Globant S.A. (GLOB) Q4 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Globant Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. Please note, this event is being recorded. I would now like to turn the conference over to Amit Singh, Head of Finance and Investor Relations for the U.S. Please go ahead.

Thank you, operator, and thanks, everyone, for joining us today on our call to review our 2019 full year and fourth quarter financial results. By now, you should have received a copy of the earnings release. If you have not, a copy is available on our website: investors.globant.com. Our speakers today are Martín Migoya, Co-Founder and Chief Executive Officer; Juan Urthiague, Chief Financial Officer; and Mercedes MacPherson, Chief Talent and Diversity Officer. 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 Martín Migoya, our CEO. Martín Migoya: Thanks, Amit, and hello everyone. Yet again, I’m happy to say that quarter four broke new records for Globant closing at $184.3 million in revenue, representing an outstanding 31.5% year-over-year growth. During this quarter, our top account grew by a robust rate of 41.2% year-over-year and the remaining clients together also reported an impressive growth at more than 30% year-over-year. Regarding fully our revenue in 2019, we brought in $659.3 million, representing a solid 26.2% year-over-year growth and beating the upper end of our revenue guidance range. Revenue growth in 2019 was broad-based with our top account growing at a solid rate of 25.5% year-over-year and the remaining clients together growing at 26.3% year-over-year. As in previous periods, we continue to expand our relationship with our key clients. During the full year of 2019, we had 14 accounts above $10 million in annual revenues compared to nine during the previous year. In constant currency terms, Q4 revenue increased by 32%, while full year revenue increased by 27.4% year-over-year. We’re proud of our Q4 and 2019 growth. I’m motivated for more this year and with Gartner’s estimate of $3.9 trillion to be spent on IT alone in 2020. There’s more than enough opportunity for fantastic growth. We believe, however, that the only way to do so is like building a sustainable and empathetic organization. We need to be conscious of the impact we generate on our clients, employees, humanity as a whole and even on the planet itself. With that in mind, we have unveiled our sustainability approach and there are a new concept known as Be Kind. Be Kind is our plan for the next five years that aim to generate a positive impact for all of our stakeholders by setting specific goals to fight climate change and to work even harder on diversity, inclusion and cultural wellness. To present these initiative, I’d like to introduce Mercedes MacPherson, Globant’s Chief Talent and Diversity Officer.

