Globant SA (GLOB) 2016 Q3 法說會逐字稿

Good day and welcome to the Globant third-quarter 2016 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Juan Urthiague, Investor Relations Officer. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today on our call to review our 2016 third-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 would like to turn the call over to Martin Migoya, our CEO.

Thank you, Juan. Good afternoon, everybody, and thanks for joining us today. I'm pleased to be here to review our Q3 2016 business and financial performance.

During Q3, we delivered another solid performance. Our revenues for the third quarter increased 22.7% year over year to a new record level of $82.4 million. We now have 61 accounts over $1 million in annual revenues compared to 51 for 2015. Later during the call, Alejandro will share more details on our financial performance.

We continue to see a strong demand for digital journeys throughout the world. As IDC points out in a recent report, digital transformation is a key driver in the worldwide service market, and success require that business and IT work together toward shared goals. The study highlights that partnering with services firms with highly skilled strategies in today's marketplace will be a choice made by both business and in key buyers looking for new ideas, added skills, and critical velocity in accomplishing the goals of the transformation journey.

Enterprises across all industries are investing heavily to face competition coming from digital native companies. CEOs and Board of Directors have the mandate to transform their companies into digital. This creates an amazing long-term market opportunity for Globant, as we are considered a leader in digital movement and having the DNA centered around emerging technologies.

To show this growth trend, let me now go over some of the latest business news. On November 3, we held our annual executive gathering in San Francisco called Con.Verge. This event aims to bring together all our customers and networks to gain insights over different trends and discussions about digital transformation. During the day, we listened to speakers from organizations like DreamWorks, Fandango, LATAM Airlines, BBVA, Airbus, HSBC, and NASA. They shared their experiences, interrupting their business to [Globant] challenges.

This event is key for our Company. It allows us to share a unique moment with our customers, getting to know more about their needs and share with them our views. Let me go over some of the ideas we discussed during Con.Verge. Since a volcano-like explosion of new technologies and new ways to connect with consumers started to arise. It's a way that is not driven by pushing messages or just transacting online with users; it is about making them become part of the digital journey that starts long before the consumer needs to transact with a brand.

This journey is relevant in every touch point and creates an emotional connection with them. We're talking about building memorable experiences. For us, this is a new way to interact with users and it is what we call digital journeys. We have created an evolved approach on how to build these digital journeys in a more effective and precise way. The first step is stay relevant. We work to provide helpful information and initiatives to understand the customer's environment, competitor, and user behavior.

Secondly, in order to build the journey, I would like to introduce a new concept called Build to Discover. This concept is based on a new way of conducting digital transformation by doing it in a more successful way. Our initial belief in embarking on a digital transformation program that has to start with an inevitable long discovery session, and once this session is completed, the engagement moves into the construction phase. But we have learned from experience that what is discovered in these initial sessions can change dramatically when the [probe] starts to grow and release to consumers.

We know that the real discover happens along the way and during the construction. It is in this phase when having a team that can execute a continued discovery process is ultimately much more valuable than trying to focus to discover only at the beginning of the project. This idea yields a different [pod] composition than what would normally would have thought. And it also brings the benefit of being able to branch out different initiatives as we build the initial probe that drive much more viable digital transformation.

A very short initial workshop at the beginning, followed by a very quick set-up of the right Build to Discover pod can make a huge difference. In other words, it is a constant based on digital transforming by doing. It is not just discovering on the beginning, but it's discovering on the making. The process relies on learning and adapting as we build the experience, and the two activities are closely interrelated.

To deliver these digital journeys in a more effective way, we have launched a new type of engagement for our customers called digital transformation centers. These centers enable us to deliver the complete cycle of the digital journey in an effective way. We base this initiative from what we learned throughout our experience working with top companies around the world.

With this, we build dedicated teams to encompass all the digital capabilities needed for a successful digital transformation. These offices are close environments where discovery, UX Design, big and fast data, seamless integration, and backend work together in sync. We build both according to the customer needs, and follow maturity process to create the different products that will enable the journey.

