Globant S.A.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Good day, and welcome to the Globant Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask question. Please note this event is being recorded. I would now like to turn the conference over to Paula Conde, Investor Relations Officer. Please go ahead.

[Paula Conde:]

Thank you, Operator, and thanks everyone for joining us today on our call to review our third quarter 2020 financial results. By now, you should have received a copy of the earnings release. If you have not, a copy is available on our Web site, investors.globant.com.

[Martín Migoya:]

Thanks, Paula, and hello everyone. I'm happy to be with you again as we continue on our journey to reinvent this industry. In Q3, Globant brought in $207.2 million in revenue, delivering a 20.9% year-over-year growth. I'm happy to see how our Globers continue to demonstrate their amazing talent and resilience in the face of uncertainty this year for us, meant to push our vision to reinvent the industry even further. IDC predicts that there will be over $6.8 trillion of direct digital transformation investment between now and 2023. Despite the uncertainties, we have a unique opportunity and we will keep working to make companies agile and accelerated. Our position remains at the forefront of the market as a pure play in the digital and cognitive transformation space. Recognizing this, IDC MarketScape named Globant as a global leader in its Worldwide Customer Experience Improvement Services 2020 Vendor Assessment. We've very honored because this shows our commitment to creating product and customer experiences that connect with millions of consumers in a different way. Many special thanks to our clients like DirecTV, LATAM Airlines, Rockwell Automation, and Prisma, who shared their experience with IDC and made this recognition possible. Now, I'd like to turn the call over to Patricia Pomies, our Chief Delivery and People Officer, to share with you some of our new initiatives. Pato, please.

[Patricia Pomies:]

Thanks, Martín. Hello, everyone. It's nice to be with you all again. As I have shared with you before, at Globant, we have more than addition of change in the world through technology. We want to change the technology sector itself. At a time when all of us are reinventing ourselves, reevaluating our opportunities, and reminding ourselves of what is truly important in life, Globant is taking those steps forward as a company. Our Be Kind initiative is taking on a new project this fall. We are presenting the Globant Awards - Women that Build Edition, to recognize women who have shown tremendous leadership in technology, and who are the future of the sector.

[Martín Migoya:]

Thanks, Pato. As you may remember, our Be Kind initiative was first presented on this call one year ago. It was based on three pillars. Be kind to our peers, to humanity, and our planet. For us, this mission is how we want to positively impact the state of our world. In addition to diversity and inclusion programs, we continue to dedicate ourselves to the planet. We will meet our objective of relying on 100% renewable energy this year, but today, I also want to share with you that we are committing ourselves towards a new and more ambitious goal. We will become full carbon neutral by the end of 2021. We make this commitment because we know that as global citizens we must set an example of sustainability over the long-term. Aligned to this, as we evolve our organization, we also believe that we have a commitment to helping our clients reinvent themselves. For a long time the concept of sustainability has focused mostly on environmental issues, but we believe that the sustainable development of the world should take into consideration a holistic approach, where people, profit, and planet are interconnected. This calls for a new approach. I'm glad to share that we have just launched our new Sustainable Business Studio. This studio will operate at intersection between digital technology and sustainability, bringing together new know-how and capabilities. We want to provide organizations and stakeholders with the tools and expertise to support climate actions and perform as responsible businesses. It is an exciting era, and I expect to share more news soon. For more information about this new studio, feel free to visit sustainablebusiness.globant.com.

[Juan Urthiague:]

Thanks, Martín, and good afternoon everyone. I hope you're all doing well and staying safe. Let me start by summarizing our third quarter 2020 results. I will then discuss our guidance for the fourth quarter. We are very pleased with our overall results for the third quarter of this year as we displayed strong execution in these challenging times. Our revenues for Q3 amounted to $207.2 million, beating our guidance and representing a solid 20.9% year-over-year growth. On a sequential basis, our revenues for Q3 increased 13.4%, showing a very healthy recovery. Q3 revenue growth was 21.9% year-over-year in constant currency. In line with our expectation, the overall demand environment lastly stabilized in the latter half of the second quarter, and we have witnessed an improvement in end market in the last several months, which is reflected in our strong sequential organic top-line improvement in the third quarter. We remain bullish about the demand environment post the commitment in crisis and are encouraged by the ongoing positive trend in our bookings. That said we also remain cautious about any impact to our end market due to the potentially new waves of lockdowns like the ones we're currently witnessing in Europe and in some parts of the U.S. As discussed in our last earnings call, we always prioritize the health and safety of our employees, and almost all of our employees continue to work from home while maintaining seamless delivery of services to our customers. Our Delivery and People teams continue to develop and execute strong and innovative initiatives to keep employee productivity morale high. Disney was once again our largest customer for the quarter growing a strong 10.2% year-over-year and 14.8% quarter-over-quarter. We continue to be very well-diversified within Disney serving the majority of its subsidiaries. Other than Disney, the rest of our accounts collectively grew at a solid 22.4% year-over-year with revenues from the top five and top 10 accounts increasing at a robust rate of 49.3% and 41.1% respectively over the third quarter of 2019. Consistent with Q2 our top accounts are proving to be more resilient to COVID-19 impact relative to the rest.

