Globant SA (GLOB) 2016 Q1 法說會逐字稿

Good afternoon and welcome to the Globant first quarter 2016 earnings conference call. All participants will be in listen-only mode. (Operator instructions.) Please note this event is being recorded.

I would now like to turn the conference call over to Mr. Juan Urthiague, Investor Relations. Please go ahead.

Thank you operator, and thank you all for joining us today on our call to review our 2016 first quarter financial results. By now you should have received a copy of the earnings release. If you have not, a copy is available on our website, Investors.globant.com.

Our speakers today are Martin Migoya, Globant's CEO, and Alejandro Scannapieco, Globant's CFO.

Before we begin, I would like to remind you that some of the comments on our call today may be deemed forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainties as described in the Company's earnings release and other filings with the SEC.

Please note that we follow IFRS accounting rules in our financial statements. During our call today we will report non-IFRS or adjusted measures, which is how we track performance internally and the easiest way to compare Globant to other peers in the industry. You will find a reconciliation of IFRS and non-IFRS measures at the end of the press release we published in our investor relations website announcing this quarter's results.

I'd like to turn the call over to Martin Migoya, our CEO.

So, thank you, Juan. Good afternoon, everybody, and thanks for joining us today. I'm pleased to be here to review our Q1 2016 business and financial performance.

Q1 2016 was an impressive quarter for our Company. We delivered an outstanding 34.5% year-over-year revenue growth, driven by both top 10 and non-top 10 accounts. We continue focusing on high growth, high potential accounts.

As has been the case over the last few quarters, more and more companies across every industry are engaging in company wide digital transformation projects. Most of the times these projects are being led by top management, including in some cases CEOs.

These transformational projects are long term in nature, having become a must-have in the current competitive landscape, and have multimillion dollar budgets coming from both business and IT pockets. Our expertise in delivering digital journeys and our unique understanding of how technologies can be used to develop a new customer experience positions us as the preferred partner for companies embarking on such initiatives.

During this quarter, revenue growth was fostered by North America and Europe in terms of regions, and by travel and financial services in terms of industry verticals. However, we also see growth in LATAM, especially in Colombia.

As an example, we have established a true relationship with one of the most important financial and insurance groups in Colombia called Davivienda, and we are working together to define their new digital strategy.

Also, if compared to Q1 2015, both our top 10 and our non-top 10 accounts delivered revenue growth north of 30%. Typically our Company is exposed to seasonality in quarter one, as it is the holiday season in Latin America. However, for the first time in the history of our Company, we achieved sequential revenue growth for the first quarter.

As Alejandro will discuss later in the call, Q1 2016 is characterized by a significant improvement in our operating numbers. Both our gross margin and operating margins expanded significantly.

Finally, our adjusted diluted EPS amounted for $0.24 for this quarter.

Before our CFO goes deeper into our financials, I'd like to share with you some of the initiatives that we have been working on during the past months and some trends that we foresee will drive demand in the near future. It is important to highlight our focus on specialization, so let me first start talking about that.

To meet our goal of becoming leaders in the creation of digital journeys, we need to stay on top of the user behavior and how it adapts to new technologies. Our holistic approach, driven by stay relevant, discover, and build teams, positions us as a key player in this new scenario.

Let me start first talking about stay relevant. I'd like to share with you some recent discoveries published in the latest Sentinel report. In this edition, we go through the concept of omnirelevant, a superior approach to create digital journeys.

In the report, we describe how consumers are constantly targeted with new technologies that compete for their attention. So, we believe that brands must focus on maintaining relevance to consumers.

To become relevant means knowing when customers will need you and how you can offer the most efficient solution without any friction. According to Altimeter, reducing friction in experiences produces a considerable improvement in engagement, reported up to 75%.

Today 90% of people say they use multiple screens for everyday activities such as booking a hotel or shopping for electronics, says a report from Google Ipsos. So, now we need to go beyond that approach and think about being relevant, about an omnirelevant approach.

This means that the conversation needs to change from an older model of thinking about channels to a more current way of thinking about moments, and knowing that channels are only a means of enhancing that moment. In the past, companies have seen channels as a way of interacting with their customers. As a result, many develop big multichannel strategies focused on creating highways for users to navigate rather than considering what digital journeys those customers wanted to take.

Steering the conversation away from omni-channel toward omnirelevance requires us to stop thinking about channels as a target and start thinking about moments of impact that a brand needs to be aware in order to provide a meaningful experience to their consumers.

