Q2 2022 Globant SA Earnings Call

Globant is also sharing its entrepreneurial spirit and disruptive culture with our external community. So far this year, we have held two editions of Tech&Fest in Mexico City and Medellin. Tech&Fest is our event series aimed to advance the conversation on the latest tech trends in a fun environment. Almost 20,000 people registered for the event.

making an incredible experience for the attendees. As you all know, one of Kloban's key differentiators is our Agile PODS.

diverse and autonomous teams that interact with our clients to craft the best solution.

We launched this methodology in 2012 and it was a critical element in our global scale-up.

Today globin has a significant amount of experience and data from nearly two decades of delivery for hundreds of blue chip clients.

Through our platforms, Global University and MyGrowth, we are leveraging this data to measure and improve the performance and engagement of our pods.

With more targeted feedback, we can boost GloBend's experience at the company, accelerating their team maturity and delivering great value to the clients. And now, an exciting new development for GloBend and our community.

As we continue seeking permanent reinvention, we want to hear and learn from diverse perspectives that can enrich our vision.

The future will be led by the new generations who will drive our world and industry forward.

So we want to hear from them to boost inspiration.

Therefore, we created the Council of Igniters, the first company advisory board made up of centennials.

We have brought together influencers from today's youngest generation who will have a regular dialogue with globins on the important issues.

from the future of work, D&I, education, and other pivotal topics.

We are excited to incorporate this dialogue into our creative perspective. This brings me to our Be Kind initiative, which continues to develop. We are back for a third edition of the Women That Build Awards, and to recognize and inspire women who are shaking up the gender reality in our technology sector.

This year, we will have new categories for Technology Influencers and Board Executives.

For those of you joining us this afternoon, we encourage you to share this award with your networks to nominate extraordinary women of today, so that we can inspire the game changer of tomorrow.

Check it out at www.wominowords.globan.com

In addition to promoting women in our sector, we are doing our own part by closing the gender gap in our own company.

Over the past quarter, we have been consistently incorporating more female globers at every level of our organization. This effort is aligned with our target of having 50% of global managerial positions to be held by women and non-binary peers by 2025. One of our key areas in Bkind is also to help humanity through technology.

During the past years, we have built different products to face key issues for different communities.

Today, we are glad to share the launch of our newest app focused on neurodiversity called Emotionalmente. This app is designed to help young people with autism.

It enables them to recognize different emotions in others, associate them to everyday life situations and implement ways to manage them.

We have launched this app in Spanish, and it is already available for free on the Google Play Store.

This is just one example of how technology can impact humanity for the better. It has been very encouraging to see global and recognized by our community.

Great Place to Work recently ranked low-end among the top 25 workplaces in Latin America. And FAZ company ranked as among top 100 great workplaces for innovators.

Also, I'd like to congratulate Martin himself. Comparably recently acknowledged him on their list of the 25 best CEOs at large companies, rated by employees of minority backgrounds.

I am extremely proud to see that all our initiatives are contributing to a unique work environment.

This environment was developed by the global throughout our company.

We have seen them take the initiative in hosting office gatherings, creation spaces, and innovative collaborations among their colleagues. Their initiative inspired us to recognize some of them as our cultural ambassadors so that they can take an even more protagonistic role in driving global values forward.

We have great opportunities ahead of us and we continue to strive for be the best place for the talent.

Thank you everyone, and with that I will turn it over to Juan for the financials.

Thank you and good afternoon everyone. I hope you are all doing well. Let me start by summarizing the strong results of our second quarter 2022. I will then discuss our guidance for the third quarter and for the full year 2022.

I am pleased to announce that in the second quarter our company showed a robust sequential acceleration in our top line, best in class CPS growth and solid free cash flow generation.

We posted another quarter of record revenue levels and industry-leading financial performance while continuing to execute on all key pillars of our strategy.

Our revenues for Q2 were $429.3 million, representing a solid 40.6% year-over-year growth, reflecting the strong and resilient demand environment for our business.

On a sequential basis, our revenues for the second quarter of this year increased 6.9% versus 5.7% in the first quarter of 2022, showing a robust and healthy expansion.

Q2 revenue growth was 42.1% year-over-year in constant currency.

