Good afternoon and welcome to the Globant second quarter 2018 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 Officer. Please go ahead.

Thanks operator and thank you all for joining us today on our call to review our 2018 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 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 would like now to turn the call over to Martin Migoya, our CEO.

Thank you Paula. Hi everybody and thanks for joining us today. I am pleased to be here to share with some updates on our business and financial performance for the three months ended on June 30, 2018. At the end of the call, Alejandro will share with you our outlook for Q3 and the rest of 2018. Q2 2018 was another record quarter for Globant. Our revenues for the second quarter increased to $127.9 million, representing a 28.4% year-over-year growth. This positions us well to achieve our financial performance and goals for 2018. This robust growth was driven by Top 10 and non-Top 10 accounts, which delivered revenue growth of 30.5% and 26.8% respectively. Our ability to nurture long-term relationships and to expand into multiple divisions within our customers are leading our growth. We now have 92 accounts with over $1 million in annual revenues compared to 76 one year ago. Later during the call, Alejandro will share some more details on our financial performance. Now, let me share some highlights about the market and the company. We are living amazing times for technology. Never in history we have witnessed two massive and disruptive revolutions happening at the same time. The digital and cognitive revolutions are affecting how companies connect with consumers and employees. Also, they are affecting how companies operate providing opportunities to make huge gains in efficiency. To give an overview, the digital space is growing at 20% year-over-year according to IDC. The cognitive field is growing at 60% according to Tractica. On top of that, IDC estimates that by 2021, 75% of enterprise applications will use AI. We are in front of a massive opportunity and Globant is in a great position to capture these opportunities. Creating solutions in this era is a totally different game and…

Thanks Martin and good afternoon everyone. Let me start by summarizing the results of our second quarter and six months ended June 30, 2018. I will then discuss our guidance for both the third quarter and the rest of the year. I am very pleased to announce another outstanding growth and robust financial performance for the second quarter of 2018. Our revenues closed at a new record level of $127.9 million, 28.4% over second quarter of last year and 6.8% over Q1 2018. During Q2 2018, Disney was once again our largest customer. Our relationship with them continues to be strong and healthy with several different opportunities after the internal reorganization that they have had recently. We are excited with the fact that high potential accounts are scaling up and becoming large and meaningful within our customer portfolio. Revenues for Top 10 customers increased 30.5% over second quarter of 2017 and 7.2% sequentially. Revenues for customers 11 and beyond increased 26.8% over the second quarter of 2017 and 6.5% sequentially. Our strategy to have a diversified base of multimillion dollar accounts is working out in line with our expectations. During the last 12 months ended June 30, 2018, we rendered services to 355 customers, 92 of which accounted for more than $1 million of final revenues compared to 76 one year ago. During the last 12 months, we also had nine accounts above $10 million in annual revenues compared to six accounts for the same period last year. We continue to grow the size of our accounts aligned with our 50-Squared strategy. As can be seen by our industry diversification, Globant's value proposition and service offering is attractive to companies across all industries and we remain pretty much balanced. Our top three industry verticals for this quarter were media and…

[Operator Instructions]. The first question comes from Puneet Jain with JPMorgan. Please go ahead.

Hi. Good quarter, guys. Thanks for taking my question. So your topline grew nicely in the quarter after hitting $50 million in revenue run rate in Q1. How much potential there is at that client account? And also if you can talk about what's driving high growth there?

Hello Puneet. This is Martin. How are you? Can you hear me well?

Yes.

Excellent. So thank you for the question. I think the relationship with our main customer is extremely healthy. They are expanding into and we are expanding the operation to other areas and they have really bold projects to keep on expanding the digital experience into many other countries and locations, et cetera. So I see a potential of expansion which we feel is pretty good. As we always say, we are going to wait to repeat those enormous growth rates as we have had experimented in the past continues in the future, but there are accounts that are taking over. Just remember, the Top 10 accounts grew, on average, more than 30% year-over-year. None of those accounts are accounts that they are accounts that we have had full year. So this is the full trend that we are seeing at Globant. So I see very good potential at Disney and I don't expect to keep on repeating the same growth as we have been doing in the past, but I see good growth coming from it.