The centers bundle these capabilities dedicated to customers, creating the necessary connection between business, product, and technology. The teams work in a dedicated way for a specific customer but share Globant's culture of innovation and benefit from our processes and creative initiatives. These centers represent the ultimate way to foster digital transformation.

Another important trend to highlight is a concept that comes to change how we can see the successful digital transformation. It is what we call omni-relevant and we talked about that during Con.Verge. Let me explain it shortly.

We all understand the concept of omni-channel; it is a simple concept that involves having the same experience no matter what touch point a consumer is using. It [implies] idea that you can start a transaction in one touch point and then continue it on the next one, having a smooth and continuous experience across the whole connection.

We consider that being omni-channel is not enough. We believe that is a very basic characteristic that any digital journey should have. Instead, we think that a digital journey should be omni-relevant. On top of being an omni-channel, we need an experience that is relevant to the environment and the moment of every transaction.

An omni-relevant approach means that experience should be, first, continuous. Companies should understand the whole flow of interaction with the user from awareness to advocacy going through transaction. Second, consistent. The quality of experience should be the same in every moment of the journey, as the customer expects only one brand to interact with them.

Third, omni-channel. Within each moment of the journey, brands have to enable the channel and touch point that is more relevant to the context in which a customer is leveraging. Fourth, relevant. Companies must gather all the information about user behavior to create meaningful moments of surprise. This will drive identification of new opportunities for relevant services and products.

The main objective is to stop thinking about channels and start thinking about journeys. Because omni-channel creates silos, while omni-relevance creates clarity, emotional connections, hence, it humanizes technology. The success of our strategy is reflected in new engagements coming from existing customers that want to enforce our presence in the digital arena. In this sense, let me mention some interesting projects we're working on.

We have been working with Warner Bros. Games San Francisco in the design and the implementation of [a medium] platform and the DC Legends game. The medium platform is a set of services designed to get titles network connected with minimal effort, and provides the game developers a new level of agility that is vital for them as they navigate the evermore complicated world of devices, markets, and business models for the games.

We continue to help one of the leading financial institutions in the US with their digital transformation for their online banking applications, both for retail and wholesale consumers. On top of that, we are working to modernize the platform used by bankers across all their retail branches.

We are working closely with the largest American sport association to capture data and insights for fans at live events in Spain, Mexico, and Brazil. In 2017, we plan to continue a deeper dive into key global markets, while performing an in-depth behavioral analysis study of the core sports fans in the US.

During Q3, we also have added several new logos to our portfolio, such as one of the leading global healthcare companies, a leading video game company, and a leading company in travel and leisure industry. All of them are partnering with us to build their digital journey.

Within our services or platform offering, we are also seeing continuous growth. With several new customers within our StarmeUp platform, one example to mention is the Script Network, and within I AM At where we added Turner. We expect this trend to keep growing in the months to come.

Now let me share with you some other important investments that we are focusing on. Since Globant was founded, it has seen a very strong growth. This growth means that the organization, the teams, and the challenges evolve, so the structure and alignment needs to evolve as well.

To accompany this growth, a few months ago, we introduced a new model that will guide our organization and will be the cornerstone of our services paradigm. The new model is called 50 Square, and it intends to reshape our go-to-market strategy to scale our Company in the coming years.

The main goal of this new approach is to focus our team on the top 50 high potential accounts that have the capacity to grow exponentially over time. To do so, we have appointed some of our most senior people from sales, technology, and operations to lead these teams and take our Company to the next level.

This account focus has been the most important pillar of our go-to-market strategy, and every account within Globant now has the goal to become part of this program. Since the program started, we have seen very positive trends in these accounts showing a much larger pipeline. We believe that this approach will be key to foster our growth.

