Globant S.A. (GLOB) Q4 2016 Earnings Report, Transcript and Summary

Good Day and welcome to the Globant Quarter Four and Fiscal Year 2016 Earnings 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 also note that this event is being recorded. I would now like to turn the conference over to Juan Urthiague, Investor Relations Officer. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today on our call to review our 2016 full year and fourth quarter financial results. By now you should have received a copy of the earnings release. If you have not, a copy is available on our website, investors.globant.com. Our speakers today are Martin 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 may be 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 as 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. During 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 other 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 website announcing this quarter's results. I'd like to turn the call over to Martin Migoya, our CEO.

Okay, thank you, Juan. Good afternoon, everybody, and thanks for joining us today. I'm pleased to be here to review with you our business and financial performance for the three months and 12 months ended on December 31, 2016. At the end of the call Alejandro will share with our outlook for 2017. Our revenues for 2016 increased to almost $323 million, a robust 27.2% year-over-year growth. This robust growth was driven by strong demand for digital solutions across the different customers that we serve. European and the United States led this growth from a regional perspective, while Travel and Financial services industry had outstanding performances. For the first time in our history, we have two customers with annual revenues in excess of $30 million. We finished 2016 with six accounts over 10 million, 11 over 5 million and 60 over 1 million compared to 5, 10, and 51 respectively for 2015. This is a clear indicator of our ability to scale up our key accounts. Q4 was another good quarter for the company. We exceeded our guidance in terms of revenue with $87.3 million, representing a 21.9% year-over-year revenue growth. Banks and travel were key contributors to this growth. Top ten accounts performed strongly with some of our 50 square accounts outperforming the rest of the company. Later during the call, Alejandro will share more details on our financial performance. Now, let me go over the state of the market and share some news about Globant. We continue to see a strong demand around digital services. Different research has pointed out the sustained growth and opportunities coming from digital transformation project. In one of its latest reports, Forrester predicts that in 2017 transformation budget will allocate the billions something similarly shown in the recent research from IDC called IDC MarketScape, worldwide digital strategy and agency services for digital customer experience 2016 vendor assessment. The research states that digital customer experience continues to be a top business imperative. Enterprise spending on professional services for this initiative are growing at 20% CAGR through 2020, generating over $32.6 billion in revenue for service providers. We’re proud to mention that this report has named Globant as a leader in digital customer experience. The study points out that worldwide Globant is seen as most capable in digital journey design, activation and measurement. Globant is also considered by clients to be one of the strongest firms incorporating cloud into engage and deliverables helping clients to visualize and design process improvement that supports digital journey and using new data sources to form and deliver digital strategies. This report continues to show a huge opportunity for Globant considering our unique positioning as a leader in digital journey and digital transformation programs. To enforce these differentiators, we are constantly analyzing new trends. Our goal is to help our customers stay fit for future challenges. We recently published our latest trend report at trends.globant.com with some key topics for 2017. Within out studios we have the talent to sustain our leading position in these emerging trends including first connected ubiquitous experiences. These types of experiences will continue to mature and evolve. The maturity of consumer devices are now connected and working seamlessly as users rely on them. The challenge continues to be focused on the creation of experiences with minimal friction. This year, we will the rise of new interfaces and higher need for synergy between devices providing immersive experiences. According to Gartner new input, output mechanisms will emerge using audio, video, touch, taste, smell and other sensory channels such as radar to extend beyond human senses. Experiences will become ever-present, omni relevant as they flow through the users. They will be embedded into the context rather than being disrupted analyzing data as it becomes available. This is a trend affecting not only consumer experience but all aspects of our lives even our work experience. One example of this is the work that we are doing for a leading retail company. To transform their talent supply processes, we are working on the creating of application which will be a virtual assistant that uses a machine learning approach. It helps candidates have a better communication and improve candidate engagement during the recruiting process. Deep learning and predictive analysis, data available for existing channels and from new input sources will together rise in deep learning and predictive analysis. Systems can learn and change future behavior leading to the creation of a more intelligent device and programs. The artificial intelligence market is estimated to grow at a CAGR of 53% from 2015 to 2020. The global predictive analytics market is expected to grow at a CAGR of 27% from 2015 to 2020. In this context, our cognitive computing studio has expanded its services and capabilities to lead this opportunity in front of our customers. To mention some example, the studio is working with a financial institution that is looking to innovate using audio processing techniques to transform the way their employees access data. At the same time, this studio is helping a global retailer company to transform their business model from a consultative sales approach to a direct sales one. They are leveraging a huge amount of sales data and machine learning techniques to help the company understand, identify and better engage with their clients, recommending products that are better suited for them. Third mutual and augmented reality. This will be one of the most popular trends throughout the year, the launch of new hardware allows more companies to leverage the technology for their own purposes. Virtual reality experiences will be expanded to involve more sensors, going from a visual and some experience to include most of our senses. As an example of our work in this area a top pharmaceutical company partnered with Globant to understand how virtual