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Sapient (NASDAQ:SAPE)

Q4 2012 Earnings Call

February 12, 2013 4:30 pm ET

Executives

Dean Ridlon - Director of Investor Relations

Alan J. Herrick - Co-Chairman of the Board, Chief Executive Officer and President

Joseph S. Tibbetts - Chief Financial Officer, Senior Vice President and Managing Director of Asia Pacific

Analysts

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

George A. Price - BB&T Capital Markets, Research Division

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Leo Kulp - Citigroup Inc, Research Division

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Thomas B. Maher - Lord, Abbett & Co. LLC

Operator

Good day, ladies and gentlemen, and welcome to the Sapient Corporation Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dean Ridlon. Sir, you may begin.

Dean Ridlon

Thank you, Kate, and thank you all for joining us today. I'm Dean Ridlon, Sapient's Director of Investor Relations. First, I'd like to apologize for the lateness in having our release cross the wire. We're having some technical issues, but clearly, we have those resolved, and the release is now -- on this quarter's results it's currently available in the Investor section of our website, www.sapient.com.

Before we begin, I would like to remind everyone that some of the matters discussed during today's call are considered to be forward-looking statements as defined by the U.S. Securities and Exchange Commission. These forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ from those expressed or implied by such statements. We have described some of these known risks and uncertainties in today's press release and in our annual and quarterly SEC filings, which we strongly urge you to read. The forward-looking statements included in this call represent the company's views on February 12, 2013. Sapient disclaims any obligation to update these statements to reflect future events or circumstances.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. The most directly comparable financial measures calculated in accordance with GAAP, and a reconciliation of those GAAP measures to those non-GAAP measures, are contained in the press release announcing this quarter's results.

I would now like to turn the call over to our CEO, Alan Herrick.

Alan J. Herrick

Great. Thanks, Dean, and thanks, everybody, for joining. We'll spend some time, go through some highlights for the quarter, some highlights for the year, give you a quick acquisition update, and then move into outlook and guidance before I hand it over to Joe to walk you through the financials.

So let me start on the highlights for Q4: Service revenues were $293.2 million, up 12% year-over-year and 11% in constant currency, up 2% versus Q3 '12 and 1% in constant currency; non-GAAP income from operations, $42.4 million, which was a 14.5% non-GAAP operating margin in Q4; GAAP income from operations, $31 million or 10.5%; non-GAAP diluted income per share was $0.20; GAAP diluted income per share for the quarter was $0.14; and cash from operations was a positive $64 million.

Now turning to segment performance. In the quarter, SapientNitro represented 68% of our revenues, or $200.2 million. Revenues were up 9% year-over-year, 9% in constant currency, and they were up 2% sequentially or 2% also on constant currency.

Global Markets represented 28% of our service revenues or $80.8 million, and revenues were up 21% year-over-year, the same in constant currency. They're up 2% sequentially or up 1% sequentially in constant currency.

And then Government Services represented 4% of service revenues in Q4, or $12.2 million, and service revenues were up 4% year-over-year and were down 3% sequentially and the same in constant currency.

A couple quick notes on Q4. Turnover was 12% in Q4 compared to 17.4% a year ago, so a strong improvement year-over-year, both for the quarter and the full year, and actually much better than our expectations. Superstorm Sandy did hit the quarter for about 30 basis points, as projected on the last call.

Now to move to an overview of the full year. SapientNitro represented 69% of service revenues in 2012 at $771.9 million in revenue. Revenues were up 13% year-over-year and 13% in constant currency.

Global Markets represented 27% of service revenues in Q4 or $298.1 million. And service revenues were up 5% year-over-year, 6% in constant currency.

Government Services represented 4% of our service revenues in Q4 or $51 million. And service revenues were down 3% year-over-year. And cash flow from operations for the year was $108 million.

Take a look at 2012 overall. We delivered 9.8% top line growth in what turned out to be a fairly choppy market environment overall. Voluntary turnover for the year wound up at 14.4%, which, as I mentioned is actually better than our targeted range of 15% to 17% voluntary turnover. And if you have followed us for a number of years, this is a place that we've been very focused over the last few years, so we're very pleased to see that result.

Global Markets entered 2012 with declining revenue due to the pressure from iBanks, and exited the year with real strength. Now if you look at Q1 2012, we entered Global Markets with a $66 million quarter. We're exiting the year with an $80 million quarter delivered in Q4. So the Global Markets team just did a fantastic job through the year in getting that business in the right position to grow.

SapientNitro delivered 13% growth while winning tremendous recognition in the marketplace for an unmatched combination of strength and creative in technology. I'll talk a little bit more about that in a minute. And SapientNitro made key investments in Asia to broaden our client relationships and our platform for growth. We also made key acquisitions. Although small in earnings impact today, they will serve us well over time as we broaden the value we provide to our clients. And it's been a year where we made a lot of progress overall that we believe will enhance our position with our clients and aid our earnings growth over the next few years.

