Globant S.A. (GLOB) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon everyone and welcome to the Globant first quarter 2017 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, today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Paula Conde, Investor Relations. Ma'am, you may begin.

Thank you operator and thank you all for joining us today on our call to review our 2017 first 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 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 on our Investor Relations website announcing this quarter's results. I like now to turn the call over to Martin Migoya, our CEO.

Thank you Paula and good afternoon everybody and thanks for joining us today. I am pleased to be here to review with you our business and financial performance for the three months period ended March 31, 2017. At the end of the call, Alejandro will share with our outlook for Q2 and the rest of the year. I am happy to announce that during Q1 2017, we had another record quarter for Globant. Revenues for the full quarter amounted to $88.7 million, a robust 21% year-over-year net growth and 28% normalized year-over-year net growth, if we assume equal growth for each quarter on 2016. This solid growth was driven by strong demand for digital solutions across the different industries that we serve. Europe continues to outpace the rest of the regions in terms of growth with media and entertainment and financial institutions being key contributors. Some of our high potential 50 square accounts not in the top 10, were important also for our growth during this quarter. 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 coming from companies looking to achieve digital transformations. Organizations keep searching for ways to create the optimal digital journey for their customers through emerging technologies such as artificial intelligence. Our studio model continues to be a key driver to hold the leadership position making us an ideal deal partner when facing these transformations. We also see that companies are increasingly perceiving the value that a pure play on digital like Globant brings to the table. In a recent research on digital transformations key to success Forrester stated, smart services buyers increasingly seek partners to bring creative and design customer experience, business acumen and technology know-how together in an integrated approach. We also see more and more firms engaging with technology service partners as they would agencies on retainer seeking continuous relationship with these strategic partners, rather than one-off projects. To reinforce these differentiators that distinguish us when partnering with our clients, we are constantly analyzing new trends. During Q1, we presented our latest addition of the Sentinel Report that aims to provide insightful evidence of consumer behavior and market trends. In the latest issue called Foresight, we focus on the ability of every organization to anticipate user behavior and turn it into an opportunity. We believe that every company is able to create a framework that allow forward thinking. The goal is to impact the way companies approach consumer engagements empowering executives to make proactive change and get the most out of emerging technologies. You can read the full report at sentinel.globant.com. In the report, we highlighted four key enablers. First, live data. Companies should define a data strategy aligned with the business needs and expectations. The key is to explore data through machine learning, analytics and other techniques to create a rich customer profile that gives access to behavior analysis. Second, relevant experiences. The goal is to understand the customer's behavior to tailor the touch points to their context and treating the customers journey as a succession of moments of engagement would allow to anticipate the next moment and improve the overall experience. Third, meaningful efficiency. Organizations should be nimble enough to react fast to the internal and external changes and retain the customer's attention. Fourth, active technology. It is key to explore the trends in the market and see them as opportunities rather than threats. These findings are consistent with some of the most innovative projects we are doing for our customers. For instance, we are working with an important client in the financial industry to review scoring complexities in the trading and sales platform and identify key trading opportunities ahead of the competition. This is achieved using new technologies lead by artificial intelligence and commanded via voice and conversational assistance. Similarly for a top retail company, we are working to revolutionize some of their business process that will reflect on their customer service. As part of this approach, we have built an optimization engine to determine the best way to store and handle products. We also built a size profile that uses a predictive model to determine the proportions of products and sizes that are going to be sold based on store locations. These two improvements collaborate to achieve the company's overall strategy and optimize the customer's experience. Now some updates on our studios. Each of them is focused on different trends and technologies and we have decided to group them in three different categories. First, strategic. These studios are key to shaping our clients' business strategy to help ensure that organizations are relevant and sustainable. Second, specialty. Studios that power digital transformations and create quality digital products with innovative technologies and emerging trends. And third, foundation, the engine that allow us to meet scale and provide efficiency and quality to our clients' digital transformations. Our set of strategic studios include our discover or consultancy studio and our new studio, which I am proud to officially announced today called the future of organizations. This area focuses in helping companies with their internal digital transformation and digital corporate culture. The goal is to ensure their success by engaging employees, thinking of them as one of the most important stakeholders of organization. Within this studio, we apply our knowledge in dealing with large-scale digital business to their internal structure aiming to create an innovative experience for each member of the company. This approach increase loyalty and in turn improves the quality of services for the company's end users. An example of their work is one that we did for a leading financial institution. Their goal was to empower their employees by promoting self-management. So we created a solution that helps people solve any need they have within the organization on their own, from booking a room to ordering catering. This translates into improved resource efficiency and direct savings. The specialty studios include our UX design, mobile, big data, gaming, Internet of Things studio, enterprise consumerization, consumer experience and digital content studios. On top of them, one of the most disruptive studios included here is the artificial intelligence that works in harnessing the power of AI to create new and better experiences and services. We work with clients apply machine learning techniques to improve and automate certain areas of operation. To name an example of our projects for one of the top US-based e-learning companies, we are working with different machine learning techniques to adapt the student experience to his/her specific needs based on historical data. Leveraging machine learning, we are helping our customer provide a better experience to scholars, hence reducing the churn and attrition of courses. Lastly, our foundation studios include the continuous evolution, quality engineering and the cloud ops studios. Within this last studio, we have experienced that traditional industries like travel and finance are moving faster to enable hybrid and multi-cloud strategies. Platform-as-a-Service is becoming more relevant. We have seen the shift in some of our customers as we work with two major airlines helping them more aggressively to the cloud. We are also working with several financial institutions in