Thanks, Martín, and hello everyone. As Martín mentioned, today we’re facing new challenges that go beyond our business. Our planet demands us to be united and responded to climate change. At the same time, we need to take a stand in regards to inclusion and diversity. We need to change the status quo by building a more fair industry, one that can provide equal treatment and opportunities for all talent, regardless of their origin, gender, religion, or any other orientation or background. With Be Kind, we’re making sure these issues are a top priority, organized under the following three pillars: first, Be Kind to the planet, Globant has made the commitment that 100% of our energy consumption will derive from renewable sources by the end of 2020, we’re also measuring our scope 3 emissions and aim to become a carbon-neutral corporation in the near future; second, Be Kind to your peers, regarding our focus on diversity and inclusion, we have committed to have women and nonbinary people hold 50% of our management positions by 2025. We are also going to train and inspire 10,000 women around the world in technology by that year. And finally, being kind to humanity, we want to transform the world with technology and apply our work for good one step at a time. To do so, we must consider the ethical implications of what we do. We have, therefore, created the AI manifesto as a guideline for our company’s do’s and don’ts regarding this technology, and we will encourage other companies to get on board as well. These three pillars of the Be Kind initiative are designed to focus in the future. To discover more, I encourage you to visit bekind.globant.com. As Globant’s first Chief Talent and Diversity Officer, I look forward to sharing with you the progress of this initiative as it develops. Martín Migoya: Thanks, Mercedes. Be Kind is a guide, not only for our company’s operations, but also with respect to all our stakeholders. Now let me share with you some notes on how we continue building long-term partnerships with our clients through innovation. Several years ago, we began our relationship with Disney to help them create the next-generation of their online experience for their parks and resorts. Over time, our partnership has grown to an array of services that connect the company, not only with customers, but with its own employees through Globant’s unique mobile apps. I’m very proud to announce that this quarter, the Walt Disney Company renewed their trust in us by recognizing Globant once again as a trusted preferred partner for another five years. This win is one that I’m happy to see, also with several of our other clients as well, including one of the world’s top global banks. We’re already working with them to re-matching their use and experience with a goal to capture additional market share and address their ever-increasing user demand. As our preferred partner, we expect to work with them as they tackle new challenges. As the bank is already a sector leader, we see large opportunities for growth for both of our companies over the next quarters. As a global player, we have worked with clients who situations are emblematic of today’s global challenges. Right now, our teams are working for the oil company, YPF. We are creating a multi-platform digital experience. We developed a new app for them so that their customers can pay through a simplified and unified method. In the past three weeks, the mobile app has been loaded an average of 4,300 times per day, reaching a total of 1.2 million. Last year, we expanded our relationship with a global automaker. We are developing new online experiences for their customers, while designing and building innovative web and mobile products that will enhance the end-to-end experience, from considering a vehicle, right through to owning a new breed of connected electric vehicles, redefining idea of what mobility means to customers. Through our partnership, we also aim to enhance and quicken the company’s concept-to-market process so that they can adapt to technological innovation with greater agility. We continue to grab AI by the horns to deliver better solutions for our clients. We don’t just give them this technology to quicken a process, but rather, apply this technology to their business strategy and redefine it. Our most recent example has been our new endeavor with a major CPG provider. We employ artificial intelligence so that they could better interpret sales data. This enabled them to build their AI workbench and adopt the best practices for scalable algorithm development. Let me double-click on AI for a moment. We apply AI to accelerate the way our engineers generate code. We call this augmented coding. Augmenting the capabilities and the efficiency of our engineers through AI enables them to be more creative, proactive and intuitive, while reducing the dispersion on code and enhancing reutilization and performance. The tool has been trained to understand new programming languages, expanding the number of projects where it can be applied every day. The secondary use for this tool is to generate documentation for undocumented code. 2019 also marked our fifth anniversary as a public company. When we first went public, we were seen as the first Latin American software services company to list on the New York Stock Exchange. We’re really proud of how much we have reinvented ourselves since then. We’re now almost 12,000 Globers working from 17 countries all over the world, and we are guiding the most successful brands through a complete transformation. We are a pure-play in the ongoing digital and cognitive revolutions, and our expertise has grown into 21 different studios. Today, we are launching two new studios to better address our clients’ current and future needs. First, the intelligent enterprise studio that helps our clients using SAP to use and leverage the data inside the ERP to create better experiences for their customers and stakeholders, with the same innovation and agility that we have in all our other studios. By creating this new studio, we consolidate what we have learned from SAP innovations created by our teams, and we look forward to helping many more unlock the full value of SAP. Also, we have launched the conversational interfaces studio. This studio enables our customers to quickly adapt to the changes we see in the market today. Nowadays, 74% of the U.S. smartphone users download just one app or less every month. Meanwhile, the usage of virtual assistance has increased by 14% in just the past year. Globant is positioned to create seamless, multi-platform experiences to allow companies to interact directly with their customers, creating better conversations. I am sure many of you listening have heard that for us, as for pretty much every other company, our most valuable asset is our people. But I can confidently say that we are unique in that we intentionally put them front and center of everything we do. Our actual ports have direct interaction with our clients. We value their autonomy, and I consistently remind our Globers that I work for them. The absence of a command-and-control organization speeds up response times and create better engagement with our clients. We can only create this value by attracting, developing and retaining the right talent. In such a competitive industry, we have managed to lower our attrition rate, reaching just 14.6% in 2019, four points down from our previous year. And I’m happy to say that we will see more clients engage with our Globers as our list of clients continue to grow. We have added Dropbox, American Airlines, American Century Investments, Crystal Cruises, plastic and several more just in quarter four. We’re very proud to be working with them to find new technological solutions for their challenges. Finally, our pipeline and backlog remains strong, with a number of high potential new clients and several long-term projects within our current clients. We continue investing in our studios to remain at the forefront of innovation, while at the same time, expanding geographically to better serve organizations around the globe. We are optimistic about our ability to deliver sustainable growth in the future. With that, I’ll turn over the call to Juan Urthiague, our CFO for a detailed financial review on the fourth quarter and full year 2019 and also to provide guidance for Q1 and the full year 2020. Juan, please? Thank you very much.