Got it. And that's expected. And can you also share qualitative comments on the recent round of salary increase in 2Q? And assuming much of that happened before currency depreciation, what do you expect for wage inflation in the next round?

Ale?

Hi Puneet. Let me take that one. We are expecting, particularly in most of the countries, is definitely very, very stable figures for wage increases. Argentina, now accounts for less than 35% of our headcount and roughly 26% of our cost for the last quarter. Definitely, the numbers for wage increases that we expected when we started the year are different. So they are more now probably on the mid-20s to high-20s. But at the same time, the pace of devaluation of the currency has been very aggressive. So I think at the end of the year, probably we are going to be more than offsetting any particular wage increase. What we tend to do when we face these particular situations of running away of the currency and then apart from inflation is typically we take advantage of the second window of salary increases that happen in Q4 for Argentina. That's the only country where we have two windows. We try to assess salaries in such a way that we remain competitive. But as I said, we fear that the pace of the devaluation has been growing faster than wages and we expect that trend to continue for the rest of the year.

Got it. Thank you.

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

Thank you. Hi Martin. Hi ale. Congratulations on the good results. So my first question is, I wanted to break down the revenue growth on components, if you can provide sort of a headcount growth versus pricing benefit? And any comment on utilization? And also sort of the contribution of acquired revenue? I believe PointSource, which is no longer going to contribute as an acquired entity?

Hi Ashwin. Thank you for the comments. As far as the topline growth, it is pretty much driven by the top accounts. If you compare that to headcount growth, headcount is growing probably at about 20% flat whereas topline is growing much faster. There has been an increase in utilization in the quarter, 200 basis points in utilization. 84% was the utilization for the quarter which is typically 200 basis point above the traditional average for Globant. So very good footprint in utilization in the quarter. And the last part of your question regarding PointSource, keep in mind that we acquired PointSource by the middle of the quarter. As you say, it is the only remaining acquisition that we have in the quarter. We haven't done any further acquisition for the past year. So the contribution from PointSource in the quarter has been really, really irrelevant, very minimal.

Got it. Okay. And then it seems that the average size of your existing relationships, it continues to grow, the opportunity set seems robust and in fact when I look at the beyond Top 10, it might even be happening to the work you are doing for clients that maybe they are not your 50-Squared list. Is this accurate? And how much do you have to invest in sales or relationship management to continue to manage this? And as the projects and relationship get bigger, does that improve your revenue visibility?

Martin,, you want to take that one?

Yes, it's okay. The line is okay. Ale, can you take that?

Yes. Of course. So what's happening, Ashwin, is that as we launched 50-Squared, we got a strong focus also on the non-50-Squared accounts, because our goal there is to get as many as we can 50-Squared accounts. So we farm and we dedicate a lot of time to those non-Top 10, non-Top 20 accounts where we have several 50-Squared accounts. We try to assemble teams at the very beginning and when we start the relationship and we are growing, probably working with just one single division, a handful of projects, we try to assemble teams that we share based on the studio expertise and based on some vertical expertise some times. And we start growing from there. Then these accounts become meaningful. We start assembling this fully dedicated team and trying to penetrate other divisions. But that's a common pattern for every single account at Globant. You know that since we launched 50-Squared. We are dedicating a lot of time, efforts, people and sales efforts to increase the relationships with not only the Top 10, Top 20 accounts but also with the non-Top 20 accounts. So that's already shipped. It's happening, as you said. If you take a look at the growth rate so far of non-Top 20 accounts, they are growing probably a little bit less than the top tine for the whole company, but still growing at a very healthy rate. And they are definitely part of our focus. Some of the accounts are not yet 50-Squared, but we believe and we truly trust the teams that are farming those accounts to make them 50-Squared in the years to come.

And safe to say, your revenue is little bit going up because of this?

Yes.

Fair enough, Ashwin.

Okay. Thank you.

The next question comes from Maggie Nolan with William Blair. Please go ahead.

Hi Ale. Hi Martin. Congrats from me as well.

Hi. How are you? Thanks so much.

Okay. I am wondering how the labor market is in your chosen geography? Is there any noteworthy change in the competitive environment now compared to over the last year or so?