[Operator:]

We will now begin the question-and-answer session. The first question today comes from Tien-Tsin Huang of J.P. Morgan. Please go ahead.

[Tien-Tsin Huang:]

Thank you so much, very good results here. I wanted to ask, with the improvement that you saw from the second quarter including from your larger strategic clients, Martín, is it safe to say that your visibility is back to pre-COVID levels, especially amongst your larger clients? I know we can't really say we're beyond the pandemic yet, but are you at a point now where you feel like the visibility is back to pre-COVID levels?

[Martín Migoya:]

Hi, Tien-Tsin, thank you so much for coming today. In general terms, I would say yes, there are some caveats are happening on -- there's a ramp-up, obviously, so some of those customers that ramped down, and -- but I feel that it's by far compensated by activity on other places, and even other areas of those same customers that are growing very, very fast. So visibility is good. Pipeline remains at very healthy levels, and increasing from previous levels. So I'm optimistic in general that the situation is good, although COVID, you never know what's going to happen. So I would never be 100% sure about the visibility, but it's much better than last quarter.

[Tien-Tsin Huang:]

Yes, no, it sounds that way, and it sounds like you're also, is my follow-up question, that you're hiring -- you're organically back to sort of pre-COVID hiring. It sounds when you're talking about your no issues or challenges from a hiring standpoint. So I'm just thinking if this demand trend continues. Do you feel confident that you have the resources to delivery if we want to get back to sort of your pre-COVID revenue growth in 2021? For instance, do you have the resources and the delivery to do it?

[Martín Migoya:]

Yes, look, we took a very serious decision when the crisis started around what would be our -- what we would do with the bench and the lower utilization that we were having, and we took a -- I think now, looking it from further, we took a wise decision given that we choose to preserve the people and to have the people ready whenever the business comes back. As the other decision could have been to preserve margins, and to preserve the utilization, and to not be ready whenever the business come back, and I think we were the winners in this decision because we choose to preserve the people, preserve the talent, keep on hiring, which slowed down, of course, during the crisis, but now we are back full steam ahead, 763 organic new people in the quarter, plus another amazing 1,100 people from the gA acquisition. So I feel very confident that we can complete and we can fulfill the needs of the talent that we need looking forward, and into next year.

[Tien-Tsin Huang:]

Very good. Thank you, nice job.

[Martín Migoya:]

Thank you. Thank you, Tien-Tsin.

[Operator:]

The next question comes from Bryan Bergin of Cowen. Please go ahead.

[Bryan Bergin:]

Hi, good evening. Thank you. I wanted to follow-up on that last question. Can you talk about where you're focused on adding headcount, right, any regions -- are you having a greater emphasis in any regions that you haven't historically been adding in?

[Juan Urthiague:]

Yes, hello, Bryan. This is Juan. As always, Latin America is still our talent development center. We are seeing a lot of growth in Columbia, in Mexico, also in Argentina at this point. On top of that, our India operation, which is extremely healthy and growing, is another area where we are growing fast, and of course we still need to do more work to accelerate in Eastern Europe, but we are doing good progress. So you should expect Latin American and India to lead the growth, and then a little later Eastern Europe, which is another area where we are putting some investment.

[Bryan Bergin:]

Okay, and then just as it relates to the 4Q revenue guide, is there anything to call out on organic trajectory assumed in that 4Q outlook outside of just a more difficult comp from 4Q '19 relative to 3Q, hearing obviously the momentum and the positive comments on visibility, so just curious if there -- what you might be baking into that 4Q growth rate, anything to call out?

