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Sapient Corp. (NASDAQ:SAPE)

Q1 2008 Earnings Call

May 8, 2008 5:00 pm ET

Executives

Gail Scibelli - VP, Corporate Communications

Alan Herrick - President & CEO

Joe Tibbetts - CFO

Analysts

Matt McCormack - FBR

Jason Kupferberg - UBS

Mark Marostica - Piper Jaffray

Vincent Lin - Goldman Sachs

David Grossman - Thomas Weisel Partners

Rod Bourgeois - Sanford Bernstein

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Sapient Q1 2008 Earning Conference Call. My name is Tony, and I will be your coordinator for today. At this time, all participants are in a listen-only mode, and we will conduct a question-and-answer session towards the ends of this conference. (Operator Instructions).

I now would like to turn the presentation over to your host for today's conference, Ms. Gail Scibelli, VP of Corporate Communications. Please proceed ma'am.

Gail Scibelli

Thank you, Tony. I would like to take this time to remind you that some of the matters we will discuss on this call are considered to be forward-looking statements as defined by the SEC. These forward-looking statements are subject to known and unknown risks and uncertainties that 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 encourage you to read.

The forward-looking statements included in this call represent the company's views on May 8, 2008. Sapient disclaims any obligation to update these statements to reflect future events or circumstances. Thank you for joining today's call. And now I would like to turn the call over to our CEO, Alan Herrick.

Alan Herrick

Thanks, Gail, and thanks everybody for joining our Q1 call. Let me get right into it. For the agenda today, we are going to walk through the press release highlights as usual, an overview of Q1. I'll give you a quick people update, and then I'm going to spend a little bit more time on a market update and a specific Sprint update. And then I'll hasn't it over to Joe to walk through the financials and then we'll wrap up.

So moving into the press release highlights, service revenues at $154.2 million, up by more than 27% over Q1 '07, 24% in constant currency, and essentially flat sequentially with Q4. Non-GAAP income from operations, $11.4 million, which is a 7.4% operating margin for Q1, represents a 48% increase from $7.7 million in Q1 '07. GAAP income from operations, $5.8 million compared with GAAP operating loss of $100,000 in Q1 '07. Non-GAAP diluted income per share was $0.10, up from $0.07 in Q1 '07 and GAAP diluted income per share for the quarter was $0.06, increased from a penny per share in Q1 '07.

So moving into the overview of the quarter, I'm pleased overall with our Q1 performance. We delivered what we expected to do against what was a tough compare on Q4 given our strong performance in Q4. In Q1, much as discussed and expected on the last call was affected by a slower budgeting process that really resulted in delays getting started, getting work underway. In Q1 we said we saw the beginning of a pickup in March and that did in fact continue, a tad slower than we were forecasting but largely as we predicted in March.

Clients also shifted from mostly finishing their budget processes largely to selecting partners and beginning to release work. And I'll give you some more depth on this when we get into the market outlook as to what we -- or at least what Sapient sees going forward.

Key highlights for Q1 is we continue to benefit from a very distinctive position in the market. Our value proposition is very sharp and our win rates remain at historic highs that we set in 2007, actually a tick up from our highs in 2007. So very pleased with our competitive performance in what's obviously a challenging climate. It is also important that, as we look forward and we look at our proposition in the market, we think we are benefiting from the intersection of business, marketing and technology, as we are able to not only bring our client's unique skill set, but to get it done, focus and level accountability that Sapient has been known for and our culture and our process excellence that brings results to clients.

Interactive side of our business continued at 45% or greater of our revenue stream. We continue to see solid demand. We also won several more awards in Q1 for our interactive work with six ADDY awards for our interactive work and one was Best of Division. And we overall were pleased with Q1 as expected and off to a good start for 2008.

Let me give you a little bit of color on our business units. North America represented 63% of our service revenues in Q1, revenue up 20% year-over-year, and roughly flat quarter-over-quarter, constant currency growth of 17% year-over-year and flat quarter-over-quarter. A couple wins to highlight. On the Interactive side, one of our new clients is MetLife, a leading provider of insurance with financial operations throughout the US, Latin America, Europe, Asia-Pacific regions. Another major win was Humana, one of the nation's largest publicly traded health care and supplemental health benefits companies. And we are provide range of interactive marketing services to MetLife and Humana.

Other new interactive clients secured in Q1 included Linksys, Pearson, City Sports, Chicago Public Schools, [Ef] Smithsonian. On the consulting side, we secured several new wins including Saveco, a Fortune 500 P&C or property & casualty, insurance company and M&I, a large regional bank, and we are currently building a claims processing logistics program for Saveco and we are assisting M&I with developing a strategy for redefining and repackaging their commercial online business.

With that let me move into Europe, represented 32% of revenues in Q1, revenues up 46% year-over-year, down 3% sequentially. In constant currency, Europe up 40% year-over-year and down a tick sequentially. Key wins for Europe, we secured several new clients in Q1 including Barclays Capital. In addition we secured ICICI Bank, which is India's largest private sector bank with total assets of $79 billion, operations in 17 countries worldwide. And for ICICI we are providing comprehensive services comprising user experience research, marketing strategy, online design and local market expertise.

We've recently helped ICICI enter the German direct banking market and are we currently working on redesign of their UK site and experience. Another key European client win in Q1 was PartnerRe, a leading global insurer with over $4 billion in revenues, and we are currently engaged with PartnerRe to design and implement a single and consistent electronic content management system that will serve their global business units.

