Globant S.A. (GLOB) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the Globant Second 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 note, this event is being recorded. I would now like to turn the conference over to Paula Conde, Investor Relations Manager. Please go ahead/

Thank you, Operator. And thank you all for joining us today on our call to review our 2017 second 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 Web site, 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 Web site announcing this quarter's results. I’d like now to turn the call over to Martin Migoya, our CEO.

Thank you, Paula. Good afternoon everybody and thanks for joining us today. I am pleased to be here to review our business and financial performance for the three months period ended June 30, 2017. At the end of our call, Alejandro will share with you our outlook for Q3 and the rest of the year. I am happy to announce that during Q2 2017, we had another record quarter for Globant. Revenues for the full quarter amounted to $99.6 million, a robust 24.6% year-over-year net growth. We continue to see a strong growth trend in the demand of digital services, driven by businesses from a broad array of industries. As IDC points out, the proportion of digital-related consulting engagements will increase from about half to full business and IT consulting engagements in 2013, 2015 to approximately 70% of all engagements in 2020 or 2021, driving the total market for digital services and agency services well over 100 billion in opportunity worldwide by 2021. IDC has concluded that digital strategy is unanimous of business strategy as digital approach has become foundational of all parts of corporate strategy. This landscape continues to give us a huge opportunity, considering our positioning as leaders in driving business to digital. On top of this growing trend, we believe that we are at the forefront of one of the most radical changes since the disruption caused by the iPhone 10 years ago, I am talking about the artificial intelligence revolution. Like many profound transformations in the past, artificial intelligence will shake the ground in the near future. It is expected to revolutionize the way end users interact with technology and reshape the business landscape. Artificial intelligence has been available for decades, but it’s just now reaching an unparallel moment of maturity. This is due to the recent advancements, specifically machine learning and deep learning. These breakthroughs are becoming the main drivers of innovation in many industries, and are powering the deep acceleration of artificial intelligence investments. Related to this, during July, we launched our latest Sentinel Report, which is available at sentinel.globant.com. This report aims to provide insightful evidence of consumer behavior and market trends. Given the impact and growth of artificial intelligence, this new addition is focused on this trend. In it, our expert has tried tangible ways to incorporate artificial intelligence in five sales that are facing extreme transformations. First, talent management; more and more artificial intelligence is used to find, recognize and engage talent through many different types of interactions. Second, educational learning; through artificial intelligence, we're able to produce tailored curriculum and materials for every student. We can track their progression in real time and understand their personality to structure the appropriate study groups. Meaningful interactions; artificial intelligence enable devices to adapt to the users and the context; it can learn how you interact depending on the time, place and even your mood. Process efficiency; with artificial intelligence, companies can better serve clients by treating them as their only client, but on a massive scale. And last, scaling interactivity; artificial intelligence has recently enabled a conversational interface. It can understand variations of language automatically and act upon it. Soon, we may not even realize we're talking with a computer. The Sentinel Report also describes that successful artificial intelligence products will be built that aid people in processing information or that facilitate decision making. Artificial intelligence is best leveraged when treated as technology to supplement, not replace human capability. Related to this, we like to announce our third edition of Converge, our annual executive gathering. This year, the conference will be focused around the profound changes the artificial intelligence is bringing to the table. Converge will take place on October 19th in New York and expects to gather experienced executives, creative thinkers and innovators, to discuss business transformations. I invite all of you to join us and keep updated with events agenda at Converge.globant.com As we continue to adapt to new realities, we are presenting some updates with our studios; Globant studios have always been the core of our value proposition; they bring together access around different technologies and trends. As I explained on the last earning call, we have organized our studios in three logical groups to increase our customer focus; strategy, specialties and foundation. Today, I'd like to dive into three studios that aim to address some of the most important trends of these days; first, the artificial intelligence Studio. This team aims to harness the power of artificial intelligence to create better experiences and services. We do it with state-of-the-art techniques, such as deep learning, neural networks and traditional machine learning approaches. We believe that this studio is critical to all of our future work, including our services or platform portfolio. In this sense, this team is working to implement new features on all our platforms that there’s the power of artificial intelligence. Second, the product leadership studio, which I am proud to present