1.5 percentage points above our headline figure and over 36.6% year-over-year growth in organic terms.

While we continue to analyze the fluid macroeconomic environment, we continue to see technology as a key pillar in every single one of our clients' strategies and a way for them to future-proof their organizations. On that note, we confidently believe we can continue to deliver robust levels of growth and profitability in the upcoming years, driven by the multi-year secular tailwinds facing our business. Thank you.

Turning now to profitability, our adjusted gross profit for the period increased to $168 million representing a 39.1% adjusted gross margin. Despite salary increases taking place in our key markets during this quarter, adjusted gross margin was pretty much flat year over year, a reflection of the positive pricing dynamics that we continue to see in the market and our focus on profitable growth.

Our gross margin levels continue to be within the industry leaders, reflecting the value that our clients see in our services, the technologies that we bring to the table, and the speed in which we are able to transform our clients' digital capabilities. Adjusted operating income for the quarter amounted to $69.2 million, or 16.1% of revenues, almost flat versus Q2 2021.

The resilient demand and pricing environment, the S&A efficiencies driven by our increase in size, along with our increasing exposure to services that help us break revenue and employee growth linearity, will continue to have a positive impact on our adjusted operating margin. At the same time, we will continue our ongoing investments in the company to capture the huge opportunity in front of us.

Our IFRS effective tax rate for the quarter was 22.5%, largely in line with our guidance.

Adjusting net income for the second quarter of the year totaled $52.1 million representing 12.1% adjusting net income margin and up 10 basis points compared to the second quarter of 2021. Adjusting deleted EPS for this quarter was $1.22 based on 42.8 million average deleted shares for the quarter and above our quarterly guidance of $1.20 per share.

adjusted EPS42 implies a solid 38.6% year-over-year growth. Moving on to the balance sheet, our cash and cash equivalents on short-term investments as of June 30, 2022 amounted to $361.7 million.

Currently, our create facility of 350 million dollars is fully undrawn.

Starting this quarter we will be reporting cash flow on a quarterly basis.

Cash flow from operations for Q2 was $45 million compared to $28.1 million in the same quarter of 2021. During the second quarter, we generated free cash flow of $17.2 million compared to free cash flow of $10.5 million in the same quarter last year.

As mentioned in our last earnings call, typically the first half of the year has a lower free cash flow as we pay bonuses and taxes and the second half of the year is when we generate the majority of our free cash flow which has on average represented around 60% of adjusted net income over the last few years.

At the end of Q2, DSO was 75 days, compared to 80 days for the same quarter last year.

We also continue to successfully execute on capital allocation strategy with integrations of recently acquired companies going as planned. All in, we continue to deliver strong revenue growth, robust levels of profitability and free cash flow generation.

continuing our commitment to deliver consistent and significant value to all our shareholders and key stakeholders.

Now, let's talk about our business going forward. I would like to share with you our outlook for Q3 and for the full year 2022. As discussed earlier, we are witnessing a robust demand environment. Based on current visibility, we expect Q3 2022 revenues to be at least $456 million, implying 33.4% year-over-year growth.

This guidance figure considers approximately 2% points of FX headwind and 3% points from prior acquisitions.

Q3 adjusted operating margin is expected to be in the 16 to 17 percent range. An adjusted utility PES is expected to be at least $1.24 assuming for the 2.9 million average duty shares outstanding for the quarter.

Regarding the full year 2022, given the overall outlook in market conditions, we are increasing our revenue guidance this quarter and we now expect full year revenues to be at least $1,775,000, representing 36.8% year-over-year growth of which we estimate 34 percentage points of organic growth.

This guidance figure considers approximately 3 percentage points of FX headwind and 2.8 percentage points of inorganic contribution.

Our strong growth guidance significantly exceeds end market growth rates.

For 2022, we continue to expect our adjusted operating margin to be in the 16-17% range. At Glovent, we continue to strongly invest in globalizing our operations, trending programs in cutting-edge technologies and expanding ourselves coverage.

IFRS effective income tax rate is expected to be in the 22-24% range for both Q3 2022 and the full year 2022.