Thanks, Martín, and good afternoon, everyone. Let me start by summarizing the results of our fourth quarter and full year 2019. I will then discuss our guidance for the first quarter and the full year 2020. I am very pleased to announce another quarter of record revenues and strong financial performance. Our revenues for Q4 amounted to $184.3 million beating the upper end of our guidance range and representing a solid 31.5% year-over-year growth. Q4 revenue growth was 32% year-over-year in constant currency. During Q4 2019, Disney was once again our largest customer and displayed an impressive growth of 41.2% year-over-year. We are excited with the fact that high potential accounts are scaling up and becoming large and meaningful within our customer portfolio. In addition to strong growth at Disney, our second and beyond clients together also displayed a robust growth of 30.3% year-over-year, with clients 11 and beyond growing at 41.2% year-over-year. Moreover, during the quarter, we continued to successfully cross-sell services with the companies we acquired during the year. Our 2019 acquisitions are fully integrated right now and performing extremely well. Our 50-Squared strategy to have a diversified base of multimillion-dollar accounts is progressing in line with our expectations. During the last 12 months ended December 31, 2019 we have 14 accounts above $10 million in annual revenues, compared to nine accounts for the same period last year. And we had 107 accounts with more than $1 million of annual revenues compared to 91 year ago. We continue to expand our relationships with our key accounts, the base for our continuous growth. Looking at diversification of our revenues by industry verticals, it is evident that Globant's value proposition and service offerings are attractive to enterprises across all industries. Our top three industry verticals for this quarter were: media and entertainment, with 23.4% of revenues; banks, financial services and insurance, with 21.3% of revenues; and technology and telecommunications with 13.6% of revenues. Professional services, consumer, retail and manufacturing, and technology and telecommunications were the fastest-growing industry verticals in Q4, growing at 59.5%, 55.9% and 45.6% year-over-year, respectively. Our customer concentration for Q4 2019 displays ongoing improvement, with our top 10 accounts representing 38.5% of revenues compared to 42.7% of revenues for the fourth quarter of 2018. In terms of geographic regions, during the fourth quarter of 2019, 75% of revenues were in North America, 20% in Latin America and others and 5.1% were in Europe. During this quarter, we continued to see strong growth in investment in digital transformation in Latin America. During the fourth quarter of 2019, 86.7% of our revenues were denominated in U.S. dollars, providing good protection to our top line against currency fluctuations. Turning now to profitability, our adjusted gross profit for the period increased to $73.5 million, representing 39.9% adjusted gross margin compared to $58.4 million, representing 41.7% adjusted gross margin in the fourth quarter of 2018. Year-over-year adjusted gross margin decline is explained by FX and active management of our business to maintain our adjusted gross marching in the 38% to 40% range, which give us sufficient room to invest in our business, in turn helping us maintain a robust top line growth trend. On a sequential basis the slight decrease is related to the salary increases and promotions window of Q4. We finished the quarter with 11,855 Globers, 11,021 of which were IT professionals. This represents a solid 559 increase quarter-over-quarter in the number of IT professionals. The strong net hires in the quarter, is driven by our robust pipeline across industries and geographies combined with low levels of attrition. Attrition for the past 12 months continued low at 14.6%, compared to 18.2% in Q4 2018, showing a significant improvement in most talent-development centers, particularly in Argentina. As discussed in the last quarter’s earnings call, going forward we view 14% to 16% attrition rate at the normalized level for Globant. Adjusted SG&A accounted for 20.2% of our quarterly revenues, increasing 90 basis points compared to Q4 2018. We continue investing for the future primarily to expand our sales coverage in our target markets. During 2019, we have been able to successfully slightly dilute SG&A expenses despite the new tax on export of services in Argentina, included within this expense line. As a result, our adjusted operating income for the quarter amounted to $30.4 million or 16.5% of revenues, compared to $23.4 million or 16.7% of revenues for the fourth quarter of 2018. As discussed in detail later, our full year 2019 adjusted operating margin was 17%, in line with our near midterm target. We are proud of this margin level for a company of our size. Share-based compensation expense for the fourth quarter of 2019 amounted to $5.9 million, representing 3.2% of total revenues for the period. This expense is mainly related to the plan of restricted stock units granted to certain key employees and directors of the company as part of our long-term retention plan. Financial income and expense net amounted to a loss of $4.5 million. This net result is composed of FX gains and losses resulting from monetary assets and liabilities in local currencies; costs related to our hedging strategies; interest expenses from our credit lines and leasings; and finally, interest income from our portfolio of investments. In the fourth quarter we had gain on transaction with bonds of $1.6 million off setting some of the impact on our margins from the Argentine peso performance. Our IFRS effective tax rate for the quarter was 22.3%, fairly consistent with previous quarters. Adjusted net income for the fourth quarter of the year totaled $24.4 million, representing 13.1% adjusted net