projects to enable and support cloud transformation, mostly driven by their internal innovation departments. Similarly, we are working with a client in the education industry to increase infrastructure efficiency for existing and new e-learning programs. Now let me go over some of our news regarding our expansion process. Aligned with our strategy to grow our U.S. footprint, during March we acquired Seattle-based Ratio, a leading digital services company specialized on video streaming solutions. Ratio is expert in developing robust digital experiences and video streaming solutions for major media companies. On top of that, they have built a transformative OTT platform called RatioTV. This successful product makes content and experience updates dynamic, while ensuring integrity across all platforms and devices. Customers of ratio include Alaska Airlines, Microsoft, iHeartMedia and Yahoo!. For their platform and services, Ratio has powered billions of views and listens. With Ratio and our local team, our presence in the U.S. and in Seattle continues to systematically growth. With this in mind, on May 9 we opened a new office space in the city that would allow us to foster our local expansion. Now let me give you a short overview of some new customers and projects that led our growth during this quarter. In the U.S., several new customers were added to our portfolio coming from industries like media and entertainment, travel and finance. These organizations joined a vast list of Fortune 500 companies, all of them with potential to join our 50 square strategy. On top of that, I am proud to share with you some of the interesting projects we are working on. We partnered with Turner to create a fully digital experience for their content management and distribution platform. We are designing the experience from scratch with the goal to make it simple and accessible to all the network and users in their huge organization with more than 7,000 employees. Weld North, a partnership between Jonathan Grayer, ex-CEO of Kaplan and KKR, a global alternative asset manager invest in and operate a platform of digital and Software-as-a-Service educational solution businesses. Globant was engaged last year to redesign, develop and evolve the digital assets of the EdTech companies currently in Weld North portfolio. This past quarter, Globant embarked on a bleeding edge initiative to design and build one portfolio company's deep learning capability. This capability will allow the company to dramatically expand its customers space and provide more effective learning at the same time. Globant's EdTech experts believe that using a combination of neural networks, deep learning and artificial intelligence is at the heart of innovation in this rapidly evolving industry and Weld North will have a competitive advantage by exploring the art of possible first. In Europe, we continue to grow as you will later see with the region's performance. We have been working on a great deal of amazing projects, not only in the finance and travel industry but also in the retail sector. These are some of our latest engagements. We partnered with a European luxury vehicle motorcycle and engine manufacturing company to work on next generation gaming platforms for their cars. We also partnered with a European consumer packaged goods company. We assisted them in leveraging block chain technologies to add certifiable tracking to their milk supply chain. In a project that we are doing for a global bank, we are involved in creating the first version of their new digital engagement platform. We have successfully launched a closed beta testing phase for their redesigned customer experience spanning from the web touch points to mobile applications. The subsequent public launch will happen in the next few months. In Latin America, Globant is supporting the digital transformation of BCI Chile. BCI is a leading bank in Latin America. They are looking to improve all customer contact channels, simplifying operations and processes through innovation. Their strategy is to create digital journeys with a customer centric approach and to create live applications focusing on evolving along the market needs. Also, during this first quarter we started working with the biggest airline in Mexico. Aeromexico is Mexico's flag carrier and operates to destinations in North, South and Central America, the Caribbean, Europe and Asia. We are working with them with the objective to support the development and optimization of their state-of-the-art digital ecosystem, which is oriented to improve customer experience with a user centric and API driven strategy within their channels. Within our Services over Platform offering, we are proud to say that we have integrated a new product into the offering. First, the RatioTV OTT platform that I mentioned earlier that provides publishers a fast to market branded video experience for mobile, tablet and connected TV platforms. Second, we incorporated a new platform called feedback. This platform is a 360 feedback app that creates a totally new way to give feedback to employees at any time, instead of the traditional yearly evaluation. This platform integrates into the StarmeUp suite providing a comprehensive set of tools that empower the future workplace. During Q1, we also added new customers for StarmeUp including Pernod-Ricard and Walmart. Both companies are looking to enhance engagement and collaboration among their employees. In the case of Walmart, we have started the relationship with their Argentina division and we believe there is promising potential of growth as the retailer is the largest private employer in the world with 2.3 million employees. StarmeUp continues to grow and we are proud to say that the platform has been awarded with an American business awards. The Stevie Awards are one of the world's premier business awards. StarmeUp won the Silver Stevie Award for Mobile Site & App in the Productivity and Professional Services category with one of the judges stating that the application is brilliant and useful and saying that this is true innovation. We believe that this recognition reflects the high potential of the platform. On top of StarmeUp, we have been awarded with two other American business awards. Through L4, we received the Silver Stevie Award in the Health category for our outstanding work with our partners at the Seattle Cancer Care Alliance on Caresi, an application that gives breast cancer patients the ability to monitor and track their care. Innovations like these revolutionize patient care and permits healthcare professionals to focus on providing the best possible service. We were are also awarded with a Golden Stevie Award in the new media and entertainment product category for our work at the Rooster Teeth First for Xbox One. Rooster Teeth Productions is an American production company based in Austin, Texas. The awarded app provides an innovative and interactive experience with Rooster Teeth customers to watch video on demand. The application explores some of the interactive gaming elements of the Xbox One platform as it allows Rooster Teeth users to enjoy the over 5,000 hours of premium content through a lean back experience. Lastly, let me remark that our pipeline and backlog remains strong with a number of high potential new customers coming from a wide variety of industries including retail, media entertainment, travel and finance among others. We are working to increase our account and delivery diversification with a focus on consolidating growth and margins for the next quarters. We will also continue to work to reinforce relationship with our current customers and incorporate more brands in a wide variety of industries looking to integrate their business into new experiences that will help attract and retain their users. 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. We remain optimistic about our ability to deliver sustainable growth in the future. With that I will turn the call over to Alejandro Scannapieco, our CFO, for a detailed financial review on the first quarter 2017 and to provide guidance for Q2 and the rest of the year. Ale, please. Thank you very much.