today; this team delivers value for customers from strategy through product delivery; it uses modern product management techniques to ensure products solve the right problem, meet user expectations and achieve business value. Another new studio is actual delivery studio. This team focuses on improving the way our customers work by leveraging our unique [indiscernible] shelf both in the technology. We provide customer center rapid evaluations and enhancement approach through an agile design and iteration process. We believe that these studios complement our offering to provide more comprehensive service to our customers. Now, let me go over some interesting projects that we have been working on. We keep expanding our client relationship and long-term partnership during Q2; mostly due to our 50-square approach. We have added new logos coming from industries like insurance, healthcare, travel and entertainment, among others. In the U.S., there are many engagements to be highlighted; First, Globant is helping Global English, the leading U.S. technology company delivering business English software to develop a new mobile platform for English language learners around the world. The platform will be powered by new technologies such as Ionic and Angular and new algorithms and modules which incorporate adaptive learning in the solution. Second during Q2, we starting working with Epic Games, an American video game development company, based in Cary, North Carolina. We partnered with Epic to provide game development support on their Unreal Engine titles. Third, we also started working with Pampered Chef, a multinational multi-level marketing company that offer a line of kitchen tools, food products and cook books, were involved on strategic initiatives to improve the consultant experience while supporting their current platform and native mobile applications. Also, Royal Caribbean has partnered with Globant to wheel the new guest digital experience for their process. In Latin America, we have also seen an interesting expansion with revolutionary projects coming from a wide variety of organizations, some of them include; we started working with Copa Airlines, the flag carrier of Panama. They engaged with us to improve the travel customers for their customers, and we will continue to deliver great solutions for them in the near future. Currently, we’re also serving Itaú Chile, mainly around user experience strategy with different products of the digital ecosystem of the bank. With our expertise on idle methodologies, Globant is developing services that are present on their main Web site another internal approach. Europe continues to demonstrate great growth, and these are some of the projects that are helping drive our expansion. We started an engagement with one of the leading financial institutions on the region who embarked on a digital transformation program. Globant is sale part of the multiple projects with this company involving many of our Studio practices. We’re also involved in the development of the public engagement platform for a major government organization, which is intended to be the beginning of the fundamental digital transformation. Lastly, we are working with a leading global insurer across multiple projects to define and execute their customer transformation program. This includes the reading signs of the customer journey, building new services and influencing change programs. With our service and our platform, I’d like to introduce a new product that was integrated to our suite during Q2; Signal, is the platform that reaches nearly every screen with a rich media experience. It is publisher controlled and is differentiated by its ability to engage users. This technology is cutting-edge and it’s simple to manage. It offers the ability to build customer experiences to meet customer goals. We expect this product to provide a seamless solution for Tier 1, 2 and 3 media publishers, looking to improve their technology approach to OTT. Now, let me go over some news in regards to our Company growth. To continue expanding our U.S. footprint during Q2, we acquired PointSource. This design and development tech agency is specialized in retail supply chain and insurance services solution. Founded in 2004, PointSource is headquartered in Raleigh, North Carolina. The company has 76 professionals highly skilled in digital transformation working for brands such Johnson & Johnson, Allstate, Soccer.com, Kohl's and many others. PointSource bring business, marketing and technology together to create transformative digital solutions. They share our platform for innovation, design and engineering. We are confident that this acquisition will foster Globant’s goal of becoming the best partner in developing profound digital experiences. As we continue with objective of strengthening our position as global leaders, we must build our teams to be best-in-class. With that in mind, we have decided to appoint Linda Rottenberg as the member of our Board of Directors. Linda is a Co-Founder and Chief Executive Officer at Endeavor Global, a global organization that empowers and drives entrepreneurship around the world. Linda was named one of America’s Best Leaders by US News and one of Times 100 Innovators for the 21st Century. Linda brings a lot of experience to the table. She is a highly recognized professional with a strong focus on innovation and business results. So we are confident that she will be a key contributor to our future success. 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 media and entertainment, travel and finance, among others. To sustain our growth, we will continue to invest on our 50-square model since it is proven to be the perfect way to engage with our most relevant accounts. 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 second quarter of 2017, and to provide guidance for Q3 and the rest of the year. Ale, please. Thank you very much.

