Good afternoon, and welcome to the Globant Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paula Conde, Investor Relations officer. Please go ahead.

Thank you, operator, and thank you all for joining us today on our call to review our 2017 third 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 Miyoko, Globant CEO; and Alejandro Scannapieco, Globant 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'd like now to turn the call over to Martín Migoya, our CEO. Martín Migoya: Thank you, Paula. Good afternoon, everybody, and thanks for joining us today. I'm pleased to be here to review our business and financial performance for the 3-months period ended September 30, 2017. At the end of our call, Alejandro will share with you our outlook for Q4 and full year. I'm excited to announce our best quarterly revenue to date. In Q3, we reached $109.7 million, a robust 33.2% year-over-year net growth. We are experiencing strong momentum in our business as demand across industries and geographies keep expanding. As a reflection of this, in the…

Thanks, Martin, and good afternoon, everyone. I will start by sharing our third quarter and 9 months ended September 30, 2017 financial performance. After that, I will provide guidance for Q4 and the rest of the year. As already pointed out by Martin, revenue for the third quarter was $109.7 million, a record for the company and represented a robust 33.2% growth year-over-year. Growth has been driven by strong traction of our largest client and increasing revenues for customers 11 and beyond, which were up 48.5% over the third quarter of 2016 and 16.4% sequentially. We expect a gradual transformation of the composition of this group of customers as we dive deeper into our 50 square program. On top of that, this strategy continues to produce results and during the last 12-month period ended September 30, 2017, we had 7 accounts over $10 million in revenues compared to 5 accounts during the same period 1 year ago. This is a clear indicator of our ability to scale up our key accounts. Our customer concentration numbers for Q3 2017 reflected good diversification and less concentration if compared to past quarters with our top 1, top 5 and top 10 accounts represented 10.3%, 26.8% and 40.7% of revenues compared to 10.4%, 33.9% and 46.8% of revenues, respectively, for the third quarter of 2016. A strong traction of non-top 10 accounts is playing a key role to diversify our portfolio of customers and to decrease concentration. Disney was once again our top 1 customer for the period, proving our relationship continues to be strong and healthy. As it has been the case over the past several years, our vertical diversification remains balanced across the different industries. Our largest industry for the quarter was banks and financial services with 24.8% of revenues, closely followed…

[Operator Instructions] The first question comes from Tien-tsin Huang with JPMorgan.

Good revenue here. I guess, I'll just ask a simple top line question. What was better than expected in the quarter? Can we attribute it to anything? Was there any kind of pull-forward effects? And same question, anything maybe weaker than expected? Looks like Europe wasn't as strong as the rest. I'm guessing, maybe that's Spain or something there. So can you elaborate? Martín Migoya: Sure, Tien-tsin. Can you hear me?

Yes. Martín Migoya: Okay. Great. Well, the fact was that we increased a lot our penetration in the U.S., some accounts driving a lot of growth not on the top 10, but some of them below the top 10, and driving a lot of growth. Europe is absolutely projected because we went live with a very huge project that we had, and we wound down a little bit some of the initiatives in Spain, as you said. And, but the overall picture is very positive, and what I can -- the color I can provide is that, we're seeing like a pretty healthy trend in terms of demand of every single studio that we have. So the surprise is based on customers going much faster than what we expected at the very beginning of the quarter when we forecasted the quarter. So that's the -- that's the main reason.

And then thinking about the fourth quarter, I guess, usually, we do see a little bit of a seasonal bump-up in the fourth quarter. It doesn't look like we'll, you're guiding necessarily to that. Anything unusual with the fourth quarter to call out? Martín Migoya: No, absolutely normal. Absolutely normal. And there is no -- I am not seeing any bump on the fourth quarter this year, But as I said, we're having a pretty strong demand on all the -- well, as I said, in some of the segments, it's more accentuated like media and entertainment and travel and finance. But I see no real bumps on this fourth quarter.