Thanks Martin and good afternoon everyone. I will spend a few minutes taking you through our first quarter financial results. Then I will talk about our outlook for Q2 and the rest of the year. Let me start by saying that we are pleased with our overall results for the first quarter of the year. Q1 was a solid quarter of revenue, closing at $88.7 million, a robust 21% year-over-year net growth, 28% if we distribute equally by quarter, they full year 2016 growth where we had two extraordinary quarters in the beginning of the year. This is the second time in our history that our Q1 revenues grew sequentially showing an increase of 1.7% over the last quarter. This is the consequence of our diversification of operations into multiple regions and hence we are being able to gradually reduce the impact of seasonality in terms of revenues. During Q1 2017, Disney was once again our top one account for the quarter, closely followed by Southwest. The implementation of our 50 square strategy continues to be successful and we now have six accounts over $10 million in annual revenues. Revenues for customers 11 and beyond increased 31.9% over the first quarter of 2016 and 13.9% sequentially. We expect a gradual transformation of the composition of this group of customers as we dive deeper into our 50 square program. Our customer concentration numbers for Q1 2017 remained fairly consistent with past quarters with our top one, top five and top 10 accounts representing 9.7%, 31.1% and 43.7% of sales respectively. Our vertical diversification remains balanced across the different industries. Our largest industry for the quarter was media and entertainment with 24.5% of revenues followed by banks and financial services with 19.7% of revenues. We continue to be very well diversified in terms of customers and industries. During the first quarter of 2017, 78.9% of our customers were in North America. The U.S. is our top country. 11.2% were in Europe, Spain becoming the top country and 9.9% in Latin America and others, Chile our top country. Europe continues to outpace the rest of the regions in terms of growth. During the first quarter of 2017, 88.6% of our revenues were denominated in U.S. dollars, limiting the impact of currency fluctuations on the revenue side. During the last 12 months we rendered services to 336 customers. We now have 54 customers with annual revenues in excess of $1 million compared to 45 one year ago. Turning now to profitability. We are seeing some headwinds as inflation in some regions exceeded currency depreciation. That is the case of Argentina. And there were also FX appreciation movements in some of the other regions where we operate, such as Colombia and India. Should we see a sustainable need to long-term FX appreciation in any of the countries where we have delivery centers, we might execute some hedging strategies. Our adjusted gross profit for the period increased to $34.6 million, 39% adjusted gross margin compared to $33 million, 45% adjusted gross margin in the first quarter of 2016. The decrease in adjusted gross margin year-over-year was primarily driven by Argentina where there was a significant devaluation of the currency back in December 2015 and the peso remained pretty much flat, being outpaced by wage inflation despite the efforts from the government to reduce it. At the same time, Colombia, Uruguay and India where we have over 32% of our headcount appreciated their currencies compared to the first quarter of 2016. We finished the quarter with 5,855 Globers, 5,421 of which were IT professionals. Attrition for the past 12 months was 19% compared to 18.4% one year ago and 19.3% for the last quarter of 2016 showing a slight improvement sequentially. SG&A increased 140 basis points compared to Q1 2016, accounting for 23.3% of our quarterly revenues, mainly driven by the expansion of our on-site operations in the U.S. and the U.K. together with further development of our delivery centers in Colombia and Mexico. We expect additional dilution during 2017 in order to offset some of the impact we are experiencing on our gross margins due to FX headwinds. We will continue to be disciplined in managing our cost while we continue to invest to expand our footprint in the United States and Europe. Our adjusted operating income for the quarter amounted to $10.2 million or 11.5% of revenues compared to $14.7 million or 20% for the first quarter of 2016. Q1 2017 has a very tough comp since our gross and operating