Let me share some news in regards to our global presence. We continue our expansion in our delivery centers in Latin America and India. At the same time, we have recently expanded our offices in San Francisco with a completely renovated playground. This center aims to expand our presence in the US and create a unique space for innovation. The office is prepared to offer our customers a place to come, try, and play with new technologies, such as virtual reality, wearables, and Internet of Things. The goal is to help them to get inspired for their future challenges.

We are also making investments in our management team. We're pleased to announce that John Raveret, former Senior Vice President of Corporate Development at Cognizant, will be joining Globant as of December. He will become our EVP of Strategy, leading various strategy initiatives and business units. He has almost two decades of experience; building Cognizant from its IPO makes him extremely valuable player for our Company. We're really happy to have him on board. He will be a key contributor in our drive to build out our global presence and brand.

Continuing with our plans to expand our footprint in our key markets, we are glad to announce the acquisition position of L4, a leading digital services company that creates innovative experiences. L4 is a US-based organization with headquarters in Seattle, focused on building complex software that engages people across every screen. The company has a team of 65 professionals, including some of the best mobile and media minds in the industry. Today, they work for a wide list of recognized brands, such as Sesame Workshop, Chicago Public Media, and Sony Pictures Television, among others. This acquisition will help us to be even closer to our customers.

The company has profound knowledge in the media entertainment sector. Its unique blend of multi-platform experience with a focus on quality assurance sets L4 apart from many other digital services companies. We found in L4, a group of people that shares our same passion for building the best experiences for our consumers. So we're really excited to have them on board. We are confident that this acquisition will allow us to reinforce our position as leaders in the digital services space.

Lastly, let me give you a brief outlook on how we see the current business environment. Our pipeline remains stronger than ever, and there's plenty of opportunities and space to grow by working on digital transformation. However, we're seeing the US market a little bit softer, expressed in some delays on project starts. This may be reflecting some of the uncertainty around elections. We believe that this environment could change with the elections now finished, but still, some of these could be extended for some months until the new government takes power.

Independently of this environment, and as we mentioned, our pipeline and backlog remain strong. We are currently having conversations with high potential customers that could translate into large business opportunities for next year. As such, we remain optimistic about our ability to grow fast in the future.

With that, I will turn the call over to Alejandro Scannapieco, our CFO, for the detailed financial review on Q3 and to provide guidance for Q4 and full-year 2016. Alej, please. Thank you very much.

Thanks, Martin, and good afternoon, everyone. I'm going to spend a few minutes discussing our Q3 financial performance, and then I will provide guidance for Q4 and the rest of the year. I'm pleased to announce another solid financial performance for the third-quarter of 2016. Our revenues closed at the new record level of $82.4 million, 22.7% increase relatively to the third quarter of last year and 3% over Q2 2016.

During Q3 2016, Southwest Airlines continued to be our number one customer. It is important to mention that Disney, as expected, grew sequentially for the first time this year. High potential accounts are scaling up, aligned with the recently launched 50 Square strategy. Revenues for customers 2 to 10 increased 37.9% over the third quarter of 2016 and 3.1% sequentially. Revenues for customers 11 and beyond increased 20.4% over the third quarter of 2015 and 2.2% sequentially.

As pointed out by Martin, our 50 Square strategy aims to have a diversified base of multi-million-dollar accounts and so far it's working out in line with our expectations. Our vertical diversification remains balanced across the different industries. We continued to target a specific account to add into our portfolio. As mentioned by Martin, during Q3, we added some new high potential accounts from various industries and regions.

For the third quarter of 2016, our top one customer represented 10.4% of total revenues, top five customers represented 33.9%, and top 10 customers represented 46.8% of revenues compared to 13.4%, 33.2%, and 45.9% of revenues, respectively, for the third quarter of 2015. We continue to be well diversified in terms of customers and industries with an increasing number of multi-million dollar accounts. Compared to the third quarter of 2015, average quarterly revenue per top 5 customer increased 25.1% to $5.6 million, and average revenue per top 10 customer increased 25.4% to $3.9 million.