[Juan Urthiague:]

Yes, no comment. Q4 is another sequential organic growth. We continue to see, as Martín was mentioning before, very good hiring and utilization improving in Q3 a little bit more than Q4. So, in the guidance for Q4 it is almost 20%, then the organic part that comes from gA is pretty much what we mentioned in the last call, even though the teams are already integrated and we have started cross-selling into the two companies and the customers of the two companies. At this point, we can say that gA is about $16 million in Q4, but again, this is probably one of the last time we will be able to split that revenue clearly, as the teams are already integrated into Globant's regions.

[Bryan Bergin:]

Okay, were they what you thought they would be from a revenue contribution for this quarter?

[Juan Urthiague:]

Yes, they are in line with what we mentioned in the last call, a little bit close to $11 million.

[Bryan Bergin:]

Okay, great. Thanks, guys.

[Operator:]

The next question comes from Ashwin Shirvaikar of Citi. Please go ahead.

[Ashwin Shirvaikar:]

Hi, thanks. Hope you guys are well. So my first question was to ask if you're seeing very strong sequential growth here, some of that's partly because of the beaten down base that we're kind of going through. Do you expect that to persist the next couple of quarters looking into next year? So not looking for guidance, obviously, but it is pretty good, solid sequential growth.

[Juan Urthiague:]

Yes, hello, Ashwin. Thank you for the question. So at this point, as Martín was saying, we are optimistic about the future. The visibility is improving. We are seeing good momentum in our top accounts, even in those that do have some COVID impact, but we are starting to see some comeback on some business units within those customers, and again, at this point, we do expect, provided that the COVID situation does not deteriorate or does not come back, a good 2021. I mean everything seems to be moving to the right direction in terms of pipeline, in terms of visibility, but I think we still need to wait a little bit until the vaccine or new treatments are out there, and remove all the uncertainty that is still around, but all in all, I think we are optimistic about 2021.

[Ashwin Shirvaikar:]

Okay. So, in other words, as you speak with your clients and talk to them about their budgets for next year, and that can get a bit delayed here and there, of course, the budget itself when times are tougher, but you're seeing for the type of work you do that demand should continue to be strong, correct?

[Martín Migoya:]

Yes. Look, Ashwin, thank you. My approach to that is that I believe that the thing is totally across the board. I mean, yes, I can talk with my customers but I can also talk with other new customers and potential customers, and pretty much all of them are thinking about increasing that spending or do the transformation faster. So I mean I think, yes, to answer your question rather than just talking about the customers, I would talk about the general environment of the demand in the industry, which I feel is strong. So this is my -- so this is what we are seeing for next year too. I mean this is just the beginning, and we are optimistic because of that reason, and on top of that then, some of the customers are, we're seeing, a positive trend in terms of how fast they want to do the transformations.

[Ashwin Shirvaikar:]

Understood, thank you.

[Martín Migoya:]

Thank you, Ashwin.

[Operator:]

The next question comes from Maggie Nolan of William Blair. Please go ahead.

[Maggie Nolan:]

Thank you. When you think about all of the changes in the last couple of quarters in this year, have there been any changes in that top 10 customer group, and can you give us an idea of the makeup of that group in terms of vertical exposure, length of relationships with those customers, and other similar details, how it may have changed over the last couple of quarters?

[Juan Urthiague:]

Yes, hello, Maggie. So yes, on the top accounts, as you would expect, some of the travel companies are out of the top 10, they were impacted heavily by COVID, and those accounts were replaced by some manufacturing companies, by some professional services companies on some financial institutions. So I think that we are actually in a situation where this year we lost a lot of revenue from the traveling and hospitality industry. If you look at that number last year, it was $92 million. If you look at the number and you look kind of a run rate, we were going to end up somewhere in the $65 million to $68 million range. So even in a scenario where we basically lost more than $20 million in travel, we're still achieving a very, very healthy growth. Hopefully, at some point in the future, those accounts start to come back. I mean, we are in very good relationship with all those accounts, and we feel that when, once all this COVID situation is over and they are able to come back to investment mode, we will be in a very good situation. So, those are the major changes in the top accounts, Maggie. I would say, less travel and a little bit more of all the other industries. It's pretty clear it's also another industry that -- that as an industry, you will continue to see growing, not stealing top 10, but we will still see some of those customers showing up in the top accounts over time.

[Maggie Nolan:]

Okay, thank you, and then can you talk about the pace of project ramp-up and how that's changed since last quarter?

