Business Context and Reporting Period
Company: Globant S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2016
Business Overview: Globant is a digitally native technology services company providing engineering, design, and innovation services to build "digital journeys" for global clients. The company operates through a network of 35 delivery centers across 12 countries, with a significant operational presence in Argentina. It serves clients primarily in North America (80.8% of 2016 revenue) and Europe (9.1%).
Key Financial Metrics (Year Ended Dec 31, 2016)
| Metric | 2016 (in thousands) | 2015 (in thousands) | Change |
|---|---|---|---|
| Revenues | $322,856 | $253,796 | +27.2% |
| Cost of Revenues | $(191,395) | $(160,292) | +19.4% |
| Gross Profit | $131,461 | $93,504 | +40.6% |
| Gross Margin | 40.7% | 36.8% | +390 bps |
| Profit from Operations | $49,572 | $23,730 | +108.9% |
| Net Income | $35,862 | $31,620 | +13.4% |
| Diluted EPS | $1.01 | $0.90 | +12.2% |
| Cash and Cash Equivalents | $50,532 | $36,720 | +37.6% |
| Total Assets | $284,748 | $222,889 | +27.7% |
| Total Liabilities | $76,188 | $62,704 | +21.5% |
| Borrowings | $217 | $548 | -60.4% |
Note: Financial statements are prepared under IFRS and presented in U.S. dollars.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased by $69.1 million (27.2%) driven by strong demand in North America (+22.8%) and Europe (+117.0%). The top ten clients accounted for 46.5% of total revenue.
- Margin Expansion: Gross margin improved to 40.7% from 36.8% in 2015. This was primarily due to a favorable lag between the devaluation of the Argentine peso and salary increases, as well as a shift toward higher-margin technology solutions.
- Operating Profit Surge: Profit from operations more than doubled to $49.6 million. This was significantly aided by the absence of a $19.1 million "Gain on transactions with bonds" recorded in 2015, which was a non-recurring item related to Argentine sovereign bond arbitrage. Without this one-time gain, 2015 operating profit was lower, making the 2016 organic growth even more pronounced.
- Acquisitions: The company completed three acquisitions in 2016 (WAE, Difier, and L4 Mobile) to expand capabilities in the U.S. and service design, though none contributed material revenue in the year of acquisition.
- Headcount: Total employees increased to 5,631 (up from 5,041 in 2015), with IT professionals increasing by 606 to meet demand.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to continue organic growth and strategic acquisitions. The company introduced the "50 Squared" go-to-market strategy in 2016 to focus on the top 50 high-potential accounts. They anticipate that existing cash and operating cash flows will be sufficient for the next 12 months. The company does not plan to declare dividends in the foreseeable future.
Unusual Items
- Gain on Transactions with Bonds: In 2015, the company recorded a $19.1 million gain from trading Argentine sovereign bonds (BODEN/BONAR) due to exchange rate arbitrage. This activity ceased in 2016, resulting in a $0 gain for the year.
- Share-Based Compensation: Expense increased to $3.6 million in 2016 from $2.4 million in 2015 due to the 2014 Equity Incentive Plan.
Key Risks
- Argentina Economic Instability: Significant exposure to Argentine inflation (estimated at 41% by private sources vs. 16.9% official) and currency devaluation. While devaluation has historically improved margins (costs in pesos, revenue in dollars), future appreciation of the peso or wage inflation exceeding devaluation could hurt profitability.
- Client Concentration: The top ten clients represent 46.5% of revenue. The loss of a major client (e.g., Southwest Airlines, Disney) could materially impact results.
- Talent Attrition: The attrition rate was 19.3% in 2016. High competition for skilled IT professionals in Latin America and the U.S. poses a risk to delivery capabilities.
- Regulatory Changes: Changes in Argentine tax laws (Software Promotion Law) or foreign exchange controls could adversely affect operations and cash flows.
Investor Verification Checklist
- Argentina Exposure: Verify the current status of the Argentine peso exchange rate and inflation data to assess the sustainability of the margin expansion seen in 2016.
- Client Retention: Monitor the renewal rates of the top 10 clients, which drive nearly half of total revenue.
- Acquisition Integration: Track the revenue contribution and integration progress of the 2016 acquisitions (WAE, Difier, L4) in subsequent quarters.
- Attrition Rates: Watch for trends in employee attrition rates, as rising costs to replace talent could erode the gross margin improvements.
- Tax Incentives: Confirm the continued eligibility of Argentine subsidiaries for the Software Promotion Law tax benefits (60% income tax reduction) through 2019.