During the third quarter of 2016, 81.4% of our customers were in North America. The US is our top country; 9.4% in Latin America and others, Chile our top country; and 9.2% were in Europe, UK as the top country. Europe is currently growing faster than the rest of the world for Globant.

Our top three industry verticals for this quarter were media and entertainment, with 20.6% of revenues; travel and hospitality, with 20.2% of revenues; and banks, financial services, and insurance were 19% of revenues. We remain very well diversified across different verticals.

During the third quarter of 2016, 89.7% of our revenues were denominated in US dollars, protecting our top line against currency fluctuations. During the last 12 months, we rendered services to 354 customers and we now have 61 customers with annual revenues in excess of $1 million compared to 47 one year ago.

We finished the quarter with 5,421 Globers; 4,983 of which were IT professionals. Attrition in the last 12 months ending September 30, 2016 amounted to 19.4% compared to 18.4% as of September 2015 and 19.9% for the last quarter. This slight increase in attrition is primarily driven by our development centers in Argentina. We expect the new economic policies in the country eventually to reduce uncertainties, and thus, contribute for a more stable job environment.

Turning now to profitability, we're seeing significant improvements compared to 2015. Our adjusted gross profit for the period increased to $34.2 million, 41.5% adjusted gross margin, compared to $26.2 million, 39% adjusted gross margin in the third quarter of 2015. The increase in adjusted gross margin was primarily driven by higher revenue per [head] combined with the normalization of the FX market in Argentina during last December, when the new government came to power.

SG&A decreased 290 basis points compared to Q3 2015. This impressive year-over-year dilution contributes further to our operating margin expansion.

Our adjusted operating income for the quarter also shows a robust improvement relatively to 2015. It amounted to $12.8 million, or 15.5% of revenues, compared to $6.9 million, or 10.2% for the third quarter of 2015, a growth of 85% year over year.

Financial income on expense net amounted to a profit of $0.2 million. This net result is composed of FX gains and losses resulting from monetary assets and liabilities in local currencies and interest income.

Our effective tax rate for the quarter was 23.2%, in line with the previous quarter. Adjusted net income for the third quarter of the year totaled $10.5 million, 12.8% adjusted net income margin, an increase of $1.4 million, or 15.3%, compared to the third quarter of 2015.

Adjusted diluted EPS for the quarter was $0.30, based on 35.5 million average diluted shares for the quarter, increasing from $0.26 a year ago. 2015 EPS had the positive influence of the gain on transaction with bonds.

Moving on to the balance sheet, our cash and investments as of September 30, 2016 amounted to $54.5 million, compared to $62.4 million as of December 31, 2015. Our borrowings decreased to only $0.3 million. The decrease in cash and equivalents is primarily explained by CapEx and M&A activity. Our balance sheet remains strong, with current assets of $130.2 million accounting for 49.6% of the Company's equity. Total shares outstanding as of September 30, 2016 were 34.5 million common shares.

Now let's talk about the nine months ended September 30, 2016. Revenue for nine months ended September 30, 2016 amounted to $235.6 million, implying a robust 29.3% year-over-year growth. Growth was primarily driven by our top customers and some new customer wins, as we continue executing our 50 Square strategy.

Adjusted gross profit for the nine-month period was very strong at $101.3 million, 43% adjusted gross margin, compared to $70.6 million, 38.8% adjusted gross margin for the same period of last year. Compared to 2015, we continued to perform significantly better with a combination of the higher revenue per head and normalization of the FX market in Argentina. On a sequential basis, FX [authorization] in some of our delivery locations and investments related to our 50 Square project have slightly impacted our margins down.

Adjusted SG&A is showing a healthy dilution of 350 basis points year over year, currently accounting for 22.3% of our revenues for the nine months ended September 30, 2016. We have been very disciplined in managing our costs more efficiently to gain dilution.