Thanks Martin and good afternoon everyone. Let me start by summarizing the results of our second quarter and six months ended June 30, 2017. I will then discuss our guidance for both the third quarter and the rest of the year. Q2 was a solid quarter of revenue, closing at $99.6 million, a robust 24.6% year-over-year net growth, and near $100 million in a quarter for the first time ever. During Q2 of 2017, Disney was once again our top one account for the quarter. Our relationship with them continues to be strong and healthy as we keep working on new exciting projects and with new divisions. On top of that, the implementation of our 50-square strategy continues to product results, and we now have six accounts over 10 million in annual revenues. Revenues for customers 11 and beyond increased 30.3% over the second quarter of 2016, and 11.8% sequentially. We expect a gradual transformation of the composition of this group of customers as we dive deeper into our 50-square program. Additionally, during Q2, we added a number of strategic accounts to the portfolio; including among others, three large insurance companies, two in the U.S. and one in the Europe, a couple of healthcare companies, one airline in Latin America and one media and entertainment company, all account that could potentially transforming into 50-square over the long term. Finally, once again, the vast majority of our second quarter revenue was generated from customers that were already working with us in the prior year; a trend that repeats overtime as we dedicate time and resources to fund our existing customer base and maintain long term relationships with our customers. Our customer concentration numbers for Q2 2017 remained fairly consistent with past quarters with our top one top five and top 10 accounts represented 10.1%, 31.6% and 43.9% of revenues compared to 10%, 34.2% and 46.4% of revenues respectively for the second quarter of 2016. Our vertical diversification remains balanced across the different industries. Our largest industry for the quarter was media and entertainment with 24.8% of revenues, followed by bank and financial services with 23.8% of revenues. During the second quarter of 2017, 17.5% of our customers were in North America; the U.S. is our top country; 12.3% were in Europe with Spain as the county; and 9.2% in Latin America and others, Chile our top country; Europe continues to outpace the rate of the regions in terms of growth. During the second quarter of 2017, 87.6% 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 331 customers. We now have 76 customers with annual revenues in excess of $1 million compared to 57 one year ago. Turning now to profitability where it's still experiencing some margin pressure. As there were FX appreciations movements in some of the regions where we operate, such as Uruguay, Mexico and India and despite certain devaluation of the Argentine Peso towards the end of the quarter, wage inflation in the country continue to outpace the valuation. Recent performance of the government in mid-term primary elections might also play a role toward flat or medium our currency depreciation in Argentina. Our adjusted gross profit for the period increased to $37.9 million, 38.1% adjusted gross margin compared to $34.1 million, 42.6% adjusted gross margin in the second quarter of 2016. The margin decrease year-over-year was primarily driven by three factors. First, Q2 2016 still enjoy the benefit of the significant depreciation of 53% in Argentina in December 2015, our main development center; after that, the Argentine peso remained pretty much flat, being outpaced by wage inflation despite the efforts from the government to reduce overall inflation in the country. Second, Uruguay, Mexico and India where we hold 23% of our headcount, appreciated their currencies compared to the second quarter of 2016. Finally, there was an strong headcount grow in promising locations that's slightly changed the cost mix. The margin decrease versus the first quarter of 2017 was primarily driven by usual salary increase window that took place during the second quarter of the year. We finished the quarter with 6,223 Globers, 5,772 of which were IT professionals. Attrition for the past 12 months was 18.1% compared to 18.9% one year ago, showing a nice improvement year-over-year linked to our diversification efforts. Our SG&A for the quarter decreased 42 basis points compared to Q1 2017, accounting for 22.9% of our quarterly revenues; although, increasing 45 basis points on a year-over-year basis compared to Q2 2016, mainly driven by some investments in our on-site sales force together with further development of our delivery capabilities in the U.S. and Lat-Am. We’ll 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 $11.1 million or 11.1% of revenues compared to $13.7 million or 17.1% for the second quarter of 2016. Q2 2017 has a very tough comp since our growth in operating margins of Q2 2016 were positively impacted by the large depreciation of the Argentine peso that occurred in December 2015 and benefit the first half of 2016, as discussed before. Margin pressure was another factor that impacted the lower adjusted operating income. Other income and expenses resulted in $0.7 million gain, resulting from the re-measurement of the liabilities related to one of our acquisitions. Our income tax for the quarter amounted to $1 million and imply normally high effective tax rate of 