This new shift allows brands to infuse more customer centric thinking into their culture and to incite strategic initiatives that serve the brand's purpose more effectively. The reports highlights five elements that must exist to achieve omnirelevance; harmony, familiar security, contextual content, sensory, and surprise.

These elements live together within an experience and present themselves at the right moment and in the right way to create a fulfilling, successful experience. Every brand should take them into consideration to create an omnirelevant experience that will surprise their users. If you would like to know more about this new concept and research, you may find the complete Sentinel report at Sentinel.globant.com.

Regarding discovery, during Q1 the team has been exploring new scenarios and future visions to inspire our clients. We have engaged with several companies to help them in their process, like the extensive research we have done to understand a specific retail market and how we can create a holistic experience that enhances the delight of consumers through technology, or the research we are executing in the banking industry to identify behaviors and new ways to engage with millennials.

On the build side, we continue to assemble strong expertise on different trends through our studios. As you know, these teams gather our professionals around different practices to create innovative software products that will surprise our customers' users.

Let me mention a few updates around them. During the past months, the consumer experience studio has reinforced its user centric approach. To address some of our customers' most important goals, the studio has been working on some of the most ambitious and long term projects.

With this in mind, they have focused on improving our customers' agile practice by leveraging our agile pods model to help them scale in a timely and innovative manner. Another studio that is key for our digital journey approach is the UX design studio, which has also seen an improvement growth.

During Q1, they launched a new practice called service design that aims to offer clients an holistic approach to envision strategic scenarios for systems to innovate different touch points, actors, and processes.

As an example of their capabilities, let me share that they worked for a leading financial institution to define their new digital channel ecosystem, starting with a UX and a strategic consultancy to define the new channels and then, together with the other studios, continued working on the internal and external sites as well as their iOS and Android applications.

Another example is our cognitive computing studio. This team has revamped the value offering to become a key player in the creation of emotional experiences. Cognitive computing leverages the advantage in machine learning and neuroscience to improve the users' digital journey, enhancing the emotional, cognitive, and decision making process of the human being behind the technology.

The digital content studio, on the other hand, has also seen a steady growth in their capacity. One of their success cases is the work that they are doing for Puma International. The studio is involved in the creation of digital products to enable the customer to improve their communications with end users.

Finally, the world and Internet of Things studio has been quite active during the past months with the introduction of Globant's playground experience in our San Francisco offices. During Q1, we receive visits from top companies coming from a wide variety of industries like media and entertainment, finance, and retail, to name a few.

They came to the playground to learn more about our experience on emerging platforms like 360 video, augmented reality, and more. These visits were the kickoff of different projects that we are now starting to work on.

We believe that our digital and technology focus will enable us to continue growing in the months to come. We continue to see strong demand of our portfolio of services, especially driven by our clients' interest in pushing their business closer to the new users' demands.

For example, for a leading finance institution, we are working on the design of new digital channels' ecosystems across the entire digital journey, including all the technology implementation for their digital channels, the cross APIs, and the big data solution, or the work we are doing for a major media and entertainment company who is planning to revolutionize the entire media experience. We expect these types of engagements to grow during the coming quarters.

In the meantime, we are proud to announce that one of our customers, Nat Geo, has collected 10 Webby awards, two Webby winners and eight People's Voice, and Globant has been actively involved in some of the products that received these recognitions. These projects are Nat Geo Kids, Unique Lodges of the World, and the climate change issue. We would like to congratulate Nat Geo and the Globant team involved for their amazing work.

As you may recall from the last earnings calls, for the past months we have been working on a new initiative called Services Over Platforms. With this new offering, we are improving the construction of digital journeys by accelerating the results and creation of products.

This means that we provide some specific platforms to be used as a starting point, and then we customize them to the specific needs of each customer using our service force. We charge for that per user per month or per transaction such as software as a service companies do.

Let me share a few updates that we have seen for our two implemented platforms, Start Me Up and I Am At. Start Me Up is a platform that contributes with the creation of internal digital journeys for companies' employees. Today we see a lot of interest on this platform.

It is now being implemented in large companies coming mainly from the finance sector, and ramped up very quickly to more than 30K monthly paying users. We expect this interest to grow in the months to come, and we foresee our customer portfolio to expand largely throughout other industries.

I Am At is Globant's platform that helps augment mobile experiences. It brings together four global trends, gaming, social networking, and big and fast data, to augment the experiences before, during, and after a touch point with a consumer. During Q1, I Am At has also continued to expand its customer base. At the same time, we have improved the platform by adding a system that simplifies the digital engagement experience and incorporates in-app purchases and user generated content.