margins of Q1 2016 were positively impacted by the large depreciation of the Argentine peso that occurred in December 2015 and benefit for the first part of 2016, as discussed before. Other income and expenses resulting in a $1.7 million gain resulting from the remeasurement of the liabilities related to one of our acquisitions. Our effective tax rate for the quarter was 19.7%, slightly below the last two quarters and in line with our expectations for the year. Adjusted net income for the first quarter of the year totaled $9.7 million, 11% adjusted net income margin, an increase of $1.3 million or 15.7% compared to the first quarter of 2016. Adjusted diluted EPS for the quarter was $0.27 based on 35.6 million average diluted shares for the quarter increasing from $0.24 a year ago. Moving on to the balance sheet. Our cash and investments as of March 31, 2017 amounted to $41.2 million compared to $59.9 million as of December 31, 2016. This decrease in cash is mainly explained by our decision to self-fund both in M&A transactions and CapEx to expand our offices in Latin America, U.S. and Europe. Borrowings totaled $0.2 million. Our balance sheet remains strong with current assets of $130.2 million, accounting for 43.4% of the company's equity. Total common shares outstanding as of March 31, 2017 were 34.7 million. To wrap up, I would like to share with you our outlook for Q2 and the rest of 2017. Let me start with the industry and macroeconomic environment. Despite this is only the beginning of the year, we feel very optimistic about the market and expect demand to accelerate further as we move into the year. At the same time, we are very satisfied with the progress we are seeing in implementation of our 50 square account strategy. Business environment is healthy and we are glad to see the evolution of some of our high potential accounts as well as the incorporation of some of the new logos that Martin mentioned before. With regards to our margins, during Q1 we experienced increased headwinds on the FX front, primarily in Argentina, Colombia, Uruguay and India. Given that currencies are expected to remain flattish in most of our delivery centers, we now see our gross margin for 2017 to be in the range of 38% and 40%, something that is fully baked into our guidance for the full year. However, we think that short-term appreciation of many Latin America currencies and the Indian Rupee shouldn't last long as the U.S. administration has been taking some action such as increase of interest rates, tax reforms, among others that will likely strengthen the U.S. dollars eventually. Despite these short-term volatility, we will continue managing our margins and investing in the long term, training our Globers on emerging technologies and expanding our footprint in our target market. We will continue expanding our footprint outside of Argentina, a factor that will enable us to keep diversifying the talent base on cost per head more towards a natural hedging. To provide a little bit of color on this. Argentina went down from 76% of our total headcount by the time of the IPO to 47% as of the last quarter. While it's cost in local currency now represents less than 40% of our total cost measured in U.S. dollars when it accounted for more than 60% at the IPO time. As always, we will continue managing very carefully our SG&A expenses to gain additional dilution along the year with the intention of offsetting potential hits on gross margin coming from FX headwinds. Finally, effective tax rate is now expected to be in the 20% and 22% range, slightly below previous quarters. Now let me provide you with our guidance for Q2 fiscal year 2017 and the rest of the year. Based on current visibility, we expect Q2 revenue to be between $95 million and $97 million, implying a 20.1% year-over-year growth at the midpoint of the range. EPS is expected to be between $0.26 and $0.28, assuming 35.7 million average diluted shares outstanding for the quarter. Looking into the year, we expect revenues for 2017 in the range of $386 million and $394 million, an implied 20.8% year-over-year revenue growth at the midpoint of the range. In terms of EPS, we are estimating a range of $1.22 and $1.30, assuming 35.8 million average diluted shares outstanding for the full year. Thanks everyone for participating on the call and for your coverage and support. Let's please now move to the Q&A section of the call. Operator, can you please queue questions. Thank you.