Now let me move finally to government services, which represented 5% of revenue or $7 million. Revenue up 23% year-over-year, 21% sequentially. Key wins, one dimension as we secured a year-long option renewal to support the Marine Corps, autonomic logistics program office at the Marine Corps systems command.

Now let me move into people update overall. Ending people count for Q1 was 6,389 people, up from 6,217 people in Q4, net adds of 172 people. Given the demand the receivable, and I'll talk about that, as Joe will more in a couple moments, but in 2008 we have good hiring momentum exiting 2007 into 2008, and we see good demand in our forward funnel, want to keep our momentum running on the hiring place and make sure we have the right capacity for the year, so we continued to hire through Q1 as we do now.

Our annual attrition rate was very low at 12.3%, compared with 15.4% in Q4 and 16.5% in Q1 '07. And as you know, connection of our people has always been a top priority at Sapient as part of our culture and the passion that our people drive to create results for our clients, and we are very pleased with the Q1 result in our turnover. Utilization, 72% compared to 73% in Q4. Utilization was down as was effective utilization. As expected with the slower start, that our clients were experiencing and our decision to continue to hire given our outlook for 2008.

I'd also mention that we've got some great recognition for our company and our people as Sapient won several awards on this front, including the IT People Employer of the Year award from IT People Awards For Excellence and Information Technology in India, top 20 great place to work in Germany, top 40 great place to work in Canada. Additionally we won the Excellence in Diversity Award; for Consulting Magazine, 2008 Achievement award.

Now I let me switch to Sprint update and then segue into some comments on my perspective and our perspective on the market. As I previously stated, we stay very close to our Sprint relationship and the specific situation that we see with them, and we continue to have a positive relationship with Sprint overall. However, given their specific situation, which I'm sure you all follow to some degree, given there's been a lot of news on Sprint; we are expecting a meaningful decrease in Sprint revenue in Q2.

And as you know, historically, Sprint has been running 9 to 10% of revenue for Sapient overall. We are projecting a fall-off that will reduce Sprint to 5% to 6% of revenue or approximately half its current run rate. And this is really due to Sprint's overall cost reduction programs and that reduction is expected in Q2 and is built into the guidance that we will provide for you and that Joe will review in a few minutes.

Now let me go back to the top and give you what we see overall in the market and what our experience has been so far in 2008. And I guess, at the highest level, we remain very positive on the outlook for the year. If we look at our four-quarter rolling pipeline or our 12 month outlook, we see good healthy demands for Sapient and the services we provide. Clearly, the climate is more challenging, spending is choppier than it was, there's no question about that. However, budgets now largely in place, slowing for continuation of work, also slowing for new assignments. It's also our view that there is more scrutiny around new assignments, especially in financial services and really a focus on making sure that they are making their making sure that they are making their investments in the right place.

So I believe it is positive that they are making investments, but they are really rationalizing and making sure they are spending their dollars wisely, especially given the backdrop of this marketplace right now.

Clients are also looking at effectiveness to get the job done, and making sure that the conversation is about result more than rate, with consideration for rate, which frankly really plays to our strengths and our ability to get jobs done. We also see a trend towards larger deals for Sapient and we've seen a notable pickup over the last few months in larger deals entering our 12 month forward pipeline.

Interactive expansion for us looks solid, as we look across the market right now. And really what drives that is, in conversations with clients, they view online as a more effective channel. And differently than the slowdown in 2001, online channels are now a core part of their business process for acquisition and retention and up-sell for their customer basis. It's more effective, it's more measurable, it's more understood, and we continue to see strong outlook across broad areas on the interactive side or across all areas on the interactive sides.

We are also seeing increased activity in trading and risk management, specifically commodities, and this is not a new theme for us. We've mentioned this consistently over the last several calls. But we obviously have a very strong heritage in commodities, and we are seeing that continue to gain momentum. We are also seeing an increase in TRMs specifically in energy companies and large oil companies, as they get more focused on risk management, real-time profit and loss processes, as well as technologies that support that. And there's obviously a lot of volatility in the commodities sector right now, which is really driving these kinds of opportunities for us whether they are energy players or financial players as well as driving increased activity in derivatives. And we remain very positive on this area overall.

Generally we also see continuation, and this isn't mutually exclusive but continuation of the desire to do more offshore. Again more capability based, less rate based. But rate certainly matters, but really a much harder eye on effectiveness, result, ROI and capability mattering, but we see that as a broad trend and companies having more specific targets around what kind of levels they want to reach on off-shoring. We continue, as I mentioned, to have a high win rate, be competitively sharp which we think then puts us in a good spot for this kind of choppy market. And I think overall it's unfortunate that the choppiness has increased. However, we believe we are well-positioned and, frankly, have good confidence in our growth as we look out for the year and Joe will talk some more about that.

We've good a look at our four-quarter forward pipeline and the rest of 2008 as it relates to opportunities. Of course, we've got to continue to execute. We've got to win. We've got to knock them down. We've got to secure those assignments, but we in fact see the demand and see the growth forward for us. So to wrap up and then I'll hand it over to Joe, very pleased with the quarter, good start to the year, continue to believe we are well-positioned in two strong adjacent markets and marketing services and consulting services. We see good momentum in our pipe and you'll see that in our guidance. Of course that's affected in the short term by Sprint in Q2, but overall strong for us, and, looking forward to continuing to execute on the year as we go forward from here.