income margin compared to $18.5 million, representing 13.2% adjusted net income margin for the fourth quarter of 2018. Adjusted diluted EPS for the quarter was very solid at $0.64 based on 38 million average diluted shares for the quarter, above the upper end of our guidance range and compared to $0.50 for the fourth quarter of 2018, based on 36.9 million average diluted shares for the quarter. Moving on to balance sheet, our cash and investments as of December 31, 2019 amounted to $82.5 million, while borrowings amounted to $51.4 million. Our cash generation was mainly used for CapEx and payments related to our acquisitions. Earlier this month, we also expanded our credit facility to $350 million from $200 million prior, while lowering interest rates on drawn amounts by 25 basis points. You can see the details in the 6-K we filed on February 6. While our cash flow generation profile satisfies our needs for investments in our business, this credit facility provides us with flexibility related to internal investments while also generating sufficient fire power for us to pursue any potential M&A. This facility also helps us develop strong relationships with Marquee Global Financial institutions, which are part of this facility, HSBC, Citibank, BNP Paribas, BBVA, JP Morgan, bank of America, SunTrust, U.S. Bank and Silicon Valley Bank. We are very proud of closing this financing, which was significantly oversubscribed as it supports our continuous growth and it is proof of our strong credit profile. Now let's talk about the full year 2019 performance. Revenue for 2019 was $659.3 million implying a 26.2% year-over-year growth and above the upper end of our guidance range. This increase was primarily boosted by 50-Squared accounts, but also new customer wins, as our portfolio of high potential customers continues to grow at a very healthy pace. Our 2019 M&A deals performed strongly and we successfully cross-sold services with our recently acquired companies. Globant dedicated significant sales, technical and delivery capabilities to accelerate our expansion within the clients added through these acquisitions. At the same time, the new services generated incremental revenues in Globant customers. Our adjusted gross profit for 2019 was $266.5 million, representing 40.4% adjusted gross margin compared to $212 million, representing 40.6% adjusted gross margin for the full year 2018. Adjusted gross margin for the year was above our target range of 38% to 40%. Adjusted SG&A showed a dilution of 10 basis points year-over-year, currently accounting for 19.9% of our revenues for 2019. Adjusted profit from operations for 2019 was $112 million or 17% adjusted profit from operations margin, compared to $84.3 million or 16.1% adjusted profit from operations margin for 2018, representing an improvement of 90 basis points. Share-based compensation expense for 2019 amounted to $19.9 million, representing 3% revenues, compared to $12.9 million, representing 2.5% of revenues for 2018. This expense, in line with our target, was impacted by a strong share price and is mainly driven by our long-term incentive programs as explained before. Financial income and expense net for 2019 amounted to a loss of $13.2 million, compared to a loss of $5.6 million in 2018. This higher expense is related to the adoption of IFRS 16 during 2019. Net FX impacts resulting from monetary assets and liabilities in local currencies; costs related to our hedging strategies and interest expense for our new credit facility. Adjusted net income for 2019 was $86.1 million or 13.1% adjusted net income margin, compared to $63.7 million or 12.2% adjusted net income margin for 2018, representing an improvement of 90 basis points. Adjusted net income increased 35.1% year-over-year, 8.9 percentage points faster than revenues. Adjusted diluted EPS in 2019 was $2.29 based on 37.7 million average diluted shares for this period, compared to $1.74 for 2018 based on 36.7 million average diluted shares for 2018. Adjusted diluted EPS in 2019 was above the upper end of our guidance range. To wrap up, I would like to share with you our outlook for Q1 and for the full year 2020. Let me start with the demand environment and its implications to our revenues. We continue to be bullish in terms of our service offering, which we believe is fully aligned with market demand. At the same time, we are very optimistic with the progress we are witnessing in our 50-Squared accounts. On the talent front, hiring remains strong, and we are able to hire and retain highly skilled professionals. Based on current visibility we expect Q1 2020 revenues to be at least $188 million. We currently expect no FX impact to our Q1 revenues. Q1 adjusted operating margin is expected to be in the 16% to 17% range and adjusted diluted EPS is expected to be at least $0.62 assuming $38.2 million average diluted shares outstanding for the quarter. Regarding the full year 2020 we expect revenues to be at least $810 million. We currently assume no FX impact to our full year 2020 revenues. With regards to our adjusted operating margins, we believe we have reached very healthy levels for a company of our size and expect to keep largely stable adjusted operating margins in the 16.5% to 17.5% range for the full year 2020. While we continue investing in our business, including training programs, and cutting edge technologies and sales coverage to expand our business. IFRS effective income tax rate is expected to remain in the 22% to 24% range, both for Q1 2020 and the full year 2020. At this point we expect the tax rate to be towards the lower end of the range. Finally, in terms of adjusted diluted EPS, we are expecting at least $2.74 for the full year of 2020 assuming $38.5 million average diluted shares outstanding for the full year. Thanks everyone for participating in the call for your courage and support. Operator, can you please queue questions? Thank you.