[Operator Instructions]. And our first question today comes from Tien-tsin Huang from JPMorgan. Please go ahead with your question.

Hi. Good afternoon. Good to talk to you all. So I guess it is good that the demand is strong. I wanted to ask Martin about, it sounds like there is little bit more in the way of new logos, maybe more high-performing account additions as well, it sounds like, in banking and media. Did we hear that correctly? Is there more in the way of new logos for Globant today?

Yes. They will continue with the same trend that we saw during the last quarter of last year and I would say improving it. We are seeing like new developments in terms of new logos and also growth out of 50 square accounts, which are not top 10 that are helping a lot for our growth which, I think, is a very good thing. I think it's a very healthy thing in terms of that we are able to with the 50 square program we are able to concentrate on those accounts that are important and then as we stated a few quarters ago, deliver results on that. Then regarding new logos, when we go hunting that's also another important improvement we have seen the close of many new logos, some of them already mentioned on the call. So the answer in general is yes. We see a really healthy business environment.

Okay. And then as my follow-up maybe to Ale, just to clarify. I am not surprised to hear the FX commentary. I guess with the EPS revisions, the change here, just want to clarify. Is that all FX related? Anything else in terms of change in mix or investments that might also be influencing that change? Thank you.

Yes. Hi Tien-tsin. No, it's pretty much related to FX. Of course we are growing outside of Argentina. So the mix is also changing which also changes a little bit the blend of the cost per head for the overall company. But the main big driver there is FX that you know and as I explained. All the currencies were playing against us in the last whole months. So it's pretty much driven by FX.

Yes. No, that makes sense. We appreciate that. Thank you.

No problem.

Thank you Tien-tsin.

Our next question comes from Ashwin Shirvaikar from Citi. Please go ahead with your question.

Hi. Thank you. Good evening guys. My question is, I guess the first one is with regards to the 50 square program and the Internet investments that you keep making. If you can talk a little bit more about maybe some specifics on the hiring of relationship managers and metrics around that? Obviously, it seems to be having the desired effect on growth. But I want to talk a little bit more on the cost side, how you are doing that?

Martin here. So look, I mean the program is really pretty much ready. There is not any improvement there on the cost. So the program would work but when we acquire some new company, then some accounts are becoming like 50 square account. But we are taking care of those accounts with the people we already have on those company. So there is not pretty much, other than the organic growth on our sales strategy, there is no additional investments made on 50 square after we finish a program and if we are adding new 50 square program, we are doing it with the same people we have right now. So that's the answer for your question. So overall, as I said, the program is working fine. Still, of course, there is a lot of room for improvement, a lot of room for delivering better things to our customers. But overall, it's working as we thought it would work. More relationships, more hours worked, more connection to the needs of our customers, stronger positioning when they have a problem or when they have a new need. Like for example, we received a call from on of our top 10 accounts today saying listen, we need visions. It was a big project. And those are the kind of great things that are happening that before were more difficult. So overall, it's great. So I don't know if that answers your question. If not, please tell me.

No. I guess we could talk a little bit more offline as well, but it does begin to sort of get to the question that I was after. One other thing I wanted to ask was, given FX volatility and what you are seeing and this has obviously come up in previous years, off and on it tends to happen. Has there any thing that's changed with regards to how you think of hedging and so on and so forth, in terms of taking one of the risks or minimizing one of risks and taking it sort of off the table?

Yes. There are two big beginnings here that's been happening since a long time ago, but accented in the last few months, last few quarters, I would say. One, that has to do with delivery. And the other one has to do financial hedging. So I will explain the delivery one and Ale will explain you the financial one. The delivery one is simple facts. We are reducing the headcount and the percentage of cost that we are exposed to at single currency. Just to give you an example, when we did the IPO, we had 75% or 76% of our headcount in Argentina. Now we have 46% or 47% of our headcount Argentina. So that's a massive change. It's not a reduction in Argentina, but it's a growth in many other places. For example, we grew to almost 1,000 people in Colombia. Now that will keep on growing. We have a very clear objective of not having more than 25% of headcount in any specific country. That will lead to a natural hedge in terms of currencies. Now if we have the perfect situation in which all the currencies we are playing against, we still have some financial hedging to do. However that sometimes is not enough but we also have the financial hedging. So as a conclusion, we have the financial hedging that Alejandro will explain but also we have the natural hedge of having many different countries in which we operate that can provide a stabilized base of cost. So Ale?

To complement the answer, Ashwin, I think we always look at what's the potential trend of the different currencies in the countries where we operate. As Martin said, we actually every single quarter the weight of Argentina is going down. And that's the impact on the weight of Argentine peso is going down but still it's a big chunk of our cost structure. In terms of hedging, we have been doing some hedging in Argentina. To be honest, the impact of the currencies in some of the other Latin America countries and even in India took us a little bit by surprise. Should those trends continue and be sustainable in the future, definitely we could implement some hedging strategies. The way we see that is that there are many indicators in the market. I mentioned a few. The interest rates in U.S., the upcoming tax reform that at the end they should lead to the natural appreciation of the U.S. dollar against most of the currencies in the countries where we operate. So we are constantly looking to this quarter probably and this is what we attempted to do also in the guidance that we provided. It has been a significant headwind.

Got it. And one quick numbers question. At this point, wage inflation for the rest of this year ahs been taken into account in your outlook, right?

That is absolutely right. Yes. Everything is baked into the guidance, yes.

Okay. Thank you.

Our next question comes from Moshe Katri from Wedbush Securities. Please go ahead with your question.

Hi guys. Thanks. Just a follow up on Ashwin's question on wage inflation. I think you indicated at the beginning of the call that we didn't see the expected moderation in wage inflation about some of the reforms that the new government has been implementing. What is the outlook for wage inflation in Argentina? You said it's 47% of your cost. What are we doing at this point to continue to kind of bring down your dependence on your delivery from Argentina into other geographies or regions? Thanks.