Okay. The baseline is certainly much higher than we expected. So last one from me, maybe for Ale, just on the margin front, as we exit the year, specifically, I guess, gross margin. Can you give us a little bit of guidance there?

Yes. Definitely. Hi, Tien-tsin. I think, as we expected, we're trying to get into that normalized and stable level of margin. We mentioned several times that range between 38% and 40%, I think we're just hitting that range. I think whatever we baked into our guidance in terms of FX and currency fluctuations is whatever is happening. So we feel comfortable about also the margin trajectory. I think there are a couple of things there that are very interesting for us, such as trying to get some pricing power that might help us to offset some of the potential downward effect that we may have of the change on the cost mix that we have. So we're very comfortable with the kind of very stable trajectory for the margins, even getting into Q4 and 2018 onwards.

The next question comes from Anil Doradla with William Blair.

Just a couple of questions. So Martin, you talked about positive and market demand. I think you also made some positive commentary around media. So as we look into 2018, I mean, these are not one-off quarters. It sounds like some of these trends will sustain itself in 2018. So any color on that front? Martín Migoya: Look, all our relationships, Anil, are long term. So, in general, when we start with projects, they are not kind of special projects or projects that end fast. So we enter into a demand mode and a delivery mode at Globant, which I think is extremely healthy. The 50 square program is paying off big time. I think that was a great move. It cost us a little bit of investment at the very beginning, but now it's working fine. So I -- my -- although, it's difficult to say right now, but my initial reaction is that we foresee this trend continuing. It's not just a casual trend or just an isolated good quarter. I see that projected into the future. Now specific numbers, I won't give you because we don't have them yet. But I'm pretty confident that it will be okay.

Good. Very good. And when I look at the top 5 customer growth, the growth was more muted perhaps. Is there anything going on in the top 5 and your particular 1 or 2 customers? Any new dynamics there? Martín Migoya: This is -- keep tractioning a lot. I mean, the business of Disney is very healthy, and that's also reflected on how we are delivering to them and we keep on being on top of the list of partners that they have. So that's something that is really remarkable. And then, the rest of the customers are performing good. Some of them growing slower, others growing much faster. Ale, could you be more specific on that? Top 10 or top 5 customer trends?

Yes, sure. I think, probably the only drag in terms of top 5 is one of the largest airlines that we have in our travel portfolio. They more than doubled their revenue last year. They got into kind of a stable environment for some of the projects that we are running, but they're catching up again and gaining traction again. So hopefully, in the next couple of quarters, we're going to see traction again in that customer. But that's the only drag among the top 5. And again, I just want to emphasize what Martin said about the non-top 10. That's a very important number. I think that's -- the evidence that the 50 square project is working that this quality shift in terms of customers that we have been executing for over the last couple of years is starting to pay off. I think that's the good news. We're not really concerned about whatever might happen in a single quarter with some of the customers within the top 5. I think as Martin said, relationships are long term and they are very solid.

So it's really a timing issue, one-off. It will get sorted out in the next couple of quarters. That's what I'm reading?

Yes, definitely. And sometimes -- I think, Anil, sometimes, it is the natural evolution of certain projects and seasonality of certain projects. There is nothing going on in that account.

The next question comes from Moshe Katri with Wedbush Securities.

Nice quarter on the revenue front. Ale, can you talk a bit about the impact of wage inflation during the quarter on margins? And then, where is the headcount today? I think in Argentina, I think last quarter was about 43% of total headcount. And then, I just want to confirm what you told Tien-tsin, which is, in 2018, you believe that both gross margins and operating margins have stabilized?