Hi, good afternoon. Thanks for all the details. I wanted to ask for Martin and Juan, just curious, you mentioned visibility yet. I was hoping maybe if you can give us an idea of your visibility now versus this time last year, overall from a revenue perspective? I know you just re-up with Disney that’s coming at a very growth rate exiting the year. Can you just comment on just broader visibility?

Okay. Yes. Hi, Tien-Tsin. This is Martin. Thank you for the question. The visibility is pretty high, as we have. It’s pretty much the same as we have last year, around 80% of what’s going on. It’s already being seen by us. So this is the current situation. And big accounts are tractioning quite well. And we’re very positive for the year.

Okay. Great. And then on the margin front, I know you gave a wide range. I know there’s a lot of – obviously, a lot of volatility going on from an FX perspective, you gave an at least comment on earnings, which makes sense. So can we assume that if margins come in on the lower end, given the given external factors that you’ll take bond gains to protect the earnings? Can you maybe just comment on those – on that potential? Thanks.

Yes. Hello, Tien-Tsin. How is going?

Okay. Fine.

So yes, in the guidance that we provided, we have an assumption in terms of what can happen in terms of FX, in terms of inflation in different countries and also, of course, depending on what happened in Latin America, we may be using the one transaction as a way to offset part of that impact. At the end of the day, as you know, from the past, when there is a delay – when there is a behavior in the FX market, where there are two rates, we may have some hiccups or some impact on the margins that gets offset by the transaction with bonds. But then when on the two markets converge, then we have the movement from the gain on transaction with bonds back into the margin.

Understood. I’m all set. Thank you.

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

Sorry. I was on mute. Thank you. And hi Martin, hi Juan. Questions on margins, and just kind of thinking about the use of, at least, as mentioned in Tien-Tsin’s question, can you comment on gross margins versus SG&A leverage, which is SG&A leverage, obviously, has been a good driver in the past, where are you leaning towards now? And with regards to gross margins, do you expect any comments, or any positivity to emerge from pricing?

Look, hello, Ashwin. Gross margin for the fourth quarter ended at 39.9%, close to the top end of the historical guidance of 38% to 40%. We move now to operating income guidance to be able to manage both SG&A investments as well as investments in the gross margin and effectively, we maintained the level of operating profit that we are showing. We ended the year at 17% adjusted operating margin, which is pretty good for a company of our size, and we are now guiding 16.5% to 17.5% for the full year, so pretty much in line with 2019. We don’t see operating – we don’t see gross margins above the range that we always provided. We continue to see it in the 38% to 40%, most likely close to the upper end of that number. But the focus of the company, given the investments that we are doing in sales, the investments we are doing to scale up the company, the investments we are doing in terms of technology and the investments we are doing to hire more people and train more people, we want to be able to manage that. That’s why there is more focus now on the operating margin as opposed to just focusing on gross margin and SG&A on a stand-alone basis. We want to look at the two combined, and we’re going to be able to invest in recent days of the business as required.

Okay. That’s good to understand the pieces. And just to clarify that those investments seemed to be all included in there. The other question is really on cadence of revenues as we – revenue growth as we look through the year as well as, if you don’t mind, kind of going through sort of the inorganic impact that flows through – as we go through the year as well?

Yes. So in terms of the cadence, as always – what is closer, like Q1, we guide with a lot more knowledge, as Martin mentioned, we have 80% visibility. So of course, visibility for the first two quarters is higher than from the rest of the year. We are guiding – we guided all about 28.6% growth for Q1 and we guided almost 23% for the full year, so unlike every year in the last five years, when we start the year, we like to drive based on the visibility what we have based on what we are seeing right now in the market. And then as the quarters progress, we typically, we might end up as we did in the past, changing a little bit our guidance. I would like to guide what we feel comfortable where we are today, right? And then the second part of your question was organic and inorganic. Q4 was a very good quarter. We ended the quarter at 21.5%. And the organic part, including the – it was more than 22% or even a little bit more, including the cross-selling that we are doing, okay? For the year for Q1, we guided 28.6%, and we are seeing the organic part more like in the 22% plus, including the cross-selling. And for the year, we are guiding 23%, where the organic part is more like 20.5%, and the rest about 2, 2.5 percentage points coming from the revenues from Belatrix, which we acquired in the second part of last year.

Understood. Thank you.

Welcome. Thank you, Ashwin.

The next question comes from Maggie Nolan of William Blair.

Just to kind of build up on that visibility and how put together the guidance, are there any considerations in place for any macro concerns or potential slowdowns in 2020? And how are you thinking about that for this 2020 guidance versus how you may have thought about that when you put out initial 2019 guidance?

Hey, how are you? This is Martin. Look, we have – we’re aware of the situation. We have no specific signals from any of our customers around any issue on that front as we are now connected to many things that are – has nothing to do with that. So I feel that the impact won’t affect us, and we haven’t baked in any impact in the future because I think that from the visibility we have today, everything is fine. So that’s everything I can say, but you never know. I mean future is something maybe in a few weeks, nobody will be talking about this anymore. Or maybe it gets harder we don’t know. So from what we know now, from what we have heard from our customers, the situation is normal, and what we continue to see is the spending that we have seen and forecasted in these few weeks.

Okay. And then congrats on the continued status with Disney. When you achieve preferred vendor status with Disney or other customers, is that something that’s going to open the door for you to negotiate more kind of multiyear MSAs or any type of spend commitments? And then what does the margin profile look like at some of these larger accounts versus on your smaller engagements?

Well, we’re extremely happy. Let me go first with the third part of the question, then I will let Juan to answer the second. We’re extremely happy that we’ll renew that amazing commitment and partnership that we have with this Disney overall. I think that it will lead to many more things together, given that the past experience that we have and the rankings in which we are evaluating against other vendors are extremely high for us. So we are really confident that, that could lead to new things and to new areas and to keep on expanding the relationship we have. And I think that there’s still a lot of room to do if we keep on performing the way we are performing. Also, the newer Master Service agreement has like different things that is an improvement from what we’ve had in the past, but we will see how all those things evolve. So I don’t know, Juan, if you want to add something on that?