reality technologies could be used for a doctor patient interaction training. The result was an immersive experience to reunite doctor patient interaction. This technology trends are aligned with our studio model and will shape the way in which we disrupt consumer experiences throughout 2017. Now let me do a recap of some new customers and prospects that led our growth during Q4 and all 2016. One of the most interesting projects is the one that we are doing for a global bank, where we are involved in creating the first version of their new digital engagement platform. As part of this project, we're building a new experience for their customers through out different touch points including new products and services for a more effective use of technology. Their main goal is to create a normally relevant experience for the organizations end-user. In the U.S. several new customers were added to our portfolio in Q4. Companies coming from industries like media and entertainment, travel and finance. These companies joined a vast list of logos that incremented during 2016, all of them pretty much aligned to our 50,000 square strategy. On top of that, there are several interesting projects to mention. One of the largest American multinational consumer goods company wanted to transform how they reach and recruit new talent. The use of process chain approach that move candidates throughout a long and manual process. They wanted to change it to a candidate centric recruiting process that will build a lasting relationships as they get the best talent. Globant working to ideate an ecosystem of solutions that included artificial intelligence gave me five mobile and web touch points. Digitalization and optimization of processes and a new communications strategy, the goal was to help the Company save time by automating the right processes reducing the candidates drop off rate and gain increased brand equity as they deliver a superior user experience. Another example is the work we have done for one large company within the health care industry globally recently completed a sales force of comm implementation. We received huge prices from the customer since it is considered to be a every very essential project for the customer centric and patient engagement journey in their business. Lastly Globant is working with CNA National Warranty Corporation on their complete redesigning and implementation of the Company's website with the goal of improving the overall user experience. The main mission is to make the website an annulative point of contact between CNA National and it’s end users by delivering an improved user interface and incorporating next gen features for mobile devices. In Europe, we have also been working on a great deal of amazing projects. Not only in the finance and travel industry but also in the public and digital sector. This can be seen in a project that we are doing for metropolitan police in the U.K. As part of our partnership with them, transforming law enforcement for a digital age. We have led a pioneering initiative on social media to prove the value of public police communication through new digital channels. The result is a new way for the public to talk to the police helping vulnerable victims of crime make contact for the first time. It also enables the public to self-serve and create a visible police presence online, reassuring the public and the deterring offenders. This is a world first in terms of strategy planning, execution and measurement. And is one part of the immense public access strategy that is being delivered throughout 2017. In Latin America we have also seen expansion with several customers and industries like finance and travel. As an example of our work, we can mention an engagement for one of the leading banks in Latin American Banco Macro we're working with them on additional strong formation strategy. That involves change at different levels of the organization from a strategy to operations and tactics. Through elevating the business vision of the commercial operations and technology area, we're focusing the bank in a client's center strategy. We do this by getting quantity and quality information about the customer to have a meaningful relationship with them throughout their life cycle. Within our services our platform is offering, we’re seeing continuous growth with several new customers in their portfolio. For instance StarmeUp most recently secured Santander Group as its largest client. This organization is a leader in retail and commercial bank base in Spain with a meaningful market share in 10 core countries in Europe and America. And 124 million customers for StarmeUp it represents over 180,000 potential users. Additional StarmeUp clients span the range of banking, media and technology companies in the U.S., Latin America and Europe. On top of that we are proud to say that StarmeUp was recognized as the top mobile app for business by the W3 award as a silver winner. This awards honors creative excellence on the web and recognized that people behind awards-winning sites, marketing programs, social content mobile apps and online video. It is an exciting recognition that shows the value of our platform in regards to building company culture and employee engagement as part of the additional transformation strategy. Now let me share some news related to our global presence. We continue our expansion in our delivery centers in the U.S. Latin America and India. Just yesterday we formally re-opened our completely renovated and expanded playground in San Francisco. The playground is Globant digital journey accelerator featuring. tangible demonstrations of how digital experiences are dreamed. It is a place to welcome our customers to get inspired by new trends and technologies. Such as mutual and mixed reality sets, Internet of Things, embedded computing and data analytics. During the opening we also hosted an exclusive talk by Mike Haley, head of machine intelligence at Autodesk, who shared his experience around machine learning and artificial intelligence. The center aims to expand our presence in the U.S. by creating a unique space for innovation. Looking forward to 2017, we're seeing a robust level of demand from both current and prospective customers. This focus continues to be around emerging technologies and digital transformation programs as these areas are key strategic initiatives for multinationals across the globe. We continue investing in our studios to remain at the forefront of innovation. And will continue investing in the development and expansion of our services over platform strategy. Our pipeline shows a healthy incremental trend. And the market is improving relative to the end of the year. Especially, within the financial industry. We remain optimistic about our ability to deliver sustainable growth in the future. With that I'll turn the call over to Alejandro Scannapieco our CFO for a detailed financial review on our fourth quarter and the full year to 2016 and also to provide guidance for Q1 and full year 2017. Ale please, thank you very much.