So with that, let me turn it over to Joe to walk you through more of the financial details.

Joe Tibbetts

Great, thanks Alan. Good evening everyone. I am going to take you through the details of the first quarter results, beginning with the P&L and then move on to the balance sheet, and then I will wrap up with some guidance for the second quarter. As Alan mentioned in the beginning of the call, consolidated service revenues for Q1 were $154.2 million, which was an increase of more than 27% from the same period a year ago. It was down 0.5% from an extremely strong Q4. And on a constant currency basis, Q1 service revenues increased 24% from a year ago and actually increased just slightly, 0.2% over last quarter.

Next looking at our revenue by industry, we again saw pretty consistent growth across industries, with financial services generating 28% of total revenue, again consistent with Q4. Technology and communications decreased from 24% of total revenue in Q4 to 21% in Q1. Consumer and travel was 20% of total revenue that was up from 18% in the prior quarter. Energy services was 12%, down to just slightly from 13% in Q4. Government, health and education was 16%, up from 15% in Q4, and automotive and industrial was consistent at about 2% of revenue for both quarters. And we had other revenue of 1% for Q1.

Recurring revenue, which includes revenue commitments of one year or more in which the client has committed spending level, which, to be clear on that, are cancelable but they have chosen us. So with that kind of client or those that have chosen us as an exclusive provider of certain services, that number again was 44% in the quarter and that was consistent with the prior quarter and was up from 37% a year ago. The percentage of service revenues coming from our top five clients in the first quarter was 25%. Again, that was fairly consistent with Q4 and was up slightly from a year ago, where it was 23%. And Q1 revenue was split 45% fixed price contract and 55% T&M contract.

Moving on to gross margin and operating expense levels, overall first quarter gross margin excluding stock-based comp was 32% compared to 34% in Q4 and this reflects the net effects of the seasonal increase in payroll taxes that we obviously get in Q1 each year, a decrease in utilization that Alan talked about little bit there, we expected that, and then an uptick in pricing. So the net effect of that was a 2% decrease in gross margin in the quarter-on-quarter, and then a year ago was 33%, roughly similar.

Selling and marketing expenses including stock-based -- or excluding, I should say, stock-based comp was 6% of service revenues up from 5% in Q4 and 5% a year ago. General and administrative expenses excluding stock-based comp and expenses incurred in connection with the stock-based compensation review and restatement for Q1 was 18%, consistent with Q4 again and compared to 21% in the same quarter a year ago, obviously 300 basis points better than a year ago. Total stock-based comp in the quarter was $4.5 million. That was compared to $4.7 million in Q4, so down slightly, and $4.2 million in Q1, 2007. Restructuring charges and other related charges were $143,000 in Q1, compared to $236,000 last quarter and a slight benefit of $112,000 a year ago.

On the operating profit line, Q1 non-GAAP operating profit was $11.4 million or 7.4% of service revenue. This compares to $16.3 million in Q4, which was 10.5% of revenue and compared to $7.7 million, or 6.4% revenue a year ago. GAAP operating profit, $5.8 million, 3.8% of revenue, compared to a loss a year ago of $100,000 and compared to $10.4 million or 6.7% of revenue in Q4. Foreign currency transactions this quarter netted to a gain of approximately $600,000, so that's a transaction gain, and are included in G&A expenses. This compares to a similar foreign currency transaction gain last quarter, you may recall, about $450,000. We had a transaction loss in Q1 of last year of about $150,000.

On the translation side of foreign currency, that totaled about $140,000 across all currencies as sequentially compared to Q4. So that was a loss compared to Q4. And as you know, we booked that currency loss distributed through the P&L based on the nature of the expense being translated, and we continue to use our 90 day hedging programs to limit our short-term exposure particularly to the Indian rupee.

Moving on to interest and other income, the net there totaled $2.8 million in Q1, compared to $1.8 million in the prior quarter and $1.3 million a year ago. Sequential and year-over-year increases were due to interest on higher cash and investment balances. We also had an insurance recovery in the period and some other income in the quarter. Income taxes; the income tax provision for Q1 was $1.5 million and the effective rate on profit before tax was 17% including -- actually it was 17%. Net income and earnings per share, our Q1 non-GAAP net income was $12.7 million versus $15 million in Q4 and $8.6 million a year ago. Non-GAAP diluted earnings per share were $0.10 per share in Q1 versus $0.12 last quarter and $0.07 a year ago. If you're looking at GAAP, net income was $7.1 million in Q1 compared to $9.2 million last quarter, and $800,000 in the first quarter of 2007. GAAP diluted earnings per share was $0.06 per share in Q1 versus $0.07 last quarter and a penny a year ago. The weighted-average common shares for the first quarter were 126 million shares and 129 million shares on a basic and diluted basis respectively.

