Sapient plans layoffs, cuts estimates

The company cited a weak North American economy, saying that its business in Europe remains strong. Sapient serves its clients with consulting, Web-based development and technology integration.

Sapient will face a restructuring charge of $35 million to $40 million in the first quarter related to the layoffs. The company is eliminating 720 people, and also plans to close its office in Sydney and consolidate offices elsewhere. Shares of Sapient fell $2.85 to $10.12, or 22 percent.

The cost-cutting measures are expected to save $5 million in the first quarter and $60 million to $65 million on an annual basis.

Despite the cost savings, the company said it will miss analysts' estimates for the first quarter. Revenues are expected to about 20 percent lower than the consensus of $136 million. Sapient said it would likely lose 3 to 5 cents per share on a pro forma basis for the first quarter. First Call consensus for the first quarter was for a 9 cent per share profit.

It expects to have $250 million cash on hand at the end of the first quarter, but did not give any further projections for 2001, citing "uncertainties of the marketplace."

Sapient's problems stem from an overall economic slowdown that has led many companies to cut back on expenses. With companies looking for ways to cut costs, spending money on information technology and IT consulting has dropped.

Consulting firms, which include Razorfish, Viant, Scient and MarchFirst, have all lowered estimates or announced restructuring plans.

Those concerns prompted at least one analyst to cut estimates for Sapient even before the company's warning.

"We are hearing increased anecdotal evidence of reduced demand in the near-term, primarily driven by economic uncertainty with the dotcom demise fading as a factor," wrote First Union Securities analyst Edward Caso in a research note. "This is currently leading to paralysis for IT users in moving forward on technology development and deployment.

"We therefore expect IT professional service firms to experience decreased utilization in Q1 and Q2, and in turn will have to further reduce billable headcount to sustain some level of near-term profitability and cash flow," he said.

Caso lowered revenue and earnings estimates for several professional services companies, including Sapient. He lowered his rating on the stock from "strong buy" to "buy," dropped revenue estimates for 2001 to $515 million from $620 million, and earnings estimates to 30 cents from 48 cents.

Investors should "expect downward revisions" for the sector, WR Hambrecht analyst Gregory Gore said in a research note.

"Although we do not yet know the timing or severity of earnings estimate changes, current economic conditions combined with aggressive models suggest that downward revisions are likely," Gore said.

He dropped all "strong buy" recommendations to "buy," giving that rating to Sapient, AnswerThink, DiamondCluster and Inforte.