Thanks Martin and good afternoon everyone. I will spend a few minutes taking you through the fourth quarter and full year 2016 results. Then I will talk about our outlook for 2017. Let me start by saying that we're very pleased with our overall results for the for fourth quarter and full year 2016. Revenue for 2016 amounted to $322.9 million, implying a robust 27.2% year-over-year growth. Southwest Airlines became our largest customer for 2016, with remarkable growth. Our number one account for 2015, Disney experienced a solid second half, which helped them to position in line with 2015 for the full-year, with good perspectives of growth for 2017. We also saw good momentum among some of our 50 Square accounts. We expect to see more benefits in the coming quarters. Revenues for top five, top ten, and eleven to end increased 30.1%, 26.8% and 27.6% respectively, showing good growth across the board. Adjusted gross profit for 2016 was very strong, at $137.1 million, 42.5% adjusted gross margin, compared to $98.7 million, 38.9% adjusted gross margin for 2015, an improvement of 360 basis points year-over-year. This significant improvement is mainly due to a combination of the higher revenue per head and normalization of the FX market in Argentina. Despite a strong improvement year-over-year, we trended down towards the last couple of quarters as we faced increased FX headwinds in some of our Latin America delivery centers. During this year, we achieved an important dilution in our SG&A as percentage of sales, decreasing from 25.5% for 2015 to 22.3%. We have been very disciplined in managing our cost as we gain scale. While we continue investing for the future primarily to expand our sales coverage in the United States and Europe. As a result of this our adjusted operating income 2016 increased substantially to 16.8% of sales from 9.7% percent a year ago, an improvement of 710 basis points. During 2016 we didn’t perform many bond transactions. So no gain on bond transactions were recorded throughout the year. Financial income and expense net amounted to a loss of $3 million. This next result is primarily composed of FX gains and losses resulting from monitory assets and liabilities in local currencies and interest on our investments and on our liabilities. Other income and expenses resulted in a $3.6 million gain resulting from the remeasurement of the liabilities related to our acquisitions. Our effective tax rate for the year was 28.3%, a significant decrease relatively to the previous year. The reduction over the course of the year was due to a more stable FX scenario in Argentina, coupled with much lower intercompany balances and a more balanced distribution of assets and liabilities across the company. Adjusted net income for the year amounted to $40.3 million or 12.5% of sales. Adjusted diluted EPS for the same period was $1.14 based on 3.5 million average diluted shares. Let’s now move to our Q4 2016 performance. Q4 was a solid quarter of revenue closing at $87.3 million, 21.9% over last year and 6% over the last quarter. During Q4 2016 Disney became again our top one account for the quarter, displacing Southwest by a very small amount. Our recently launched 50 Square strategy has started to generate results and we now have six accounts over $10 million in annual revenues. Revenues for customers 2 to 10 increased 31.9% over the fourth quarter of 2015 and 5.8% sequentially. Revenues for customers 11 and beyond increased 14.3% over the fourth quarter of 2015 and 0.2% sequentially. We expect a gradual transformation of the composition of this group of customers as we dive deeper into our 50 Square process. Our customer concentration numbers for Q4 remain fairly consistent with past quarters with our top 1, top 5 and top 10 accounts representing 9.4%, 33.3% and 45.8% of sales respectively. Our vertical diversification remains balanced across the different industries with media and entertainment and financial services leading the path, accounting for 23% and 21.4% of revenues respectively. We continue to be well-diversified in terms of customers and industries with an increasing number of multi-million dollar accounts. During the fourth quarter of 2016 78.9% of our customers were in North America, the U.S. was our top country; 11.5% were in Europe; Spain becoming the top country and 9.6% in Latin America and others; Chile our top country. Europe continues to outpace the rest of the regions in terms of growth. During the third quarter of 2016, 88% of our revenues were denominated in U.S. dollars, protecting our top line against currency fluctuations. During the last 12 months we rendered services to 340 customers. We now have 60 customers with annual revenues in excess of $1 million, compared to $51,000 one year ago. Turning now to profitability, we’re seeing solid improvements compared to 2015. Our adjusted gross profit for the period increased to $35.8 million, 41% adjusted gross margin, compared to $28.1 million, 39.2% adjusted gross margin in the fourth quarter of 2015. The increase in adjusted gross margin was primarily driven by higher revenue per share combined with the normalization of FX market in Argentina during last December when the new government came to power. Sequentially, currency fluctuations continue to create headwinds on our adjusted gross margin, particularly in Argentina and Columbia, our two largest development centres. We finished the quarter with 5631 Globers, 5219 of which were IT professionals. Attrition for the past 12 months was 19.3%, pretty much at the same level of last quarter which was 19.4%. SG&A decreased 250 basis points compared to Q4 2015, accounting for 22.4% of our quarterly revenues. This impressive year-over-year dilution is a key contributor to our operating margin expansion. Our adjusted operating income for the quarter improved substantially relatively to Q4 2015. It amounted to $13 million, or 14.9% of revenues, compared to $8 million, or 11.2% for the fourth quarter of 2015 a growth of 63% year-over-year. Financial income and expense net amounted to a loss of $1.2 million. This net result is composed of FX gains and losses resulting from monitory assets and liabilities in local currencies and interest income. Other income and expenses resulting in a $2.6 million gain, resulting from the remeasurement of the liabilities related to our acquisitions. Our effective tax rate for the quarter was 22.7% in line with the last two quarters. Adjusted net income for the fourth quarter of the year totaled $10.9 million, 12.5% adjusted net income margin, an increase of $1.9 million or 21.1% compared to the third quarter of 2015. Adjusted diluted EPS for the quarter was $0.31 based on $35.4 million average diluted shares for the quarter, increasing from $0.26 a year ago. Moving on to the balance sheet, our cash and investments as of December 31, 2016 amounted to $59.9 million, compared to $62.4 million as of December 31, 2015. At the same time borrowings decreased to $0.2 million. Our balance sheet remains strong with current assets of $133.3 million accounting for 46.9% of the Company’s equity. Total shares outstanding as of December 31, 2016 were 34.6 million common shares. During 2016 we improved our cash generation. The generated cash was used for CapEx, earn outs related to past acquisitions and initial payments of L4 and WAE’s acquisitions. To wrap up I would like to share with you our outlook for Q1 and the full-year 2017. Let me start with the demand environment and the implication for our revenues. We continue to be bullish in terms of our service offering which we believe is fully in line with market demand. At the same time, we’re very optimistic with the progress we’re seeing in our 50 Square accounts. With regards to our margins we’ll stick to the normalized range around 40% and 41%, we pointed out in the last few calls. We’ll continue our training programs in cutting-edge technologies and the implementation of our 50 Square strategy. On top of that, the continuity of FX volatility around the globe, but primarily in Latin America is expected to generate slight headwinds to our gross margins as we have seen in the last few months. The Argentine peso is trading today at the same level it was a year ago with inflation in excess of 30% for 2016 though clearly trending down. Argentina despite becoming less relevant, it still represents 49% of our workforce. However, we will continue managing very carefully our SG&A expenses to gain additional dilution, with intention to offset potential fee from gross margin coming from FX headwinds. Finally, effective tax rate is expected to remain in the 22%, 25% range in line with the last three quarters. Now let me provide you with our guidance for Q1 2017 and the rest of the year. Based on current visibility we expect revenues for 2017 in the range of $383 million and $393 million and imply 20.2% year-over-year revenue growth at the midpoint of the range. In terms of EPS, we are estimating a range of $1.29 and $1.39 and imply 17.7% at the midpoint of the range, assuming 35.9 million average diluted shares outstanding for the full year. Looking into Q1, we expect revenues to be between $86 million and $88 million, and EPS to be between $0.24 and $0.28 assuming 35.7 million average diluted shares outstanding for the quarter. Thanks everyone for participating on the call and for your confidence and support. Let’s please now move to the Q&A section of the call. Operator, can you please queue questions? Thank you.

