Globant S.A. (GLOB) Q1 2015 Earnings Report, Transcript and Summary

Good day and welcome to the Globant First Quarter 2015 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Juan Urthiague, Investor Relations Officer. Please go ahead.

Thank you, operator. And thank you all for joining us today on our call to review our 2015 first quarter financial results. By now you should have received a copy of the earnings release, if you have not, copies available on our Web site, investors.globant.com. Our speakers today are Martín Migoya, Globant's CEO; and Alejandro Scannapieco, Globant's CFO. Before we begin, I would like to remind you that some of the comments on our call today maybe deemed forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainties are described in the company's earnings release and other filings with the SEC. Please note that we follow IFRS accounting rules in our financial statements. In our call today we will report non-IFRS or adjusted measures, which is how we track performance internally and the easiest way to compare Globant to our peers in the industry. You will find a reconciliation of IFRS and non-IFRS measures at the end of the press release we published in our Investor Relations Web site announcing this quarter's results. I would like now to turn the call over to Martín Migoya, our CEO. Martín Migoya: Thank you, Juan, good afternoon everyone and thanks for joining us in this call. I'm happy to be here today to share with you some of the important highlights that happened during the first quarter of 2015. We had another great quarter and a solid start of the year. Our Q1 revenues were $54.5 million, which represents 26.4% year-over-year growth. At the same time, adjusted EPS for this quarter were $0.22, 100% above the $0.11 for Q1 2014. This strong revenue growth together with a growth in EPS and operating income reflects the great opportunity that is in front of us. And it's a good reflection on how our position in as a pure play new and emerging technology is enabling us to grow faster and deliver consistent financial results. Let me share with you that on March 26, we closed the secondary public offering of 4 million shares including the Greenshoe. The idea was to provide more liquidity to our stock diversifying our investor base and strengthening our position as a public company. We are extremely happy with the outcome of the follow-on especially since a huge attention and interest that we received from the market showed that our unique vision set us apart of the rest of IT service players and reinforce our growth path. The group was over subscribed 7x and the deal was priced with no discount versus the last trade and above the price at the time of filing, again, very happy with the outcome and thanks for your help and support during this process. Before diving into our financial details, and as always, I would like to go over the last quarter in terms of our business and strategy. Also, we view some of the market trends that we ambition for the future and tell you some of the reasons that are behind our growth and that will allow us to continue with this evolution. Analyst reports continue to see increasing client-demand for digital consulting work. Companies are looking for panels that can help pretty much in their business practices using new digital areas. This represents a huge opportunity for Globant. This report highlights our positioning as a pure play in the digital landscape, while positioning the rest of the traditional service providers as legacy providers. We have the agility, culture and expertise to continue benefiting from this trend. As a proof of that we continue to see more customers coming to us looking for solutions around the topics mentioned above. They look for a company that can provide expertise in this specific domains and our strong growth in revenues can be justified due to this focus on new technologies. During the last month, we have incorporated new brands to our portfolio of customers including companies like [indiscernible], ServiceNow and Petrobras all coming from the wide variety of industries including technology, travel, finance and retail among others. More over, we have gained a stronger foothold in our WPP customer relationship with Big Data and U.S. engagements accounting for our largest focus areas. We have also expanded our services with companies like United Airlines, Southwest Airlines and AEP Energy and have been involved in very interesting projects that have the potential to revolutionize the market. We have collaborated with National Geographic Kid to create their new Web site, which has recently been awarded with the people's choice 2015 Webby Award. National Geographic Kids approached us with a goal of aligning its Web properties with its uber kids brand of products. We were involved in the development and brand realignment as well as a creation of a premium service called National Geographic Kids Adventure Pass. Today, we are extremely proud to have participated in the creation of a product that is now widely recognized by its audiences. We also partnered with eBay Classifieds Group to work on several mobile projects. They were looking to create mobile applications that were easy-to-use visually appealing and focus on social media. Their main goals were to provide a better experience to their end users. We collaborated on the core development of the native iOS and Android mobile platforms helping eBay Classifieds Group with relevant design development, talent and scale. Lastly, as I shared with you previously, last year we were engaged in the development of Scholas.Social, a global platform conceived by Pope Francis to unite educational institution from all creeds and cultures of the world. This year we continue to support Pope Francis initiative by being involved on the creation of Scholas Labs, a brand designed to accelerate educational project and support technological entrepreneurs committed to innovative integration. All this new development and projects to enforce new trends and technologies are mandating what companies are looking for. More and more organizations from a wide variety of sectors are becoming more interested in finding innovative ways to relate to their audiences and we have become a unique pure play in this segment. During