Adjusted net income for the nine-month period ended September 30, 2016 was $29.1 million, 12.4% adjusted profit margin. Adjusted diluted EPS for the same period was $0.82 based on 35.3 million average diluted shares.

To wrap up, I would like to share with you our outlook for the rest of 2016. Let me start with the demand environment and the implications for our revenues. The market opportunity remains intact. We're delighted that business coming back as expected, and there is a clear and sustainable need for digital transformation process that Globant is extremely well positioned to satisfy.

We continued to be bullish, despite the previously mentioned delays we're seeing [about] the decision processes of some companies. As played out by Martin, we attribute most of those delays to the uncertainties linked to the US presidential elections and the Brexit. We need to observe how this evolves in the next few months.

With regards to our margins, we continue to invest in the Company, not only to enhance our capabilities around emerging technologies, but also to implement our 50 Square strategy. Additionally, the continuing FX volatility around the globe, but primarily in Argentina, Colombia, and Uruguay is having an impact on our costs, for the next quarters and given the current effective scenario, we expect some slight reductions in gross margin. We'll continue managing very carefully our SG&A expenses to gain additional dilution, or to offset potential [peaks] from gross margin. Finally, effective tax rates will continue to normalize in the 24%, 27% range, more likely near the bottom of that range, as this has been the case in the past two quarters.

Now let me provide you with our guidance for the rest of the year. Based on current visibility, we are now updating our revenue guidance for 2016 to a range of $320 million and $322 million, an implied 26.5% year-over-year revenue growth at the midpoint of the range. Implied guidance for Q4 2016 will be revenue within the $84.5 million and $86.5 million range.

In terms of EPS, last quarter, we guided $1.14, $1.20 for the full-year 2016. But given the previously mentioned headwinds coming from FX volatility in Latin America, and some new investments that we decided on in our 50 Square program, we may be closer to the bottom of that range or even slightly below. As such, we are providing a new range of $1.12 to $1.15 assuming 35.4 million average diluted shares outstanding for the full year. The full-year guidance implies an adjusted diluted EPS for Q4 in the range of $0.30 to $0.33, assuming 35.7 million average diluted shares outstanding for the quarter.

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

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Ryan Potter, Citi.

Hello, actually this is Ashwin. My question is on 50 Square, which seems the formal bending of the growth initiative you had for some quarters. The question is how many of the 61 active clients are on that list? And have you seen the benefit of this to increase project size? Also, if you can break out the lower EPS, how much of that was FX and how much of the extra investment in 50 Square?

Hi Ashwin, how are you? Thank you very much for your question. This is Martin. On the first question, the program, it's not fully completed yet. We don't have the 50 accounts yet, but we are moving very close to them. So we are, I would say, in very good shape with the implementation of the program and it's starting to kicking in based on some metrics we have on the pipeline and by saying that pipeline on those specific accounts is starting to grow faster than before and faster than other accounts. That's the part -- that's very good news in terms of that.

I think it will start to kick in during the next few quarters in a much more stronger way. But still, the problem needs, I would say at least 10 at 12 accounts more to be completed. And then, the other question, Alejandro? How you split, Ashwin, do you want to repeat the question?

What was the question in terms of the split, Ashwin?

Yes, so you have roughly, I think, $0.05, $0.06 lower guidance and how do you split that investment between -- how do you split that between the investment you're making in 50 Square versus the effective FX?

So, I would say this. The big [cap] of that is coming from 50 Square, and it's a result of the investment that we have been doing in all those accounts. Keep in mind that many of the 50 Square accounts are already customers of Globant and customers that we have been farming and we have been investing. So a big part of that is 50 Square.

There's also the headwinds that is coming from currencies in Latin America. That trend seems to be changing now after the elections in US. What happened actually in Q3 is that there was actually headwinds for many of the currencies in Latin America for us, even between (inaudible).