Switching over to the balance sheet, I'll just walk through the more significant accounts there. Cash and marketable securities including about $1.8 million of restricted cash decreased by $13 million to $164.8 million at the end of Q1, down from $178.1 million at the end of Q4. And that primarily was impacted by the payout of our accrued annual bonus compensation in Q1 and was offset by other net positive cash flows. Cash flows from operating activities in Q1 reflected the use of $6.8 million of cash versus cash generated from operations of $31.7 million in Q4. Again, that significant difference there relates primarily to the bonus payment. Cash flow for us is obviously seasonal as a result of that bonus payment in Q1 and the Q1 cash flow represented a significant improvement of $11.2 million better cash flow compared to the comparable period in Q1 of 2007.

Our investments at the end of Q1 included $21.3 million of auction rate securities. We talked about this last quarter. We represented a substantial reduction from the $41.6 million that we held at the end of the year. We recorded a temporary impairment this quarter of $1.1 million on that $21.3 million to reflect the fair value impact of the lack of current liquidity of our investment in auction rate securities backed by student loans. Because of the temporary nature of this impairment, it was not recorded as a charge to earnings but as a charge to other comprehensive income and stockholders equity, and further as of March 31, we have classified all of our auction rate securities from short-term to long-term investments to reflect that lack of liquidity for these securities in the marketplace. And reiterating, just to be clear what was said on our last call, our auction rate securities are collateralized by student loans and municipal debt, and none of these securities are backed by residential or commercial mortgages or sub-prime debt.

Accounts receivable net of allowances increased to $85.8 million at the end of Q1 from $82.4 million at the end of Q4. Unbilled revenues were $37.8 million, compared to $33.4 million last quarter, and deferred revenues totaled $10.3 million compared to $14.3 million in Q4. DSO, day sales outstanding and accounts receivable including unbilled revenues and net of deferred revenues increased slightly to the 63 days from 57 days in the fourth quarter of 2007. That was down significantly from 79 days a year ago. Our people count Alan mentioned already.

Switching to the buy back, we have continued to buy back shares through the first quarter, repurchasing 304,000 shares for approximately $2 million in the quarter, and then to date in the second quarter since March 31, we've repurchased an additional 513,000 shares for an additional $3.8 million. And at this point as of yesterday, we've had approximately $3.7 million of authorized buy back remaining in the program. And just a side note, our quarterly report on Form 10-Q was filed about an hour ago.

Switching to guidance, as noted in the press release, we expect that second quarter service revenues will be $158 million or higher, taking into consideration continued expected good growth across the business, including financial services, as well as the impact of the expected reduction in Sprint revenue. We expect that our Q2 non-GAAP operating margin will be 8% or higher. We continue to expect that our growth in annual fiscal 2008 service revenues will be in the range of 20% to 25% for the year. And we also believe that we are still on target to exit 2008 with non-GAAP operating margin within our targeted range of 13% to 16%, giving us 10% or more in non-GAAP operating margin for the year.

As you know, we have benefited from control over spending and gains in effective pricing, and we see further improvements coming from better effective utilization through fixed price performance and matching of talent and experience to client engagements, as well as seasonal impacts and scale improvements. We recently took a small action in India involving the exit of 160 associates. This action was taken to rebalance our staff, given that clients are looking to us to help them solve increasingly difficult problems. I mention this really simply because it may get picked up in the news, and we wanted you to be aware of it and that it involved only a small number of people. To be clear, we continue to hire in India and worldwide and I think Alan spent some time talking about our people count increase.

Several other data points we want to give you, our guidance is largely foreign currency neutral for the remainder of the year. Trailing expenses for outside services related to our restatement of a year ago are expected to continue. We are guiding that at about $400,000 per quarter relating to go ongoing tax and legal work. Stock-based compensation should continue to be approximately $4.4 million to $4.8 million per quarter. The effective income tax rate is expected to approximate 15% to 20% for the second quarter and for the full year 2008. And this reflects our current expectations for a higher level of profit in the U.S. than a year ago. We talked about that last quarter, which allows our book tax rate to benefit from a US tax loss carry forwards.

The Indian government, as you know, extended the STPI benefit one year to March 31 of 2010 now, and this extension pertains in our case to our Bangalore and Noida offices. Our Gurgaon office happened to have been opened just 10 years ago from the dates that the STPI benefits were scheduled to terminate which is 2009. So those benefits will expire on 2009 in any event because of having reached that 10 year term. And as we previously discussed, we also plan to avail ourselves of the tax benefits afforded by the Special Economic Zones program, so called SEZ program as we grow into future facilities into India.

As for outstanding shares, the quarterly weighted average basic share counts increased by approximately 300,000 shares in Q1. For Q2 we actually expect the share count to go down slightly from Q1 as a result of our stock buyback activity. And the weighted average basic shares for the whole year 2008 is expected to be in the neighborhood of 126 million for the year. And with that I will pass the call back to you, Alan.

Alan Herrick

All right. Thank, Joe. So back to the high level. We are pleased with the outcome for Q1 and, frankly what we expected it to be, solid revenue growth, 27% year-over-year, 24% in constant currency, also improvement year-over-year in our operating margin, we are also pleased with the forward look we have at the opportunities set in front of us as we look at the remainder of 2008. Win rates continue to be at or above historic highs. We think we are in a good position and have to keep executing through this market. So with that, Operator, if we could hand it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Matt McCormack with FBR. Please proceed.

Matt McCormack - FBR

Yes, hi. Good evening. In terms of your guidance and maintaining your guidance in light of your expected Sprint decline in the second quarter, was that contemplated when you gave the guidance a few months back or what is kind of -- where are you seeing the demand to offset that decline.

