Globant S.A. Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 20-F, not a standalone fourth-quarter report. Financial statements are prepared under IFRS and presented in U.S. dollars.
Business Context
Globant is a Luxembourg-incorporated digitally native technology-services company providing software development, design, consulting, testing, infrastructure management, application maintenance and platform-based services. At year-end, it had 6,753 employees, 37 locations in 30 cities across 12 countries, and operated primarily through delivery centers in Latin America, with expanding operations in the United States, Europe and India.
- Revenue mix by client location: North America 78.8%, Latin America and other 11.8%, Europe 9.3% and Asia 0.2%.
- Major industry exposures included media and entertainment, banking and financial services, travel and hospitality, and technology and telecommunications.
- The ten largest clients represented 41.9% of revenue; the largest client, Walt Disney Parks and Resorts Online, represented 10.2%.
- Repeat clients accounted for 88.3% of 2017 revenue.
Financial Performance and Key Metrics
Amounts below are in millions of U.S. dollars unless otherwise stated.
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | 413.4 | 322.9 | +28.1% |
| Gross profit | 150.3 | 131.5 | +14.3% |
| Gross margin | 36.3% | 40.7% | -4.4 percentage points |
| Profit from operations | 33.2 | 49.6 | -33.1% |
| Operating margin | 8.0% | 15.3% | -7.3 percentage points |
| Profit before tax | 38.5 | 50.2 | -23.2% |
| Net income | 30.5 | 35.9 | -15.0% |
| Net margin | 7.4% | 11.0% | -3.6 percentage points |
| Diluted EPS | $0.84 | $1.01 | -16.8% |
| Adjusted profit from operations | 56.7 | 54.7 | +3.8% |
| Adjusted operating margin | 13.7% | 16.9% | -3.2 percentage points |
| Adjusted net income | 46.1 | 38.8 | +18.8% |
| Adjusted diluted EPS | $1.28 | $1.09 | +17.4% |
Revenue growth was driven by higher demand in media and entertainment, banking and financial services, gaming, mobile, cloud, analytics and consumer-experience services. Cost of revenues increased faster than revenue, primarily because of headcount growth, salary inflation, foreign-exchange effects and expansion of the U.S. delivery footprint. Selling, general and administrative expenses also increased, including higher U.S. sales staffing, facilities, professional fees and depreciation.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $43.0 million, compared with $31.5 million in 2016.
- Cash used in investing activities was $57.5 million, including $27.5 million for property and intangible assets and $31.1 million for acquisition-related transactions.
- Cash provided by financing activities was $16.6 million, including proceeds from borrowings, share-based compensation exercises and subscription agreements.
- Cash and cash equivalents increased modestly to $52.5 million from $50.5 million; cash and investments totaled $60.7 million at year-end.
- Capital expenditures were $26.3 million, up from $21.9 million in 2016.
- Total borrowings were $6.0 million, compared with $0.2 million at year-end 2016. The debt was primarily drawn under a secured revolving facility of up to $40.0 million, bearing interest at LIBOR plus 1.75% and maturing in 2022.
- Total liabilities were $93.8 million and total equity was $263.4 million. Other financial liabilities of $29.2 million primarily related to acquisition consideration and options.
- Management stated that cash, operating cash flow and available credit were expected to satisfy anticipated cash needs for at least the next 12 months.
Material Changes Versus 2016
- Revenue grew 28.1%, but gross margin declined from 40.7% to 36.3% and operating margin declined from 15.3% to 8.0%.
- Reported net income declined by $5.4 million, despite lower income tax expense and lower net finance expense.
- Adjusted results improved because 2017 included substantially higher share-based compensation, acquisition-related items and impairment charges excluded from management’s non-IFRS measures.
- 2017 included a $4.7 million impairment of acquired intangible assets and a $1.6 million impairment of tax credits; neither charge was recorded in 2016.
- Share-based compensation expense increased to $14.5 million from $3.6 million.
- Headcount increased from 5,631 to 6,753, while IT-professional headcount increased from 5,219 to 6,279.
- Globant acquired Ratio Cypress and PointSource in 2017, contributing to a $33.7 million increase in goodwill and higher acquisition-related obligations.
- Client concentration improved: the ten largest clients declined to 41.9% of revenue from 46.5%, and the largest client declined to 10.2% from 12.3%.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings guidance forecast. Management’s strategy is to grow with existing and new clients, expand its Studios and emerging-technology offerings, recruit and retain talent, increase its U.S. delivery footprint and pursue selective acquisitions.
- Key operating risks include employee attrition, wage inflation, utilization, pricing accuracy, fixed-price contract execution and the ability to attract skilled technology professionals.
- Argentina remains a significant cost and operating base. Inflation, currency volatility, political and regulatory changes, tax incentives and potential exchange controls could materially affect margins, cash flows and access to funds.
- The Argentine peso depreciated 18.4% against the U.S. dollar during 2017, while reported Argentine inflation was 24.8%.
- Management estimated that a 10% increase in Argentine wage inflation, assuming constant exchange rates and no pricing offset, would reduce annual net income by approximately $6.8 million.
- Revenue is concentrated in North America and in several industries, making the company sensitive to client technology spending and economic conditions.
- Contingencies included a FAECYS labor claim with estimated possible loss of $0.7 million to $0.8 million and an ongoing IRS examination with estimated possible loss of $0.3 million to $0.5 million. Management considered adverse outcomes not probable or not material.
- Globant settled a U.S. Department of Justice visa-related investigation for $1.0 million, paid in March 2017.
- The company does not plan to pay dividends in the foreseeable future and expects to retain funds for operations, acquisitions and expansion.
- Management and Deloitte concluded that internal control over financial reporting was effective as of December 31, 2017; the assessment excluded Ratio and PointSource, representing approximately 3% of consolidated assets and 4% of consolidated revenue.
Important Facts for Investors to Verify
- Whether margin pressure from wage inflation, currency movements and U.S. expansion persists or reverses.
- The quality and collectability of the $80.1 million trade-receivables balance and the timing of tax-credit recoveries.
- Performance and future earn-out obligations of Ratio, PointSource, L4, Clarice and WAE, including the $18.6 million of non-current other financial liabilities.
- Compliance with the secured credit facility’s covenants and the refinancing or repayment of the $6.0 million borrowing.
- Potential impairment risk for goodwill of $98.9 million and remaining acquired intangible assets of $11.4 million.
- Reliance on major clients, particularly the top ten clients representing 41.9% of revenue.
- Continuation of Argentine, Uruguayan and Indian tax incentives and the effect of subsequent tax-law changes.
- The impact of adopting IFRS 15 and, later, IFRS 16; management expected no significant IFRS 15 effect but had not quantified the IFRS 16 impact.
- The filing’s annual results should not be treated as a separate 2017 fourth-quarter earnings release; quarterly Q4 revenue, profit and cash-flow figures are not clearly provided in the filing text.