Business Context and Reporting Period
Company: Globant S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Business Overview: Globant is a digitally native technology services company incorporated in Luxembourg, with principal operations in Argentina. The company provides engineering, design, and innovation services to create "digital journeys" for global clients, primarily in North America and Europe. As of December 31, 2015, the company operated 33 delivery centers across nine countries and employed 5,041 professionals ("Globers").
Key Financial Metrics (Year Ended Dec 31, 2015)
| Metric | 2015 (in thousands) | 2014 (in thousands) |
|---|---|---|
| Revenues | $253,796 | $199,605 |
| Cost of Revenues | $(160,292) | $(121,693) |
| Gross Profit | $93,504 | $77,912 |
| Operating Profit | $23,730 | $22,129 |
| Net Income | $31,620 | $25,263 |
| Cash and Cash Equivalents | $36,720 | $34,195 |
| Total Assets | $222,889 | $161,125 |
| Total Liabilities | $62,704 | $33,646 |
| Shareholders' Equity | $160,185 | $127,479 |
Margins (2015):
- Gross Margin: 36.8%
- Operating Margin: 9.3%
- Net Income Margin: 12.3%
Debt and Liquidity: Borrowings (current and non-current) totaled $548 thousand. The company reported a net cash outflow from operating activities of $5.3 million in 2015, primarily due to working capital changes, though this was offset by investing and financing activities.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 27.2% to $253.8 million, driven by a 30.2% increase in North American revenues and significant growth in the Media & Entertainment and Travel & Hospitality sectors.
- Profitability: Net income rose 25.2% to $31.6 million. This was driven by strong revenue growth and a significant non-operating gain.
- Unusual Items: The company recognized a Gain on Transaction with Bonds of $19.1 million (up from $12.6 million in 2014). This gain resulted from the spread between the U.S. dollar price of Argentine sovereign bonds (BODEN/BONAR) purchased in the U.S. and their higher fair value in the Argentine market, converted at the official exchange rate.
- Cost Structure: Cost of revenues increased 31.7% to $160.3 million, largely due to the addition of 1,189 IT professionals (a 34.7% headcount increase) and wage inflation in Argentina.
- Foreign Exchange: The Argentine peso depreciated 52.1% against the U.S. dollar in 2015. While this increased the cost of revenues in USD terms due to wage inflation, it also contributed to foreign exchange gains and the bond transaction gains.
Guidance, Outlook, Risks, and Contingencies
Outlook and Strategy: Management expects to continue organic growth and strategic acquisitions to expand geographic footprint (e.g., India, U.S.) and service offerings (e.g., Cognitive Computing). The company plans to invest in capital expenditures for new delivery centers.
Key Risks:
- Argentina Economic Instability: Significant exposure to Argentine inflation, currency devaluation, and government intervention. The company relies on the "Software Promotion Law" for tax benefits (60% corporate tax reduction), which requires ongoing regulatory compliance.
- Foreign Exchange Controls: Restrictions on converting Argentine pesos to U.S. dollars and repatriating capital could impair dividend payments or liquidity. Recent reforms by the new Argentine government have eased some restrictions, but uncertainty remains.
- Client Concentration: The top 10 clients accounted for 46.7% of 2015 revenues. The largest client, Walt Disney Parks and Resorts Online, represented 12.3% of revenues.
- Talent Retention: High attrition rates (17.7% in 2015) and competition for skilled IT professionals in Latin America pose operational risks.
- Unusual Bond Gains: Management explicitly states that gains from bond transactions are not necessarily indicative of future results and depend on the spread between U.S. and Argentine bond markets and exchange rate fluctuations.
Investor Verification Checklist
- Sustainability of Bond Gains: Verify the future viability of the $19.1 million gain from sovereign bond transactions, as it relies on specific Argentine market distortions and exchange rate spreads.
- Argentine Tax Incentives: Confirm the continued eligibility of Argentine subsidiaries for the Software Promotion Law tax benefits and monitor any regulatory changes.
- Currency Exposure: Assess the impact of future Argentine peso volatility on operating costs (wage inflation) versus revenue (USD-denominated).
- Client Concentration: Monitor the renewal status and spending levels of the top 10 clients, particularly Walt Disney Parks and Resorts Online.
- Cash Flow Quality: Investigate the $5.3 million net cash outflow from operating activities, specifically the $32.1 million increase in "other receivables" related to advance payments for real estate (IRSA).