Alan Herrick

When you look at Sprint overall, it's something that obviously, given our exposure over the years, something we watch very closely and obviously on every call try to give an update on Sprint, given their situation in the market. So it's always been in our thinking, you never know the specifics of how it might happen based on their reaction to certain things and market events but always been in our thinking. But as it relates to the strength in our pipe right now; broadly all thing interactive show very good strength for us across the board.

If you remember on the last call I went over five different categories, buckets of interactive and broadly across all those categories, we are seeing strengths. Then on the consulting side, if you look at -- there's different strengths in different pockets, but discretionary spend a little less strength obviously, which I think would be obvious to everybody at this point. But when you look at trading and risk management, we see a lot of strength in that area of the market, but also in meaningful engagements. Like we talked about our wins in insurance and claims processing, we are seeing more investment in certain things around health care as well.

So when you are getting clients making investments in revenue streams or things that can really drive efficiency that have sponsorship, all of that investment is continuing. So what I characterize it more as, what we see out there is a much stronger thought process around rationalizing and making sure that their investments matter, they can get the return they are looking for and they are looking for a partner like Sapient that can fit that bill and stand tall to getting those thing delivered in an on-time fashion for them.

So really seeing strength cross critical things, seeing a general trend of offshoring, although changing in nature a little bit, continuing because that drives effectiveness, it drives better cost effectiveness for them, and it drives also a desire to have headcount off their books and on somebody else's. So seeing some broad strength across the offshore trend as well. Although as I mentioned it is more capability sensitive than just purely rate sensitive from our experience in how clients at least look to engage us right now.

Matt McCormack - FBR

And just to stay on Sprint, obviously it's going well with 12%, I believe, in the first quarter and going down to about 5%. Could you talk about what types of services are going away and what's going to be left and I guess the recurring nature if you will of what is going to remain?

Alan Herrick

Yes. Obviously a lot of changes with Sprint, and I think the best -- I can only disclose so much about Sprint based on our agreement, but one thing we can say is, we do all services for Sprint. Pretty much everything that we offer, we have been able to provide to Sprint in some shape or fashion and I would think of it as more of a trimming across most things as they rationalize their investments and they look at their merger opportunities. So it's not a specific thing but more of an overall reduction that probably broadly affects most of their partners working with them, from what I can see. And then obviously we've got to continue to keep an eye on it from here as we continue forward, but again we are seeing the brunt of the reduction in one quarter, so I think it's also a great testament to the strength of our pipe that we are going to actually grow right through it.

Matt McCormack - FBR

Okay. And just my last question, you obviously had a lot of new client wins in the quarter. Can you just kind of talk about how that compares to the fourth quarter and the year ago quarter?

Alan Herrick

Yes, I guess Q1 a little differently in January and February definitely slower for us and as we said March picked up. So we did see increase in wins in March that I would say look very similar to what we saw in the fourth quarter, and we obviously had great momentum in the fourth quarter. I'd say January and February obviously slower. And I think the way I characterized it last time, and I would just having dinner with some clients last night, where I think what happened is the budgeting process went two rounds, three rounds if not four rounds to really make sure they got locked down and got the right budgets in the right spend and the right area. But once they got through that, they started to release money and started doing the things that they were sure they should be doing, so that created a delayed effect in the release of spending. I don't think all of that released in March, I think you started to see that activity in March and I think it honestly continued in April as clients got sure about where and what they wanted to spend. So I characterize Q1 overall as slower, if you look at it on a comparison to Q4, but then I would characterize March as much closer to in line.

Matt McCormack - FBR

Okay. Great. Thank you.

Alan Herrick

Thank you, Matt.

Operator

Your next question comes from the line of Jason Kupferberg. Please proceed.

Alan Herrick

Hey Jason.

Jason Kupferberg - UBS

Thanks and good afternoon, guys. Just a clarification on Sprint, you are going to see the decline in 2Q you said and then you are assuming kind of a flat line for that run rate go forward on a quarterly basis?

Alan Herrick

Yes, we are probably just being cautious about it, assuming that it could lose some share from there, but we are assuming it could be in that neighborhood going forward, that there won't be another significant drop off. Again there's a lot we have to be watching -- watch and be careful about Sprint given the fluid nature of their business right now.

Jason Kupferberg - UBS

Right. Right. Okay. And just to switch gears to the margins for a second, I know you reiterated the outlook for the year here, it seems like you will probably need to do 12% plus in the second half to get to the full-year target. Can you walk us through the specific drivers? I think in the past you have kind of gone down to the basis points level at different parts of the P&L to kind of walk us how you get from point A to point B.

Joe Tibbetts

Hi Jason, it's Joe. So, yes, I think the story there remains largely the same that in the G&A side that we've got about 100 basis points to 170 basis points that we think we can capture through improvements in process and technology, then obviously a scale factor as well. On the gross margin side, we've got some seasonal impact that helps us as we proceed through the year, which we don't have as much pressure on the comp as in relation to some of the FICA stuff. Of course we do pick up in Q3 the annual wage increase, which will hit us across the board. But with really think that the place, the focus going forward is in utilization. We've gotten some improvement in pricing, we continue to work that, and make sure that pricing tries to keep up with wage inflation over time. So we are doing that.