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

Hey guys, so I had a couple of questions and for the first one, Ale is around the gross margins. So obviously there's a couple of components of it right, there is a component of the FX impacts and then there's component of potential salary inflations. So can you help us understand how these two are inter-playing? Historically what we have seen is that you will revisit your salary targets twice a year, so given this particular environment that we are in, where the peso has been relatively flat how should we be looking at the interplays of your salary inflation plus FX?

Hi, Anil, how you’re doing? This is Ale. As you said it’s composed of two FX so I would say pretty much all of the currencies in Latin America especially for Q1 the outlook for the full year is different, also U.S. dollar seems to be strengthening among the year but the outlook for Q1 is deal with most of the Latin America currencies appreciating against U.S. dollar in fact that has been the case on average 3% to 5% in most of the countries where we have delivery centers. So that’s a big driver of that conservatism if you wish that we are baking into the markets, as far as inflation in Argentina how we manage that, inflation is trending down I explained that in the speech. What's happening is after the significant evaluation that occurred last December 2016, there was unexpected inflation. But now although things are trending down, so our expectation is that inflation is going to be pretty much aligned, rate inflation is going to be pretty much aligned to the full year currency devaluation we have two windows for salary increases. The first one is the biggest one happens in April and the second one is going to be towards October. But that’s the smallest part. I will say it two-thirds in the first window, one-third in the second window. So we are trying to be a little bit conservative, but I mean we have levers. To offset the impact of our potential rate increases outpacing the evaluation in Argentina, meanwhile growing nicely in other countries especially in India, Colombia, Mexico. Mexico became very competitive after the evaluation after Trump took power in U.S. But I think there are number of factors that make us believe that we are going to be still making the margin targets that I mentioned in the call.