31.2%. Increasing effective tax rate is the consequence of the impact of an extraordinary impairment of tax assets recorded for the period, which have no impact in income tax but generated a lower profit before income tax base. It will work to exclude such loss from activity the effective income tax rate for the quarter would got being 20.5%, which is in line with our expectations for the year. Adjusted net income for the second quarter of the year totaled $9.6 million, 9.6% adjusted net income margin compared to 12.7% for the second quarter of 2016. Adjusted diluted EPS for the quarter was $0.27 based on $36 million average diluted shares for the quarter in line with our expectations. Moving on to the balance sheet. Our cash and investments as of June 30, 2017 amounted to $36.3 million compared to $59.9 million as of December 31, 2016. This decrease in cash is mainly explained by our decision to practically self-fund for the time being M&A transactions and CapEx to expand our offices in Latin America, U.S. and Europe. Borrowings totaled $10.3 million as of June 30, 2017. Our balance sheet remains strong with current assets of $131.4 million, accounting for 39.2% of the Company’s total assets. Total common shares outstanding as of June 30, 2017 were $34.9 million. Now, let’s talk about the six months ended June 30, 2017. Revenue for six months ended June 30, 2017 was $188.3 million, implying a 22.9% year-over-year growth. Grow was boosted mainly by non-top customers and new customer wins in the financial services and insurance space. Adjusted gross profit for the six months period was $72.5 million, 38.5% adjusted gross margin compared to $67.1 million 43.8% as of the gross margin for the same period of last year. On a year-to-date basis, we continue experience the headwinds of the FX market in most Latin America currencies combined with wage inflation in Argentina. Adjusted SG&A level accounted for 23.1% and 22.2% of our revenues for the six months ended June 30, 2017 and 2016 respectively. This year-over-year increase was mainly driven by investments in expansion of U.S., Colombia and Mexico delivery centers and some more sales coverage. Adjusted net income for the six months period ending June 30, 2017 was $19.3 million, 10.2% adjusted profit margin. Adjusted diluted EPS for the same period was $0.54 based on $36 million average diluted shares for the period. To wrap up, I would like to share with you our outlook for Q3 and the rest of 2017. We continue to experience sustained demand for our digital offerings and we also see traction from our strategic accounts. Business environment is healthy, and we’re glad to see the evolution of our 50-square accounts strategy. The continuity of the FX volatility around the globe, but primarily in the different regions where we operate, requires us to take a conservative approach in our guidance for EPS. In terms of margins and as we explained in our last earnings call, we still expect some margin pressure and short-term volatility; all of that baked in our guidance. We continue to experience headwinds on the FX front from some of the countries where we operate, such Mexico, Colombia and Uruguay, where currencies are expected to remain flattish or with a slight appreciation versus U.S. dollar during the current year. In Argentina, there has been some depreciation of the peso lately, but wage inflation continues to outpace the valuation. We think that short-term appreciation of many Latin American currencies and the Indian rupee shouldn’t last long as the U.S. administration has been taking some actions, such as increase of interest rates, tax reforms, propose sales, among others that will likely strengthen the U.S. dollar eventually. Despite this short-term volatility, we’ll continue managing our margins and investing in the long-term, training our Globers on emerging technologies and expanding our footprint in our target markets. We’ll continue expanding our footprint outside of Argentina, a factor that will enable us to keep diversifying the talent base and balancing our cost structure with a better handle on margins. As always, we’ll continue monitoring very carefully our SG&A expenses to gain additional dilution around the year with the intention to offset potential hits on gross margin coming from the previously described picture. Finally, effective tax rate is expected to be in the 20% and 22% range, in line with previous quarters. Now, let me provide you with our guidance for Q3 2017 and for the rest of the year. Based on current visibility, we expect Q3 revenues to be between $103 million and $105 million, implying a 26.3% year-over-year growth at the midpoint of the range. EPS is expected to be between $0.32 and $0.36, assuming $36.2 million average diluted shares outstanding for the quarter. Looking into the year, we now expect revenues for 2017 in the range of $397 million and $403 million, an implied 23.9% year-over-year revenue growth at the midpoint of the range. In terms of EPS, we reinforce and maintain a range of $1.22 and $1.30, assuming $36.1 million average diluted shares outstanding for the full year. Given the FX volatility and wage inflation environment already described, we have decided to maintain the wide range of the EPS as it could driven towards the lower end if such headwinds continue or toward the higher end, if such situation reverse. Thanks to 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.