But we think that the opportunity is the pickup in utilization, we talked about why Q1 was down a little bit. And we think that there's opportunities there to did a better job with our effective -- with the way we are staffing jobs, our effective utilization, meaning what really gets billed and gets collected. And continue to hold on to the gains that we've made in the other areas. So that's really where it will come from. All that total is about 500 basis points to 650 basis points between the seasonal impact and the pricing utilization part.

Jason Kupferberg - UBS

Okay. What kind of utilization rates do you need to get to in the second half, roughly?

Alan Herrick

If you look -- one second on that, I will give you a relative comparison, if I can read my chart here. If you think about it this way, largely we are looking at utilization that runs roughly in line with Q3 '07. We would love to see it get up to the 78%, 79% range as we talked about before. But as you'd expect, utilization in Q4 seasonally gets worse and that's what happened, that's what usually happens. But given the delayed start-up, utilization got worse in Q1 as we said we expected, but seasonally that's usually not the case. Usually utilization improves in a normal climate in Q1, so you really got quite a bit of room from your Q3 run rates and where we operate in Q3 to where we operate in Q1. So we think there's quite a big swing there that creates a lot of opportunity for us, as far as margin improvement to get to the levels that we would like them.

Jason Kupferberg - UBS

Okay. Just the last question on the revenue side, maybe you people got spoiled here for a while. You guys were generally being beating the quarterly revenue number for the last five or six quarters and this quarter a little bit light versus expectations. I mean, at the end of the day was this just a function of some of the work slipping to the right that you described or in hindsight were you a little bit more aggressive in the outlook that had you put out there, given the track record of out performance that you were posting?

Alan Herrick

I think that just there a lot of things changing in the climate obviously in January and February, and we saw some pick up in March, but didn't quite see it at the level that we probably thought we would see it. (Inaudible) tad off from that continues to improve from our perspective from what we've seen early here in Q2. But I would characterize it as that.

Jason Kupferberg - UBS

Okay. Thanks for the comment.

Alan Herrick

All right. Thanks, Jason.

Operator

Your next question comes from Mark Marostica with Piper Jaffray. Please proceed.

Mark Marostica - Piper Jaffray

Yes, thank you. Wanted to start it off with a question on Sprint again, and I'm not sure if you can disclose this, but margins on the Sprint relationship, are they by your comments that Sprint services that were kind of trimmed back, were kind of broad in nature? Would it be safe to say the margins on your Sprint business are around the company average or above or below, I don't know if you can give us any color there?

Alan Herrick

Yes, I would say -- we can't give you any specific color on Sprint. I wouldn't think there's any anomalies there that would make it broadly any different than any other portfolios business we have.

Mark Marostica - Piper Jaffray

Okay. Great. And you mentioned that you're still moving forward on your hiring plans. I think last year you hired almost 1,300 people net ads. What would you expect to end this year at?

Alan Herrick

Well, it comes back to really for us; we don't really disclose people count for, hiring but it comes back to really our revenue guidance of 20% to 25% is the right way to think about that. And obviously, that will include hiring in India that will be important to that. It will also include hiring in Europe and the United States that will be important to that, whether you are on the consulting side or the interactive side. But also as we increase our utilization rate, you would expect hiring to trail our growth rate but by some margin.

Mark Marostica - Piper Jaffray

Sure. And on the Indian comment where you were doing some rebalancing, the 160 associates that exited, what type of skills did those folks possess, anything specific you could point to?

Joe Tibbetts

Those were really, early stage associates and what we are finding is the clients are -- the work that we are doing for clients is increasingly focused on skills that require more experience and so we certainly still need lots of associates. So that's not the message. But we did feel that we were a little imbalanced and needed to do trim at the edges a little bit on the associate level, relative to our current leverage model. So that was really the point of why we did that.

Mark Marostica - Piper Jaffray

Right. One last question, you mentioned an insurance recovery in the quarter. Can you quantify that for us, please?

Joe Tibbetts

Yes, it was about $400,000 of the other income.

Mark Marostica - Piper Jaffray

So that was before tax?

Joe Tibbetts

Yes.

Mark Marostica - Piper Jaffray

Okay. Fair enough. Thank you. I will turn it over.

Operator

With Goldman Sachs, your next question comes from Julio Quinteros. Please proceed.

Vincent Lin - Goldman Sachs

Hi. This is actually Vincent sitting in for Julio. Just quickly I did not get the -- I'm sorry I missed the earlier part of the call, but I did not get the revenue growth in both reported and constant currency for North America and interactive.

Alan Herrick

Okay. Hold on a second. So for North America it was 63% of our revenues and up 20% year-over-year, and 17% in constant currency. And then interactive in Q1 continued at 45% or a bit greater of our revenue.

Vincent Lin - Goldman Sachs

Got it. Okay. And just wanted to make sure just following up on Sprint, just wanted to make sure did you say that your guidance actually baked in the reduction, the expected reduction in Sprint or not? The previous guidance when you actually provided this guidance for the first time in March?

Joe Tibbetts

Yes, I think what we said if you recall, this is an area that we've been watching full year a while and, knowing that, I think we factored in some best guess at the time about what we thought Sprint would do. I think we also said that we thought that the impact was going to largely impact Q2 or at least that would be when we'd first have a substantial change. And so we didn't know the exact numbers obviously any more than we do right this minute. But we did consider that in our guidance and we are considering it in our guidance from this point forward as well.