Very good. And Martin, a big picture question, 50 Square strategy reorganization of the sales force, its all about scale. Can you give us an update how you are doing, have you populated most of the senior sales people to go after these 50 accounts or they still more hiring at a very senior level?

Hey, how are you, Anil. Thank you for the question, look I mean, [indiscernible] we have delivered pretty much everybody we needed to hire for the account that we already have some new logos are coming to the – into Globant, beautiful logos, so we will develop more people into those places which you already have. So I don’t expect to keep on investing in the 50 Square all investments have been made already. And the deployment has been very smooth and as we predicted without or starting to be tangible now. As I said on my speech we see some of the 50 Square accounts are outperforming by far some of the breadth of the account. So that’s a clear result that our strategy of focusing on the important customers and but not forgetting about getting new customers that will become important in the future. It’s also yielding results and is very welcome in two different parts, first by our team and second by our customers. So that’s a conclusion for all we are doing at the 50 Square program.

Very good. I think that’s all for me guys and congrats on the results and looking forward to an exciting year.

Thank you very much, Anil.

Thank you.

Our next question comes from Tien Tsin Huang of JPMorgan. Please go ahead.

Thank you. Just following up on Anil’s question on gross margin, Ale. How much gross margin pressure could we see in 2017 and I guess how far look kind of go down before you have trouble to offset that in terms of your SG&A leverage, just trying to be a little bit more specific on [indiscernible] relative to SG&A. Thank you.

I think the range as I pointed out, Tsin it’s going to be in that 40% to 41% we compare that to the average share gross margin for 2016, we are taking about 100 to 150 basis points. But we also plan to offset every tank of that operation as we have been executing dealing really in the past.

Okay. But from a full year standpoint 40% to 41%, it sounded like – I thought I heard it’s below that within the year. Okay. I guess overall maybe for Martin, just competitively speaking, I know a lot of firms are talking about digital now. You are at pure play. I'm curious to be seeing these changes competitively whether it's in the form of changing in your win share or retention or pricing. Any kind of comments you can share would be great. Thank you.

Yes, thank you. Thank you very much again for the question. Really everybody is talking about the digital, and it kind of became a boss word. Not many have the real experience and exposure in terms of our interest – in terms of their most talented people doing what we do. So I still remain very confident about our abilities to deliver in the market to win big deals against the big boys. We are being much faster, smarter in our proposals, faster to adopt. So I think that, I’m faster to move from our studios and create new value propositions. So remember, as a smaller company, we do, we have some big advantages because we are smaller, but the fact that also being smaller, if you a terrible competitive advantage in terms of how fast you can move, how fast you can adopt. So, no change on the operation side, which is meaningful. No change on our capability to use customers. Hence that using consumers which is what we love to do. And there are not many companies out there are talking about emotions and we are talking about how to connect in an emotional way with consumers. And that's the real important differentiator that we are exposing to the market, and the brands – and the customers are really liking it very much.

Our next question comes from Joseph Foresi of Cantor Fitzgerald. Please go ahead.

Hi. My first question here is just around the revenue range for 2017. What puts you at the higher end of that range and what puts you at the lower end?

I think that we have also been – we always been with – we are too in front of the year. I mean we are just starting the year. We have very good prospects. We have very good accounts. I think, look, if some of that hit described program accounts, again the traction we are expecting for them to gain will be very comfortable to be on the up of our range. Then – but things happen across the year, so we choose to be as always are – what we think it will happen. So I insist on our guidance in terms of the midpoint of the range. However, as always we do as much as we can to move higher. So this is the way that you should expect us behaving.

Okay. And then just on hiring plans for 2016 we saw, I guess on a net addition basis – I’m sorry in 2017, we saw on 2016 kind of a very strong 1Q then 2Q, 3Q kind of slowed, and the 4Q is a very strong. Can you give us some visibility on what you're planning on hiring next year and how we should expect that to trend throughout the year?