this quarter, our studios have continued to invest in new initiatives to reinforce our knowledge around new trends expand our portfolio of solutions and develop our talent pool. For instances, we have launched our consumer mobile experience initiative to develop an omini-channel retail strategy for our customers. Most of our consumer experience our mobile studio have come together to provide an integrated and seamless solution for companies that want to provide the best consumer experience to their audiences. Regardless the device that you use whether it is a computer, mobile phone, tablets, smartwatch, SmartTV, digital reality or any other distribution vehicle. Another example is our mobile studio. We will continue to increase its team and focus in the latest OS versions and in new platform such Apple Watch and Android Wear. Most importantly to show how trends like wearables, mobile, gamification, and Internet-of-Things continue to reshape our world and how consumers behave. Our UX & Social Studio has published a new addition of our sentinel report available at sentinel.globant.com. This edition, we highlight four trends that we believe will determine how the market will evolve in the coming months. The first one is called cashless, and highlights their technological advancements and consumer desire for cashless transactions, such as what is happening with Apple Pay. Secondly, point and know refers to mobile technology that allows you to point, know and buy anything through new or a seasoned technologies such as QR codes or augmented reality information is being released through objects and locations. [Infullest] [ph] talks about consumers voracious appetite for information. Consumers will continue to look for products, tools and services that provide the right information at the right time in an understandable, intuitive and a natural way. The challenge is to help consumers make sense of it in a way that adds value to their lives. The fourth one is called Cloud Express, technology is increasingly harnessing the wisdom of the connected crowd; collective input can improve design, organizing funding and increase the speed of decision making. Cloud Express can help companies make marketing strategies even more innovative precise and exciting. All these highlights, point out the exceptional opportunity that we have in front of us. Our unique Studio Mobile lead the path of this growth and we have the required expertise at scale to revolutionize our customer strategy. But, it is not just about being at the forefront of technology being a pure play next generation technology is about being a global company having the best talent of this generation together on our team. With that in mind, we are constantly looking for a special and extraordinary team from all over the world that have the creativity and outstanding skills needed to create amazing products. During the past month, we have opened new development centers in Bahia Blanca, Argentina, São Paulo, Brazil, Bogotá, Colombia and New York in the U.S. This expansion will help us increase our pool of talent in these key locations while reinforcing our coverage to provide better services for our customers. And that's not all, today, I would like to announce that we have come to an agreement to acquire Clarice Technologies, a unique innovative software program development company which we believe not only reinforces our positioning as the only pure play in this new and emerging technologies but it also strengthens given that their base in India, our vision of building a global team with best talent in the world regardless their geographic location. Like Globant, Clarice Technologies believes in the importance of creating products that are not only robust in terms of engineering but also appealing for the users. They share our passion for innovation, for new technologies, for design and they combine in their teams, recognize experts in the UX and design with technology subject matter experts, together we will strengthen our focus on development solutions that leverage emerging technologies and trends and on building software for Globant brand that brings together engineering design and innovation to meet scale. Clarice Technologies was founded in 2008, and the headquarters is in Pune, India and California in the U.S. and employees roughly 250 IT professionals who will continue to be part of the team after this transaction including the founders. The company has developed know-how in some of the most innovative technology trends and has applied this knowledge working for many Fortune 500 companies. As a proof of their focus and innovative solutions, we received the Red Herring Global Top 100 award in 2013, Deloitte Technology Fast 50 award in 2014 and Gartner included Clarice technologies in their “Cool Vendors in Application Services” Report in 2015. It is important to highlight that we see a truly global company a pure play and emerging technologies just as we are and with a unique culture. Their focus will help us to increase the depth of our capabilities in mobile Internet-of-Things and UX and expanding our delivery capabilities for the first time out of Latin America, which we believe will result in better and expanded services to our U.S. and global customers. In building a global company we are constantly looking for a special and extraordinary team from all over the world. This is an important step for Globant and we are thrilled to have Clarice and their management team on Board. Our pipeline and backlog continue to be at very good levels including a vast majority of long-term projects with our current customers and high potential new customers. The absence of a dual mandate gives some big advantage for us and our customers really appreciate our focus in emerging technologies, innovation and design. During the last 12 months, we rendered services to 292 customers, three and 11 customers generated revenues in excess of $10 million and $5 million respectively reinforcing our ability to grow our key accounts. Now, we have four accounts with revenues over $10 million based on Q1 running rates. With that I will turn the call over to Alejandro Scannapieco, our CFO for a detailed financial review on Q1 and provide guidance for the next quarter and full 2015. Alej, please?