Finally, we expect adjusted duty DPS to be at least $5.03 for the full year 2022, representing a solitary 3.8% year-over-year growth. Adjusted DPS guidance assumes 42.9 million average duty shares outstanding for the full year!

Thanks everyone for your participation in the call, for your coverage and support.

Thank you Juan. So before going into the Q&A section of this call, I would like to turn it back to Martin who will share with us our new global campaign. Martin, please go ahead.

Thank you, Arturo, and thank you everyone for participating today. It would be great to show you a little bit of what we are doing in terms of spreading our brand and spreading our word. So please go ahead with the reproduction of the commercials that we have been launching exactly yesterday, I think. So go ahead, please. Thank you.

Chris? 996! What's happening? Mark's about to reach a thousand slides in the new client presentation. What? 997! 998! I need to highlight product delivery. Get me an incomprehensible graphic ASAP. That's for a message, Ar. 999! 996! One more sign!

unmute your line and make the question. After you have made your question, please mute your line back again. And also, we would kindly ask that you limit yourself to one question and to one follow-up. So with that in mind, we'll go to the first question on the line-up. Ken Hsing-Huan from JP Morgan, please go ahead. Your line is open.

Great, thank you, Anto. Good growth here, as usual. I wanted to ask, if you don't mind, just on visibility, the question I'm sure everyone's going to focus on. I'm asking because I'm thinking about the growth, obviously very good. The level of upside is more consistent with what we saw last quarter, but not quite as high as what we saw during the pandemic. But again, more consistent with what we saw pre-pandemic. So I'm curious around...

you know, visibility and if you've changed your philosophy on guidance at all, now that we have a little bit more of a pattern.

coming out the pandemic. Thank you.

Let me take the second part of the question. In terms of philosophy, as we have been saying since the beginning of the year, the pandemic is over and because of that we were going to start guiding the same way that we used to guide prior to the pandemic, you know, trying to provide that guidance to the market that, you know, we feel confident that we can achieve or hopefully slightly exceed as it has been the case over the last three quarters.

So, as we said at the beginning of the year, we are guiding with the same philosophy that we have seen the IPO in 2014.

As you know, then during the pandemic, because there was so much volatility and so many things going on, it was hard to guide. You know, economy is opening and closing very quick. But we did say very clearly at the beginning of the year, and we continue to say going forward, that our guidance philosophy will be the same that we have had since our IPO in 2014 and in the pandemic. And as for the visibility, I will probably let Martin. Yeah. Thank you, Juan. Thank you, Dean Qin, for the question.

Visibility is still very good. I mean, most of our customers are in good shape, and that's very important. If there's a recession, it's difficult for us to see exactly where it's coming and which sectors. Although we have seen some sectors on the high-tech space that are suffering a little bit, we see some others that are going very good. Our largest customer, Disney, is having a good moment in terms of growth of their…

and they surpassed Netflix in terms of monthly subscribers of the whole set of platforms that they have. And that's very encouraging, and parks still are going great. And our growth, as we said, with Disney, it was slower during the second quarter, but it's already showing signs of going faster on the third quarter. So basically it keeps on being quite good, and our exposure to those.

potential areas of problems on a potential recession is not that high neither. So overall it's good. So I don't know if you want to do the follow-on to clarify anything. Okay.

No, that's perfect, my team. Thank you for that. I was going to ask...

Patricia a little bit more about attrition, but I I have to ask you don't mind on the crypto the wallet Let me ask about the wallet right that's a little bit different So it sounds like gold bond will will own that product and go directly with customers or consumers with that product did I hear that no, it's just sort of a new new idea for

For the content, you also talked about the autism thing, which is really interesting, but interesting to see a little bit more direct consumer offerings from GoVon. I hope you have read the QR and get the Satoshi's. But having said that, it would be great to clarify this. We are always thinking about new ways of interaction.

and we feel that the crypto space also needs a kind of a reinvention in terms of how it interacts with consumers. So what we're presenting today is a platform that could be used by any of our customers in case they need. This is a closed beta test and it's not involving a massive amount of customers.

