Globant S.A. 2018 Form 20-F Summary
Business context and reporting period
Globant S.A. is a Luxembourg-based digitally native technology services company providing software development, design, engineering, consulting and digital transformation services. The filing is an annual report for the fiscal year ended December 31, 2018, prepared under IFRS in U.S. dollars. The source filing does not provide separate fourth-quarter financial statements; the requested 2018 Q4 period is therefore represented by full-year results.
At year-end, Globant had 8,384 employees, 40 locations in 32 cities across 14 countries and 373 clients. North America generated 77.9% of revenue, Europe 8.9%, Latin America and other markets 12.6%, and Asia 0.6%.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $522.3 million | $413.4 million | +26.3% |
| Gross profit | $203.8 million | $150.3 million | +35.6% |
| Gross margin | 39.0% | 36.3% | +2.7 points |
| Profit from operations | $66.8 million | $33.2 million | +101.4% |
| Operating margin | 12.8% | 8.0% | +4.8 points |
| Net income | $51.6 million | $30.5 million | +69.4% |
| Net margin | 9.9% | 7.4% | +2.5 points |
| Diluted EPS | $1.41 | $0.84 | +67.9% |
| Adjusted profit from operations | $84.3 million | $56.7 million | +48.6% |
| Adjusted operating margin | 16.1% | 13.7% | +2.4 points |
| Adjusted net income | $63.7 million | $46.1 million | +38.3% |
| Adjusted diluted EPS | $1.74 | $1.28 | +35.9% |
Adjusted measures exclude selected acquisition-related charges, impairments, share-based compensation and other specified items and are not standardized IFRS measures.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $67.2 million, compared with $43.0 million in 2017.
- Cash used in investing activities was $46.1 million, including $28.7 million for fixed and intangible assets and $18.4 million for acquisition-related transactions.
- Capital expenditures were $28.5 million, and spending on internal developments and acquired licenses was $9.6 million.
- Cash and cash equivalents were $77.6 million; cash plus investments totaled approximately $86.2 million.
- Trade receivables increased to $110.9 million from $80.1 million, reflecting revenue growth. The company recorded a $3.4 million impairment of trade receivables.
- No borrowings were outstanding at December 31, 2018. The amended credit facility permits up to $50 million of delayed-draw term borrowing and $150 million of revolving borrowing, with potential revolving commitments of up to $250 million, subject to covenants. The facility matures October 31, 2023 and bears interest at LIBOR plus 1.75%.
- Total liabilities were $99.2 million and total equity was $337.9 million. Operating lease commitments totaled $55.2 million, including $16.1 million due within one year.
Material changes versus the prior comparable period
- Revenue growth was broad-based, led by media and entertainment, travel and hospitality, banking and financial services, and consumer, retail and manufacturing.
- Revenue from the ten largest clients rose to 44.0% of total revenue from 41.9%; the largest client, Walt Disney Parks and Resorts Online, represented 11.3% versus 10.2% in 2017.
- Time-and-material revenue declined to 82.6% of revenue from 91.1%, while fixed-price revenue increased to 17.4% from 8.9%, increasing exposure to project-estimation and execution risk.
- IT professionals increased to 7,821 from 6,279, while total employees increased to 8,384 from 6,753. Attrition was 18.2%, compared with 18.0% in 2017.
- Gross margin and operating margin improved primarily through cost efficiencies, operating leverage and lower U.S.-dollar-denominated costs following the depreciation of the Argentine peso.
- SG&A increased 20.2% but declined as a percentage of revenue to 25.5% from 26.8%.
- Net foreign-exchange expense increased to $7.4 million from $2.7 million. Argentina's peso depreciated 102.2% against the U.S. dollar in 2018, while reported Argentine inflation was 47.6%.
- The company acquired Small Footprint for approximately $7.4 million and completed the acquisition of the remaining minority interest in Dynaflows. It also launched cybersecurity and over-the-top studios and StarMeUp OS.
- Globant adopted IFRS 9 and IFRS 15 in 2018 without a material transition impact. It expected IFRS 16 adoption on January 1, 2019 to add approximately $46.9 million of right-of-use assets and $48.5 million of lease liabilities.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantified 2019 revenue, earnings or margin guidance. Management expects existing cash, operating cash flow and available credit capacity to satisfy anticipated cash needs for at least the next 12 months. Strategy focuses on expanding existing and new client relationships, innovation in digital and cognitive technologies, talent recruitment and retention, geographic expansion and selective acquisitions.
- Key operating risks include utilization, employee attrition, wage inflation, fixed-price contract overruns, pricing pressure, rapid growth, competition and client concentration.
- Approximately 77.4% of revenue came from media and entertainment, banking/financial services/insurance, travel/hospitality, and technology/telecommunications.
- Argentina-related risks include inflation, currency volatility, political and economic instability, possible exchange controls, tax changes and the expiration of the Software Promotion Law at December 31, 2019 unless extended or replaced.
- Argentina introduced a 12% export duty on services, capped at ARS 4 per U.S. dollar, effective January 2019.
- Unusual 2018 items included a $6.7 million gain from remeasurement of acquisition-related contingent consideration, a $1.6 million gain related to the Dynaflows put/call arrangements, a $1.0 million loss from settling WAE-related claims, an $0.8 million impairment of the Collokia investment and a $0.3 million intangible-asset impairment.
- An IRS examination proposed approximately $1.4 million of employment-tax assessments plus penalties and interest for 2013–2015; the company filed protests and stated that the ultimate outcome could not be predicted.
- Subsequent to year-end, Globant acquired Avanxo for consideration of approximately $48.6 million, including $40.1 million in cash and $0.8 million in shares at closing, with additional earn-out payments subject to performance.
- The company stated that it does not expect to pay dividends in the foreseeable future and intends to retain funds for operations, expansion and acquisitions.
Important facts for investors to verify
- Confirm full-year versus fourth-quarter comparability, because the filing does not present standalone Q4 results.
- Reconcile IFRS profit and margins to adjusted measures, particularly the effects of share-based compensation, acquisition accounting, impairments and contingent-consideration remeasurement.
- Assess whether revenue growth is translating into sustainable cash conversion as receivables and payroll liabilities increase.
- Monitor fixed-price contract mix, utilization, attrition, wage inflation and the ability to pass costs through to clients.
- Review Argentina currency, inflation, export-duty and tax-incentive exposure, including the replacement of the Software Promotion Law.
- Evaluate client and industry concentration, including the top client's 11.3% contribution and the top ten clients' 44.0% contribution to revenue.
- Assess acquisition integration, earn-out obligations and the financial impact of the Avanxo acquisition.
- Review the proposed IRS employment-tax assessments, other contingencies and the $55.2 million of operating lease commitments.
- Verify the impact of IFRS 16 on reported assets, liabilities, operating expenses, EBITDA and cash-flow presentation beginning in 2019.