My favorite part is explaining the economics of moving work to india and the pricing pressure in the current environment.
"Like apparel and electronics manufacturers before him, Greenberg can cut costs by moving operations abroad. He wants to transfer half the workload to India, where salaries for programmers are typically a fourth what they are in the U.S., (see the story that follows). Not all the savings are hitting the bottom line; he is cutting bids by 20% to 50% to win new clients. "
Time for fuzzy math. If they succeed in moving half of the work to india at 1/4 of the cost, but have to cut prices by 20% to 50%, what is the impact to the bottom line?
Cost savings % * % of work moved = % of direct cost saved:
75%* 50% = 37.5% best case if they can move 1/2 the work over seas.
so using Dec 2001 numbers, they ALMOST break even. 63mm revenue, 31mm direct cost (46mm * 67%), 34mm SG&A. And that is best case scenario.
My other favorite part - HE is cutting prices. Is he actually selling?
'do you still disagree? Are you still confident?'
i mentioned that the key was getting their utilization higher. this quarter it dropped from 59% to 50% (or there about).
when they have a project, the income exceeds the expenses for those involved over that period. but when you're working only half the time, it won't cover the downtime or fixed expenses.
obviously this wasn't the quarter they return to profitable growth, or even head in the right direction. and their guidance is that it won't happen next quarter either, or perhaps not this year.
but, i don't think the company will go away. they will stick it out. not sure if i will, but i'm holding for now.
do you still disagree? Are you still confident?
Subj: Re: get what you pay for ? I don't agre
Date: 04/06/02 02:19 pm
'The only thing I was trying to show is that they are losing money on every project, Indian or not'
i disagree. i'm confident that most of projects are breakeven or profitable (looking at the costs and revenue of the project only, not the fixed costs of the company). the issue around corporate profitability is getting their utilization higher (more billable hours per billable employee) and balancing out the fixed to variable portions of the business. they are attempting to solve this by layoffs, adjusting the labor force to india, and of course by continuing to work on the pipeline.
yes, they are losing money now, both cash flow and net losses (so are a lot of companies). obviously the point of investing in sapient is do you believe they will continue to lose money or return to profitable growth. i believe it's the later.
You obviously have me confused with someone who hangs around message boards engaging in esoteric arguments with bashers. My position in SAPE is green, and that is my main concern. I just wanted to point out that the real world is not linear and not static. SAPE is a top company in this sector and its future, like that of so many others from ORCL on down relies on cost cutting and recovery of business capex spending. They are doing a decent job of cutting costs (although I do not approve of layoffs and out-sourcing) and capex spending will pick up as the economy recovers. But, then, you don't believe that either. Best wishes to you.
I figured costrader wouldn't respond - because he/she can't actually articulate what those complex price elasticity of demand factors are or how to measure them. So again, I'll simplify. see the article above.
WIPRO is cutting rates. Think of what that means to SAPE.
Now the math. All data from the article, unless otherwise noted.
WIPRO will make 2.35b rupees on 9.19b rupees in sales. Btw, is a rupee a jelly bean? The conversion rate is about the same.
The conversion rate from the article is 1 rupee = about 2c. So revenue of $188mm and net of $48mm. 9000 employees. I'll make this part up. Say 20% are overhead. So 7200 billable. Back to math. That means that each billable would generate $26k in revenue per quarter or $104k per year.
So how much does Sapient have to cut their rates to get down to $104k a year? A daily rate of about $500? To be competitive?
Last thing - wasn't Lucent a Sapient Client at one time? If so, why are they one of WIPRO's biggest clients? Are they still with Sapient too?
So enlighten me as to your methodology for analyzing Sapient in this ever evolving world. How do you analyze Sapient's business and extend that analysis to assess the stock's future performance?
Apparently, I am unable to comprehend the complex world that you and Sapient live in.
Well, if nothing else, you have further clarified your beliefs to the board, and your lack of understanding for the changing business dynamic in a changing world. The model is not linear or static as you put forth, but non-linear and evolving. Best of luck to you.
"I don't want to sound argumentative,"
but I'm going to sound argumentative...
"but you haven't covered all the assumptions."
Yes I have. There are 3 basic assumptions. How much work Sapient gets, how much customers pay for it, and how much work goes to india.
I assumed that sapient gets the same amount of work, customers pay 50% less for it, and 50% of work ends up overseas.
If you want to assume something different about these things, have a blast. Go crazy. I'd like to hear a fact based argument for rising prices for IT consulting, better win rate at Sapient or why they can transfer more work to india.
"If prices are cut 20%, will the number of projects go up 20% or will they go up 25%?"
I assume that it the number of projects will go up 0%. Price is the ONLY tool they have to remain competitive. Congratulations, you are now a commodity consulting business.
" Where on the curve will they break even against their fixed costs? "
It should be very easy to break even against fixed cost, since this should be a variable cost business. Somehow, Sapient has run SG&A (fixed cost) of 50% of revenues. That is astounding. That number shouldn't be more than 14-20% (take a look at Accenture or KPMG for comparisons, and they are actually GROWING businesses). Sapient's performance here sucks.
"As the world economy improves,"
Now there is a stretch that I don't believe.
"how much new business can they shove under their umbrella of fixed costs?"
My assumption is none. IT budgets are slashed 30%. Competition is harder. Companies are kicking out the consultants and creating their own capabilities.
"There are lots of things to consider here."
Other than the three above, I don't think much else matters.
I don't want to sound argumentative, but you haven't covered all the assumptions. First, you seem to make the case for 50%. What about the case for 20%? What proportion of projects will be priced down 20% vs. 50%? What is the elasticity of demand? If prices are cut 20%, will the number of projects go up 20% or will they go up 25%? Where on the curve will they break even against their fixed costs? As the world economy improves, how much new business can they shove under their umbrella of fixed costs? There are lots of things to consider here.
I would love to share my ideas with you and anyone else on the board. I also would love to get your ideas. I have dropped you an email and I would welcome email excahnges with other investors on the board. I can be reached at firstname.lastname@example.org
Best of luck to all!