I was getting a report about 65 people downloaded the QR. That's the maximum of 100. So it's a very close limited trial test. So again, we will keep on thinking about our philosophy of having these platforms for those that really want to get into the game. And we thought it was a very good idea to show it in this way, like live...

giving up some Satoshis so you can play with it, check with WhatsApp what you can do. You can exchange them. We're using the service of an exchange on the backend of Ripio. And you can exchange that from Satoshis to USDC. You can ask for a small bill or a check to send it to any of your friends over WhatsApp.

that other person will be able to cash in those satoshis. So you can set it in the format of send $1, so you don't know how many satoshis you are sending, but yeah, you're sending $1 to the other person, which is the most important part. And then at the moment the other person cash it in, the satoshis get converted at that specific exchange rate. So it's a pretty interesting interface. In the moment you receive those satoshis, you have a new crypto wallet, pretty much without the effort of doing anything. If you type address.

No, it's fun to see the customer experience live, so I appreciate that guys. Thank you. Welcome.

Thank you very much for the question.

Thank you very much, Xinxin. So our next question comes from Ryan Potter of Citi. Ryan, your line is open. Please go ahead.

Thanks for taking my question and I guess I'll take the attrition question.

Can you give some details on how attrition has been trending recently, maybe some color on how it's been trending in July , and does that continue to be concentrated largely in Argentina? And I guess can you provide some more details on how Argentina attrition on itself has been improving and how you expect attrition to kind of play out the rest of the year?

Hi, well we see that as we mentioned, I mean attrition remains flat as we mentioned in the last quarter and the good news is that we are seeing a really good number in June and July and so we think that we are going to continue with that downward trend for the second half of the year. In Argentina, I mean it's stable this last two months also and I think that is the trend.

Of course, the rest of Latin America, you know that it is still a kindly hot market, but we are very stable because we continue to have very solid value proposition for our employees. In fact, the last Pulse interview that we made to all our clubbers made a great, great result that I feel very comfortable working in Globe&, and they feel very good emotionally and spiritually and of course.

and working in Globe. So I think that is the way we like to do it. Trying to bring more career paths, more opportunities, and improve our value proposition in terms of the career that they want to do in a company like Globe. So I think that answering your question, you see that it's going to be down in the second half.

That is what we expect, of course.

Got it. That's good to hear. And then I guess just touching on the Latin America demand environment, I believe you mentioned you saw some strong new logo growth in Latin America. So I was wondering if you could kind of broadly discuss some of the trends you're seeing in the Latin America demand market. Is this an active focus currently and do you expect Latin America's percent of revenue to kind of increase over time?

Thank you for the question. Latin America for us is like our home.

We...

We believe that the brand of global in Latin America is a very strong brand. And we want to use that. We have been building this brand for the last 19 years. And I believe that.

the response we're seeing from the customers and the needs that are being increased by the demand.

It's really interesting and we don't want to walk away from that opportunity. So we are investing a lot in growing Latin America. We will keep on growing. I cannot say that percentages will change but yes, I can say that we are very serious about how to help our customers, how to help reinvent the whole set of customers that we have in Latin America. So I am very bullish about what is happening in that specific region.

Any sense that clients are treating 2023 potential spending differently at this juncture?

Very difficult to answer that question. We are not seeing that right now. That's all I can say. We are not seeing that right now in any of our customers.

But I don't know, you never know what's going to happen. I believe that even in a complicated environment that it could be, I would say that the demand for what we do will remain very strong.

very specific on that on my speech, my initial speech.

Why? Because these guys will keep on needing technology and I still believe that technology is the largest possible driver for improvement of efficiency and improvement and winning market share in pretty much all the industries.

So, I believe that that's a pretty solid trend that won't change and GloBend will benefit from that.

So let's see how it evolves. But we are not seeing any specific effect on the planning of next year.

And the follow-ups on top client here at Disney.

some new leadership appointments, specifically in its streaming unit. Can you kind of characterize the current conversations with the counterparts in the business? And what gives you the confidence, it sounds like there's some reacceleration, what gives you the confidence that this is sustainable and is the expectation that it will return to grow in line with the company average in the second half of the year? Yeah, I believe that, well, Disney is a great company and we are great partners in that. We have been working for them for...

more than 10 years.

And the stakeholders that we are seeing on the streaming side are not new in the company and we know them.