Okay, and last question would be with regards to the level of investment that you're making in 50 Square. I would imagine as the clients grow, you can scale that out, but is this a, would you call it an investment that stays with us for the next couple of quarters, full year of 2017? How long of an investment is it?

Definitely this is a long-term investment. As we said, Ashwin, it's pretty much related to technologies, assembling the right people into those accounts, investing in the products that we're building for those accounts. So it's a combination of many different factors, but definitely beats our long-term shot.

Our plan is to continue investing in those accounts. The plan that we have laid out at the very beginning, it's a plan that exceeds even 2017. So it's getting also into 2018. So it's a long-term plan of investment in those accounts. That doesn't necessarily mean that we're going to be lowering margins. It means that we will keep investing in those accounts; that's where different penetrating in those relationships, and it's pretty much aligned to our growth program for the next five years.

Got it. Thank you.

Tien-tsin Huang, JPMorgan.

Thank you, good afternoon. Just following up on Ashwin's question, just the return on investment on 50 Square. It make sense to hear the investments, but do feel good about new high potential accounts breaking through? For example, in 2017, could we see some new high potential accounts breakthrough maybe into the top 10, given what you've seen about the pipeline?

Ashwin, hi, how are you? This is Martin. Sorry, Tien-tsin, sorry about that. Yes, as I said, I am already seeing some increase on the pipeline that is connected to the 50 Square effort. I think it's very interesting seeing how the dynamics of the teams that are dedicated to those accounts are playing. It is very interesting to see how much deeper the relationships became. So it won't surprise me if we have more accounts here in 2017 coming into this program and making it happen.

As I said, it still is not finished. I'm not expecting to keep on investing more and more money on that. This is what we are investing now. So I want to be very clear on that. But I foresee and I think that this will yield great results in terms of margins, in terms of also revenue growth in those accounts. But at the same time, we're not losing the idea about generating new accounts and generating new logos.

By the way, we have a great set of new logos for this quarter, also on the hunting side. So it's a play between those two things. And I want to be very careful on how to play the 50 Square game at Globant in the future, but I hope that answers your question.

It does, Martin, thank you. So, for you, Ale, just on the gross margin side, as we think about gross margins in fourth quarter maybe into next year with 50 Square, and all the moving pieces you described, any guidance on the gross margin line specifically?

We always talk about a normalized gross margin on the 40%, 42% range, and that's actually what's happening. We have left behind the Q2 solar increase, but eventually some of the Latin America currencies play against us in Q3. What we have seen lately is -- (multiple speakers). Pretty much all of them. It was Mexican peso, Colombian peso, Argentine peso being flat. But that trend seems to be changing a little bit. I would say everything is fully baked into our normalized margin that we have embedded into our guidance for Q4 and for the full year.

Okay. Understood. Thank you.

Anil Doradla, William Blair.

Hi guys, thanks for letting me ask a question. Martin, you talked about 50 Square, a couple questions around that, investments, people, and technology. Can you give an illustrative example of what this investment was and -- ?

Yes, well, basically as you know, Anil, sorry I'm all a mess with the names today. Sorry about that. Anil, the fact is that we have for each of those accounts, we have, like, one member on the Sales Team, one member on the Operations Team, one member on the Technical Team, which are like the Vice President. And then we have a Managing Director for each of the relationships.

So that is the investment; it's basically people that have been moved into those places. And I think the additional costs generated by that are because of those new people or either people that were in other places of the Company that were moved into that specific location. So these are the new costs that we are facing. Maybe all those guys that we are moving that were on the revenue side are now taking care of the relationship of that account, hence, margins go a little bit down because of that. And that's part reflected on the EPS that we were mentioning.

Very good. So if I look at this change in personnel, it sounds like it was maybe a change in strategy or it was a strategy that you've embarked upon. And when you look at your top 50 accounts, how many of these are oriented with this new setup or this new model? Have we just started or most of them are over? And are you just going to focus on the 50 -- ?