Lastly, let me remark that our pipeline and backlog remain strong, with a number of high potential new customers coming from a wide variety of industries, including retail, media and entertainment, travel, and finance, among others. We are working to increase our account diversification with a focus on consolidating growth over the new quarters.

We will also continue to work to reinforce relationships with our current customers and to incorporate more brands in a wide variety of industries, looking to integrate their businesses into new experiences that will help attract and retain their users.

With that, I'll turn the call over to Alejandro Scannapieco, our CFO, for a detailed financial review on Q1 and to provide guidance for Q2 and full year 2016. Ale, please? Thank you very much.

Thanks, Martin. Good afternoon, everyone. I am going to spend a few minutes discussing our Q1 financial performance, and then I will provide guidance for Q2 and the rest of the year.

We finished the quarter with 5,285 Globers, 4,847 of which were IT professionals. Attrition for the 12 months ending March 31st, 2016 was 18.5%, compared to 19.9% for the 12 months ended March 31st, 2015 and to 17.8% for the full year 2015.

I'm very pleased to announce a robust financial performance for the first quarter of 2016. Our revenues reached a new record level of $73.3 million, accelerating to a 34.5% year-over-year growth. This robust revenue growth was driven not only by our top 10 but also by our non-top 10 accounts, which grew 35.6% and 33.5% respectively compared to the same period last year.

Our top one account grew a solid 52.6% compared to Q1 2015, though it experienced a decrease compared to Q4 2015 based on their prioritization of the investment in one of their main overseas theme parks. Excluding our top one account, our accounts increased 32.5% year-over-year and 3.8% quarter-over-quarter.

Our strategy to have a diversified base of multimillion dollar accounts is working out in line with our expectations. As pointed out by Martin, Globant has a solid value proposition which attracts companies across all industries.

We continue to target specific accounts to add into our portfolio. During Q, we added some new high potential accounts such as one of the largest online travel agencies, one of the largest Canadian banks, and a leader in consumer goods.

As it has been the case in previous quarters, the vast majority of our revenue was generated from customers that were already working with us in the prior year, a clear sign of our ability to farm accounts.

For the first quarter of 2016, our top one customer represented 11.6% of total revenues, top five customers represented 36.4%, and top 10 customers represented 48.4% of revenues, compared to 10.2%, 30.9%, and 48% of revenues respectively for the first quarter of 2015. We continue to be well diversified in terms of customers and industries, with an increasing number of multimillion dollar accounts.

Compared to the first quarter of 2015, average quarterly revenue per top five customers increased 58.8% to $5.3 million, and average revenue per top 10 customer increased 35.6% to $3.5 million. As discussed in the past, we have a delivery strategy that focuses on growing our top accounts.

During the first quarter of 2016, 82.2% of our customers were in North America, the US is our top country; 10.8% in Latin America and others, Chile our top country; and 7% were in Europe, Spain replacing UK as the top country. We are starting to collect the benefits from the investments in our European sales strategy.

Our top three industry verticals for this quarter were media and entertainment with 21.9% of revenues, travel and hospitality with 20.5% of revenues, and technology and telecommunications with 17.3% of revenues. We remain very well diversified across different verticals.

During the first quarter of 2016, 91.9% of our revenues were denominated in US dollars, protecting our top line against currency fluctuations.

During the last 12 months, we rendered services to 359 customers. We now have 54 customers with annual revenues in excess of $1 million compared to 43 one year ago. Despite our focus to farm large accounts, we have started adding some brand new customers tied with our Services Over Platforms strategy.

As mentioned before, our full quarter of revenue amounted to $73.3 million, which implies a 34.5% growth year-over-year.

Moving down on the P&L line items, our adjusted gross profit for the period increased to $33 million, 45% adjusted gross margin, compared to $21 million, 38.5% adjusted gross margin, in the first quarter of 2015; and $28 million, 39.2% adjusted gross margin, in the fourth quarter of 2015.

The increase in adjusted gross margin was primarily due to the full quarter effect of the devaluation of the Argentine peso that occurred toward the end of December 2015 and continued during this last quarter.

During this quarter, we also managed to dilute further our SG&A, 310 basis points sequentially or 420 basis points compared to Q1 2015, while at the same time we continued investing in our onsite sales force and delivery capabilities. This is an impressive dilution that contributes further to our operating leverage expansion.

Important to note, Argentina has moved to a free floating currency system and FX rates converged. As such, the spread between the official and the blue chip FX rate has disappeared, and no additional gains on transactions with bonds that we used to show below the line were recorded. They are now part of our operating income line, as it was expected and as it was discussed thoroughly in the past.

