance notice requirements before raising a matter at a meeting of stockholders or nominating a director for election; and • a Chairman of the Board or a Chief Executive Officer are the only persons who may call a special meeting of stockholders |
| Provisions of Delaware law may also discourage, delay or prevent someone from acquiring us or merging with us |