[Martín Migoya:]

Yes. So, I would say that when you look at Q2, Q2 is basically worse. Initially, things started to slow down then they stabilized, and towards the end of the quarter, you started to see a recovery, right, and the recovery accelerated all throughout Q3, every month was a little bit better than the previous one. We restarted all the hiring engines and we ended up with a very solid hiring number, very, very solid, and I think that again the needs from the customers, the customers have more visibility now, so they are more comfortable restarting or accelerating some of the projects on digital transformations, but they had in the pipeline, and I think that we got some of that benefit, and the fact that we kept basically pretty much everyone in the company and we kept on hiring selectively and we accelerated very early in the quarter. It helps us to take part of that growth very quickly.

[Maggie Nolan:]

Okay. Thank you.

[Martín Migoya:]

You're welcome, Maggie.

[Operator:]

The next question comes from Diego Aragao of Goldman Sachs. Please go ahead.

[Diego Aragao:]

Yes. Thank you for taking my question. Actually my question is more like a follow-up with the views for 2021. I mean just I would like to understand what are the factors that should drive most of your growth, and maybe if you can also comment about like the factors that you are most concerned about at this point, that would be helpful. Thank you.

[Martín Migoya:]

I am sorry, Diego, would be able to repeat the question? There was some noise in the line and we couldn't get it.

[Diego Aragao:]

Yes, sure. So I just want to hear your views about the factors that should drive most of your growth in 2021, and also what are the factors that you are more concerned about at this point in terms of potential projects generally been delayed? It will be helpful if you can comment about the views for the main sectors you have been providing service. Thank you.

[Martín Migoya:]

Yes, Diego, now we got it. Thank you. This is Martín. In healthcare financial sector payments, retail, online retail, those segments grew quite fast and I feel that they will keep on growing there, and then the catch up will come back from those that were not enjoying the COVID-19 crisis on the sectors that were a little bit more complicated to their business, and the drive for us during this month has been basically entertainment, entertainment not the online entertainment, but the -- another strong sector for us was gaming and game creation and game operations and under the guys that when they leave it slower, on in-person entertainment, and of course, the whole travel segment from airlines to cruise lines and hospitality and hotels, that part -- the drug and the accelerators were the others that I mentioned. Hope that answers your question.

[Diego Aragao:]

Okay, that's helpful. Thank you.

[Martín Migoya:]

Thank you so much.

[Operator:]

The next question comes from Arvind Ramnani with Piper Sandler. Please go ahead.

[Arvind Ramnani:]

Hi, thanks for taking my question. You've talked a lot about the acceleration of digital work over the next couple of years. Can you talk a little bit more about how you're preparing to take advantage of this demand? You know I would think from a sales operation's delivery perspective there's a lot to be done, and also if we can give some color sort of differences between how you are approaching it from your existing clients versus prospecting new clients.

[Martín Migoya:]

Hello, Arvind. Thank you for the question. Yes, we're doing many, many things. On the hiring front and we continue expanding our recruiting teams our staffing teams in the regions where we are, as you know, we have taken the decision to have presence in Latin America, in India, and in Eastern Europe, and I think that's going to be a possibility in the future because we are present in these 3 largest talent pools out there, right. So, on that front, we're doing a lot of things. If you look at the official number that has continued to come down, you know, we have done a lot of work to cover where people engage with the company to keep all the more senior people in the company, all the knowledge that they have gained over the last several years. In the company and I think the training that we're putting for these guys all the different skills that they are gaining are going to be very, very important, and those are some of the things that we are doing, just to make sure that we from a legal point of view, we have the talent available that we need. We've been carrying quite a lot in advance. As you can see in our numbers I mean, we haven't really stopped hiring, except from a little bit in Q2, and that's part of getting ready, and then, on top of that, as we've been investing quite a lot in our internal strategic initiatives like a romantic coding and those are things that augmented, recruiting augmented staffing. Among the knowledge, multiple internal strategic initiatives that we believe are going to help us change the industry and help us be really, when all these opportunities that are happening, i.e. from the past, right? So I think that those investments plus all the investments and bringing people into the company. I will think people on training people are the right decisions to take advantage to advantage of these opportunities that are in front of us.