For the reasons detailed before, our adjusted operating income for the quarter amounted to $14.7 million, or 20% of revenues, compared to $4.5 million, or 8.2%, for the first quarter of 2015.

Financial income and expense net amounted to a loss of $0.6 million. This net result is composed of FX gains from the impact of the Argentine devaluation on Argentine denominated monetary liabilities, gains from our hedging strategies on interest income, and losses resulting from the impact of the Argentine devaluation on Argentine denominated monetary assets. We continue hedging our net exposure in monetary line items against potential devaluations.

Our income tax for the quarter amounted to $5.7 million, still high with an effective tax rate of 42% but showing a decreasing trend if compared to Q4 2015.

As discussed during last quarter's call, this abnormally high effective tax rate is the consequence of the impact of the Argentine devaluation that generated taxable profits in the local Argentine financials that do not flow into the consolidated financials but do generate higher taxes to be paid locally. This effect is expected to be reduced as we move along the year and FX rate in Argentina stabilizes.

Adjusted net income for the first quarter of the year totaled $8.4 million, 11.5% adjusted net income margin, an increase of $0.9 million, or 11.9%, versus the first quarter of 2015.

Adjusted diluted EPS for the quarter was $0.24 based on 35.2 million average diluted shares for the quarter, increasing from $0.22 a year ago.

Moving on to the balance sheet, our cash and investments as of March 31st, 2016 increased to $69.2 million, compared to $62.4 million as of December 31st, 2015, and borrowings remained at $0.5 million.

Our balance sheet remains strong, with current assets of $131.3 million, accounting for 56.3% of the Company's equity. Total shares outstanding as of March 31st, 2016 were 34.2 million common shares.

To wrap up, I would like to share with you our outlook for Q2 2016 and an update for the full year ending December 31st, 2016. We continue to be optimistic in terms of the overall demand environment, as we see that companies from all industries need the type of services we provide and consumers are engaging through technology with their brands and products.

We perceive this need across all industries and geographies, and Globant is very well positioned to help our customers within that demand environment. We expect growth to be driven by a large number of high potential accounts, not only our top 10 accounts.

We are very positive that during Q2 and the rest of the year we should be able to continue delivering solid financial results. At the same time, we will accelerate the investment in our people for future growth.

FX movements around the globe, particularly in the different regions where we have delivery centers, need to be carefully managed to avoid fluctuations in our results, particularly in terms of costs, as 94% of our headcount sits outside of the US. As such, we need to take a conservative approach in our guidance.

For the upcoming quarters, we expect a slightly lower gross margin, as salary increases kick in and there will be some increases in our SG&A as a result of sales coverage expansion, though we will continue gaining dilution compared to last year.

Finally, we see a normalization of effective tax rates at 25% to 27% range for the long term, once a stabilization of the FX rate in Argentina has happened. We still may see some volatility, but reducing as we move along the year.

Based on current visibility, we expect revenue for 2016 to be between $309 million and $315 million. We reaffirm our guidance for adjusted diluted EPS for the year in the range of $1.12 to $1.20, assuming 35.8 million average diluted shares outstanding for the full year.

Turning to our guidance for the second quarter, which is also embedded in our full year guidance, we expect revenue to be between $76 million and $78 million, and adjusted diluted EPS to be in the range of $0.25 to $0.29, assuming 35.3 million average diluted shares outstanding for the quarter.

Thanks to everyone for participating on the call and for your coverage and support. Let's please now move to the Q&A section on the call. Operator, can you please queue questions? Thank you.

(Operator instructions.) Tien-Tsin Huang, JP Morgan.

Good afternoon; good growth here. Just want to ask about -- looks like by our math clients two through four grew at a really -- quite a strong pace. I'm curious. Is that pretty broad based across two through four, or was it a single account that drove some of that? And is it sustainable?

It's broad based, Tien-Tsin. This is Alejandro. How are you?

Hi.

It's broad based. All accounts are growing nicely within that frame.

No, that's good to hear. And then just broadly speaking, just given the volatility in the FX and you gave the detail around the peso, what's the latest on wage inflation, and how do you plan to manage that from here? Any change? I heard the commentary around gross margin for second quarter. But, just going forward, what should we expect?

Well, as we usually did in the past, I mean, dealing with wage inflation in all of the Latin American countries where we operate is part of our business. Probably Argentina is at the highest in terms of wage inflation.