Yes. Let me take that Joe. I think what's happened in 2016 – let’s spend one minute on what’s happened in 2016. I mean there were a couple of – I mean, we hired very aggressively in the first quarter, and in fact 234 net hires in the first quarter of the year, then there was another second quarter some hiring. We decided to slow down a little bit, manage certain effect headwinds that we had and we still protect margins. From time to time we then also do kind of balance the time pool, we call that the venture time pool. So that’s what we did in 2016. Having said that and forward looking into 2017, we have all the engines in place. We’ve applied this that are definitely outpacing the growth of Argentina, like India, like Columbia, like Mexico, even U.S. A combination between the acquisitions that we have made during 2016 plus the organic having that we’re doing in U.S. in different places. So I think we have all the engines ready to be very aggressive and very robust in terms of accelerating, hiring whenever if needed. So the process for hiring this year is it's a very good one.

Okay. And then just going back to the digital movement, maybe you can frame for us what inning you think we're in. I mean early stages people were talking about companies going digital and we're hearing more and more about AI and automation. So maybe you could just give us some idea of what inning we would be in, what phase we are in, are we leaving Phase 1 heading into Phase 2, and your thoughts around that. Thanks.

Yes, I would say it varies by continents. The United States and North America in general it’s in a pre-advanced stage. I mean, advance in terms of they already know that they want it, they have some plans and maybe they already started it. But now they need to build it and really transform their businesses to digital. If you go more to Latin America, then you will find that the weaker understanding, however, there are some leading companies that are really talking about that and we can engage earlier on the process on those places. And in Europe it's happening something in the middle. I think Europe is still in stage – United States is in stage two out of five, Latin America is in stage zero out of five and Europe is in stage one out of five. So it's still early. I think digital transformation needs to go much deeper. Now I think – look, the transformation is starting to happen on the consumer and consumer facing place. But now we need to take over pretty much everything and our Internet of things studio assets pretty important role there. Because pretty much everything will start pushing information into the well and pretty much everything, you will need to be understood by artificial intelligence and keep learning and providing results, there are relevant for consumers beyond self interaction or the easy net of use or making an emotional connection with the consumer. So that’s a next way that is coming on digital transformation. It would be even bigger than the initial portions that we’re raising, much, much bigger. So company is going to invest a lot there. So that’s – so we’re so bullish about the market, so bullish about the future of the top of our – particularly two, three of our – two years indeed, Internet of things big data and artificial intelligence, I’ll call it a computing as we call it. Those are the things need to work together. Now to understand what machines – there are the machines are producing to create more relevant experiencing for consumers and to create really new solutions for consumers. So this is where we’re seeing – this is where we’re investing money to be on the forefront of those things from image recognition to deep learning, develop and enhancing that recognize any kind of scenario. I think you may have seen the Amazon Go video that has launched, which you enter into the supermarket, you just keep the things. And then a bunch of artificial intelligence and a bunch of cameras look at what you mean and just sit on your shopping card would you have just pick up from the shelf. – :

Thank you.

Very welcome. Thank you for the questions.

Our next question is from Ashwin Shirvaikar of Citi. Please go ahead.

Thank you, guys. My first question is on 50 Square just trying to obviously understand it’s a little bit better. If you could walk through the decision process at the client level, so I’m imagining someone like a Disney or Southwest has a senior relationship manager to sort of exclusive to the account I guess. How many accounts – when you add revenues, you can see a scale benefit. And how do you decided and help us model is out a little bit better?

Look I cannot list out right now how many of those accounts we have already deployed. But what I can tell you is that there more are lead to follows. Each time we have an account, which because Tier 1 or Tier 2. Tier 1 means that they have a huge potential to keep on growing and its really material for our company. Tier 2 means for us, there has a huge potential although is not currently really material it’s more revenue we have been – in earlier stage of account. So we have those two kind of accounts and from time to time we review which accounts each on each, each of the pocket, but the teams that we plan everything of those Tier 1 and Tier 2 accounts already set up. And they are working. And they are exploring no opportunities and exploring new account. And so I think probably, but sometimes, things happen that one guy goes from one big account into another big account. And then that are – guy that willing to the next account, call our guys from the 50 Square program to develop new basis and new company, which was not our customers. So again the team is in place, some of the things and movements that we experimenting during the third and the fourth quarter last year. Our rates as we made a lot of movement. The customers are really happy with this. I don’t know, but it is a moment that really is staying out. So we’re happy with or without, but there are no, which are the information you need to put unto your model. This is how it works and this is how we decided.

Right. I was kind of hoping its regards to the late year, late year – late 2016 investments that we’re made. So it’s good to hear for all that you have, they can have everything that you need in terms of investments already done on the front. I’ve got not everything with most. But on a year-over-year basis, what’s the step up I guess in dollar spend, just because you did not have this for all of last year.

No, no, no, no. It’s already done. All the people that we need is already in the company. Even for those are consider you to come and even more meaning of those accounts have been or will be tracked and will be develop by people that we’re currently having the company doing some other accounts, which are not Tier 1 or Tier 2.

Okay.