Okay. Moshe, how are you doing? As far as the impact of wage inflation in the margins, again, everything has been baked into our guidance. For the quarter, what's happening is some of the currencies that appreciated in the first half of the year started to devalue against the U.S. dollar. So that was a little bit of help even though it wasn't a significant devaluation of the currencies. But they were playing somewhat neutral in the quarter. As far as Argentina, there was a little bit of devaluation of the Argentine peso, but it's still-- wage inflation is outpacing the devaluation of the currency. So in fact, it's kind of an increase in cost per head in US dollars. But we have been able to offset that through decentralization. So jumping into your -- the second part of your question, Argentina is still going down as the percentage of total headcount. Now it's 40% of the total headcount. Colombia, India, Mexico and U.S. are outpacing the growth of Argentina. So we did execute on our program of decentralizing the talent. And on top of that, I think we have paved the way to have a 2018 with more stable margins, as we decentralize costs and are being able to decentralize the headcount, the management of margins and the cost base is easier. So I think we're going to have definitely a different year in 2018. We envision gross margins to be stable in that range that I provided and definitely to keep gaining some operating leverage.

And I think you mentioned the -- you've been talking about the gross margin range. Can you remind us non-GAAP EBIT margin range that you are guiding for? And then, where is wage inflation in Argentina as we speak?

We're not guiding for EBIT margin. What we said in the past and we reaffirm that, Moshe, that we like to be in a range that's very close to meeting. I think this quarter, we're very close to that. So that's kind of the range that we ambition, but we're not providing a far guidance on that. As far as wage inflation in Argentina, it's still running at high-teens, low 20s. That has been the case for all these years. Devaluation in the full year is going to be between 12% and 13%. That's what we're forecasting for Argentina. Martín Migoya: Also, I would like to point out -- Katri, can you hear me? This is Martin. Point out, there is a very interesting improvement in margins. The gross margin coming from Q2 into Q3 of 1 percentage point, which I think is important also to pay attention to.

Yes, a step in the right direction.

The next question comes from Joseph Foresi with Cantor Fitzgerald.

Could you talk about the organic growth in the period and how does that look like maybe over the last couple of quarters? And what are you expecting for '18?

Well, the growth, Joe, is pretty much organic, of course. We have a combination of several things there, like the traction of the non-top 10, the traction of our largest customer that has been regaining growth in the three quarters of this year, because if you take a look at the sequential growth of the largest customer, that has been growing in Q1, Q2 and Q3, which is very good. Then, of course, we have some tailwind from the acquisitions, but keep in mind that PointSource and Ratio were very small tuck-in acquisitions. No acquisitions that we have made over the course of the history of Globant have been more than 3% to 5% of our revenue. So pretty much, the growth is organic. We don't even have yet 1 account coming from acquisitions that is part of the top 10. So the growth remains mostly organic and within relationships that we have been farming. And looking into 2018, we're very optimistic about keeping up with this level of organic growth. We're in the middle of the budgeting process. And again, I would like to reinforce the point that was raised by Martin. I think the demand environment is very good. I think we have achieved very strong penetration in some of the sectors. We're gaining new customers in new verticals, especially on the insurance sector, the healthcare sector, now also the automotive sector. So those are brand-new verticals, if you wish, for us, where we are clearly underpenetrated and that's a big opportunity for us to reinforce the organic growth. But we see a very positive outlook for next year as well.

So maybe you can just frame for us like, what are your expectations for -- without giving guidance, what are your expectations for 2018 for organic growth? And then what would it be kind of, if you were to include acquisitions? I'm just trying to get a ballpark. Is it 20%, 25%? I'm just trying to get some sense of what you think the organic growth could look like?

I would say, again, we're not providing guidance for next year until February. I think we have been able to keep up with this 20% plus growth steadily. We're [indiscernible] to have that 20% plus organically. And then, on top of that, if there are some specific tuck-in acquisitions that make sense for us, that are strategic for Globant, I mean, we have a segment of some of the technologies that we want to incorporate, some strategic investments that could be linked and compatible with our studio offering, definitely, we're going to be looking into those companies. But so far so good with the organic growth and the relationship that we're still farming. I think if you take a look at the overall portfolio for Globant and if we just pick up, let's say, the top 30 customers, those are huge accounts, accounts that are spending billions in technology, where Globant is becoming a strategic partner. So by itself, the opportunity to farm and to breed those accounts is a very large opportunity. So for us, it's more about execution, doing the right thing, trying to breed the talent, to train the talent within the organization, to be innovative to keep cutting-edge technologies that -- at the verge of whatever we do with the studios. That's the way to go and how we're going to be growing this company organically on a 20% plus [ clip ].