What has been happening, Moshe, I think inflation in the country probably is going to be, in the case of Argentina, it's going to be half of what it was last year, which is a very good indicator. Still, it's high inflation if you compare to the rest of other countries of Latin America and even India. So we are talking probably about something in the low 20s or high teens. In terms of inflation, the currency has been pretty much flat if we compare to the last three, four quarters. Having said that, I think the outlook is good. I don't what to speak to the government policies. But we can clearly see that they are being very vocal about lower inflation. I think they are putting a number of measures in place, a number of policies to lower inflation. That definitely is a big factor that could affect then how much of that is translated into wage inflation. So we are optimistic about the future. We think the trend is good. But as Martin explained in the very beginning, I think this is not changing our overall strategy of becoming a global company, of having a global foot print. I think we have been making the big, big progress in terms of growing our headcount in U.S., our talent base in U.S. That's pretty much aligned also to some of the intentions of U.S. administration, the new government. We have been making a lot of progress in countries like India, Mexico and even Colombia. So I think at the end of the journey probably, I think inflation in Argentina is going to go down. But probably by that time, as Martin explained our cost structure is already going to be very well diversified.

Okay. And then if you look at your headcount, is there a specific plan to bring down the headcount exposure or the cost exposure to Argentina maybe in the next 12 months? Do you think that 47% goes down to maybe 40% a year from now? Just any color on that direction will be helpful. Thanks.

No, definitely it's going down. It's going down quarter after quarter. I mean, we explained that by the time of the IPO it was 75%, so probably less than three years time, we are talking a reduction of almost 20 percentage points of total headcount. And on top of that, not everything, there is no direct relationship between total headcount in Argentina and cost in Argentine pesos. The total cost in Argentine peso is much lower than the 47% as we also have some cost in U.S. dollars, mainly the rent in the country. So the exposure to Argentine peso is even less.

All right. And then just a final question. How should we think about pricing and revenue per billable headcount on an ongoing basis? And that's also been moving in the right direction? Thank you.

Yes. Well, we see pricing evolving into the right place and the addition of WAE last year plus L4 and Ratio are moving the company to the right direction. We are learning a lot of things from those companies that we acquired and being able to sell better things we have. So that's something that is happening in a very interesting way. Of course, we have accounts that are big which are more difficult to deal with in terms of increasing prices. So we need to be moderate in those expectations. But I think that overall the picture that we are seeing is that the need of what we do, digital transformation plus now talking about artificial intelligence transformation, that will happen one way or another. It will be like a stream of demand that is really big. Hence prices on these areas will go up as they are far away from being a commodity. So I see the environment here is very positive. However, we need to be cautious because of negotiating with current customers, so on and so forth is always more complicated. But the overall picture, I think, is positive for newcomers, for the new customers.

Thanks for the color.

Thank you.

Our next question comes from Arvind Ramnani from Pacific Crest Securities. Please go ahead with your question.

Yes, sure. I just wanted to connect with you on the margins, Clearly you have multiple moving parts that you covered with currency, wage inflation, multiple geographies and you said it's probably not going to be -- this headwind should abate as the year progresses. But are there any kind of specific things you are doing to address some of these margin headwinds? And also if you can talk about some of the levers you have in place?

Yes. Definitely. Hello Arvind. The diversification strategy is speeding up. So definitely moving projects and teams, I mean the fact that we work on SoP, it's helping us to move entire teams into different regions, which in turn is helping us to partially offset the impact of the FX headwinds. That's one of the things. We are also working on efficiencies on the accounts. That is also helping us to improve the margin profile of certain accounts. I think the fact that we have incorporated a lot of talent in U.S. is helping also to find efficiencies in not too much struggle from Latin America into our accounts. We have more local coverage now. That's also helping us to get a better profile on the margins. So there are several things that we are doing in terms of partially offsetting this effect. But we are still facing some of the headwinds based on the distribution of delivery centers that we have.

Great. That surely helpful. And then on the revenue side, clearly you have given us a good perspective on 50 square. But do you think Globant can protect its strength in technology? If you cam maybe a little bit more of these emerging technologies, including cognitive, artificial intelligence, virtual reality? What percentage of revenues are actually been driven by these unique newer technologies? And what type of investments do you have in place?

Okay. So thank you very much for your question. We are really making a bold move into to all the things about artificial intelligence. We launched a couple of year-and-a-half ago some related to our cognitive computing studio. They have been working very hard on training people inside Globant on how to use artificial intelligence, you can say on every project. So it's difficult to say how much is coming because we are not measuring that by studio. But we are measuring that by the increase in the revenues we are seeing. And the most important thing is we are changing the agenda of dialogue with our customers. That's like a dimension for us in terms of what we are talking about when we talk to our customers, not just the digital transformation on how to connect more efficiently with your consumers, but now also how to do that using artificial intelligence, even sometimes how we can change or improve the connection with the consumers with the use of artificial intelligence. So for us, it's a very important area. We see our future very connected to that. Now I think that the technology is already there. I mean every big spender, from Microsoft to Google, you go into Amazon and even Facebook will have their own frameworks for artificial intelligence that will be open to be used and we would use them. And the fact is that using them really takes a little shortcuts and brings a lot of power. And we need to be on top of that, which we are doing and investing on that, build on top of that our own flavors to get the kind of responses that we need on top of the artificial intelligence stuff. So there is a big movement inside Globant around that. I will love to explain you more whenever we meet, but it's something big happening.