So if you -- I'm just going to just share with you a few highlights from each business unit, looking back on the progress we've had for the year. So Global Markets won a Best Industry Infrastructure Initiative Award at the Banking Technology Awards, really for our work around the data warehouse with the ECB. That's now gone live with more than 35 different companies onboard. Global Markets also developed the Clearing and Connectivity Standard for ISDA, which has -- Clearing Connectivity Standard that ISDA has now just announced support for, and that's really International Swaps and Derivatives Association. We talked about this before. But this really allows Sapient Global Markets and ISDA to work together to expand services to include additional products, participants and geographies over the next year. And we also saw a great success in the publishing of CROSSINGS, which is the magazine GM publishes, that continues to gain recognition and readership, and it's really focused on the critical issues to both capital markets and commodity markets globally, and overall, really help position our business as a thought leader in the industry and really helping kind of capital and commodity markets engineer themselves and work better as we move into kind of the new normal of the capital markets world.

If I switch overall to SapientNitro highlights for the year, at the top level, just tremendous progress, top to bottom. We've added to our creative capabilities and strength overall. We've added 20 senior creative leaders to the company in 2012. We received 155 creative awards globally during 2012. That number is up from 97 in 2011. So I can't say enough about the progress in matching our creative leadership to our technology leadership in the marketplace. We also earned the highest score in Gartner's Magic Quadrant for digital marketing agencies. We were ranked as a leader in the Forrester Wave of Global Commerce Providers. We were ranked as a leader in the Forrester Wave of U.S. Digital Agencies -- Mobile Marketing Strategy and Execution. We were just recently named an agency to watch by Ad Age. And in the U.K., we were named Digital Agency of the Year 2012 at the DADI's. So by all measures, we've made just tremendous progress in 2012, and look forward to converting that progress into earnings growth as we move forward.

And just a couple comments on the acquisitions. You saw us announce 2 acquisitions in the quarter in -- or early here in Q1, I guess, early in January. And as you know, our strategy continues to be the same, which is to add capabilities that will really help us strategically augment our value, our services that we can offer to our clients. So we did 2 things early here in Q1. The first is (m)PHASIZE. (m)PHASIZE is a leader in cross-channel analytics, portfolio modeling. And I guess the simplest way to explain it is (m)PHASIZE is really focused on return on investment, of how you actually spend your marketing mix, whether it's around television, print, online, mobile, but how do you look at the effectiveness and the cross-channel impacts of changing the way you spend across your marketing mix, which is a key value proposition to the CMO relationships that we have with clients. Their existing clients include, to mention a couple that we can mention, J&J and AVON. The second acquisition is iThink, an agency located in Brazil, which really marks our entry into Latin America. And you heard us talk about the importance of the BRIC footprint for us over time, and this now really gives us a position in all 4 of the BRIC markets, and gives us the ability to expand our client relationships into Brazil. And Brazil, particularly important also in the short term, next 3 or 4 years here, where you've got clients focused really on the 2014 World Cup, the 2016 Olympics. They've got a strong client base, including Castrol, Johnson & Johnson, Kraft, Google and Samsung.

So now let me spend a few minutes on guidance. While the environment continues to be challenging overall, we think we can have a year that's even, or better than 2012, so we would expect to grow revenues at 10% or better, and non-GAAP operating margin to be 12.8% or modestly better. And let me walk you through a little bit of the reasoning on why we think we can be at or even better than 2012. One thing that we know is that our Global Markets business is starting from a stronger base of revenue and a far improved funnel versus last year. Second, we also believe the tone overall for clients is improving here, albeit slowly. We do think the tone is improving. There's slightly more confident in our clients' thinking, again, incremental but slightly improved. And we do believe that the second half of 2013 is likely to be stronger than what we saw in the second half of 2012, largely due to the reduction of negative events associated with elections, the fiscal cliff, tax rates and kind of general uncertainty and worry as it relates to our clients that there'd be less consumer spending that would actually put pressure on their earnings and part of what drove some of the contractions and the smaller starts that we saw in the back half of the year. So we believe that the back half of '13 doesn't -- at least at this point, we don't forecast the same kind of negative events that we did actually see take place in 2012. Having said that, we realize the environment is still what it is, and it still is a choppy, choppy time out there.

The other thing I want to spend just a minute on, because I know this has been probably the most common question I have received, which is really about our long-term guidance. And although we're not in a position, nor do we really have a crystal ball for 2014 or what we think the environment is going to be in 2014, we do see a path to 100-basis-point improvement in operating margin as we head into 2014, assuming the environment doesn't deteriorate in 2014. And the improvement is really attributable to really 3 things, but we think there'll be reduction in our international investments as we move into 2014 based on our success that we've had at the end of the year and our plan on 2013. We also think there'll be gross margin improvements, primarily due to utilization. And of course, we'll continue to hopefully gain some scale benefits in G&A, which we think is a path and opportunity to post 100 basis points of margin improvement in 2014.

Moving to Q1, we expect revenues to be $295 million to $300 million and non-GAAP operating margin to be between 9.2% and 10.2%. Our guidance for Q1 takes into consideration really 2 things that you would need to understand. First, as I've mentioned over the last several calls, we've been stabilizing the iBanks sector. We saw some growth with some new clients. I've also mentioned that we've solidified almost all of those relationships, so we have a strong confidence in our outlook, with the exception of one. And unfortunately, that one that we have not been able to solidify over 2012 is declining. It declined in Q4, and we're expecting a $3 million headwind in Q1 related to that investment bank. And then we do think that after we get through Q1, the majority of that impact is done, and it won't be material to our growth in the subsequent quarters of the year.