Got it. Okay. Last one from me. Looks like the total customers went up and it sounded like 50 square, you're trying to kind of thoughtfully grow the customer base. Maybe you can reconcile the 2 of those. Were those customer increases due to acquisition? How should we think about customer additions?

Mostly, coming from acquisitions. So if you take a look at the long tail and the size of the customers that we were [ reduced ] the less material customers and trying to improve quality of [indiscernible] customers with more potential. Go ahead, Martin. Martín Migoya: No, our main focus is always the quality of the relationship and the quality of the customer. So just I want to reiterate we just won, for example, YPF, which is the biggest petroleum company here in Argentina. And those are the kind of customers and quality relationships that we're really looking for. So we are investing on getting those kind of customers. And sometimes, trying to get rid of those customers that are small or does not have the potential that we're looking, always following in our 50 square approach. So when we're talking about that, we're talking about winning market share from our competition in a very, very concrete way and growing -- outpacing in growth through all of them. So I think that's the way to see the amount of customers. I mean, I'm not that concerned about the amount of customers. I'm concerned about how deep the relationship with them is.

The next question comes from Frank Atkins with SunTrust.

I wanted to ask a little bit about progress in the 50 square program. Are you seeing increases in a number of service lines or studios or touch points in your large existing clients? Do you think you're penetrating those accounts in different areas along with the plan? Martín Migoya: Yes, we're penetrating some of those accounts with our consultancy studio. We are penetrating with our artificial intelligence offering. There are some additions into our offering that are really very, very important. The fact that we have a much robust presence in the U.S. after we finish the acquisitions to expand our footprint in the U.S. is also extremely important. And it has strengthened our positioning in pitching deals and just a few days ago, a great -- [ can I just provide ] a bit more color, a great -- a big company on the automation sector, we cut a deal with them, which was a multiyear deal that included almost 6 of our studios together working with them. So those are the things that are really, really important. And the fact that some of the acquisitions that we did in the past, like for example, the [indiscernible] acquisitions where we got the consultancy studio, which was much deeper than what we already did in that discover area are providing us like some additional insights and some opportunities to get connected to the customer earlier in the development process, which is yielding much better deals and yielding. So I think, it's a way that -- to explain that acquisitions in some way is not just to expand the presence, but also to get new ways of doing things and new knowledge that we didn't have. So I see that as a really good way to expand our offering, and we have been executing that very, very well and the results are what we are delivering today, the numbers.

Okay. Great. And I believe in your prepared remarks, you talked about some additional traction in Mexico and Peru. Can you talk about any specific areas of functionality or industry vertical there? Martín Migoya: Yes. Peru and Mexico mostly is around financial sector. There is a big wave of digital transformation undergoing on the financial sector in Latin America, in general, happening in Argentina. We're winning some other financial institutions also in Europe, in part too, but the financial sector in Latin America has been very powerful. Now, we are seeing the oil and gas sector now with the deal that just announced with YPF. That's another big opportunity for us to grow in a different sector. And there are other sectors where we're seeing some on the hospitality area, that we're seeing in Latin America some growth.

Okay. And last from me. Could you just talk a little bit about the pricing environment? Martín Migoya: Pricing environment, I don't see any pressure on the pricing environment. I mean, we are being comfortable with the pricing we have. Sometimes we're not the cheaper offering, and we don't want to be in that position because what we offer is totally different. And I feel that customers are recognizing that and those that don't want to pay for that, then it's better that we don't work together. So I don't see any pressure on the deals that we want in terms of pricing. So that's my point.

The next question comes from Avishai Kantor with Cowen.