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Ashwin Shirvaikar with Citibank.

Thank you guys and good performance on the top-line again. My question Martin was with regards to -- you had a comment on project size in the opportunity set for digital increasing; as these digital projects become more mainstream. Could you comment on your ability to scale these projects from a talent hiring perspective?

I think that the demand is becoming mainstream, as you said, I would take examples on some of our biggest accounts and some others that are not our biggest accounts, but are growing very, very fast. And we have, I would say, pretty much no problem to scale the projects, given that our actual pods are meant to that. We have, within the whole company now about a thousand pods that are working, each one with their own name, with their own specification and values, mission statements, all those things. And when those pods mature, happen something that we call mitosis and that mitosis means that we'll separate those teams when they have more senior members, we separate those teams into two different teams. And that's the way that we have to scale; it's not about just hiring people and training them and putting them into work, but it's about making the mitosis in the same way itself replicate itself, to generate another one with the same DNA that is equally efficient. So I think that that approach that we are following is extremely important to scale on our customers and it's also one of the reasons why our customers are selecting us.

And so the second part of it was as you raise revenues but not the bottom line, and you've obviously mentioned a fairly long list of reasons Ale in that. I just want to confirm that what you meant was it's entirely FX, it's really not pricing, it's not mix, there is nothing going on. It is basically FX volatility that you're concerned with range.

Just wanted to confirm that Ashwin pretty much all of the tracks that and all of the margin pressure that we're facing is effect. Its effect in most of the currencies in Latin America that appreciated for the first six months of the year, and in Argentina it's a combination. There is very little devaluation in the first six months than there was a little bit of further devaluation with our software at the end of the quarter, and that's combined with a still wage inflation in the country.

And a quick third question, stock-based comp was really high in the quarter. I don't think it's been on a quarterly basis at this level. What's driving that, and is that a new sustainable level? What's going on, can you comment on that case?

No, it's a one off effect that's pretty much related to the issuance of where three tickets of units program for certain key employees. So you should inspect that at a normalized level, going forward.

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

Good afternoon and congrats from my side on the solid top line. So Martin and you talked about the pipeline being solid, you highlighted three-four end markets. Is there any particular end market that stood out that perhaps is your expectation that is worldwide highlighting, where you’re getting very solid traction?

I would highlight two; one is entertainment well, within the texture of media and entertainment; and the other one is finance. But we’re seeing -- it's very interesting because we’re seeing the demand being expanding in pretty much in any industry. Now, also on industry side for example, industry automation or automotive industry; every industry needs to go through this transformation. So we are seeing that effect and also we’re seeing that the effect is being across all the industries. Now, which are the places in which we are performing in a much more -- we are growing more are media and entertainment, finance, also travel, the travel space and social growing very fast. So those are the three areas that I would suggest, I mentioned.

And Ale, I understand you have salary adjustments twice a year, and I think April to October, so there is one coming in October. Is that right, did I understand that right?

That’s correct.

And so the way I look at it is for the FX headwinds. Is it fair to say that it takes basically maybe six to nine months for the salaries to catch-up with this new normal of FX? In other words, as you come to the October salary year timeframe, that’s when you would be able to get more in line with the currency situation. Is that a fair assessment?

Well, typically this type of the salary increase that we’ve seen in Argentina where we have -- that’s the only country where we have two salary windows. But in the rest of the countries, in Latin America and India, which is just one single window. In the case of Argentina, the big chunk of the salary increase happens in Q2 in April. So it takes several months because you have the ably and the jump in the costs in Q2, and then as the currency slowly at the value and you catch-up. So it takes probably between four and six months in order to catch-up. The second salary increase in October is probably one third of the total salary increase of the year. So it’s probably -- it’s going to taking less in terms of months cut-up assuming that there is smooth pace of the evaluation of the currency. Hopefully that clarifies.

So it's fair to say that the range that you’ve given now showed us an significant move in the FX front. It’s fair to see that you have a good handle I know it’s a wide range. But we should be okay right now after passing three months after -- and the April was the last time. So I’m just trying to basically quantify the confidence we should have on that range.

I understand. And we really feel comfortable with the guidance that we’re providing and the range that we’re providing. Of course, we see volatility but we still see volatility in the currency. I mean the currency started, particularly in Argentina, started with a very steady devaluation in the past month.

I think we lost Ale.