What's expected in the market is that, based on many of the economic measures that the new government is taking, is that inflation is lower towards the second half of the year. Having said that, again, for us it's a combination of wage inflation, the pace of devaluation.

We had a significant devaluation in the first quarter of the year. We do the first window of wage increases in April, then the second one in October. So, all in all, we think we are going to be able keep up with the wages in constant currency.

There is still some FX volatility in Argentina, but I think that situation is quite different from last year where the official exchange rate was artificially held up by the government. Now there is free fluctuation. Wage inflation, it's one of the variables that we usually monitor and manage, as it has been the case in the past.

Good, understood. That's helpful. Thank you.

No problem.

Thank you, Tien-Tsin.

Anil Doradla, William Blair.

Hey, guys; good job on the continued strength in the business.

Hi, Anil.

A couple of questions, Martin. So, when I look at your June quarter, obviously you made some comments around the gross margin, that perhaps that kind of flowed through the EPS line, but you are maintaining your full year. So, as we look into the second half, obviously it's going to be a second half loaded year. What makes you confident that some of the issues that you have faced on the gross margin perhaps in the near term won't play out again as the year progresses?

Alejandro, you want to take that one?

Yes. Yes, sure. I think -- Anil, this is Alejandro. I think what we see, the forward-looking view that we have, is first one of the big outliers that was definitely a headwind for us in terms of the bottom line or EPS level is that high income tax rate. This quarter it was still high. It was at 42%, though it was lower than Q4 last year. That was at 55%.

So, we clearly see an FX rate trend, that it's more normalized. As that factor is normalized and the level of open accounts receivable that we have between our Argentine subsidiaries and US subsidiaries is decreasing, we can clearly see a different trend for the income tax rate with a stable margin.

So, the way we think about that is that all the profits that we had below the line, in that gain on transaction with bonds that we had in the past, now are part of the operating margin of the Company.

We still see very healthy business coming in. Even the margin on that business that is coming is coming at very good rates. So, we can clearly see a very good pattern for our gross margins. And definitely some of the factors that might affect the EPS growth are pretty much related to this income tax line that we think is going to be normalized in the next couple of quarters.

Okay, great. And then as a follow up, I mean, if I look at your largest customer, Disney, there was some decline this quarter off of a flattish sequential growth last quarter. I know in the bigger scheme of things there are so many things moving around we should not look at patterns in one, two quarters with some of these large customers. But, any comments on your largest customer, I mean, from a demand environment, from a pipeline environment? Everything moving in the right direction? Is there any increased competitive pressures? Any comments would be great.

This is Martin, Anil. Thank you for the question. Look, we come from a year of extraordinarily high growth at Disney, including some discretionary expenditures that they did on quarter four. So, that's on top of Disney is coming in a moment right now of putting the Shanghai park on track, so on and so forth.

So, I am not seeing any major trend in terms of someone competing against us. It's just Disney going slower -- a little bit slower this year, as we forecasted and we said many times last year. So, no concerns on our side on the Disney front. We keep on being their preferred vendor for all the things that are digital, and we are in very good shape. The relationship is extremely good.

Anil, talking deeper into that, we were able to enter now into ESPN, for example, and starting to explore -- explode ESPN as an account, and right away growing very fast in ESPN. So, those things are positive trends.

And again, coming from such a year with Disney, it is difficult to keep the pace forever at that speed. So, this is what you are seeing now.

Very good. And one last one, if you don't mind. You guys talked about client consolidation, going from this large number to more focused clients. How are you progressing on that front? Are you able to let go some clients? And help us understand, when you tell a client that maybe we don't want to do more work with you or we're consolidating our list, explain how that interaction is going on. Do you find clients unhappy when you make that move? Thank you.

It doesn't happen very often that we tell a customer that we won't work anymore. I mean, I think things fade out in a rational way and in a normal way. It's also us not paying the right -- it's like saying okay, we will pay this amount of attention to this customer. So, that's the dynamic.

It's not like having the hard conversation saying we don't want you anymore as a customer. Of course there are exceptions to that, but that's the situation in general. Did that answer your question? Let me know, please.

Yes. Yes, great. And great job.

Excellent. Thank you very much, Anil.

Jason Kupferberg, Jefferies.

Hi, guys. This is Amit Singh for Jason. Thank you for taking our question. So, is Clarice -- the contribution from Clarice in your numbers in this quarter? If it is, could you tell me what is the organic revenue growth for the quarter?