So you portrayed a very -- seems to be a very strong demand environment and a stable pricing environment. Can you give us an indication on what's happening with the average project size? And is that strong demand environment driven more and more by C-level executive in boardrooms now? Martín Migoya: Yes. What is happening is that companies -- well, we have been talking about this for many quarters already, but companies are like moving into a mode in which they need to do the digital transformation. And on top of that digital transformation, which is like a tsunami that happened. There is another tsunami happening, which is the cognitive transformation. So now these things are not on the IT department, but they moved up into the C level, into the CEOs and chief marketing officers and chief product officers of pretty much all the companies that we work with. So engagement by nature are much bigger. So programs are much bigger. They start way before what we were starting 3, 4 years ago. So the engagement in nature is much more stable. And what I think is that, that will continue. That trend will continue. I mean, we're just in the beginning of the cognitive revolution. What's going on, on artificial intelligence, digital transformation is undergoing, but there is still a long way to go for the vast majority of the brands. So I think that trend will continue moving into the same direction, as representing a market opportunity for the players being able to play the game and it's really massive. And we are in an excellent position to take advantage of that.

Avishai, if I may add to that. Even looking at the size of our customers, I mean, if you look at customers over $1 million, in the last 12 months, we're moving from 61 to 78. If you look at customers, just to give you another example, over $5 million, we're increasing that by 3. If you look at customers over $20 million, we only had 2, now we have 3. So I think we are -- it's exactly what Martin explained about the number of opportunities and the size of the opportunities -- also that -- that's also being blended with Globant gaining in scale in those customers.

My next question. You added 153 IT professionals during the quarter. Is finding the right talent sometimes the bottleneck for growth at certain specific clients? Martín Migoya: It's a great question. The short answer is, no. And the reason why it's not is because we are spread out across many, many different geographies and countries. So for us, when we go and get talent, we get it from many different places with many different cultures and with many -- and we have many different needs and each country or each place or geographical location has like a different specialty. And now we have India, which has been growing nicely into our portfolio. And I think that the strategy that we follow around expanding and trying to get the best possible talent that we have been following for many, many years -- get best possible talent independently on where we are, is really paying out. And so short answer is, no. We don't get any bottleneck there. And we believe in talent. And we believe that really talented people can be trained and can be modified and can be -- and are fast learners. So that's a focus where we are recruiting our people, getting talented people and that's the core of everything.

The next question comes from Ashwin Shirvaikar with Citi.

My first question is with regards to headcount growth. Would you expect -- to what extent would you expect to sort of reaccelerate that growth, I guess, in 2018? And is there sort of a particular profile you're looking for with regards to both in U.S. versus Argentina versus all these other locations? Martín Migoya: Well, we have a strategy of get the talent where we have the best quality candidates. So there is no specific location that we will favor in exchange of others. For us, the priority is the talent. We see the trend of the net headcount increasing, hopefully, in the future. I cannot precise any specific number, but I see that increasing. And also, I think that, that is totally connected with the bench size, with the, what we call the talent pool size. It's connected to many different aspects that has a lot to do with the business environment. So the business environment is tractioning so that number should be increasing and increasing.

Probably the only add to that, Ashwin, is that we have been able to increase headcount slower than top line, and I think that should continue to be the trend. I think a couple of things there like, Martin touched base on the pricing power. We're not feeling that pricing pressure and we see that the newer technologies can be priced better. We have increased the revenue per head. If you take a look at the trend on the revenue per head, 3%, 4% per year, that has been kind of the trend. It will continue to be the trend this year. We're executing on Services over Platform. That is our strategy to decouple revenue growth from headcount growth. We're making progress. It's still not meaningful revenue there, not relevant for Globant. But definitely, that should help us also to decouple revenue growth from headcount growth.

Got it. And the second question I had was, with regards to -- trying to figure out the success of the 50 [ squared ] approach. Obviously, you give customers with greater than $1 million and we see clear traction there. But can you talk about customers with greater than, say, $5 million in revenue. How that has been proceeding, customers with greater than $10 million? It would be just from a disclosure perspective, really good to get that sort of information, which gives us idea of traction of 50 square.