Great. That's really helpful. If I can, just a quick follow-on on AI. Have you also seen kind of higher interest from your clients? When you think of some of the prior technology trends, you probably caught the trend a little bit earlier than your clients. But do you think that AI is one of those which the appliance driving those conversations? And are they interested? Or is it something you are trying to push on to the clients?

Listen, clients are starting to realize it. For me, artificial intelligence is the next mobile. I don't know if I am unable to explain myself. Artificial intelligence is the next big move. We can talk for years about augmented reality. We can talk for years about spiritual or 3D immersive experiences, whatever. Those are great technologies and will cause a lot of new things to be done. Now, when you are talking about artificial intelligence and the way and the improvement that those that those are the reasons are able to do with the processing power that's available today, that's really a game changer. So for me, I would compare this kind of spring that we are living for artificial intelligence, not even summer, spring for artificial intelligence. I will compare that to the come to the market of the first smart mobile phones or smartphones to the market. So I think we are in pretty similar moment. Fortunately, these kinds of events are happening every year faster and faster and faster. So we need to be very aware of that and we need to be able to accommodate our organization around that. So we are prepared. We have launched the studio a few years ago. So we are prepared for that.

Great. Thank you very much and good luck for the remainder of the year. Very helpful.

Thank you.

Thank you very much.

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

Yes. Hi. Thank you for taking my question. So my first question is, you have been doing a few M&A transactions in the past year. If you can describe how competitive is the M&A market? Who do you typically compete against? And what is happening to the spread between the bid/ask spread in those transactions?

Well, difficult to answer. Every case is different, totally different. We see some competition, although we are very careful with the things that we acquire, very careful. We are looking maybe some times years into those companies to understand how they are and how they work, following if they achieve the numbers that they promised to us in the past. So whenever we engage in a process like that, it's not that competitive process, but more a seduction process from both part. A part is seducing the company that we are interested in and them seducing us. So we don't enter that much and we don't want to enter into those competitive bids. Then the ask and bid gap is difficult to answer. Sometimes it's big, sometimes it's very small. It depends on the company that we are acquiring. But in all the cases, we are paying a very fair price for our acquisitions.

Okay. And then what do you think is a bigger challenge for you in driving growth into new areas? Is that clients finding the necessary funding? Or you guys being able to find the right talent to building your internal capabilities?

Look, internal capabilities, I think we are in good shape. But just from the customers, I think that everybody is cognizant about the fact that they need to do it or someone else will do it for them. So that is now becoming an issue. I think, again I have been repeating this for many, many quarters. Having the right coverage, having the right amount of people on the street, having the right amount of connections and good relationship, that sometimes take a lot of time to develop. It's very important. The good news is that with the 50 square program, these things are forward happening more in, I would say, erratic way. Now they are happening in an organic way. So I am very optimistic about the fact that now these relationships that we are faltering with the 50 square program will yield better results and faster growth towards the future. So this is my take.

And then the stronger, the above company's average growth in Europe, is that driven by 50 square, by recent acquisition such as WAE? What's driving that?

It's a mix, Avishai. Definitely 50 square is helping us to drive further growth into some of those accounts that are within that program and project, but also if you take a look at our customers 11 to end, quarter-over-quarter, this quarter against the same quarter last year, they are growing above at the 30% flat slip. So definitely it's a combination of 50 square on some of the accounts that we have targeted to be part of 50 square at a certain point but they do have the potential. So I think it's a mix. Of course, we are farming the 50 square accounts. Those are the primary targets that we have. And we have assembled already the teams there. so we are looking to bring enough to speed some of the relationship that are not 50 square.

Our next question comes from Anil Doradla from William Blair. Please go ahead with your question.

Hi guys. So obviously there's a lot of questions around the 50 square and part of that, if you remember, Martin, you talked about lowering the number of clients or logos which we were seeing. So can you talk over the next maybe couple of years, if you look at the trajectory of the number of logos or clients, should we be expecting a decline of three or four every quarter? Or can you share some insight on that?

Yes. Honestly, it's not a metric we are concerned about. So I won't pay attention to that. We provide a metric. If you want to follow, be my guest. But it's not an important. The important part is how many those are really productive relationships. How many of those are growing, how many of those are high potential accounts, may be adding 10 logos just for the sake of improving that number doesn't mean anything for Globant. So that's the way you need to think it.

So Martin, when there is a decline in a logo or a client goes away, typically are these declines largely driven by the projects and you guys decide not to participate in the renewals? Or is it that you get designed out? Or can you share some insights on the delta of what's actually going on?