Thanks Martín. Good afternoon everyone. I'm going to spend a few minutes taking you through the first quarter results then I will talk more about our Q2 and full year outlook. As detailed in the press release, quarter one was another quarter of robust results with revenues at $54.5 million implying 26.4% year-over-year growth and $0.22 as adjusted diluted EPS compared to $0.11 for the first quarter of 2014. This strong revenue growth was primarily driven by deeper penetration in our top accounts as we have indicated in the recent period. Our largest customer on our top accounts grew stunning 81.8% and 52.3% year-over-year respectively. This is a clear indicator of our ability to grow our largest customers by delivering digital, mobile, analytics and UX and UI project among other emerging technologies. Additionally, we added a number of strategic accounts through the portfolio including among others two very large consumer good companies, one global financial institution, a growing entertainment company, one huge energy producer, one U.S. based airline and a number of large technology companies. Finally, the vast majority of our first quarter revenue was generated from customers that were already working with us in the prior year. For the first quarter of 2015, our top one customer represented 10.2% of total revenue; top 5 customers represented 30.8%; and top 10 customers represented 47.8% of revenues compared to 7.1%, 25.4% and 39.8% of revenues respectively for the first quarter of 2014. The slight increase in concentration is due to the remarkable growth in our top one account, which is [hiring] [ph] additional and longer term projects. We believe that our portfolio is well diversified for a company of our size with marquee customers that could drive sustainable growth over the next five years. Compared to the first quarter of 2014, average quarterly revenue per top five customers increased 53.8% to $3.4 million an average revenue per top 10 customer increased 52.3% to $2.6 million. We are very excited that our top customers are seeing the value we provide and are increasing the size of their business and contact with us. This reinforces our value proposition and gives us a robust base to grow in 2015 and onwards. During the first quarter of 2015, 84.1% of our customers were in North America, the U.S., as our top country, 10.1% in Latin America, Chile our top country, and 5.8% were in Europe, U.K top country. Our top three industry verticals for this quarter were media and entertainment with 22% of revenues, technology and telecommunications with 20.2% of revenues and professional services with 14.8% of revenues. As you can see we are concentrating in a particular industry and we remain pretty much balanced across different verticals. During the first quarter of 2015, 95% of our revenues were denominated in U.S. dollars, there has been very limited exposure to FX situation in our top line. As mentioned before, our first quarter revenue amounted to $54.5 million which imply a 26.4% growth year-over-year. Following with the rest of the P&L line items, our adjusted gross profit for the period increased to $21 million, 38.5% adjusted gross margin compared to $17.6 million, 40.9% adjusted gross margin in the first quarter of 2014. The 240 bps decreased is explained mainly by two factors. Q1 2014 was abnormally high given the 23% evaluation that happen in January 2014 in Argentina, our main development center, a record of 270 net additions during this quarter. This increasing headcount is a consequence of a strong business momentum and despite slightly reducing our utilization below 80% in the quarter, it allow us to maintain almost flat quarter-on-quarter revenue in UX, the weakest quarter of the year given the holiday season in Latin America. This level of net hiring is also very good sign for achieving this year's revenue targets. Despite the static gross margin reduction, adjusted net income for the first quarter of the year totaled $7.5 million, 13.8% adjusted net income margin, an increase of $4.1 million or 580 basis points versus the first quarter of 2014. Adjusted net profit for the period was boosted by 150 basis point reduction in SG&A expenses measured as percentage of sales combined with 1.8 million of tax recoveries and larger gains on transaction with bonds. During this quarter, we continue investing heavily in sales and marketing adding three sales employees in the U.S. At the same time, the rest of the G&A areas gained efficiencies and diluted as a percentage of revenue as most of the significant investment there was done prior to the IPO. Adjusted diluted EPS for the quarter was $0.22 based on 34.5 million average diluted shares for the quarter effectively doubling the $0.11 for Q1 2014. Now let's move on to balance sheet. Cash on investments as of March 31, 2015 increased to $69.9 million compared to $62.2 million as of December 31, 2014, and borrowings decreased to $1.1 million from $1.3 million three months ago. Our balance remains a strong with current asset of $125.4 million accounting for 73.5% of the company's equity. Total shares outstanding as of March 31, 2015 were $33.9 million common shares. We finished the quarter with 4040 Globers, 3,694 of which were IT professionals, attrition in the last 12 months ending March 31, slightly decreased to 19.9% compared to 20.2% for the 12 months ended December 31, 2014. Now, I would like to share with you our outlook for Q2 2015 for the full year ending December 31, 2015. We expect to continue delivering strong revenue growth on profitability as it has been the case in prior years and our commitment when we made the IPO. We also expect to continue making strategic investments into the business. Based on current visibility and including the impact from Clarice Technologies acquisition we expect 2015 revenue to be between $244 million and $250 million, implying a 23.7% year-over-year increase at the midpoint of range. In terms of margins, our 2014 gross margin was among our highest at 41% and 170 basis points above 2013. For 2015, we expect gross margin to be below 2014 levels due to additional investments in our operations and in studios and some FX headwinds in Argentina, which we seek to offset that the net income EPS level by a steady SG&A evolution and the continuity of our current FX hedge strategy through gains from one operation. We are also increasing our diluted EPS for the year, which is now expected to be in the range of $0.88 to $0.96 assuming $34.8 million average diluted shares outstanding for the full year. Turning to our guidance for the second quarter, we expect revenue to be between $58 million and $60 million. Adjusted diluted EPS is expected to the range of $0.19 to $0.23 assuming $34.6 million average diluted shares outstanding for the quarter. With that, let me hand over to Martín for closing remarks. Martín Migoya: Thank you, Alej, and thanks everyone for participating on the call, your courage and support. Let's now move into the Q&A session. So operator, can you please queue the questions. Thank you very much.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Anil Doradla of William Blair. Please go ahead.