The other point is in transitioning the 2 new acquisitions to public company revenue recognition, we'll not get full revenue credit in the quarter. And this is a transitional process that we do expect to have normal revenue recognition in Q2. However, we'll be picking up more costs than revenues as it relates to Q1, but of course, you'll see that effect reverse in Q2. So we'll put a little extra pressure on Q1, and then you'll take the benefit in Q2, so essentially, it's a wash.

So with that, a couple thoughts before I wrap and move to Joe. But again, if you look at our progress in the year of building the brand and the company in 2012, it was great. And we have -- we're in a position to post, at a minimum, a similar year if not a better year in 2013, if we get the environment to improve modestly for us.

So with that, I'll hand it over to Joe.

Joseph S. Tibbetts

Great, Alan. Thank you. Hello, everyone. I'm going to spend a few minutes to take you through the details of the fourth quarter results and then talk about our outlook for the first quarter of 2013 and the year. As usual, the full details of our results can be found in today's press release, the Financial Statistics page in the Investors section of our website and in the SEC Form 10-K, which we expect to file within the next couple of weeks.

On the revenue side, consolidated service revenues for Q4 were $293.2 million. That's a sequential increase from the third quarter of 2012 of 2% on an as-reported basis and an increase of 1% in constant currency. Compared to Q4 of last year, revenues were up 12% as reported and up 11% on a constant currency basis. When you look at that by industry, the Consumer, Travel and Automotive sector was 42% of our revenue in the quarter. That's the same as Q3, same percentage-wise as Q3. Financial Services increased to 33%. That's up 1% from 32% in Q3. Government, Health & Education was 10%, unchanged from Q3. Energy Services was 8%, also unchanged. And Technology & Communication was 7%, also unchanged. Long-term and retainer revenues were 51% in the quarter compared to 55% in Q3. The T&M contracts were 44% of our Q4 revenue, and 56% came from retainers, fixed-price contracts and other contracts. The percentage of service revenues coming from our top 5 clients in the fourth quarter was 21%. That's the same as Q3. And the revenue from our top 10 clients was 36% in the quarter, up 1%, 100 basis points from Q3.

Turning to gross margin and operating margin. As usual, I'll refer to the non-GAAP numbers that we consider a meaningful picture of the company's comparative performance. Overall, fourth quarter gross margin, excluding the non-GAAP items, was 34.9%, down from the fourth quarter of 2011, which was 36.2%.

Selling and marketing expenses were 3.8% of revenues in the quarter, up slightly from 3.7% a year ago. And G&A expenses, general and administrative expenses, were 16.6% of revenues, unchanged from the same quarter a year ago. In restructuring and other related charges, we recorded a charge of $500,000 in Q4 compared to a benefit of $19,000 in Q3 and a benefit of $300,000 a year ago. Amortization of purchased intangible assets for Q4 was $2.9 million, up from $2.7 million in Q3 and $2.5 million in the fourth quarter a year ago. Acquisition costs and other related charges were $1.6 million in the quarter. This compares to $1.1 million in Q3, $600,000 in the fourth quarter a year ago. And the Q4 charges related to fair value true-ups to earn-outs from the acquisition of DAD, as well as third-party due diligence costs.

GAAP operating profit was $30.9 million, which was 10.5% of service revenues. This is down from 9% -- sorry, down from 9% in last year's Q4 reported operating profit of $33.8 million or 12.9% of service revenues. And sequentially, GAAP operating profit was down 6% from $32.8 million or 11.4% of service revenues in Q3. Non-GAAP operating profit was $42.4 million, 14.5% of service revenues. This is an increase of 2% from last year's Q4 operating GAAP -- sorry, Q4 non-GAAP operating profit of $41.6 million, which was 15.9% of service revenues. And sequentially, non-GAAP operating profit was equal to the $14.4 million in Q3, which was 14.7% of service revenues. In the quarter, we had foreign currency translation gain of $266,000 as compared sequentially to Q3. We recorded a net transaction loss of $527,000. That's included in our general and administrative expenses. And we had a net hedging loss of $694,000, which is also included in our general and administrative expense line. Interest and other income totaled about $900,000 in the quarter, a slight increase from $800,000 in Q3 and down from $1.6 million a year ago.

On the income taxes, the income tax provision for Q4 was $12.2 million, for an effective tax rate of 38.4% in the quarter. This quarter's rate was again affected primarily by the jurisdictional mix of our profits globally, and this principally relates to our development and expansion strategy in Asia, as we've previously discussed with you. The effective tax rate for the full year of 2012 was 40%, which included 1.2% relating to nonrecurring items.

On a GAAP basis, net income was $19.6 million or $0.14 per diluted share, down 27% compared to $27.0 million or $0.19 per diluted share a year ago, and sequentially down 9% from $21.5 million or $0.15 per diluted share in Q3. On a non-GAAP basis, net income was $27.5 million or $0.20 per diluted share, down 15% compared to $32.3 million or $0.23 per diluted share a year ago and sequentially down 2% from $28 million or $0.20 per diluted share in Q3. Weighted average common shares for the fourth quarter were 140.9 million shares on a fully diluted basis.