No. We haven't seen any major change. Colombia is performing very well. Mexico is performing very well. Argentina is performing very well too. India is doing great for us. And we are gaining in places like Colombia, Mexico and India where we are growing very fast. We are gaining a lot of momentum in terms of the projects that we are doing in there and in terms of the opportunities that we bring in to those professionals. So we are seeing Globant gaining momentum and gaining attractiveness on those markets. Also in Argentina, in the interior of the provinces where every day becoming better and better. So I see a landscape which is pretty favorable for us. We are recruiting record number of people every month. But there is a reason for that. There are two factors that really attract talent to Globant. Being the first, the kind of projects and the kind of customers we have with us. We are working with the top brands in the planet. And that's very relevant for the professional careers of people. And the second thing is, we are providing like five dimensions of change for people. They can change on verticals, going from one vertical to another. We can change the projects. If they love the vertical but they care about one customer, they can go to another in the same vertical because we have pretty deep interpenetration in verticals that work. They can even change their career, stop being a project manager and become a client partner or stop being a client partner and becoming a deep technical expert on something that they love. They can change countries. They can change many different dimensions that they can choose. So Globant is prepared for that and it is prepared for every Globers to be able to choose and the organization will try to help, of course, in whichever way and we are going to leave the things on them. But Globant is becoming one of the best place to work, as I stated on my previous review. One of the best paces to work in Latin America and in the regions in which we operate, including India and the others and U.S. and Europe too.

Okay. Thanks. And then on utilization, you had pretty high utilization levels this quarter and last quarter as well. Do you think that these are kind of new normal levels? Or do you think that you will move back down towards your average utilization, either this year or even into next year?

I think over time we have been improving the way we handle our efficiency across the teams. I think the fact, Martin mentioned that now we are much more well diversified across different locations and that's definitely helping us to monitor better the shallows in accounts and the juniors in accounts, some of the hours that we spend in the fix price contracts, in the time and material contracts. So we are confident that we can maintain this kind of levels of utilization. I think this is the result of hard work and the diversification among different locations where we have been at scale.

Great. Thank you.

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

Hi. Great execution, guys. My first question and I might have missed that, just to clarify, so your Q3 revenue guidance and essentially your Q4 guidance, that's all organic amount, right? It seems PointSource anniversaried about a year ago.

That is exactly right, Avishai.

Thanks. And my second question, the margin performance and you mentioned, Martin, you said that India is doing great. Is part of the margin performance related to you being able to share, shift some of the work between some of the Latin American countries to India, let's say, in a higher percentage compared to previous times?

It's one of the portions but it's not that important. I think that we are moving, we grew significantly in India but I think the improvement in margin are coming from different places. First, from internal efficiencies that we are doing and how we operate and second, from some kind of tailwind that we are getting on the exchange, for example, in Argentina and for example, in other places. So the two main factors are one, the operational efficiencies we gain. Second, the movement of some things of India and then the tailwind on the exchange rate. Ale, do you want to add something to that?

No. I think it's precisely that. It's a combination of factors. Utilization is also helping us to manage better margins as well.

Okay. And my next question, you spoke a little bit about Disney and you mentioned that you are growing, expanding into some new interesting areas with some of your key clients outside of Disney. Any specific examples that you can share or at least the areas? I know sometimes it's hard, but any specific areas that you can share?

Yes. It's difficult. But as I mentioned, we are exploring other countries or other areas within the company, other companies that they have acquired and they are acquiring. So the expansion is in many dimensions, it's not just one area and we keep being one of their preferred vendors there.

So it's basically you being able to leverage recent acquisitions which took you into new areas combined with the 50-Squared plan, basically the combination of both. This is what's driving it?

Exactly right.

Great. Thank you so much. And good luck for the rest of the year.

Thank you.

Thank you so much.

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

Hello. This is Mike Reid, on for Joe. I appreciate you taking our question. Do you think you can give us more detail on where you might be gaining more traction in some of the emerging technology studios, such as artificial intelligence and Internet of Things?

Yes. Just to clarify your question, you want to expand on the artificial intelligence studio?

Yes. Just maybe some areas in particular where those are beginning to gain more traction?