Definitely, customers within 50 square have been growing nicely as an effect of several different factors. I mean, for us, a successful story would be 50 square is an account where we are considered a strategic partner. So we get more and more visibility on the opportunities and on the projects that we're running. That has been the case with several different accounts on the financial sector, on the media and entertainment sector, on the travel industry, among the top 3 verticals, if you wish, of the top 50 square accounts that we have. But then, we have a number of accounts where we have also been able to penetrate other divisions. That's a very good proxy of how Globant can grow in those accounts, and we typically start the same way we have started with the 50 square accounts. So regardless of the fact that we are running big businesses or meaningful businesses, in some other areas, within that account, we start very small with other divisions, and we start growing from there. So that's another very good proxy of growth within 50 square. And I think also the cross-selling of our studios within the 50 square accounts, that's another indicator that we try to measure in terms of quantifying the success that we're having with 50 square accounts and definitely, revenue growth among those accounts. We have a set of customers that are out of the top 10, but still 50 square accounts that are growing very, very fast and are yielding new opportunities for us. So I think, again, coming back to my previous point, I think it's up to us to be able to handle that demand and to be able to execute to get the talent -- train the talent, staff the talent in the accounts and keep that innovation happening in the accounts. That's what's happening with 50 square. We're very happy with the progress so far, and as Martin said, for couple of quarters, we needed to kind of deal with the investment for 50 square. But now we were -- we have started seeing the benefits of that.

That's a good update. It's -- we get so many questions on 50 square. It would be good to get sort of a -- from an investor perspective, more data with regards to how many 50 square clients and at what stage they are and things like that. And on maybe on a statistical basis, if you could share at some point. But my next question is to -- last question, on LatAm growth, I just want to come back to that because you added some very good clients over the last year, 1.5 years. Is the LatAm growth strategy, I mean, because that's unusual market from the perspective of other companies, which are not that big in LatAm. Is there -- are you running the risk of getting sort of too stretched by having 1 or 2 large clients in Argentina, 1 in Chile, 1 in Mexico, and so on, and so forth? Is that from a management perspective -- Martín Migoya: What do you mean by -- in terms of management?

Yes. Management and sales. Martín Migoya: Okay. Look, I mean -- yes. Our -- we are -- I'm from Argentina. So I have a very direct connection with the business environment here. So Argentina should not be a problem. Chile's very close and we have a great team in Chile. I mean, every single country that we talk, either we have a delivery center, right? Or like in other locations that we don't have a delivery center, we have a great management team, a local management team. So it's not a stretch at all because we already have deployed because we're delivering there. And indeed, we can leverage better the resources that we have locally in -- for example, in Mexico, or in Argentina, or in other places toward locally. And also really some restrictions like, for example, the perfection of English that we need for certain projects in Latin America is much lower than the English that we need for other places, when we are talking about Latin America and the U.S. So I think, for Globant, it's extremely healthy the development that is happening, it's totally positive what we're seeing. I'm very happy with the progress we're having in Latin America, and it's very important how we are positioned in Latin America as thought leaders, as a company which is really recognized for the international appreciation that it has. So I foresee Latin America growing, although the potential of customers in Latin America needs to be evaluated on a case-by-case scenario. It's not like in U.S. like you can get pretty much any customer with a revenue of -- take any customer with a revenue of $10 million, $20 million. So Latin America is different. We need to be careful, but we have that into the account. So I'm very happy with the progress that Latin America is having.

Understood. And the profile of local clients, margin-wise, is it similar to the U.S. clients? Martín Migoya: Yes, absolutely. Otherwise, we don't do it.

This concludes our question-and-answer session. I would like to turn the conference back over to Martín Migoya for any closing remarks. Martín Migoya: Okay, guys. Thank you very much, as always, for your support and your coverage. We are very happy with the results of this quarter and we're looking forward to keep on having conversations with you. And please let us know if you have any doubt. Thank you very much.

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