On the balance sheet, last year, the board authorized the stock repurchase program of up to $100 million of buyback over 2 years. To date, we've had repurchased -- we have repurchased approximately 4.2 million shares of stock under the program at an average price of $10.54 per share for a total price of $44.6 million. So we didn't have any additional repurchases during Q4. We do expect to continue our buyback activity as we progress through 2013.

Cash and marketable securities at quarter-end were $251.0 million, a net increase of $38.6 million in the quarter. The increase in cash in the fourth quarter was largely related to cash provided by operations, which was $63.9 million in the quarter versus $68.9 million of cash provided from operations a year ago.

Accounts receivable decreased to $169.0 million at the end of Q4 versus $174.3 million at the end of Q3. Deferred revenues totaled $27.2 million at the end of Q4, compared to $20.2 million at the end of Q3. Unbilled revenues at quarter-end increased by -- sorry, increased to $72.0 million versus $69.9 million at the end of Q3.

And our day sales outstanding was 63 days, down from and improved, obviously, from 67 days at the end of Q3 and improved from 64 days a year ago.

The people count at the end of the quarter was 10,709. And of those, 9,530 were in delivery.

Turning to revenue and contribution margin by operating segment. SapientNitro generated $200.2 million in service revenues compared to $196.3 million in Q3. That was a sequential increase of 2% and an increase of 9% over the $184.0 million last year. And in terms of profit, SapientNitro generated $65.6 million in profit, for a contribution margin of 33%, compared to $64.6 million in profit and a contribution margin also of 33% in Q3. This also compared to $65.4 million in profit and a contribution margin of 36% in Q4 of last year.

Global Markets generated $80.8 million in service revenues compared to $79.6 million in Q3, a sequential increase of 2% and an increase of 21% over $66.6 million in Q4 last year. Global Markets' profitability was $25.9 million, for a contribution margin of 32%, compared to $26.2 million in profit and a contribution margin of 33% in Q3, and this also compared to $21.4 million in profit and a contribution margin of 34% in Q4 of last year.

Sapient Government Services generated $12.2 million in service revenues compared to $12.6 million in Q3. That's a decrease of 33% sequentially and an increase of 4% from the $11.8 million of revenue from Government Services last year, fourth quarter of last year. Sapient Government Services generated $3.4 million in profit, for a contribution margin of 28%, compared to $3.6 million in profit and a contribution margin of 28% in Q3, compared to $3.1 million in profit and a contribution margin of 26% in Q4 of last year.

Now turning to the financial outlook. As Alan mentioned, for the first quarter of 2013, service revenues are expected to be between $295 million and $300 million. First quarter non-GAAP operating margin is expected to be between 9.2% and 10.2%. And for the full year 2013, service revenues are expected to grow by 10% or higher over 2012, and non-GAAP operating margin is expected to be 12.8% or modestly higher.

A few other items of guidance for 2013. Our book basis effective tax rate for the full year 2013 is expected to be approximately 34% to 37%. And the rate for the first quarter is also expected to be in that same range of 34% to 37%. Our 2013 cash income tax rate is expected to be about 33% to 34% as we have used up our U.S. net operating loss carryforwards and credits during 2012. Capital expenditures for 2013 are expected to be in the range of $40 million to $42 million. Stock-based compensation expense is expected to be approximately $7.1 million in Q1, and roughly $30.7 million for the full year. Amortization of purchased intangibles in 2013 is expected to be about $15 million, and acquisition costs and other related charges are expected to be $3.7 million for the year. The weighted average diluted share count is expected to be in the neighborhood of 141.5 million for the first quarter and approximately 142.0 million for the year, and that assumes a certain amount of buyback activity during the year.

So with that, I'll pass the call back to you, Alan.

Alan J. Herrick

All right. Thanks, Joe. And just to wrap before we move to Q&A. If we're going to -- as we start into 2013 and step back for a second, really, since we came out of the '09 recession, we've been able to add $482 million in annual revenue and $76 million in annual non-GAAP profit. We've also made tremendous progress over the last few years in really building our brand and building our business. And as we've said, we're still very much in the building phase, new geographies, as you've seen today and over the last couple years, new capabilities that you've seen today and over the last couple years, as well as our rapidly evolving brand. And 2012 is arduously -- arguably our strongest year on continuing to advance our brand and our capabilities. And we look forward to executing and converting those advancements and that progress into earnings growth over the next several years.

So with that, operator, if we could open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Rod Bourgeois with Bernstein.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Is 10% revenue growth, in terms of the outlook for 2013, is that outlook based on balanced growth across the SapientNitro business, as well as the Global Markets business? And if you could also comment -- just to give us a better sense of your visibility for 2013, could you give us an idea of how much of that 10% growth is coming from existing clients or seemingly your visibility should be decent versus new deals with new clients that you're betting will occur in upcoming months?

Alan J. Herrick

Yes, so a lot of the growth in the year for us is really based on the existing relationships. And I think as we've talked about before that our top 60 clients represent a large majority of our revenue, so that's where our focus is now. Obviously, at our size now, there's always new revenue added into the year based on new clients. So there's some of that. And I can't precisely pin that for you, but it is largely from our existing client base, is how we think about and forecast growth. And as we look at kind of growth between the segments, your first question, we're probably not going to parse it that finely, but we think at 10% or better for the year, that probably handles several different outcomes as it relates across the business units. But we are expecting the both to be in a good position for growth for the year.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Okay. And then just to give us an idea of what the -- this is the final question on the demand front. If you...