It came like aspirational for our people to with it.

Right, I understood. A separate question on the supply side, there are sometimes companies it use offshore, but when do provide sort of exchange rates that are extremely in the guidance at least for major currencies. Is that something you can share your assumptions on either at this time or not, we could call and I guess the question there is given continued policy uncertainty in the U.S. if we see, we get volatility in this supply currency. How quickly can you react to that?

Okay. That’s a fair question Ashwin. I think I mean we have been concentrating on executing our best – plan very well over the last two years. If you ask me that same question, probably three, four years ago, the answer who have been different. I think at this point, we have achieved a level of the centralization and diversification among the company and building up teams that are very strong in terms of quality, in terms of the skill set in different places that would allow us to react very quickly to any potential shape in the currency. We’re looking into that. We’re looking into what maybe potential effects and things. I think we’re going through that part of having a much more globalized company and a fast would be able to react quicker if needed.

Understood, got it. Thank you.

No problem.

Very well done.

Thank you.

Our next question comes from Avishai Kantor of Cowen. Please go ahead.

Yes, hi, it’s Avishai, thank you for taking my question. So my first question is that, again focusing on 50 square. So now that you have it sounds like you have most of your consulting sales and client management capabilities into your top line that you wanted to add in place. Do you see any signs of ability to compete the largest scale potentially longer duration contact? Martín Migoya: Avishai, thank you for your question. The short answer is yes, but it is not that we didn’t see it before. When we are talking about the 50 square program is not just about getting deeper – getting longer-term and bigger deals which is of course always what we have been pursuing. But, it’s also about being able to explore – more areas between the company getting through more of the – those companies that are extremely large. And be able to develop that relationship in a closer and deeper way with those customers. It should not imply a change in how long the contracts are or how big the contracts are. Of course, maybe sometimes we can get a bigger deal like it’s happening now with one of the 50 square accounts. But, it’s not that the firm just for that. That is for granted any other relationship we have in Globant. Every time we talk a lot a customer, our initial intentionally is to get additional confirmation from a 100 people. This is obvious. And this is how our salesforce is trying to position it and sometimes we need to start with smaller projects more opportunities and so and so forth. But the long-term ideas that whenever we have a 50 square program right, account. We have a better relationship we have the best in class relationship compared to all the rest of our competitors. So this is idea with the 50 square program. You should take the relationship with our customers to the next level, based on perfection on delivery. That’s the idea.

I understand. And then my next question, does the 2017 guidance factor any changes in the ability to raise pricing for existing on your clients? Compared to what was in 2016?

Hi, Avishai, this is Alej. There is very little assumption of price increases. That doesn’t mean that we can have certain aspect in terms of the pricing. What’s happening with the pricing is, we’re not feeling any pricing pressure. Some of the new businesses are coming with good prices. The quality of the delivery that we do with our discovery practice that we kind of shape up after that acquisition of WAE as the UK company. It’s also at the very high level in terms of pricing. So I think it’s done and putting that into the bundle of getting larger in certain accounts where you need to price potential discounts. I think on and on, we have back you to very conservative assumption in the revenue guidance for 2017.

Great. Thank you so much for those clarifications.

No problem. Martín Migoya: Thank you, Avishai.

Our next question comes for Frank Atkins of SunTrust. Please go ahead.

Thank you for taking my questions. I wanted to ask what you’re hearing from clients in the financial services sector. We’ve heard mixed results from peers. Something challenges others seeing opportunities in terms of changes in interest rates and potential deregulation. What are you hearing from your financial services sector clients? Martín Migoya: What we hearing is very bullish scenario. They are optimistic for the future. They need to spend smartly the money. That they have so we are seeing like a gradual improvement of the scenario from last year. In general, they needed to invest a lot of additional information of their businesses and they need to compete now with newcomers like the –company so and so forth. So they need to do the transformation. So, they are investing money. They will keep on investing money. And we foresee good sign out for this year.

Okay. And as my follow-up I wanted to ask about your people nice revenue growth there. Where are the opportunities in Europe coming from and what you see going forward? Martín Migoya: So I’m not sure I get the questions.

What are the opportunities that you are seeing in Europe for revenue growth? And what drove the… Martín Migoya: Europe?

Yes. Martín Migoya: Europe. Will we have pretty good set of interesting customers in the financial sector in Europe specifically? And this large banks are undergoing very deep transformations and they are as I mentioned in my script one big bank in Spain we are transforming pretty much all the digital bang for them and where we are doing the platform which is great. And we are seeing like a very bullish 2017 in particular in Europe on the financial sector. Now, we have other sectors that are going to like the retails and some others. So I’m bullish for 2017 in Europe. It grew a lot from blast fear at this year – sorry, from 2015 to 2016, it grew our market share the our market share in Europe and I expect for that to keep on being the case for this year.