[Arvind Ramnani:]

Great, terrific and I also wanted to ask on Disney to the extent that you're able to share your hearing. Certainly, business has been really strong. You've talked previously about your kind of work with Disney Plus. Can you -- let us know like, you know, kind of the breadth of work that's being done at Disney. I mean, for example is parks. Still, like a good account, or sort of. Should we expect kind of pent-up demand in park, as we look into 2021?

[Martín Migoya:]

This is a success story for us. As you know, we have been rolling a lot over the last several years. In the last quarter, we said that we were expecting recovering Q3, and you know we wrote down recovery. Once again, we're expecting sequential growth for this quarter at Disney and hopefully you know they're able to reopen all the parks, and the vaccine is readily available, and that's going to be a very positive factor for Disney, but if that doesn't happen we're still recovering able to expand our services into multiple areas within that account. That is the reason why we are going to recover our business to keep growing our business even in middle of the pandemic. So we feel optimistic of our business, it's a great account, it's more than 11 years. So we're really working with them, and we have expanded our offerings into multiple areas in that customer.

[Arvind Ramnani:]

Great, thank you.

[Operator:]

The next question comes from Steve Enders of KeyBanc. Please go ahead.

[Steve Enders:]

Hi, great. Thanks for taking the question. Just wanted to follow-up on what you're hearing from your clients when it comes to demand outlook and other discussion around the vaccine is still fairly, fairly recent, but is there an opportunity to get a mock even further budget within your customers as we move into '21?

[Martín Migoya:]

Yes, the demand outlook is interesting. I mean what's going on in different industries is it's really something that we're seeing as a very positive trend, and again, when you talk about certain spaces, where the transformation were slow down, for example, ed-tech, and everything that is happening on education, and you're seeing now that every single career in the planet is being taken offline, online, sorry, and it's been and even the exams are happening online. That's a huge transformation that was about to happen, but never happened, and now suddenly, you have 100% of the population of the world, pretty much studying from home. Well, that will require and this is just an example, and I think it's a very illustrative example because that will require like a whole new set of technologies that needs to happen, and need to get ready for this massive amount of things that maybe, 20%, 30% of all things will come back to classes to physical connection, but 70% will remain or somebody that will remain online, and that's a massive jump in terms of the technology that is needed. So I'm taking this example, because I think it's one of the most visible example, but in the same way, in many other industries, the same thing is happening. So when we talk about this acceleration in the demand, we're talking about this kind of mega changes that are happening. Not all of them will, not everything would change, but many industries would have a deep and profound impact after this new. I would say the discovery of how to do things. So I'm very positive because of that, because of those kinds of examples, I'm mentioning. That's my outlook on what's going to happen in the coming months, quarters and maybe years.

[Steve Enders:]

Okay, great. That's really helpful, and then just as a follow-up, I know you just had the Converge Conference back in September and talks about augmented coding then but, what kind of interest have you seen from clients so far, and what you're doing with augmented coding?

[Martín Migoya:]

Well, the reaction is being pretty positive. I mean it takes a while to be able to deploy the whole technology, because now it has to do with the source code that they use in each of the clients. So, there's a lot of work around to be enabled to install the applications and to train them all for that specific environment, but we're being very successful with that, we have a huge pipeline of customers and a lot of interest from most of our customers to move into this new technology, and the results so far from what we have been seen are pretty impressive, not just providing the coder with a piece of code that is ready to be used, and then you just need to change your vitals, but now we are playing with the auto complete, so while you're typing, the next sentence that is the most probable sentence that you need appears on your screen, and it's not just a syntax, it's auto complete like you may have any ID, but it's something that is bringing -- is being brought by artificial intelligence in product, which is even more amazing than what we had before. So I'm very positive with the adoption of these technologies, and I'm very positive about how these will differentiate Globant when we talk to our customers. This is very important. I mean it's not just -- this is a platform that would allow us to differentiate our offerings when creating software and this is one instance of reinvention of the industry. So, every time I explain this, it's the adoption, and it's also the opportunity that talking about this is providing in front of our customers and positioning for our customers to see us as the reinvention of the industry you're seeing and accelerated by Artificial Intelligence and much learning.

[Steve Enders:]

Okay, great. That's really helpful. Appreciate the insights there.

[Martín Migoya:]

Thank you so much.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Martín Migoya for any closing remarks.

[Martín Migoya:]

Thank you very much for everyone for coming to our Q3 2020 earnings call. Thank you for your support, for your help during all these years and looking forward to see you on our next earnings call. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.