Yes, absolutely. Artificial intelligence, for us, has been like a place in which we started gaining a lot of traction. We are treating that as a platform. We are not selling artificial intelligence by the hour like we do in other projects. So for us, the promises of expanding our platform efforts on artificial intelligence are extremely important. Then I would like to say that we are like in the middle of all the algorithms and platforms that are out there in the market. We are like the connection between all those platforms and algorithms and our customers. And we are routing the best possible algorithms pretty much in real time, sometimes depending on the challenge to be able to understand better, which is the algorithm that will answer better a question on specific areas, let's say, image recognition or character recognition or speech detection or tech simplifications or whatever area we would like to add on the artificial intelligence side. So the offering that we are providing to our customers there is totally different. We are packaging this solution for our customers in a totally different manner. So it's very well received among our customers, this new expansion. Together with other studios, like the cyber securities studio which is gaining lot of traction too and also the studio around service as mobile and we are gaining a lot of traction too, is our future of organization studio and our agile delivery studio. Those two studios are studios that aim mainly to change the culture of the organizations and to affect and to provide tools to make a much better digital transformation and cognitive transformation, not just the technologies but also the tools to transform and affect the culture of your company. So that's like abstraction of the things that are going faster these days within Globant.

Got it. And then second, just any changes in demand environment or spending of financial services, may be particularly at banks?

Expanding in financial services, sorry?

Any changes on the bank demand environment or spending? Any update there? Or is that kind of similar to what has been?

No. It's similar. We haven't seen any backlash there. Indeed, we are seeing now budgeting sessions for many of the banks. Expenditures look pretty healthy for next year too.

Got it. Thanks guys.

Welcome.

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

Thank you for taking my questions. I wanted to see if I could get a quick update on the hedging program? And given the degree in movement in some of the major currencies and inflation, are you contemplating any changes to the hedging program?

Hi Frank. The current hedging program that we have in place is typically placed to cover some of the exposure that we have in local currency to some net monetary assets in some countries, particularly in Mexico, Colombia and Argentina. But that's not the big exposure towards local currencies. So those are small cases. We typically use a combination of some local future markets to assemble some futures there or NDF, should that the case be. Then on the salary side, definitely the perspective that we see for this year, if we take the year-to-date numbers, every single country is running higher devaluation than the pace of wage inflation. And even in the case of Argentina where inflation is still high, the pace of devaluation is running faster. So typically in those countries we are not hedging the cost side of the salary. But then, we are doing some hedging to forward contracts on the net monetary asset position. But those are small hedges.

Okay. That's helpful. And then has there been any changes in any of the pricing environments for the particular studios?

No. We haven't seen any change neither. I mean, there's typical pressure. I mean we are competing against other companies out there. But I haven't seen any massive change or any significant change in the pricing environment. Indeed our revenue per head is growing quarter-over-quarter. So we are pretty happy with that and that's a reflection of and remember we are not talking about pricing at Globant, we are talking about most of our resources off-shore because we have just 10% of our people onsite. So when you compare apples-to-apples, we have almost two times the pricing traditional IT outsourcing vendors have. So we are selling something different. And we are not seeing that much pressure. There's such a demand for talent, for teams, for pods, for knowledge that I think companies are starting to realize that there is not a big deal around negotiating a price but it's better to get the pressure sometimes.

Okay. Great. And if I could ask one more about cash flow? What, in your view, is a healthy cash flow conversion rate? And where do you think this is going kind of longer term as you look at the cash flow trajectory?

Our goal there, Frank, is to improve year-over-year. I think for us the use of cash in the early days has been important in terms of assembling delivery centers in many different places using the CapEx that we needed in order to grow fast. I think we are reaching to a point where the improvement of free cash flow generation and free cash flow conversion should improve every single year. Again, you are going to see the filing in Luxembourg tomorrow. I think we had a very weak Q1, that's typical seasonality but then a very strong Q2 in terms of free cash flow generation and that should be the trend going forward. If you ask me, it's still too early to get into the high-70s or low-80s of some other bigger sized company, but that should be the trend for us going forward. So we should get there within the next two, three years.

All right. Great. Thank you very much.