And I believe that the investment on the streaming platform will keep on being and keep on growing. Not just that, but also going into other areas. I believe that maybe they will be going into the metaverse, they will be going into the NFT space, they will go into many other places.

So, and that's why I'm positive about the evolution of that customer, specifically that customer in terms of what they want to do. And the success, as I said, the success is so large.

that now they have more subscriptions than Netflix.

And when I saw that news I said, okay, yeah, right. Everything is about the quality of the content. And this is exactly what's happening. That's why I'm so excited about what's going on in Disney in terms of the evolution of their business.

And of course that will drive more and more things for us to do. Of course we don't have the crystal ball here, but I'm very optimistic about the overall situation that Disney is living right now.

Good to hear. Thank you.

Thank you very much. Thank you. Thank you.

Thank you so much, Zach. So our next question comes from Maggie Nolan from William Blair. Maggie, your line is open. Please go ahead.

Hi, how are you?

Can you give us a little bit more color Juan on the expectations for the impact of things like salary increases and price increases and foreign currency on the margins in the back half of the year? Sure. Hi, how are you? So you know there are like multiple pieces going on there. On the salary front we have been increasing salaries during the second quarter and we have some other increases in the last part of the year.

At the same time, we have been increasing our revenue per head consistently over the last 18 months and we have been able at the same time to maintain our gross margins pretty much north of 39%, which is a very healthy level. We continue to see gross margin in the historical 38 to 40% range, so we donít see a lot of variation there, so we do believe we will be able to offset an incremental...

salary increase that we may have over the rest of the year. That's on the salary. There was another part of the question, Maggie.

and pricing and something else you mentioned I think. Salary, pricing, foreign currency. Foreign currency, okay. And then on the foreign currency, you know, we have two different situations there. One on the top line and we are losing revenue because of how the FX is playing in Latin America and also in Europe . For the second quarter, our growth would have been 42.1%. You know, if it wasn't for the FX.

changes that we have seen. For the guidance for the year, you know, we guided for the full year 36.8 percent and that includes three percentage points of negative effects impact. So we could have ended guiding 39.8 percent.

So, that's on the top line. It's a negative impact.

on the margins, you would have expected that to be positive, and that is the case, but we will, and we are reinvesting that additional money, you know, getting ready for 2023, expanding our business into new locations. You know, so far this year, you know, we opened places like Poland, places like Canada, Ecuador, Costa Rica, and we plan to keep on expanding our operations.

We have been also investing in our studio offering and Diego has been talking about that during the call and also in prior calls and we will continue to do that. So any efficiencies that we are getting from the FX on the cost side are being reinvested but we are losing some on the top line.

Okay, that's really helpful, thanks. And then as you think about the back half of the year and the overall demand environment, are there any differences between your end verticals, the industries that you serve, and how those clients are thinking about budgets or any kind of differences in terms of how you expect those verticals to perform, maybe what you expect to be the strongest?

Okay that's really helpful thanks and then as you think about the back half of the year and the overall demand environment, are there any differences between your end verticals, the industries that you serve, and how those clients are thinking about budgets or any kind of differences in terms of how you expect those verticals to perform, maybe what you expect to be the strongest?

As I said, our exposition to those segments which are more impacted right now, which is basically big tech.

We have a large customer there which is Google and we haven't seen any impact on that specific account.

And then on the other side of the others...

They are our customers, we don't have such a huge exposition, so we are not at all concerned about that. On the rest of the segments, I'm seeing very positive trends. On the financial sector, on the travel and leisure, on the entertainment space.

on the CPG, on pharma. All of those segments, I don't know if I'm forgetting any pinpoint here, but all of those segments we're seeing very strong demand. And of course, demand is not the same as it used to be in the first half of 2021.

It was like crazy.

But it didn't come back to the pre-pandemic level. So we're above the pre-pandemic level, below the, I would say, the mid portion of the pandemic side. So we're starting to see an impact with populations beyond the population.

That's the overall situation that we are seeing, Maggie. I don't know if you want me to clarify on any other, you know.

specific area.

No, that was very helpful. Thanks for taking my questions. Thank you so much. Thank you.