Hey, guys, congrats on the great results. Martín, I had a couple of questions, your top customers growth was very impressive, I think you said something like 80% year-over-year growth, can you share how much you could grow with this top customer and where I'm trying to go with this question is, should we be worrying about saturations at this customer say in a couple of quarters or do you think, there is quite a bigger opportunity of growth? Martín Migoya: Thank you, Anil for the questions. Well, the first reaction to your question is those customers that are in our top list are really very big. And I cannot estimate now – the answer to your question, all what I can say is that we are just scratching the surface of what we can do in those companies not because we are not being trading in the process we already have but because we have been elected like priority vendors for many things that they are doing in many other areas, just in the areas we are working now. So I think growth from those big accounts will come from two dimensions, first, keep on delivering on that and remember every time we are talking about projects of the king we are doing we are not talking about something that starts and ends, instead we are talking about continued creation growth that always demand new and new features coming from those vendors from those – I mean from us into those big customers. So that's the first I mentioned. The second I mentioned is going into another area or other areas of development and still – the expenditure that they have in Globant is very small compared to the whole budget that they have. So we are very positive about the idea of keeping on growing those accounts.

Great. As a follow up – you talk about margins being a little bit less than 2014 largely due to the investments and Martín and Alejandro, can you explain big picture as we over the next 12 to 15 months obviously there is a good pipeline and good demand environment, but you have to keep up with it, so this margin profile which we will see in 2015, as we look into 2016, will the growth requirements and investment requirements kind of outpace some of the margin upward trend so to speak or do you think this is what you do over the next couple of quarters will set you guys, so for the next a year or two?

Hey, Anil. This is Alejandro. Thank you. Thank you for the question. As you know, we are in the sweetest part of the demand of – the services that we provide, we will continue investing especially in the capacity of our studios, we will remain at the high-end of technology, cabinet of technology that proving to be very effective in terms of growing the accounts. Having said that, we will continue delivering levers through SG&A dilution that will help to have sustainable levels of operating margin and at the end also to expand EPS going forward. So having kind of -- further look into 2016. As for gross margin as I said probably 2016 margin is going to be a little bit below the level of 2014. But again, we are going to be a compensating part of that with SG&A dilution at the operating margin level.

Great. And once again, congrats guys.

Thank you. Martín Migoya: Thank you. Thank you.

[Operator Instructions] The next question comes from Tien-tsin Huang of JPMorgan. Please go head.