Alan J. Herrick

Sure.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

If you could give us an idea of the swing factors that you're looking at for 2013. In other words, if you were to do materially above 10% revenue growth in 2013, what would be the most likely source of that upside? Would it be existing clients increasing their discretionary spending, or would it be you have better-than-planned new logo wins in upcoming months? Just to give us an idea of what the big swing factors are.

Alan J. Herrick

Yes, some -- this is probably a sum of all, Rod, but we had -- obviously, if you look at 2012, we had a great year on logos, right, much better than our revenue growth represented. So I think we've got a great set of clients, and continue to really build on that in 2012. So I think the factors for us are still more of it would come from existing clients expanding. Certainly, new logos will help, but we've got strong stable logos, so it'd be nice to expand the size and the strength of those relationships. And part of what the acquisitions bring is some of that cross-selling opportunity, give us some different looks at how we knit together things for our clients. But I think really kind of what the trigger is, is that if the environment has some improvement in its overall for clients. And if you look at what happened in the back half, especially to SapientNitro, and I would argue that the iBanks has been running a different cycle that started back in '09 that's got its own time line. But if you really look at what happened in SapientNitro in the back half of the year, it was a lot of tightening. So having some modest success there I think would help as well, but largely, existing is the answer to your question.

Operator

Our next question comes from the line of David Grossman with Stifel, Nicolaus.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

If perhaps I could just follow up a little bit about what Rod was asking. I guess first is it looks like you assume some deceleration in growth as -- at least from the first quarter and a year-over-year basis. And if that's -- if I'm doing my math right, I guess, as I look into '13, given some of the things you've said, that Global Markets is better positioned, and a lot of the uncertainty and perhaps some of the issues we had in the second half of '12 have abated this year, why would we expect a similar year in '13 as opposed to a better year?

Alan J. Herrick

Yes, I think that -- I think it's a good question, overall, David. I think there is an opportunity to have a better year. I think what we're being cautious of is that it's still choppy out there, right? You've still got events in front of us with the fiscal cliff. You still got ways where external forces could drive the indecision into businesses, and we're very cognizant of that. We got a little better confidence, I think, in conversations with people here. And in a real choppy year, we put up 10%. And if this year's improves, we hope we could do a little better than that, right? And obviously, in a better environment, we think we could do far better, right? So I think that we're being cautious about that because, frankly, it's hard to read 2013 in full from the 2nd week of January. But if you're right, we've got some things going in our favor, so if the year kind of improves a little bit in sentiment, it should give us some help. But we're not guiding that we're going to get that help. We're taking a view that it's going to remain choppy, and we'll update you as we go.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

Right. And just one other thing. I think just on the top line is that in the fourth quarter, or subsequent to the third quarter call, I think you started talking a little bit about win rates and market share and some of the work you have done. Perhaps you could just give us a quick update on how that may have changed since the last quarter, when we -- you updated us in terms of the work you did around your win rates and anything else that would help us better understand the share, if there's been any share shifts. And then secondly, on that same line, you -- to your point earlier, you said you did a ton of new logos last year. You did a great job of signing a lot of the front-end work. Have you seen those conversion rates change at all over the last 3 months as well?

Alan J. Herrick

Okay. So well, so one question and one comment I made earlier, I'm not sure -- I was thrown by your deceleration in Q1 comment, by that guide we actually would think that growth would pick up over Q4. But to your second question on the long update I gave on the last call, so trying to give you a short version of that in 30 seconds. So we are looking at that and have a bid that will continue to do so. And I think what we see is that the market in -- it's second week of February, so a lot of these things, like economic indicators, get revised. But I think if you look at that and take it on face value, it looks very similar to 2012 as far as market growth rates if you go through all that math of where the different opportunities are spending, looks very similar, which is in a growth rate in the mid-4s to the low-5s, depending on really how you cut it. However, what we think could happen here is increased confidence against that growth rate, which is really what we're looking for, right? As we described last year, what happened is we win something and then it would get smaller, and then it would sleep 8 weeks on us, right? And that was just from pressure that clients had. They weren't sure what was going to happen with their own top line or their own profitability. So I'd say from what we know now here as we hit the second week of February, the same kind of analysis that we did in Q3 would say a relatively similar range of growth for the market. And we do think that, that's outperforming both the market. And if you look at any of the agencies or holding companies or digital assets that they own on organic growth rates, we continue to think that's outperforming it. But again, we were -- we'd like to do better than we've done, but we do believe we need a better environment to get to better growth rates than what we're telling you here today.

David M. Grossman - Stifel, Nicolaus & Co., Inc., Research Division

All right. Great. And just one other question just on the margin front. You talked about flattish margins. Could you help us understand what the puts and the takes are, '13 versus '12, that lead you to a flattish outcome for '13?

Joseph S. Tibbetts

Sure. Want me to, Alan?