Thank you, Maggie. So our next question comes from Surinder Dinh from Jeffries. Surinder, please go ahead, your line is open.

Thank you. A follow-on question about the guidance.

When I think about the 3Q guide and then I kind of back into the 4Q numbers, it looks like you're generally maybe higher than average historical growth rate there on a quarter over quarter basis, especially given

the lower day count. Can you talk about that a little bit? Is there perhaps a large project that's signed that you're expecting to go in 4Q, or how should we think about the dynamic of 3Q versus 4Q given the growth rates? Thank you, Srinid, for the question. So yes, on Q4, the implied growth, quarter over quarter, is a little bit higher than the one that you have in Q3. And that is driven by certain large projects that are ramping up and are gonna be at foot speed in the fourth quarter.

That's why some of them are showing mostly towards the last part of Q3 and some are starting in October and we're already getting ready for that. That's what we're seeing a little bit higher growth in Q4.

Got it. And then a related question in terms of there was an earlier discussion about a lot of new growth in Latin America.

When you think about these new relationships, are you approaching them from a dollar denomination perspective or?

Given that a lot more of your revenues are denominated dollars in the geographic footprint of those revenues. Yeah, typically in many countries.

We continue to close contracts in Latin America in US dollars. There are a few exceptions, but those are exceptions to the rule. Most likely we will typically sign up a contract in dollars or rates in dollars.

Okay, thank you. That's it for me. Thank you. Thank you very much. Thank you.

Thank you, Surinder. So our next question comes from Arvind Ramani from Piper Sandler. Please. I just wanted to ask with the Devona environment, you clearly outlined the demand continues to be fairly robust and healthy, but are you able to comment on the nature of work that clients are prioritizing? Are clients moving more from growth initiatives to cost initiatives or are some of the larger projects basically going through more evaluation or additional levels of approvals?

fast as the first quarter of 2021, but it's not on the pre-pandemic level. It's still higher. So this is the overall idea.

Okay, perfect. And then on the kind of talent, I'm trying to get a kind of gross margin, right? With the gross margins, how are you kind of fighting the dynamic of...

you know this bill rate increases versus salary hikes and is that also having an impact on attrition and how should we think about it over the next 6 to 12 months? Yeah, thank you, Arvin. So yes, I mean we have been saying since the beginning of this year we've been working with customers on pricing. These are long-term relationships and because of that, customers understand that.

in a hot labor market, in a hot inflation market worldwide, we need to work together, we need to increase salary sometimes, then we need to increase rates also if they want us to keep scaling with them with the quality that is expected. And again, since these are long-term relationships, most likely the conversations end up well and we find a way whether it is with an increase for the overall team.

for an increase in a specific project. We agree on an increase in the future. I mean, there are multiple ways in which you can make things work out with each different customer. And we have been, because of that, we have been able so far to maintain our margins pretty much in line, even in a very hot labor market scenario. We expect to continue to see more of both, more of additional salary increases, but also...

additional rate increases going forward, inflation, even though in the US started to stabilize, it's still high in most countries. And that, of course, is something that our customers are also seeing, and we will need to work together to adjust our rates accordingly as well. So we expect our margins, you know, overall, both gross and operating, and net income to be stable throughout the year. Of course, you know, sometimes you increase...

salary today, increase rates tomorrow or the other way around. I mean the company as a whole on average, we expect stable margins for the rest of the year.

Perfect. And this last question on tax rate, how should we be modeling tax rate for this year and if you can give us color next year? I think, you know, tax is a combination of...

20 plus countries at this point. So depending which country grows faster than others and many, many other things, it can move a little bit. But we typically target between 22 to 24 percent as a target IFRS effective tax rate. So that's the number that we are guiding as we mentioned in our guidance slide.

Thank you. You're welcome. Thank you so much.

Thank you so much, Arvin. So that will conclude the question and answer portion of our call today. With that, I would like to turn the call over to Martin for some closing remarks. Martin, please go ahead. Martin, please go ahead.

Thank you, thank you. Well, thank you very much everyone for participating on this call. As always, very happy to report our very good results. Looking forward to seeing you on the next quarter. Cheers, bye bye.

Bye bye.