All right, great. Thank you very much. Martín Migoya: You’re very welcome.

Our next question comes from Jason Kupferberg of Jefferies. Please go ahead.

Hi, guys, this is Amit Singh for Jason. Just a quick question regarding your guidance for fiscal 2017. So the revenue growth guidance is around 20% year-over-year. How much of that is sort of inorganic from L4. And then just related to that, the last few years you guys have grown revenues at higher 20% rate. And then the commentary today has been nothing but positive it seems like. And then your 50 square strategy is also starting to provide results that seems like. So why would sort of the growth come down from high 20s to – 20% next year. Is it just you guys trying to be conservative at this point early stage of the year?

Well we’re exactly at same last year, this is the visibility we have right now. And I want to be sure that what we’ll tell to you is what we can execute. There’s nothing more now. Are we bullish about that equation of the market compared to last quarter? Yes, we are. So last year, we started with 21%, now with 20.2% then with a little we can deliver along the year. But the expectations I want to take the expectation on what I’m confident that we can do right now which is that 20.2% on the midpoint of the range.

Okay, inorganic contribution around 1%, 2% from L4?

Ale can you cover me on that.

Definitely, definitely it’s pretty much in that range. I mean it was a very small back win acquisition that we disclose so you’re pretty much in the range. Yes.

Great. And then…

And then it could be – sorry, not there decision has it’s connected to our intension to keep on expanding our footprint in the U.S. and that’s very important for us. That’s really, really important for us.

All right, great. And then just a follow-up on margins what is the implied sort of adjusted operating margin within your fiscal 2017 guidance. And from the call it seems like any FX sort of headwind you think you can counteract with SG&A efficiencies and it seems like investments related to 50 squared are behind you guys. Are there any other positives or negatives to margins – operating margins next year?

Yes. In terms of operating margin we’re speaking I mean we don’t guide operating margin but we are planning to be upon slightly below 2016. And also effect it’s coming from FX as you’ve said. Especially I mean the most relevant effect on FX is Argentina phase of as I said before the phase of wage inflation is still outpacing the phase of evaluation. We seen that’s situation it’s going to be reverse towards probably the second half of the year, inflation is trending down that’s one being as you said definitely a most of the daily investment in 50 square is gone. We have assembled most of teams, it could be the case that we get new accounts into the 50 square and we need to assemble new team. But the big chunk of investment that’s pointed out by Martin is already gone. So I know I think we’re targeting to have AT&A dilution and offsetting factor. So that we can come up with kind of frame levels of net income if compared 2016.

All right. Perfect. Thank you very much.

No problem.

Thank you very much.

Our next question comes from Jason Washburn of Pacific Crest Securities. Please go ahead.

Hi, guys. This is Jason in for Arvind. Just I wanted to ask you what are your spending priorities as it pertains to building your tax capabilities in fiscal 2017?

Yes. I mean just to be very clear. Globant has always been investing in developing new studios or new capabilities here or training people. This is the core of the digital era. The new technologies are changing so fast that you cannot stop investing there. I don’t project to have a bigger chunk of investments that what we did last year, but what I’m saying that we’ll keep on obsessed on how to seduce our consumers, on how to be able to connect with millions of consumers and which are the technologies that are erasing those friction points that I was talking about. And to connect with them emotionally and to connect with them in a different way. And that the differential that as a company, I’ll keep on investing there to have the best possible technologies and the best possible teams to create those friction that’s experience to our customer. So this is the future of our investments, this is what we want to be seem all our efforts to train our people.

Great. And then just a follow-up. I know you spoke a little bit about [indiscernible] related work. Could you maybe elaborate a little more on what you guys are doing in the space? Thanks.

Yes. We’ve a four studio around there. We’re playing out a lot with technologies around recognition of things and actions that people do within different spaces. And helping other systems to get more relevant information in the – relative information for the experience that they are building for their consumers. That’s one of the things in which we are investing most of our time. Then also artificial intelligence behind analyzing data to understand balance of different assets coming from what is called in Internet of Things. Different – different yes, we have enable devices sense or so on forth. So those are the two places in which artificial intelligence is playing a big role within the solutions we are providing to our customers. But again we don’t believe in a single solution. I think artificial intelligence seems to be applied industry by industry in a very specific way to solve that friction with consumers. And I don’t believe in having one single massive solution that is the perfect brain, no for the perfect brain for every single situation like other companies do. I believe that having a specific solution for different industries for different scenarios is much more adequate in terms of artificial intelligence and the way to brought it to the market.

Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Martin Migoya for any closing remarks.

So thank you very much operator. Thank you very much everyone for participating on this call. I’m really excited about what’s going on at Globant. So I expect to see you on our next earnings call. And thank you very much for your continued support and understanding. Thank you, cheers.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.