Alan J. Herrick

Yes, sure -- okay, so if you look at '13 overall, and again, it could be flat to better is what we said, but what we're cognizant of, again, of course, is -- why it wouldn't be better is probably 2 reasons, or maybe 3. One is our international investments are going to be similar year-over-year. So although Asia will be improving, we're actually picking up the offset in that improvement in Brazil. And we think that the big improvement in that really becomes in 2014, and that's part of what gives us 100 basis points of potential lift in 2014. Secondly, we think we have some acquisition and integration costs, because part of what -- in the way that our model works, we're really trying to offer a connected value proposition and connected capabilities for our clients. There's a lot of learning, there's a lot of extra sales effort in the first year to really knit those things together. It's also why we also don't count the revenue in the same way. And we think that's got some costs in the short, and then it turns into, hopefully, a broader platform for continued growth. So we think those 2 things are even to working against us a little bit, and then we've got a choppy market. Now if those things go a little better or we get a little better market, we can drive utilization and pricing a little better, then we can play to the upside of that. And then as you look at '14, as I talked about briefly, you got the international piece, but then we do have more confidence in the G&A and the utilization piece in '14 based on other progress we've made over last year and what we expect to make this year.

Operator

[Operator Instructions] Our next question comes from the line of George Price with BB&T Capital Markets.

George A. Price - BB&T Capital Markets, Research Division

I wanted to just kind of follow on the margin theme a little bit. First, for the quarter, the non-GAAP operating margin came in toward the low end of the expectations. It was down a hair quarter-over-quarter when it's usually up in the fourth quarter despite slightly higher utilization. And it looks like Nitro was always part of that factor. It was down 200 bps quarter-over-quarter; again, usually up quarter-over-quarter. Could you give a little bit more color on what happened there?

Alan J. Herrick

Yes, I think the large reason -- and maybe, Joe, you may have more detail on this. The large reason for us in Q4 at the highlight level is that attrition slowed well under our expectation. So if you think about it, kind of a normal expectation for us in Q4, probably it'd be about 300 basis points higher on attrition. Now thinking about that differently, it's great. We’re thrilled with that, and we'll put that to good use in the future, but it definitely, obviously affected our margin in Q4 and being longer on people.

Joseph S. Tibbetts

Yes, that's really the bulk of it, Alan.

George A. Price - BB&T Capital Markets, Research Division

Okay. So -- but the -- I guess the utilization would have been even higher you're saying or implicitly with the stronger revenue than otherwise?

Alan J. Herrick

Correct. And the mix of utilization is a little deceiving sometimes in Q4 because you get -- you can get higher rates around the holidays for India, and you get lower rates in the western geographies. So even though the number optically picks up, the economic utilization is actually significantly down quarter-over-quarter, as you would expect seasonally for us.

Joseph S. Tibbetts

And then our operating expense spending as a percent of revenue was a little bit higher than the prior quarter. So we had that going against us as well.

George A. Price - BB&T Capital Markets, Research Division

Okay. I guess just looking at the 13% to 16% target range is -- and I understand that there are investments that you guys are putting in for growth and puts and takes that you've discussed. But just to kind of lay it out there, I mean, is the upper end of that range, I mean, really even still valid at this point? I mean, even if you get the 100 basis points of expansion going into '14, is it more realistic to kind of think about the lower end of that range as the reasonable target range?

Alan J. Herrick

Well, I think, George, it depends a little bit on what your horizon is for time line. So we're not -- I'll give you a couple -- a little color on that. We're not in a position to really answer that question yet, but I would say that we're obviously -- we're in an environment that's more mucky and choppy than maybe we'd like to have. However, we're also in a time of significant operating expansion, and what I mean by that is not just growing revenue. When you're growing a lot of new geographies and new capabilities, you're much more in the building phase than you are in the optimizing phase, right? And I just think that, that, from our perspective, when we look at what that creates and kind of the leverage that we'll have in the model in the future, we still think that's meaningful. But I want to be thoughtful on years here because I do think that we are going to be building some new places in the world, and that's -- that needs to be reflected in our thinking. But then as we do get more maturity in the model over the years, we do think that gives us other leverage in the operating platform, it gives us other leverage in G&A as well. So we think, kind of to your point, the 100 basis walk-up for next year we think we get a better view on. But in that, we're also going to have ourself hopefully in 2014 and '15 with meaningful revenue in APAC and pretty good expanding revenue in Brazil. And then I think that gives you some other opportunities on how you actually optimize and manage some of your profit growth, if you will. So I think we got to get back to that when we get back to that. We'd like to have a little better look at a better environment before we get back to that conversation. But even in this environment, if we can walk into that and start to execute 100 basis points higher next year, and maybe all things will line up and we will actually get an improved environment as well.

George A. Price - BB&T Capital Markets, Research Division

Okay. The last one, on the second half of '13, kind of your comments around growth with fewer negative events and all of us having lived through the last year, I think we'd like that. But I guess how much specific visibility do you have to that? And I guess another way to ask it is, is that view any different from how you typically plan your years? Is there any more, any less visibility, any difference in assumption around that, maybe between North America and Europe or anything like that?

Alan J. Herrick

Sure. I would say that generally, if you look over our last 5 or 6 years of doing this, our approach to it is similar, right? So we do see -- we can see Q3 and Q4, on a weighted average probability basis, that gives us a basis for our guidance. Now I think that we've got some things to believe, as I outlined, that we think the second half will be better, but we probably also didn't foresee how choppy the second half got in SapientNitro for us last year, right? So obviously, we've been considerate about thinking about that. But if you're asking just about pipeline visibility, it's the same process, same approach, and the pipeline has the strength to support what we've outlined at 10% or better here today.