Yes. In terms of the biggest customers on the margin profile, Globant has a very consistent margin profile among all customers. Typically, what happens is that whenever you are giving a new contract with a new technology with more, let’s say, hot technology, I think, in the point in time, those projects tend to have higher margins than other projects that you were doing in the past, so they typically average out. We don’t have a big dispersion in terms of margins. The margin profile can grow from minus five to plus five that’s pretty much the range in which projects and margins move around. So there is no big expression between the different customers and between the different projects.

All right. Thank you both.

Thank you, Maggie.

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

Hi, this is Steven Chang coming on for Joe. Thanks for taking my question. Just more on the Disney contract. So I was just wondering if the new signed contract with Disney, if there has – if there are any, I guess, material changes compared to what any contract that you had historically with Disney? And also maybe if – due to the strong growth in this one in this quarter compared to the beginning of 2019, can – do you see Disney continuing their growth? And maybe if they had given any outlook in the future due to maybe some macro turmoil or anything. Thank you.

Thank you, Steven for the question. This is Martin. Look, I think that there’s a good situation with Disney, our track record is amazing. So keep on having like good stuff going on with them. The forecast we are seeing now it’s a pretty – I would say, it’s a pretty good growth also for this year. Now the new terms of the MSA are very good. That’s all I can say. I’m cannot review any other things that are there. They’re very good, and we hope that some things that were in the past in the MSA were different and now are improved. So we are happy – we’re extremely happy with that negotiation. I think it would be much better for both Disney and ourselves. So the overall situation is going good. I think Disney with all the things that you know around Disney Plus and other things that are happening in the company is having a great moment. It’s on a great situation. So we’re very happy with that. We feel part of that, and I think that we’ll keep on growing. And as I said always, if we keep on performing, everything is about how we perform. And so far, our team has demonstrated a really world-class doing what we do for them.

Okay, great. Thank you. If I could just squeeze one more quick one in. So I’m sure the low – you had talked about the low attrition and the M&A pipeline has broke to your net adds for your headcount. I was just wondering if in the future, with a continued strong pipeline, you continue seeing that strong addition of headcount, especially in 2019 with that huge jump compared to 2018. Thank you.

Yes. So this is Juan. So this year, 2019, we had an amazing organic growth in terms of net additions, and that is composed of record hirings and lower – and very low attrition. And also, we added a number of developers and designers and engineers through acquisitions. So it was a very strong year overall in terms of net additions. For 2020, what we are seeing is a strong pipeline, strong business momentum, that’s reflected in our guidance for the year and for the quarter. And of course, we will continue hiring more Globers, training them to be able to deliver on that pipeline that we are seeing.

Great. That’s helpful. Thank you so much.

The next question comes from Arturo Langa of Itaú BBA. Please go ahead.

Hi, Martin and Juan. Thank you for taking my questions. First, I was wondering how you think about inorganic growth opportunities at this moment. I mean looking at your multiple, it’s quite high. So I was thinking maybe do you look at options such as debt to optimize your cost of capital? And should – is this a moment when you think more that the opportunity to look at targets is more attractive relative to maybe some months ago? Just wondering how you think about that internally. And then second is regarding the knowledge flow in Argentina, the bill was submitted, I think, yesterday to Congress. And I was wondering what you could share there in terms of how you see this proposal? When you think you will get approved sort of the timing and all those details? That would be it. Thank you.

Thank you, Arturo, for the question. I will take it. So in terms of M&A, we always, when we do a deal is because we find a company with a similar culture that complement our service offering that gives us a new geography and new skillset so – we are not in a hurry to make acquisitions, we need to find the right company, and we need to pay the right multiple. We have always been very, very strict in how we make acquisitions, both in terms of which companies we acquired and also in terms of how much we pay for those companies. We are not thinking about changing any of that in the near future. Second, going into the knowledge flow in Argentina, as you just pointed out, the new regulation was sent to the Congress yesterday. The new regulation has very, very similar benefits to the previous so far promotional low. It’s supposed to be treated by the House in the near future, but I cannot say when it’s going to happen. This is really outside of our control. But it’s a – it’s good news that, that relation was sent again to the Congress. It also shows that the country understands how important this industry is for the country. It’s an industry that generates a lot of employment. It’s an industry that creates a lot of opportunities all over the country, and that generates a lot of net dollars for the country. So it’s good that the government realized and sent it back to the Congress so soon.

Great. And on – just on the first point, do you think about taking more debt on to get a lower cost of capital. Is that something you think about? Or is that out of question?