Amit, it's pretty much organic. If you recall, we had less than 250 people coming from Clarice. So, if you compare that level of revenue, and even some of that revenue was at a lower revenue per head than Globant's, so I would say it's pretty much immaterial.

I mean, the companies are fully integrated. We acquired Clarice back in May 2015, so it's pretty much organic.

Okay. And just to put some of the previous questions together, I mean, the revenue guidance has been raised. Was the EPS guidance maintained because -- what is the new tax rate expectation for the full year? I think earlier it was 34% to 35%, but it seems like now you guys probably are expecting more. And then, between last quarter and this quarter, your expectation for full year margins is now slightly lower. Am I -- is that the correct way to think about it?

As you know, we usually guide conservative. We try to factor and to take into our guidance most of the variables that might affect the numbers and we guide where we feel comfortable that we can achieve.

As far as tax rates, the full year forecast is second, third, and fourth quarter are going to be lower than Q1. So, probably something in the 28% to 32% range is going to be the full year, but definitely it's going to be a significant decrease in the upcoming quarters.

As I explained before, the big devaluation in Argentina already happened. And also, the intercompany open accounts within Argentina and US are much lower now because we are bringing more money to cancel and to settle that open accounts receivable.

All right. Thank you very much.

Avishai Kantor, Cowen.

Yes, hi. Thank you so much for taking my question. My first question is on Disney. Was Disney in line with what you expected at the beginning of the quarter, or something happened throughout the quarter?

No, nothing happened. So, yes, it was absolutely in line with what we expected. Yes.

Then what was the DSO for the quarter?

It was 56 days, Avishai.

Thank you very much. Great.

Five-six, yes.

And how did that compare to the previous quarter? Can you just remind us?

We are usually running at 58, 59 days. So, it was pretty much aligned, a little bit lower.

Okay. And then my last question, do you have and measure what is the incremental wage inflation from the devaluation compared to wage inflation in previous years?

No, it's going to be pretty much the same, Avishai. We don't think that that's going to change dramatically, same levels.

So, are we still --?

At least if compared to 2015.

So, are we talking about 20% to 25% range?

It is 20%, yes, for Argentina. It's a different situation now --.

Yes, in Argentina.

In different countries, yes.

Great. Thank you very much. That answers all my questions.

No problem.

Thank you.

Joseph Foresi, Cantor Fitzgerald.

Hi. I know you gave some color about the margins this year. But, I was wondering, could you talk about what you think the natural margins for the business are and the expansion of those margins over the long term?

Yes, sure, Joe. I think that the expansion that we had in Q1 was a little bit out of the ordinary course because of the high devaluation in Argentina in the last quarter.

But, having said that, we definitely see a trajectory of the margins to be within the historical ranges of 40% to 42%. That should be a range for gross margins on a full year basis.

Now we have a blend of delivery centers in many Latin American places combined with India. So, the blended should be a range of 40% to 42%. Keep in mind that we are still investing a lot in training, trying to get our people up to speed in these emerging technologies.

Operating margins definitely improved significantly. We were expecting that. As we said in the past, that gain on transactions with bonds, the way we saw that it was kind of validating the higher exchange rate that was artificially being held up by the government.

So, now we feel that that piece went above the line. It's part now of our operating margins. And definitely expansion there is going to come from G&A dilution. As we have been proving over this last four or five quarters, dilution has been steady.

We are very disciplined in the way we manage expenditures within the Company. But, nevertheless, we continue investing in expanding our sales force and our coverage.

Okay. So, I mean, are we looking -- I mean, there's going to be obviously a little dip towards the end of the year, but we're talking about -- should we expect, I guess, margin expansion on an annual basis as we look to 2017 and 2018? I'm obviously not asking you to commit to anything specific, but I'm just wondering directionally how to think about it.

Yes. Directionally, you should expect us to get leverage on G&A dilutions. It could range from 50 to 100 basis points, but that should be the trajectory in the long run.

Okay. And then could you give us an idea of what the attrition rate looked like in the quarter? I'm not sure if you had it in your prepared remarks.

And then I'm wondering, is labor the gating factor to scaling the business at this point? Is that your biggest concern?

So, attrition went up a little bit this quarter. Let me take the first part and I'll leave the second to Martin.

I think that it was 18.5%. That was the precise number for Q1, a little bit -- 70 basis points above last quarter. I think that the big driver there is definitely Argentina and, within Argentina, a couple of cities, Buenos Aires and Cordoba.

But, we continue executing our plan to lower attrition in the long run. I think we have been living for years in the low 20%'s. And we are still executing on that plan that is pretty much diversifying our delivery centers out of tier one cities, providing project mobility, working towards competitive compensation.