Operator

Our next question comes from the line of Todd Van Fleet with First Analysis.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

So I'm wondering if you could call out the revenue contribution from acquisitions made -- recent acquisitions made. I know there've been 1 or 2 smaller ones, but if you could call that out for us. And then the next question, I guess, related to margin to some degree is we saw turnover fall, as you pointed out. I'm just wondering if there's any interplays there with respect to wage pressure, pricing pressure, that you might be seeing for your billable talents. So just wondering kind of what the dynamics are in the marketplace now as you see it and as you're expanding abroad, particularly Asia Pac. What are the -- are we seeing wage inflation for some of these key billable positions?

Alan J. Herrick

Sure. So, I think, I guess a couple comments on your first question, which is -- so I would think about -- my comments aside about Q1 revenue recognition, I think about the acquisitions in around the $10 million range. I would think about -- the only thing -- my only caution on...

Joseph S. Tibbetts

That wasn't in the quarter, though.

Alan J. Herrick

No, $10 million for the year, for -- $10 million for 2012 actually is what the run rate was. My only thinking, to add to that, in how this works for us is that it does divert a little bit of our organic growth to knit the acquisitions in because they're not coming with just the isolated selling capabilities. What we really do is we go to our existing client base. That becomes an education for our team, an education for their teams. So if you think about what happens to reach the acquisitions, we took about 5 to 8 clients to start, where we knit the account teams together, and we really try to figure out how to make sure the new teams and what they're offering can be really valuable to our clients. So that diverts our teams from essentially building business in other areas to helping build their business. Once you get a little farther out -- I don't know if it's precisely a year. Once you get 6 months out, 9 months out, maybe it's 12 or 18 months, depending on which one, then you actually get uplift because you have better breadth of services and a bigger footprint in our clients. So just in the way we think, you guys are going to think about how you'd like to think about, but in the way we think about it, we actually don't add it on top because it diverts a little bit of our organic growth.

Joseph S. Tibbetts

Yes, can I just add two cents on that?

Alan J. Herrick

Sure.

Joseph S. Tibbetts

So just to be clear, so that was for the most recent 2 acquisitions, so not including the Second Story, which was technically last year, which will add a little bit more than that. Otherwise, I totally agree with Alan's characterization of how that revenue gets done. And so just want to be clear about which pieces that was. And then going forward, that's not -- they're pretty small to us. And because they get so integrated with our sales, sales process, and all that, we don't sort of call that out separately. They'll just get blended into our revenues, but that's a good characterization of what we got going in here.

Alan J. Herrick

Yes. And I think on your kind of talent conversation, I don't think we're seeing anything different. I do think that maybe the market's -- if you look at all the competitors in the market, especially on the digital marketing side, maybe it's not as feverish as it was a couple years ago. I think that's true. I do think that it's probably a -- I think at normal years, kind of the way to think about it, where great talent is always highly valued. Our focus is obviously in both bringing in and keeping great talent. But we don't see any kind of aberrations as it relates to that in this year.

Operator

Our next question comes from the line of Leo Kulp with Citi.

Leo Kulp - Citigroup Inc, Research Division

Can you fill us in on your repurchase activity for the quarter?

Joseph S. Tibbetts

Yes, so as I mentioned, there was no repurchase activity in the quarter. We sort of kept our eyes open with respect to external market. External economic conditions and what have you, I think we mentioned to you last quarter that, that was what we were doing. I also indicated that we do expect to continue with the buyback program in 2013. Obviously, not a lot of specificity there as to timing and quantity, but that's definitely our intent, and that's kind of where we are.

Operator

Our next question comes from the line of Edward Caso with Wells Fargo.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

It's actually Rick Eskelsen on for Ed. Just kind of following up there on the cash deployment. It seems like recently, you've been shifting, doing tuck-in M&A recently. Is that just -- are you increasing that as a focus for your cash deployment or is it really more of a function of how the funnel shook out and the specific opportunities that you saw?

Alan J. Herrick

Yes, so you mean the acquisition funnel itself?

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Yes, exactly, yes.

Alan J. Herrick

Yes, so I think that it is -- I guess the way to think about it is strategic acquisitions, tuck-ins are something that we like, because you get great teams and then you help them bolster a position and you cross-sell. So we think that's a good formula for us. Don't take that as we're opposed to doing something larger or something larger mattered to us, and if it would really move the needle, we wouldn't hesitate either. But I do think to find companies that have great teams that really are doing really interesting stuff in the market that our clients would really appreciate. We've looked a lot over the last few years, and we came up over a couple years where we just couldn't find anything that made a difference to us, so we're trying to be very pragmatic about that. And then, yes, we were able to find several here that we're really excited about. So I think that kind of ebb and flow because it's really -- because it's not something that we need to do. It's something that when you meet people out there that are really doing something that could help us and advance our proposition to clients, we would do. Right? So I think there can be some variability to that.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then the other one is just following up on the deal sizes and deal starts. It sounded like the environment was relatively similar, where you might be seeing small starts and small deal sizes currently. But in your guidance, especially in the second half, you expect that to abate a little bit. Did I kind of hear that correctly or could you give an update there?