As you know, Arturo, two weeks ago, I mentioned this in the call. Two weeks ago, we signed – we amended the previous credit facility that we have. We expanded the facility from $200 million to $350 million and we increased the number of banks we – now we have pretty much all the big banks or most of the big banks behind that, backing us up. We will take debt only if we need it for incremental expansion into new locations. If we want to do an acquisition, we need some money. We are not just going to take debt just for reducing the cost of capital. When we take debt, it's because we are seeing growth, we are seeing an opportunity to grow the business. And this is the plan that has not changed. Those are the drivers for using that in the future.

Okay, thank you. Martín Migoya: You are welcome.

The next question comes from Diego Aragao of Goldman Sachs. Please go ahead.

Yes, thank you. Hi Martin, Juan thank you for taking my questions. The first question is related to the business diversification and your goal to expand, let's say, into new regions. If we would think about your business two, three years from now, what are the main goals for Globant in terms of global footprint? And maybe if you can also comment on how much can you benefit from this diversification in the future, let's say, in terms of margins that would be great. Thank you. Martín Migoya: How are you? Thank you very much for the question. Look, there are several answers to your multiple questions. And the first one, in terms of diversification, in terms of geography, we are going to other destinations in Asia, and we are happy about that. We are still in very early days, but that's the plan we have for the next three, five years to execute. Then in terms of diversification of different practices, we have launched, as I said on my script, we have launched two new studios, one which is really connected to what's going on with the SAP implementation, not because we're going to implement SAP, but yes, because we're going to be using the SAP information to create applications that really can be engaging with consumers. The other studio that diversifies a little bit what's going on in the technology market is the conversational interfaces studio. That studio for me it's like the next mobile. And to synthesize what we do there, basically is we create engines of artificial intelligence that connect the consumers real-time and can transact on the back, while, for example, having a banking application where you can connect through WhatsApp and then the bank can answer, which is the balance that you have, that you can make a transfer, you can make – recharge with the QR or pay with a QR code, things like that. And all of those things without downloading any application, hence, reducing the friction we have with the consumer and being able to expand that into many other places. So if you ask me, the next three, five years, I see Globant as a disruptor on the game. I see the industry is going to a place where not much innovation is being done on how professional services are being rendered during the last 25 years. And at Globant, we're innovating every single – in every single aspect of that industry, from how we are organized, to how we use technology to decrease our attrition to how we use technology and in artificial intelligence now to how we code, to how we use technology, to how we design, how we retain, how we recruit. So I think that there's a huge space like other companies did feed on how to redefine the taxi industry, or how to redefine the hotel industry, or how to redefine the car industry, there's a huge space to create that next-generation player to reinvent the industry, to reinvent the space. And I think that Globant, given the scale, our vision how we use technology and how we think about that, it's in the best position to execute that vision. And so that's what you're going see us doing. Are we going to be successful on that? We don’t know. We hope yes. And we are doing everything we can to make it happen. But I feel that that's the huge space that we have in front of us in a market which is really massive massive. Sorry for the long answer, it was a long question.

Yes. No, thank you for that, it was a very detailed answer. Thank you. So look, my second question is also related to margins. My understanding on the 50-Squared strategy is because you can keep focusing on all, let's say, the large accounts and hence, the relationship with them and eventually grab our large share of quality within these clients wallet within these clients, by doing that you can also reduce the number of clients by closing in smaller contracts and concentrating your efforts within those large accounts. So my question is can you help us to quantify how efficient this could be to your margins as well? Thank you. Martín Migoya: Look Diego thanks for the question. Yes, we continue to believe that focusing on high potential, large corporations that are investing hundreds of millions, or sometimes a few billions in technology every year is the right path to keep growing our company. We have grown the company primarily by farming those accounts. But of course, we always have some new logos here and there, companies, of course, with high potential that we believe can become multimillion dollar accounts. And when we are doing that, over time, what happens is that the smaller accounts with no potential typically will end up at some point, not working with those companies any longer. However, that does not have an impact in terms of gross margin. If that has a positive tailwind, you can see that in terms of the operating income and what happens with SG&A, right, because focusing on these large companies and farming companies is always more cost-effective than hunting new companies. Once you are inside a company, you have the relationships in place, the safe guides that you need are a lot more focused, and they have all the contacts in place to bring new business into the company. The same goes for all the support areas, right. Once you are used to working with these companies, you have – you know what sort of talent you need to provide for those projects, you know how to collect an invoice, you know how to negotiate the contract. That creates synergies in every support team. So eventually, that has helped in the last three, four years, to reduce the weight of our SG&A as a percentage of revenues. Right now, what we are guiding is a more stable margin. We want to have – we believe that the level of operating margin that we have achieved, we closed at 17% in 2019, we think that keeping that level and investing more in sales coverage, investing more in training our employees, investing more in getting the company ready for the next stage in terms of scale is the right approach while we continue growing the company. So we expect now more stable margins for the near future, while we continue expanding our revenues.

Okay, that’s super helpful. Thank you. Martín Migoya: Thank you, Diego.

Thank you, Diego.