So, those are kind of the pillars against attrition. It has been paying off over the last two quarters. There was a little bit of a spike this quarter, this increase of 70 basis points. But, we are comfortable that in the long run the plan that we have to lower attrition will continue to pay off.

I don't know, Martin, if you want to touch base on the talent question.

Yes. What was the second question? Sorry.

Well, I was just wondering -- the business is running very well and the growth rates are there. So, I'm wondering what the biggest gating factor to scaling is. Is it just being able to find enough good talent out there?

No, I don't think that's the bottleneck for us. I think bottleneck for us is more on the coverage side. Again, you know this business is about how much coverage you have in the important accounts. Getting 50 accounts of $40 million each, that's our aim for the near future -- well, for the midterm.

So, I think the fact here is the best coverage you have, the better you can connect with your customers, the more business you pick up. So, that's a bottleneck. That's where we need to be more efficient. There's where we need to hire more people.

And it's a difficult job because hiring people on that aspect is difficult. Sometimes the failure rate on that specific aspect of the business is tough. So, that's a bottleneck, but not the talent.

Got it, okay. And then I'm going to sneak one last one in. You talked about higher growth accounts and going after them. What criteria do you use for identifying a higher growth account versus one that maybe won't be as productive? Thank you.

Well, we tend to see not much the size of that account, but yet the headroom, how much money they spend, which are the conditions and which are the projects that they are embarking, also in which situation they are in terms of their digital transformation. For us, it's extremely important.

There are companies that are just starting to think about it, there are companies that are just making some plans for it, and there are companies that are very advanced into it. So, depending on where they are, it could be higher potential or lower potential for us.

Those are the factors that we consider as important factors when we see the headroom for us in an account. Then how well developed that relationship is, that's the matter that we need to work.

I can give you many examples, but there are accounts in which we are, with the relationship, very well developed but the headroom is very small. And we have other accounts in which we are very incipient in the development of the relationship but the headroom is very big.

So, we have very specific metrics in which we measure how much friction that account has for us, how we seek to deal with them, and then we figure out according to an index, a very scientific index, which is the type of account that we are in front of. So, that's the way we decide. It's not purely on expectations or [as-struck] expectations, but also on hard data we have from the account.

Thank you.

You're welcome.

Frank Atkins, SunTrust.

Thanks for taking my question. Wanted to ask about SG&A. You mentioned the nice leverage on G&A. What to -- how sustainable is that going forward? And then where do you sit in terms of sales capacity and how do you balance investments there with managing those costs?

Yes, okay. On the first one, I think SG&A was -- dilution was pretty much driven by a combination of factors. I mean, we are very disciplined in terms of trying to keep costs under control. That, combined with the devaluation in Argentina that affected a number of line items within SG&A, helped us to get that high level of dilution that we have this quarter.

Having said that, within SG&A definitely the sales coverage is one of our priorities. We have been increasing the sales team overall on a yearly basis 20% or 20% plus in terms of headcount. Now we have 56 people within the sales team. They are distributed mostly in US and now in Europe as well, plus some people in Latin America.

We feel confident that we will be able to maintain a healthy SG&A dilution. It's not realistic to think that we are going to have the kind of dilution that we have in this quarter because we will still invest in the sales organization and in the coverage. That's something very important to mature the relationship with our accounts and to get those big high potential accounts.

It's very important that we invest in the right people, not only sales guys, purely sales guys, but also the client account partners, the people who are walking the halls with our customers, participating in the roadmap of their development and their transition into digital. So, we'll continue investing there, but definitely there is going to be dilution as measured as a percentage of revenue coming mainly from G&A.

Okay, great. That's helpful. And then, can you quickly update us on exposure from WPP and how you're kind of leveraging that relationship into opportunities?

Yes. The transfer to WPP direct accounts is very low, as historically it has been. As we always say, the main idea with WPP is to work together, and we are working together to be able to penetrate the accounts they already have.

So, relationships with accounts that they already have, and they have good penetration there, we try to go directly into those relationships and try to build the business, which is different in nature. The relationship they have is more an agency relationship, and we are coming from the technology sector.

So, not necessarily -- we can leverage some relationships, but we can -- some people relationships, but the essence of the engagement is different. So, the major success stories we have in the past connecting with WPP accounts are going directly into the accounts that they have and pitching together with WPP, but us being like the main contractors on that specific engagement.

The potential is big because they have an amazing roster of accounts, and we can work together on many of them. And that's how we see the future of our relationship with WPP.