Hi. Great, thanks. Good afternoon. I guess on the – just on the guidance here, Alej, I'm curious, how much of the change is coming from the Clarice acquisition and has that deal actually closed? Just want to get clarity.

Okay. Hi, Tein-tsin. How are you? So the answer to your question in terms of the closing, yes, the transaction is closing in May. As far as for the guidance very little of that in Q2 as you can imagine, in the full year again, we are not splitting the number of organic vis-à-vis in organic that we have been doing in the past. We plan to do a very, very quick integration of the company. And if you compare the revenue from Clarice to Globant is not material at all. Having said that, we have blended and factored some synergies into the full year revenue guidance and that's the number that we guided for the full year. And in fact, that we have been doing in the past – we are confident that we can achieve. Martín Migoya: Yes. And the last thing Tien-tsin, I would like to add into Alej's comments. Just make your own mark, 250 employees within the Clarice team. The revenue per head is a little bit lower than our revenue per head. So you can do your own marks and if you want to include it, although we are not delivering the exact number.

All right. Martín Migoya: What we can also add to that Tien-tsin is that deal is going to be accretive for Globant both in terms of top line growth and margins.

Okay. Okay. That's good to know. And then just on the large client side, just to follow up the last question, is – I know obviously you are penetrating the clients – large clients are growing, is it the size of the digital projects themselves that are increasing or are you just getting broader adoption within the client, if you follow my question. Martín Migoya: Yes. There are two things – the two things – pretty much the two things are the same time, Tien-tsin. A portion of the growth belongs to going deeper into that same project for example, a project that used to be just online now is becoming more mobile oriented, so you need to go deeper into that direction, all right? And then, there are other areas that are being penetrated within that same customer from just one too many. So that's the trend we are seeing – that's the trend we are seeing in pretty much all the big customers. And it's very helpful by the way.

Yes. Okay. That's good to know. One more question from me, if you don't mind. Just the WPP related revenue, I heard you mentioned that – I don't know if you gave any numbers, how big is it, now, is it growing above corporate average any details there would be great. Thank you.

In terms of WPP, of course, you have the disclosure in the 20-S. It represents a little bit less than 5% of the total revenue for Globant. But, we have said in prior calls we have changed a little bit, the strategy now is not only growing after the company from the WPP group but also trying to lever on the WPP relationship. So that they can make interaction for us for large customers, while we can serve them on the digital space. So maybe Martín, if you want to add something to that. Martín Migoya: I think it's pretty much what Alejandro said. The only addition to that is that we see – although we see pretty flat revenue coming from the traditional WPP customers, the other revenue come from no relationship based on the WPP relationship is going. So I think that all-in-all it remains very positive for us although the direct relationship with WPP is not growing that fast.

If I may add that engine something that is – I think it's something to highlight on the WPP relationship is that they appointed a new Board member and the Board member that they appointed is the COO of digital strategy for the whole group of WPP. So that's a big reinforcement of the commitment from WPP to investment that they are having in Globant and the synergies that we can build up together.

All right. Now, that's great. That's good to hear. Good results. Thank you.

Thank you. Martín Migoya: Thanks Tien-tsin.

The next question comes from Avishai Kantor of Cowen. Please go ahead. Please go ahead with your question Avishai Kantor.

Can you hear me now?

Yes. Please go ahead.

Thank you. Can you please talk a little bit about hiring plans by regions for the year?

We have been very, very active in the Latin America region, we have been – we don't disclose the numbers of planned hiring by region, but, what I can tell you is that, we have been growing very fast in Mexico. In two cities on Colombia both in Bogotá and Leticia; Argentina also a very good place also for hiring. We continue to execute on our plans of grow in U.S., our onsite in U.S., we have been very, very active in U.S. I mean the headcount in U.S. was only 2% two years ago, now, its 5% of the total headcount of the company and growing. So you should expect that to continue growing in U.S. And of course, now with the acquisition of Clarice, India is going to be also a very interesting source of talent for us. That would be in a nutshell, our planning for growing the headcount across the regions.

Thank you very much.

Seeing that there are no other questions, this concludes our question-and-answer session. I would like to turn the conference back over to Martín Migoya, the CEO, for any closing remarks. Martín Migoya: Thank you very much operator and thanks everyone for participating in this call. For us – our pretty good results and we are very happy to have you here again to share that. Thank you. Thank you. And see you next quarter. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.