Alan J. Herrick

Yes, so I think that I guess the best way I would characterize it is, yes, it is largely similar. Maybe it's a slightly more confident client right now than we had last year, but that's incremental. And I think if we get into the year, and clients are able to hold their budgets, hold their capital spending, their earnings are where they want them to be, we don't expect the contraction that got more significant for us in the back half of 2012. And we do think that had a lot to do with uncertainty. Uncertainty about many things, whether it's fiscal cliff or elections and taxes. But all that uncertainty led to a fear, kind of a retraction in consumer spending that would affect our clients pretty significantly. And we think that's what caused them to tighten up some things, right? So, assuming, which is an assumption that we don't have those events at the end of '13 and you just have modest improvement in the environment, that's what's in our assumptions.

Richard Eskelsen - Wells Fargo Securities, LLC, Research Division

Okay. And then just the last one, following up on attrition. I don't know if you can break it down, but it seems like you've been focused a lot recently on reducing your attrition, but it's also attrition tends to decline when the environment is more uncertain. So how much of it was due to your efforts and your focus there? How much was due to the environment? Are you expecting to see your attrition get back to sort of normalized rates here if the guidance assumptions you have in place play out as expected?

Alan J. Herrick

Yes, so I guess the way I think about it is we thought about 15 to 17 is kind of a healthy rate for the company in many environments, right? And if you look at kind of when we really focus on this and started, just going back 3, 3.5 years ago, we've put a lot of focus into the environment overall, into career paths and other things that we believe we ought to do better for our people and still have much to do, frankly, on that basis. So we think certainly part of it is that, part of it has then been the transformation of the company, the company's market position, the success that we've had in both business units. That certainly is helpful. Right? So I think there are certainly things that we've done to affect it. But then you've always got a correlation to what the market is doing, right? If the market is crazy hot or crazy cold, that always amplifies that effect. So I think both are true.

Operator

Our next question comes from the line of Tom Maher with Lord, Abbett.

Thomas B. Maher - Lord, Abbett & Co. LLC

Just a couple of quick questions. On the Q1 acquisition impact, it sounds like that's somewhat of a modest drag on the non-GAAP op margin. Is that right?

Joseph S. Tibbetts

That's right.

Thomas B. Maher - Lord, Abbett & Co. LLC

So you got all the expenses, but the revenues don't really flow through yet?

Alan J. Herrick

Right, or we'll get some of the revenues, but we'll get more -- we'll get all of the expenses.

Thomas B. Maher - Lord, Abbett & Co. LLC

So -- exactly. So in terms of the guide on the margin range, is there -- could you quantify how much that's holding the margins down?

Alan J. Herrick

No, but what I would say is we should get that benefit back in Q2.

Thomas B. Maher - Lord, Abbett & Co. LLC

So for the year, it'll pop the margins better for Q2 then?

Alan J. Herrick

Right, so essentially neutral to the year, if you will.

Joseph S. Tibbetts

Yes, it's transitional.

Alan J. Herrick

Yes, transitional.

Thomas B. Maher - Lord, Abbett & Co. LLC

Okay. And then the other question I have was, in terms of the investments you guys made last year in Asia, yes, it sounds like the focus here maybe is moving more to Latin America this year. Is that right?

Alan J. Herrick

Yes, and Latin America -- well, so Asia will still be significant this year, but -- so what we talked about Asia last year, when we talked about it with you guys, is that Asia would turn to profit at some point in 2013, we'd have profitable quarters. So we believe that will happen in the back half of 2013. But we still think for the year of 2013, Asia will still be a meaningful drag, but it will be an improvement over 2012. But that improvement is largely deployed in our investments in Brazil and what we're going to do to move people in to help round out capabilities in Brazil, right. And then -- and Brazil won't rival Asia as it relates to that. It just happens that it's enough to eat up the improvements we'll make year-over-year. And then we think we'll see real relief from that in '14.

Thomas B. Maher - Lord, Abbett & Co. LLC

So I mean, to put it sort of in simple terms, if you were not to continue -- if you weren't continuing to invest internationally, you'd see a little more of the improvement or lower drag from Asia come through on the margins?

Alan J. Herrick

Yes, and we said that's about a $15 million number.

Thomas B. Maher - Lord, Abbett & Co. LLC

Okay, good. And then just last, and this is sort of a dumb question. But in terms of the characterization of this year being "like '12," you're talking in tone -- in tenor, client concerns and choppiness, I mean, is that what you're kind of referring to? Because you're talking about growth being up -- or revenues being up 10% plus, margins flat at least. So I just want to make sure that it's clear that you guys are talking about the tone of the business currently relative to last year.

Joseph S. Tibbetts

Yes. Yes, the tone of the outside world, too. I mean, really, the markets in which we're in, and the choppiness and the -- it's still not settled down into something that you'd really like to see. And I guess we're just saying that we're just continuing to operate in that kind of environment.

Operator

I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.

Alan J. Herrick

All right. Great. Well, thanks, everybody, for joining. We look forward to executing on our opportunity in the year. And we'll speak to you on the next call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.

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