Okay. And last one from me, can you talk about any changes in pricing, areas of strength or weakness, by studio or services that you're seeing?

No, we are not seeing any major change. Indeed, the revenue per head -- Alejandro, please correct me if I am wrong, grew a little bit from 63 to 64. Is that correct?

Yes.

But, I am not seeing that in any specific studio. While the revenue per head of our acquisition in India was lower, but independently on that we were able to grow our revenue per head driven by some deals at the discovery area of Globant, in which we are growing and working more with -- as a consultancy company, understanding and discovering new opportunities for our customers.

The way there is totally different, and that's driving our revenue per head a little bit higher. But, that would be the only thing to mention.

Then of course revenue coming from the services of our platforms, which is still very small but is starting to be interesting, is something that could drive our revenue per head very fast. And that's another lever that we have for our margins toward the future.

We are not counting on that still because it's very incipient. But, in one quarter we went from zero into almost -- or more than 30,000 users paying every month for our services on the platforms we have, which is pretty interesting as a trend. So, those are the movements we are seeing.

All right, great. Thank you very much.

You're very welcome.

Moshe Katri, Sterne Agee.

Hey, guys. Thanks. Can you comment on what's factored in terms of comp increases this year in your guidance? You mentioned that there's going to be salary increases coming up in Q2. Maybe we can get some sort of a range, and how does that compare versus prior years? Thanks.

I think in the case -- hi, Moshe. How are you? In the case of Argentina, we are still seeing kind of similar ranges as last year, mid 20%'s is kind of the range.

In the case of the other countries in Latin America, I would say the best estimate that we have is it's weighted increases matching the pace of devaluation in those countries.

So, we don't expect, except for Argentina, which is still at a very high level of wage increases, to have that level of wage increases in the other countries. So, it's a different situation for every single country.

Understood. And then when Joe asked you the question about the long term margins, you said gross margins at about 40% to 42%. Can you give us a range also for the non-GAAP EBIT margins in the long run?

We don't guide that for operating margin. What I can tell you, Moshe, is that we'll continue reducing G&A. At this level of net income, it's a pretty decent and reasonable level for a company of our size, but we'll continue expanding that through G&A dilution.

I mentioned that range for the gross margin because, even though the currency fluctuation in Argentina is tough and now we see a much more normalized FX market in Argentina which will contribute to have more normalized margins in the long run for the country, we are still investing a lot.

I mean, most of the technologies that we're implementing, executing, and deploying within our customers are emerging technologies. We need to invest in the people. It's not enough to get people out of college and assign them to projects. We need to train them.

We are in the sweetest spot of where the demand is, so we'll continue to invest in that. And that's why we are projecting that kind of margins in the long run.

All right. And then last question, do you have a target for headcount growth additions in 2016? And then maybe you can put that in the context of some of your hiring, I guess, plans in India based on the acquisition that you've done last year. Thanks.

Yes. In terms of headcount growth, we suspect that to grow a little bit below the top line. We are executing on some initiatives that could decouple revenue growth from headcount growth. Martin highlighted a couple of initiatives on the Services Over Platforms.

And in the case of India, we just launched a new office for 1,200 people. It's a brand new office that was launched in May. There is going to be a formal launch by mid July.

And definitely we're very happy and very proud of how the business is evolving in India. I think we found a company with the right talent, especially matching three or four of the capabilities that we have within our studios, within the domain expertise of our studios. So, we think that combining that talent that we're being able to find in India with the talent we already have in Latin America, we are definitely very well positioned to keep up with this level of growth.

I think India surprised us because of the quality of the talent and the matching with the culture of Globant. So, we are very happy. I don't know, Martin, if you want to add something to the Indian play.

No, I think that you covered pretty much everything, but we are happy with the team we have there. I think it's a great team, a great team of professionals. That's the most important part, and they are performing quite well in terms of recruiting and in terms of business.

So, the fact that we are now in India answers the question that we have about global talent. Talent is everywhere, and we need to go wherever the talent is. So, it doesn't matter because talent is in India or in Argentina or in Colombia.

So, I think that the game now became much more global. It's not just an India game or an Argentina game or whatever. And we are pursuing that vision. I think we are doing it in a very, very efficient way.

All right, guys. Thanks, good job.

Thank you. Thank you for the question.

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

So, thank you very much, everybody, for joining the call, for your time, for your support -- continued support here. I am looking forward to see you in the next quarter. Hopefully we have great wins ahead. Thank you very much.

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