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

Hey thanks. Strong quarter guys, congratulations. A couple of things. First, what's embedded in your guidance for growth or lack of growth in some of the clients that we had some issues with last year, Southwest, Santander Bank? What are the assumptions on that in the guidance for calendar 2020?

So Moshe, this is Juan, I mean, we haven't mentioned the company. So I know it's an airline interval, but we never mentioned – we don't give specific names. Having said that, we typically – for next year, what we are seeing is a slight recovery in this bank. However, if you still look at financials, we have been able to grow more than 25% in last year, so we had a very strong performance, even despite one of the banks not performing as we initially expected. And for the travel industry, for the airline we had facing some headwinds in the past, we are seeing a stable year as of today. But at the same time, we are seeing some good momentum in the travel industry, with other airlines growing significantly faster and helping us to keep up with the growth in the travel industry. Travel grew last quarter 14% sequentially. So that was a good number, even though for the year, we ended up at only 4%.

Hey, great, helpful. And then can you remind us what was the headcount that's Argentina-based for the quarter?

Yes, so in Argentina, we saw 30% of the total headcount. And the total headcount for the quarter, wait one second, was 11,855 employees for Argentina. For the year came down four percentage points, we started the year with 34%, we ended the year with 30% of total headcount. There was an increase of more than 200 people in absolute numbers. But again, we continue with our diversification strategy, growing across the globe and becoming a more global company.

Helpful. And then what is embedded for pricing and guidance? Is it still a couple of hundred basis points per year?

Look, I mean, even though we have been growing more than 2% on average, when we build the guidance and when we work on our budget, we always assume flat pricing so that we take some conservative approach on that front even though the pricing environment looks good.

And then the final question, I believe you started moving, maybe expanding your 50-Squared more towards maybe 100 top tier accounts. Is that still the plan to try to expand into a larger set of potential key accounts down the road? And where are we in that process?

I mean, as the organization, things are growing too. And our former 50-Squared program now has been like renamed into 100-Squared program.

Yes. Martín Migoya: And I think that that’s kind of movement we are seeing in terms of the growth of our organization. And with the guidance that we did for next year, maybe the exit run rate will be very close to $1 billion in revenue. And the fact is that we need to start thinking an organization in a totally different manner. And reflect of that is a change on the 100-Squared program and how we are seeing those things happening. So short answer to your question is yes, we are evolving everything within Globant to start dealing with a much larger organization and a much larger market opportunity that we have in front of us, while we think to reinvent the whole space.

Thanks Martin. Martín Migoya: Welcome.

The next question comes from Bryan Bergin of Cowen. Please go ahead.

Hi, good afternoon. Thank you. I wanted to ask on Europe. Can you just talk about your efforts to scale there? And regarding just 4Q performance was that fully due to the one large banking client and anything else to call out there?

Hello Bryan. I couldn’t get the first part of the question. Sorry, can you repeat.

Yes. Can you just talk about your efforts to scale in Europe? And then just on the 4Q performance, I want to confirm that it was just the one large banking client.

Great. Yes. So Europe was flat pretty much quarter-over-quarter. We continue to see Europe as a big opportunity for us. We continue to see both continent and the UK, Europe as a big opportunity. Despite that client that during last year could not grow the opportunities that we are seeing for 2020 are quite, quite positive, not only with that customer that we are seeing a recovery, but also with other banks in Europe with some automotive companies in Europe and with some airlines in Europe. So we are optimistic about Europe, we continue to invest in the team. We have been increasing the seniority, and we have a much more experienced management team in Europe. So Europe continues to be an opportunity that we have to materialize during next year. We are optimistic about Europe. Martín Migoya: Yes. And by the way, we have mentioned on the previous call that that customer was recovering, and this is what we are seeing now. So that's a positive sign.

Okay, that's helpful. And then Martin, just that augmented coating example you detailed was interesting. How prevalent are cognitive service engagements or at least serious conversations around those? How prevalent are those across your client base today? And then are there any particular industries that are moving faster on those than others? Martín Migoya: No. We have been trying the software, and the product and the artificial intelligence engines in many different customers. It's really promising what we’re seeing and we have been engaging already in conversations for our own customers to use the same tool for their own people, which is also pretty interesting. The product is doing amazing things, also it's been able to code and document back code that is totally undocumented, which is really, really attractive from our perspective to do software accuracy and things like that. So I see a promising path of growth for that specific technology that we are launching in the market. For me, it means mainly a gain in productivity for our people that will be translated into our customers, and hence, we will be able to defend better our positioning on defending the price. So we're extremely positive about the progress of that initiative.

Okay thank you.

Welcome.

This concludes our question-and-answer session. I would like to turn the conference back over to Martin Migoya for any closing remarks. Martín Migoya: Well, guys, thank you very much for covering us. Thank you very much for supporting us. We have had another very good quarter and good outlook for 2020. And I really look forward to see you on the next. And of course, any other questions, we're always available. Thank you so much.

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