Okay. Well, that’s great. Best of luck.

No problem. Thank you very much, Anil.

All right, thanks.

But again, to summarize the question that Ale was saying -- that you asked to Ale. We’re seeing -- we’re pretty confident with that also with learning the whole process. But I would say that we are confident with that, there’s some volatility happening on the main currencies in which we are operating and we’re expecting that volatility to settle. But the range is something that we always provide, and we feel confident with that.

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

Could you quantify the margin impact from wage inflation during the quarter? And then what was wage inflation, in general, in Argentina and what do you expecting that to be by the end of the year? Thanks.

It's a blend, Moshe -- how are you doing. It’s a blend because you have the effect of what’s happening in Argentina, but you also have the effect of Latin America currency depreciating against the U.S. dollar this technically states the Mexican peso. And on a year-to-date basis, it’s appreciating almost 15% against the U.S. dollar. So it’s a blend of course that in fact of the effective taxes is coming from Argentina, wage inflation in the country is running at mid 20s to low 20s, while the pace of the valuation year-to-date has been only 5%, that has been the combined effect.

And then as a follow up, two things; one, is there any possibility to factor that, these increased costs in future engagements in terms of how you contract days; and then just remind us what was your headcount in Argentina as a percentage of total headcount. Thank you very much.

I would assume that when you are talking about factoring that into the contracting in the engagements with our customers. Should that be the case?

That is correct.

Yes, should that be that case. Honestly, the way we’re trying to manage this is basically by decentralizing Argentina and expanding our current base first, because we believe in decentralizing the clients for the client in many different places and largely in our capabilities, our skill set and the possibility of facing up larger deals. The side effect of that we’re decentralizing Argentina and we’re lowering the reach of Argentina. I think the government in the country is doing many different things to lower inflation. So we’re very optimistic in the mid run in terms of the how inflation is going to turn out in 2018. But in the short run, it’s us managing costs by moving projects from different locations. Now we have the ability to place projects in many different places all across Latin America, India and also U.S. So that should be the leading driver. We don’t want to mess up our customers with renegotiations, because of certain wage increases in one of the countries where we operate; it's just that we need to manage that.

And on the headcount mix in Argentina?

Headcount mix as of today it's 43%, so it’s running probably -- if you compare that to one year ago, we’re running 9 percentage points, 900 basis points below. So Argentina as you see in the quarter is decreasing as a percentage of today headcount. With that that will likely have probably new location about 25% of our headcount, it's going to take time with Argentina, but everything as reported we're decreasing Argentina as a percentage of the total.

The next question comes from Tien-tsin Huang with J. P. Morgan. Please go ahead.

Just to add on to Moshe's questions around the contracts. From a pricing standpoint, any change in your pricing philosophy given what's going on with inflation and labor mix, and perhaps competitiveness in hiring talent?

Look, there is some changes, some changes that we are doing that we have been making them from the beginning of this year and in last year, which are changes to follow a little bit more our costs. But I would say that given, in general, contracts are being renewed at new prices, so we're not seeing any pressure on the pricing side. And we were seeing our prices have -- our new contracts are going up nicely without any injury on demand. So we see that as a very interesting effect of our -- it's immense between our 50-square program and fewer digital positioning that we have. So I don’t know if that answer your questions.

No, it does, that’s helpful. And then just as a quick follow-up, just the revenue guidance change. How much of that is inorganic from acquisitions versus any other organic changes? Sorry if I missed that, just want to make sure I got that.

Organic is most of it, inorganic is just a bit on the guidance, organic is -- most of it based on some customers that are structured quite very well.

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

When you talk about scaling, do you expect to do more M&A, and how should we think about the balance between M&A and margins?

Look, for us, M&A has purely strategic movement. It's never about the volume, and we've said this many, many times. So if there is any strategic move that we can do, like the acquisitions that we did in the past, I would say year or year and a half, that has to do with expanding our footprint in the U.S., and we're very committed to that. And now we have a pretty decent footprint in the U.S. compared to what we have. So if there is a strategic reason to do it, we will do it. Otherwise, we’ll refrain from doing it. So we see now our footprint in the U.S., which is quite healthy. So we’ll keep on searching new strategic areas to expand our business. And of course, we're looking into more strategic areas to expand our businesses but it will not keep on happening on the same way that we saw it until now, unless we find something very unique of course.

