Business Context and Reporting Period
Company: Globant S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2014
Business Overview: Globant is a technology services provider focused on delivering innovative software solutions leveraging emerging technologies (mobility, cloud, big data, social media). The company operates through a network of 29 delivery centers across 19 cities in seven countries, primarily Argentina, with significant client management in the U.S. and Europe. The company is incorporated in Luxembourg and uses IFRS accounting standards.
Key Financial Metrics (Year Ended Dec 31, 2014)
| Metric | 2014 (in thousands) | 2013 (in thousands) | Change |
|---|---|---|---|
| Revenues | $199,605 | $158,324 | +26.1% |
| Cost of Revenues | $(121,693) | $(99,603) | +22.2% |
| Gross Profit | $77,912 | $58,721 | +32.7% |
| Gross Margin | 39.0% | 37.1% | +190 bps |
| Operating Profit | $22,129 | $(5,699) | Turnaround to Profit |
| Net Income | $25,263 | $13,769 | +83.5% |
| Diluted EPS | $0.79 | $0.48 | +64.6% |
| Cash & Equivalents | $34,195 | $17,051 | +100.5% |
| Total Debt (Borrowings) | $1,285 | $11,795 | -89.1% |
| Operating Cash Flow | $14,296 | $1,211 | +1080% |
Note: The 2014 results include a significant non-operating gain of $12.6 million from transactions with Argentine sovereign bonds (BODEN/BONAR) acquired via capital contributions.
Material Changes vs. Prior Period
- Revenue Growth: Driven by a 26.6% increase in North American revenues and a 49.4% increase in Latin American revenues. The top 10 clients accounted for 43.9% of total revenue, up from 39.7% in 2013.
- Profitability Improvement: Operating profit swung from a loss of $5.7 million in 2013 to a profit of $22.1 million in 2014. This was driven by revenue growth, improved operating leverage, and a $1.5 million reversal of an impairment allowance on tax credits.
- Debt Reduction: Borrowings decreased significantly from $11.8 million to $1.3 million, primarily due to the repayment of debt using proceeds from the July 2014 IPO and operating cash flows.
- Non-Operating Gains: The "Gain on transaction with bonds" decreased from $29.6 million in 2013 to $12.6 million in 2014. The 2013 gain was derived from export payments, while the 2014 gain was derived from capital contributions used to purchase bonds in the U.S. and sell them in Argentina.
- Headcount Expansion: IT professional headcount increased by 17.6% (512 net additions) to 3,424 to meet demand.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Strategy
- Growth Strategy: Focus on expanding delivery footprint (particularly in the U.S.), deepening relationships with existing blue-chip clients, and pursuing strategic acquisitions.
- Liquidity: Management believes existing cash, operating cash flows, and a $15 million credit facility are sufficient for the next 12 months.
- Dividends: The company does not anticipate paying dividends in the foreseeable future.
Unusual Items
- Bond Transaction Gains: A material portion of 2013 and 2014 net income is derived from arbitrage opportunities involving Argentine sovereign bonds (BODEN/BONAR) due to the spread between U.S. and Argentine market prices. Management notes these gains are not necessarily indicative of future results.
- Tax Credit Reversal: A $1.5 million gain in 2014 resulted from the partial reversal of a valuation allowance on tax credits under Argentina's Software Promotion Law, following regulatory clarifications.
Key Risks
- Argentina Economic Instability: High inflation, currency devaluation, and exchange controls (restrictions on converting pesos to dollars) pose significant risks to operations and repatriation of funds.
- Tax Incentives: Reliance on Argentina's Software Promotion Law (60% corporate tax reduction) and Uruguay's tax-free zone. Changes to these laws could materially increase the effective tax rate.
- Client Concentration: The top 10 clients represent 43.9% of revenue; the loss of a major client could materially impact results.
- Talent Attrition: High competition for skilled IT professionals in Latin America; attrition rates were 20.2% in 2014.
Investor Verification Checklist
- Sustainability of Bond Gains: Verify the likelihood of future gains from Argentine bond arbitrage given potential regulatory changes or market convergence.
- Tax Credit Recoverability: Confirm the status of the $5.2 million in value-added tax credits recognized in 2014 and the timeline for monetization from AFIP.
- Exchange Control Impact: Assess the practical ability to repatriate earnings from Argentine subsidiaries given current foreign exchange restrictions.
- Client Retention: Review contract terms for the top 10 clients to understand renewal risks and pricing leverage.
- Wage Inflation vs. Devaluation: Monitor the net impact of Argentine wage inflation against the devaluation of the peso on cost of revenues.