Vincent Lin - Goldman Sachs

And just finally, I think you indicated that there has been some increased indication for increased offshore spending going forward; could you provide a little more color in terms of what kind of services that you are seeing getting more traction in terms of offshoring?

Alan Herrick

Yes, it's a little company specific. I am just trying to aggregate it in my mind right now, but I think again, for the things that we are exposed to, which may be a different sample than others might talk about, it's a lot around development and improvements across areas of their business, whether you are looking at potentially financial services companies, energy companies or you are looking at consumer products companies. It tends to be more improvement and development related for what we see and an increase in what they call investment or new development spend that are the opportunities we are seeing, some around support and maintenance, some of those things in more effectiveness, but less so there and more towards new investment or continuation of investment they have, or depending on which companies, you are also seeing companies that just deploy IT in India as a way to do business and how we fit into that equation and how they deploy us can vary a lot month-to-month or quarter-to-quarter, but it's just an accepted practice that they mix in so much capability offshore and how they actually attack their business and IT problems.

Vincent Lin - Goldman Sachs

And just a follow up to that, are those mostly incremental offshore products or are you also seeing a little bit of clients wanting to ship on-site resources to offshore locations?

Alan Herrick

Well, I think clients are really thinking about what's the right balance of -- onshore, offshore is not quite our term, but we run a more distributed model, but really trying to think through how do you configure a distributed team and how do they flow back and forth to India, how many people do you want with industry-based knowledge and high-end skills sitting in western geographies, how do you actually package, orient and connect that work, and what's kind of the optimum model. And I think it also depends on what category of work clients are looking at.

So if you are looking at something that's very cross functional you have to really drive a lot of consensus across the organization. That might be something very, very different model of deployment than if something is more isolated or maybe if that's one function in an organization. So I think there's more thought to how they look at different categories of work and more thought to what is the right distribution model based on that category, and then how do we drive efficiency and optimization against that particular model. So I think very thoughtful strategy and in that that's driving both things. It's driving more offshoring in some cases, but it's also making sure that they are not over mixed or under mixed to use your term with onshore people.

Vincent Lin - Goldman Sachs

Got it. Thanks for the call.

Alan Herrick

Thanks.

Operator

Your next question comes from David Grossman with Thomas Weisel Partners. Please proceed.

David Grossman - Thomas Weisel Partners

Thanks. Good afternoon, guys.

Alan Herrick

Hey David.

Joe Tibbetts

Hi David.

David Grossman - Thomas Weisel Partners

Just quickly on Sprint just to, I know you've already given us a lot of information, but I just wanted to make sure I have the numbers right. So if you said that it was about 12% of revenues, so you are talking about $18 million to $19 million in the first quarter, did I understand you correctly that that would drop to 5 or 6, or that could drop about $9 million sequentially?

Alan Herrick

Yes. It was -- I think it had been running about 9% to 10% more recently and then that dropping to 5 or 6 in Q2.

David Grossman - Thomas Weisel Partners

So you are going to drop about $6 million sequentially just from Sprint alone.

Alan Herrick

That's about right.

David Grossman - Thomas Weisel Partners

Okay. And then in terms of the visibility, I mean obviously Sprint we all knew that was kind of a wildcard, how do you feel about the visibility right now where you sit on the second quarter versus where you sat on the first quarter and also, I guess, you're kind of same degree of visibility on the second half of the year?

Alan Herrick

I guess obviously I think similar to my comments before, January and February obviously didn't have as good a year as we've usually seen with the things going on in the market and budgets being less clear. But I think as the weeks go by and as we get into Q2, clients are knowing and sure of what have they are going to spend, a little bit more work on just how and where they are going to spend in some particular cases, probably especially financial services. But budgets are released, they are underway, we don't see retrenchment in that process, which has caused us to have what I say similar visibility into Q2 as we have seen previously. And then also similar visibility into the back half of the year, whether you're looking at the consulting or interactive side, we've got a good view to the revenue stream that is similar to what we are used to.

So clearly Q1 different, but as we've gotten more into Q2, we've seen good growth in our four-quarter pipe, good specificity in the project sense, which is what we look for, the assignments sets or whatever particular type and style that you're looking for. But a sense of where, what, when and how those thing will happen, which we always look at the quality of the four-quarter forward pipe and how much do we know and can we understand it and have good confidence in it. So I think very similar to what we've seen in the past as we now get into Q2.

David Grossman - Thomas Weisel Partners

And then in terms of just looking at the utilization, as I recall in the past, it wasn't so much the gross utilization number as much as kind of where the assets were being utilized, whether it was in India Europe or in the US because of the various cost differences in each of those geographies. So even though you are down sequentially, do you feel like going into the second quarter, in the second half of the year that given some of the restructuring you've done, that the balance was better than it was entering the year.

Alan Herrick

Yes, I think so and obviously only a small thing in India, as Joe mentioned but I think generally what happened in Q1 is it was an overall reduction in utilization, so it wasn't anything specific mix-wise. It's just a slower Q1 based on what we've seen for budgeting and we do expect that to pick up across the board as we go into Q2.

David Grossman - Thomas Weisel Partners

So do you have pretty good, based on the revenue visibility that you have, you have reasonable visibility on improving utilization here in the second quarter?

Alan Herrick

Yes, I think they go hand in hand. So one drives the confidence of the other.