I guess maybe asking in a different way. How should we think about margins in 2018? And do you have any specific margin targets or long term outlook or long-term outlook that you can share with us?

I we have been talking though about the normalized margin range of between 38% and 40%. I think the margin pressure that we’re facing this year is a little bit extraordinary. I think that it’s a combination of several effects, as I pointed out and I decide during the call. So the combination and participation of Latin America currencies plus this combination of very slow devaluation in Argentina combined with wage inflation. But we’re continuing to be executing on plan of decentralizing in Latin America and also India. We’re moving projects to several different places, and that at the end is definitely given us some edge in terms of balance in terms of how we manage margin. And on top of that, what we clearly see that brand new technology, particularly don’t related to the most emerging technologies, AI, some machine learning things, cognitive computing, are allowing us to charge the better rate. Also, some of the acquisitions that we have made are going to be into having a better drop on our rate. So all of that combined also with a smart and efficient use of resources, make us to believe that 2018 is going to be a better year in terms of margin profile, but still within that range of 38% to 40% that I mentioned.

And then the last one for me, I guess, I’m wondering are you concerned about talent at this point, particularly in Argentina; obviously, wage inflation is up; you did the stock comp pulling up, which should probably retain obviously more people. So maybe if you could comment on just about being able to retain the talent there, and if you can give us some attrition rate in Argentina versus the global one you reported that would be great. Thanks.

Attrition is trending down. We don’t provide the numbers of attrition every quarter, but we provide once a y. Please correct me Ale if I’m wrong. But it’s trending down so we have good puts on that front. On the other side, we have no problems with talent given that we are spread around in a base of talent that is very, very big, just doesn’t make -- it's [100 million] people and also where we have presence in India with 1.2 million, almost 1.2 billion people. So we have no lack of talent or conditioning to get talent from Argentina or from any of the other 17 countries in which we operate. So we think that we will keep on expanding and having great access to talent. We feel that also we are a great choice for keep the carrier of our Globers relevant, given the kind of projects we have, given the kind of customers we have. And working for Globant they realized that -- what they realized is that they can gain actually some of the best runs in the world period. They can stay relevant because they work with the latest technologies and using the latest concepts on shopper creation. And that’s attractive of being part of Globant, and people know, our people know and the people from the market also know that and they value that. So that’s why I don’t see any constraint right now in terms of talent in any of the countries in which we operate.

If I may complement that answer, Joe, attrition this quarter went down to 18%. There was a pretty nice decrease on attrition. As we decentralize, definitely the attrition tends to be better at the core company.

Ale, do you have the attrition rate in Argentina?

It’s running in mid 20s, while the rest of countries are pretty much in mid-teens.

The next question comes from Frank Atkins with Suntrust. Please go ahead.

Wanted to first ask in the prepared remarks you talked a little bit about positive trends in the financial services sector. Can you give us some color there as to what’s driving that better performance, may be some of the services you’re hearing from the clients, or some of the types of clients you’re driving?

There are several strategies in which banks and other financial institutions are going after these digital conformation projects. In some cases, they create a new company and they just start from the scratch creating new banks like happened to one of our customers. In other cases, they focus on making total transformation of how they see the creation of software probes and how they run their company. They are now thinking about running their company as a product itself, which is quite interesting. On some other cases, we are seeing total transformations in terms of management of the organization to get focus into this new trend, which is leading to projects which are inside the same company, inside the same financial institution but with many different -- very different stakeholders than before. And then some other more traditional banks are going the way trying to transform their internal IT department into something more agile and more nimble to be able to catch up with the speed of development they need in different days. So of course all of this has come under nomination, the nominator which is regulatory; things always speak down; the go-to-market strategy; big IT departments; big spending with traditional vendors that they need to start changing, and all those things takes time. But we’re very happy with the progress we’re making in that industry. And overall, I see that as a very high potential industry for Globant in the next -- in the coming years.

And then can you talk a little bit more about the strategic rationale and the capabilities around the PointSource acquisition. And any more color you could give us on either revenue contribution or margins relative to the core would be helpful as well.