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

Hi. Thanks for taking my question. I just want to kind of revisit the question on artificial intelligence. Could you provide some color? Can you parse out like when you look at AI offering, how much of it is basic, like RPA type of offering versus more of the cognitive part of AI versus basic like analytics? If you can just break out these three components, RPA, cognitive and analytics and how that feeds into your AI practice, that would be helpful/

Yes. Most of it is cognitive. RPA is a space that we are exploring. We have not a huge indent into RPA. We consider that at some point RPA will be replaced by traditional machine learning and machines learning how to recognize documents and things and screens and automating the work in a much more efficient job. That's our long-term view on RPA. That doesn't mean that at some point we won't enter into that. But I am much more focused on cognitive machine learning stuff, machine learning projects we are presenting to our customers in a proactive way. That, of course, sometimes includes some data analytics and non-supervised machine learning that takes some kind of patterns within some set of data that we get from our customers. But right now, projects are more around bots that can answer in a very efficient way question from customers, algorithms that detects fraud into customs. We are more in the side of teaching machines how to recognize frauds to provide them and to analyze them in an efficient way, how to teach machines how to recognize attrition or talent. Those are the things and projects we are proposing proactively to our customers and it is being very well received. And again, it's not that we are using one technology or another technology. We are using Microsoft or Amazon or Google. We are trying to use all of them and we are trying to make a layer of abstraction for our customers so they can use artificial intelligence without the need of researching which is the best algorithm for each particular solution at every single moment. And this is one of the most interesting value adds that we have for our customers.

Great. And in the prepared remarks, you kind of talked about a lot of AI work being disciplined and making sure they all don't convert to time and material. Can you talk a little bit about what kind of essentially pricing model you have for these engagements? And also explain how your sales team that is essentially incentive to basically sell on T&M? How are you changing the mindset to focus on selling more value?

Look, for years we have been pushing and we have been saying that for us, it's extremely important as a company and as a next generation professional service organization to provide our services in the best possible way. That means that our company has been talking about platforms and using platforms and increasing their revenue on platforms for many years already. And we haven't done it through acquisitions. We did it organically, which is really amazing. So all our sales force have been trained for many years already in trying to sell our platforms. It started by selling the StarMeUp OS, which has already hundreds of thousands of users, if not millions in the platform. Now the idea is that we will be charging, let's say that we put a machine learning system that is watching cameras. And those cameras are detecting, let's say, in the scene are detecting fires or accidents or assaults or any kind of crime or reports or a gunfire. Well, every detection that we generate with our algorithms is being charged on a per camera basis per month, just to give an example. So there's a set of fees that the customer pays but then the ongoing work of those algorithms that we do, we charge a customer in a totally different manner. It's not per the hour but per detection on the system. I think that explains a little bit the perspective of Globant. So sales force is already trained and we are selling a new platform for their portfolio.

Yes. That's pretty helpful. If I can just squeeze one last one in. You all have been leaders in the whole digital space for a long time now. But can you maybe explain which of your studios are seeing really high growth above 50%, 60%, whatever the number is versus which of the studios have gained scale and some of the growth rates are not as high? Basically, can you explain which ones are seeing the highest growth?

Yes. Look, there are some studios that are always going faster than others. So we are seeing a lot of growth on artificial intelligence. We are seeing four digits growth on artificial intelligence, triple-digit growths on future of organizations. We are seeing high double digits on mobile. We are seeing a lot of demand on the cloud ops and the cloud environment operations. We are seeing also huge growth on the cybersecurity, which is a studio we just launched. So we are seeing very high growth on some studios and some, for example, other studios that used to be quite aggressive in terms of growth that now has emerged into artificial intelligence, like big data that is moving all the growth into our artificial intelligence studios. And then some others are going slower. For example, gaming, for us, is going slower because the gaming industry is growing but it's not growing as fast as it was in 2008, ten years ago. So that studio is very healthy, very profitable, but it's growing slower. And then, we have some other studios that are growing slower, too. We have, our of our 20 studios, I would say we have many that are growing fast and some that are growing slow. So that's the kind of picture.

Great. Thank you very much. Good luck for the remainder of the year.

Thank you Arvind.

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

Thank you very much operator and thank you everybody for your attention that you devote every quarter to us. We are looking forward to see you on the next earnings call. Thank you very much.

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