David Grossman - Thomas Weisel Partners

Okay. And then just one last question on the other income for Joe. I think you said you had a $400,000 insurance recovery in other income.

Joe Tibbetts

That's right.

David Grossman - Thomas Weisel Partners

With that aside, should we assume that other income would remain relatively flat sequentially with rates staying relatively flat?

Joe Tibbetts

Well, you should look at the cash balance; obviously that's changed a bit, its down a little bit from last quarter. So we got that. And then there is also a piece of other income in there as well, which was about another $400,000. So there's probably $800,000 of one-time stuff in there this quarter.

David Grossman - Thomas Weisel Partners

Okay, all right. Great, guys, thanks very much.

Joe Tibbetts

Thank you.

Operator

With Bernstein, your next question comes from Rod Bourgeois.

Rod Bourgeois - Sanford Bernstein

Yes. I guess what I want to really understands is your guidance for the year is 20% to 25% revenue growth. When you look at that guidance range today versus the way you were looking at that same range three months ago, do you have more conviction within that range today than you did three months ago or less or about the same? Can you give us a bird's eye view on how that's looking?

Joe Tibbetts

We had good growth in Q1, which was a little bit on the high side of that range, if you currency adjust it, then it was sort of where you right where you want it to be so sort of 24% versus the high end of 25%. I think we've got, we talked about, Alan just spent some time talking about visibility and sort of how we feel about it. So I think that pretty much answers kind of as we look at that number. We think we've got pretty good visibility to say comfortably that we will be within that range.

Rod Bourgeois - Sanford Bernstein

I guess I'm asking a slightly different question. Has your conviction on being able to achieve that range gone up, down or stayed neutral in the last three months?

Joe Tibbetts

I think that's sort of putting shades of gray on the guidance, and we typically don't do that, Rod. I mean we sort of put a number out there and then not say how where we are on the conservative spectrum. We try to be fairly consistent about our conservatism from quarter-to-quarter. So I think we are doing that here. So I mean I wouldn't say that we are feeling terribly different about that guidance or we would be moving it.

Rod Bourgeois - Sanford Bernstein

What I'm really trying to figure out, right, your year started slow, I mean had you some budget delays and other things like that, but you are keeping your guidance intact. But you're conveying that you're -- you're seemingly conveying that your conviction in that guidance is about the same. So if you started slow but your conviction is neutral, then has something positive happened to sort of offset the fact that your year started slow? Trying to figure out the puts and takes on how things have changed in the last three months. So, we know it's negative that things started slow. Is there an offsetting positive that's happened in the last three months that's allowing to you keep your conviction level the same?

Alan Herrick

Yes, and I'd say that you're right in Q1 that started slow, but Q1 also started as expected. And within what we set for guidance. So when we are setting our guidance, we expected Q1 to be slow on the call and in fact it played out that way. So I don't think in the way you're positioning it, that Q1 was under what we expected, therefore we got to have a little bump to get back on. In our thinking, we thought Q1 would be slower due to budgeting. It in fact was. We thought March would be better. It was. We see better pick up Q2. We've got good visibility. We feel like we are in a good spot to achieve and execute on our guidance from here forward.

Rod Bourgeois - Sanford Bernstein

Right. And in terms of the non-Sprint related revenue progression from Q1 to Q2, is that about what you were expecting three months ago? You've got, you basically have to sign a lot of new business in order to grow 2.5% sequentially when you are going to lose that much money on the Sprint side, so are you about the same in terms of your outlook on June as you were three months ago? It just seems like you've got a lot of revenue growth to fill excluding the Sprint deal fall-off?

Alan Herrick

Sure, but we are obviously -- as I said, we're seeing good momentum, right? As we sit here broadly across all things interactive, we are showing good momentum, in addition to some of the trends I mentioned in consulting. So I think again that's -- I know you're looking for a specific indication, which you are not going to get out of us. But as we sit here today, we are obviously positive about what we just provided for Q2 guidance and I think it does represent strength in our funnel, that we can take that kind of decline or reduction in Sprint and still see the kind of opportunities that we see right now.

Rod Bourgeois - Sanford Bernstein

Right. But bottom line when you say $158 million or higher for June, you mean it's very unlikely in your view that you are going to be below 158.

Joe Tibbetts

That's not a comment we would respond to Rod. You can appreciate that we are basically saying that we think we are going to be 158 or higher with the same spirit that we've given you the other guidance as we've gone along here. We can't sort of handicap the likelihood percentage of missing that.

Rod Bourgeois - Sanford Bernstein

Right. Okay, great. Thanks, guys.

Alan Herrick

All right. Excellent, I think we are right at time Operator, so we will probably wrap up there with questions and thank you for joining the call. Just a quick recap. Again, I think we have a unique combination of marketing and consulting. I think we are positioned very differently. It gives us good diversity in our revenue stream and I think you are starting to see that strength witnessed in our guidance for Q2 and for the year. We continue to have stellar win rates, frankly and we think that holds us in good instead, especially in slightly choppier waters. We look forward on executing on both our revenue expansion, as well as our margin expansion and look forward to talking to you all on the next call. Thanks everybody for joining.

Joe Tibbetts

Thanks operator.

Operator

Thank you. And thank you ladies and gentlemen for your attendance on today's conference. This concludes your presentation. You may now disconnect. Good day.

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