I will give you the strategic rationale and then we’ll let Alejandro to do the other part. So on the strategic side, first, it’s a part of the East Coast where we pretty much we didn’t have anything. And on the East Coast we now have a delivery center, which is pretty solid about 70 professionals are working now at our office in Raleigh, North Carolina, which is a great place to scale out the talent here in the U.S. So that’s one strategic geographic coverage factor. So that is complementing the other two acquisitions we did in Seattle. So now we have around 700 people in total in the U.S., which is a pretty decent name in terms of coverage and in terms of percentage of the total headcount of Globant. So that's one part. The second part and most important part is the complement that these guys from PointSource are bringing to the table. They have a lot of experience on insurance company, which we can leverage and then they have a pretty interesting approach to do digital transformation, which we can also leverage in some aspects within; so those two are the strategic things. And then the coverage and the size of the operation here in the East Coast is much better, and right now, that’s what I am thinking here.

As far as contribution, Frank, what I can tell you is that definitely they’re going to be accretive; they have been growing faster than Globant; they are the smaller size, but they are growing faster than Globant; and definitely even from the margin total for our onsite business, they have a pretty nice margin profile that is going to be contributing to us. And they are deeply penetrated, as Martin pointed out, into the insurance, retail and supply chain verticals, which is very interesting for us.

The next question comes from Arvind Ramnani with Keybanc Capital. Please go ahead.

This is Jason Washburn in for Arvind. You guys mentioned demand being propelled by averaging tax, such as AI?

Around the AI, I think we have a huge opportunity. The main thing is that we're leaving -- as the iPhone got 10 years ago and in the new pretty much we work expanding the same technologies over and over. Now, we are at the verge of a new total transformation and a new -- as the digital information is happening now, we feel that a currency transformation will happen in the future. And this is as a next big movement that pretty much every company will need to embrace, because it's coming, either you embrace it or you will be a victim of it. So what we feel is that we have been already started with our cognitive computing studio about two years ago, and now we are expanding how deep we want to go into that. Because right now, it's very cheap and very easy to get into those artificial intelligence solutions to solve many problems that the companies may have even on business process outsourcing to automating any kind of -- or helping -- taking decisions in a better manner. There are hundreds of processes that could be automated by artificial intelligence and machine learning in the coming years, and that's a huge revolution that is going on top of the digital transformation. So as an independent company, we're not tied to any kind of particular platform like any of the big vendors are. We are able to tap into the best possible technology if it is from IBM or from Google or even Amazon or from whomever it’s providing these algorithms or processing power to help us. So I feel that we’re really in a great position to monetize this next big transformation. So that’s why I’m not talking anymore about just digital transformation. But I think more about digital transformation enabled through artificial intelligence or digital transformation plus cognitive transformation, and we are the ones that will make it happen. We have already many, many cases in which we are helping our customers with that. And also we have instructed that that pretty much every Globant needs to know about artificial intelligence, and need to understand the rudimentary of artificial intelligence to understand how to apply that into every single project and every single process even within our company. So I think there is a market revolution that we’re leaving technology; again technology is surprising us, it's going faster -- it's going much faster than what we expected a couple of years ago. So we decided to put full scene ahead on that and to start talking about that as the central part of the digital transformation as we deliver it.

And then I guess what percent of revenues would you say driven by AI and what investments have you made up to this point in AI?

No, we haven’t making a lot of investments and a lot of projects with our customers. We don’t disclose that information about percentages coming from that. We mix servicing within -- because it is our core so cannot differentiate, this is coming from artificial intelligence, because normally it’s mix within the project that we are currently doing.

And then if I could squeeze in one more, just with margins. What leverage do you guys having place to help to offset some of those headwinds?

Definitely, the leverage is on, again on the decentralization and the balance by different locations. India is a very good lever to improve market; we are moving several projects into India because the side effect, I mean, we’re moving projects into India, because we have the quality and the talent there; we’re leveraging to expand some projects in Europe, where the times on caps by doing some and start in India; we’re even doing some projects with some of our top customers in India, combining that with Latin America. For instance for DC, we now have a couple of teams in India doing business, so that’s a very good lever. And definitely the other thing is pricing. Most of these emerging technologies can have some leverage on pricing. There has been no placing in that space, so you become shortlisted and there aren’t a number of investors who are capable of doing the kind of digital stuff, so that’s also to gain some leverage on pricing.

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

Yes, thank you very much operator. Well, thank you very much everybody for joining us and looking forward to see you on our next earnings release. Thank you for your questions and for your understanding.

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