We have two different tiers of accounts we have tier one in tier two. Tier one are those that represent really something meaningful for Globant in terms of revenue. Tier two are those accounts that have the potential but in particular are not meaningful.

Not necessary are the top 50 accounts, because sometimes we have very small accounts that have huge potential and are on tier two. So it's not that relating with top 50. Sometimes we have -- we're in the top 50 accounts that won't -- that is very difficult to grow, so we are focusing our attention now on high potential accounts that have the future for growth. Is that clear? Have I explained that?

Yes, so just a small clarification.

Sure, go ahead.

So is this something that is new to the strategy or this has been in place for sometime?

No, it's a combination. Something -- well, we started that way at the very beginning when we started to expand the coverage to the point to cover pretty much all the country. We wanted to have right now, as I said, we're not done with the 50, but we are close to that. We've started to move people from other places and take some hits on the calls, but that was the idea.

Okay great. Thanks a lot.

Avishai Kantor, Cowen and Company.

Yes, hi. It's Avishai. Thank you so much for taking my question. My first question is going back to what you described as a little bit of a soft environment in the US. Is this related to projects to which were supposed to ramp up during the September or the December quarter? Or was this related to elongated sales cycles, or it's a combination of both?

Well, it's a combination. Some projects, for the last quarter, some projects, mainly I think everything is related to the uncertainty due to the elections that were producing, specifically in the US markets. We don't mention anything about the Brexit, because we didn't feel it at that time.

But now, yes, was like a huge wait-and-see situation from some accounts that represented a delay on some projects. That's why I mentioned that softness. For me now, the elections are over and everything will be back into normal. But maybe until the new government takes power, new policies, whatever happen, we don't know. But maybe it can be extended for a couple of quarters.

However, it's a minor thing; it's not just a massive thing all across every account. So it's something we are seeing that we wanted to mention as a [part]. It did increase our revenue guidance for the last quarter; however, we are seeing that softness. It could have been better, that's what I'm saying.

Okay. My next question is on hiring. Your rate of hiring of IT professionals slowed down pretty significantly in the last two quarters. Any -- if you can talk a little bit about that. Is there a way to mitigate basically some margin effect which is coming from those investments?

No, as we -- hello Avishai. As we explained in the past, from time to time, we tend to manage the talent pool and the utilization to protect margins. Keep in mind that the last quarter of last year and the first quarter of this year, we hired a number of IT professionals. So now, we tended to manage a little bit further the talent pools and the utilization.

We also have combined with that, we have a higher revenue per head. It's coming, I would say, both ways from the recent acquisition of We Are Experience. That's one side of it. And also some new businesses that we're getting at better rates.

So the whole combination of the two things that all the hiring that we had in the last quarter of last year and the first quarter of this year combined also with the talent management, what we call the talent pool, it's [the bench] it's basically explaining that softness that you see in hiring.

Great. Thank you so much.

No problem.

Joseph Foresi, Cantor Fitzgerald.

Hello, I wonder if you had any early thoughts on the annual growth rate of digital for next year? And what do you think the biggest challenge is to your assumptions? And again, I'm looking for an industry outlook.

I don't have a guidance yet for next year. We see it in good shape based on our pipeline, as I mentioned. I see demand coming from the current customers, from new customers. The demand on digital is there.

Definitely it hasn't changed a single bit, demand is there. What I mentioned maybe on the softness has more to do with some decision saying, okay, let's take the decisions a couple of months or we take decisions next month, whatever, or after the elections. That's the thing. So there's not a single element that is telling me that next year will be softer in terms of digital demand.

Okay, and then on the softness was this a particular vertical and was it US-centric? And did you see any cancellations? And it sounded like it was more than one client. I'm just trying to get a sense of where exactly you're seeing it.