80% of the time, our customers were not interested in. And 20% of the times are projects ending or things like that or budget running out. But we are cleaning the house. We are saying, listen we need to focus our energy in important things although we are maybe losing some piece of revenue here and there. But we need to focus on the energies on those things that have the right potential to grow. And this is what we are doing. So we do respect that.

Very good. And Ale, on the reported quarter and the full year guidance, we had at least on 2018, we had a little reset on EPS. Can you quantify exactly the impact of foreign currency? I mean that the currencies on the outlook and the current quarter?

Yes. Well, I mentioned that we are expecting now gross margins between 38% and 40%. So you can make the math. But we are talking about something in the range of 200 and 200 BPs in the full year.

So whatever that impacted is purely FX driven there?

Yes. That was one of the first question that we got. It's focused primarily driven by a secondary.

Okay. Thank you very much guys.

You are welcome.

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

Hi guys. This is Mike Reid, on for Joe. Thanks for taking our question. I had a question about hiring. There was a little pickup here. I was wondering if you were thinking you would see the same level maybe through the rest of the year? Or if there may be some seasonality in hiring? Or if you might possibly ramp it up a little bit given the little better demand outlook?

We do have the engines to accelerate and sometimes it's needed to manage utilization to slow down hiring. I think we have a very good. I mean Martin pointed out a very good outlook for demand. So we are kind of following out that trend and probably hiring is also reflecting that. I think we are very healthy in terms of hiring engines across the different regions where we operate. So it's hard to say if we are going to be ramping up hiring. What I can tell you is that we have a very, very healthy structure for hiring. I think we have matured in different locations. That does something that we have achieved over the couple of quarters. So I would say that hiring across the different regions in Latin America, India and even in U.S. and Europe, now we have the engines and the recruiting team to accelerate hiring, if needed.

We go ahead a curve. Sometimes the thought that the correlation between the two things. When you grow, it's something that you cannot predict out of the recruiting. When recruiting slows down, you cannot predict that we are not growing. It's something that is not really connected one thing to the other. But the overall picture, yes. But it's not really connected one thing to the other in the short-term.

Okay. Great. And then you mentioned last time, the salary increases were probably set for April and October. With about two-thirds coming in April, does that still say you have probably still the same plan? Or is it changed any?

No. It's the same thing. But that only applies to Argentina.

Okay.

If you look at the rest of Latin America countries, there is one thing those are increasing the year.

Okay. Great. Thanks guys.

You are welcome.

You are welcome.

Now ladies and gentlemen, our final question today comes from Frank Atkins from SunTrust. Please go ahead with your question.

Thanks for taking my question. I wanted to ask a little about the competitive landscape. Are you seeing any changes from the large legacy players that are getting more involved in the digital side? Any behavioral changes or changes around client behavior related to that?

I think competitive landscape remains pretty much the same. Accenture is out there. Some of the smaller companies, high-end companies like Sapient, well, Sapient or Thoughtworks or some internal development. The competitive landscape didn't change that much. We are seeing a good portion of those companies on some of the deals. But it is not very consistent. Some times we find one. Some times we find out. But it's not that we always find one company in all the accounts. So that's the overall picture in terms of digital transformation and we expect also with this new positioning about artificial intelligence transformation we expect to change. Honestly, we expect to change the agenda of what we were talking about with we our customers. I think that after several years of investment, now we are ready to have a different kind of conversation with our customers and implement artificial intelligence processes that would also make many process within the company, including of course how you connect with consumers. So that's another expansion. That's an added dimension that we will have to talk to our customer. And that's pretty much the competitive landscape on how we have positioned our company into that.

Okay. Great. That's helpful. And then there's been a lot of discussion around 50 square in terms of the initial ramp up of investments and what that means for margins. But as we think further out a couple of years down the road, as you get larger accounts and your accounts that you are currently in grow and scale, how does that affect margins, either gross margin or SG&A?

Once you have the team in place that team, the cost of that team gets diluted as the account grows. So as we become bigger, of course there will be some kind of increase on the team. Bu the increase on the team will be smaller than increase on the account. So we expect to gain some leverage on the margins on that aspect. I don't know if that answers your question.

So maybe let me complement that, Frank. What you see whenever you reach certain scale at an account, you have much more levers in order to manage your headcount and to manage the cost. So definitely it then stops being probably margin neutral or sometimes even profited when you are gaining scale because you have different tools in terms of how you allocate the cost or how you allocate the team. You also have more visibility in terms of the roadmap of development. So that allows you to make sure and to plan for the teams. So definitely its' cost efficient from the clarification perspective and it helps you to enhance the margins as long as you gain the proper scale in the account.

Ladies and gentlemen, we have reached the end of the allocated time for today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

So thank you very much everybody for participating on our earnings call and looking forward to see you next time and many of you will meet at the J.P. Morgan Investor Conference happening next Monday and Tuesday. Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. we do thank you for attending. You may now disconnect your lines.