No, no specific place; it was across some of our customers in different -- a few -- it came out of customers across different industries. So, yes that's the approach, and yes, we're not seeing as a generalized thing. It's some softness on some specific customers. It's not any particular industry neither; that's why we took the conclusion that I mentioned. It's not that it's centered on financial sector or it's centered on any other sector.

Got it. And then can you help us understand how you got to know the acquisition, I think it's L4? What capabilities do they have that you were looking for and is there any client overlap or client concentration there?

Not really. They have a main -- their main customer is the customer we don't have, which is a pretty large customer for them, which is very good for us. It could become a 50 Square account they won, which is good. Not in terms of size, it's not very big, but it has very high potential.

In terms of customers, it's a great customer fit between the two companies. In terms of capability, their people based in the US, in particular, in Seattle, where they have the head office. We needed as much (inaudible) presence there. We have already some customers there, so now we will have an office, we'll have people there to help us grow our Company.

They're great creating software experiences and digital transformation. They're really good at that. They have some of the brightest minds in terms of digital and mobile in the market. We really love the team. They share a lot of our cultural values, as when we did the acquisition of WAE and when we did the acquisition of Clarice in India.

I think we are keep on going in a very continuous and constant way, and expanding our growth in the US, and our footprint in the US, which is extremely important. So they are good at product and software design and software experience creation. And consumer, they have really great mobile products, great set of customers. They also have very interesting capabilities on the quality engineering side, so it's a great fit for us. We are very similar companies focused exactly on helping customers go through the digital transformation.

Got it. I'm going to sneak one last one in. I think you had talked about possible margin expansion in the past. Is that something we should still think about? Thanks.

Margin expansion? Meaning -- referring to -- .

Over the long term. No, no, in the Company over the long term?

It will definitely be that way, so I think that the combination -- even the combination of having more on-site people can definitely be offset by a much more balanced cost composition of Globant. We have been expanding in many different places, so we can combine and we can offset some of the increases in the on-site personnel.

Also, with the higher revenue per head, what we're seeing is the value that is being brought by the digital design, by the work that was done by We Are Experience, the company that we acquired, now is being combined into our studios, is definitely helping us to gain operating expansion, operating margin expansion.

And also, the SG&A dilution, as I said, we have been very disciplined in terms of enlarging the scale of the Company and trying to be very efficient in the way we manage resources. The answer, the short answer is yes, we will continue expanding operating margins.

Thank you.

No problem.

Frank Atkins, SunTrust.

Thanks for taking my question. I wanted to quickly see if I could get an update on headcount by geography. Typically, you do that yearly, but if you could maybe update us on some of the major geographies, that would be helpful.

Yes, definitely. Argentina now is roughly 51% of the total headcount, so year over year, it's going down 7 percentage points. Columbia is already 15%. It has been the fastest growing location in the past year. India is getting closer to 10%, Mexico is 8%, Uruguay is 8%.

And US has been growing. It's roughly 7% at this point, but we also will need to take into account next quarter the acquisition of L4.

Okay. And that goes into my next question. The headcount numbers don't include L4, is that correct? And then, does revenue guidance contemplate any revenue from L4?

Yes, headcount, that can include the headcount of September; doesn't include any headcount from L4. As for revenue guidance, keep in mind that we're closing this transaction toward the end of the year, so it's very relevant that revenue guide is going to be coming from there.

Okay. Last one for me, can you talk a little bit about the seasonality of SG&A going into 4Q?

Yes, I think it follows, except for sales, it's kind of a particular animal within SG&A, as it can swing based on different types of hiring that we may have. And most of those hirings are usually in US. But I would say the rest of G&A, you only have some certain swings in the second quarter and the fourth quarter.

Keep in mind that in a couple of countries, in Latin America, we have two windows for salary increases, being Argentina, the largest one. So that creates certain swings in the SG&A usually in the second quarter and in the fourth quarter.

Great. Thank you very much.

No problem.

Jason Kupferberg, Jefferies.

Hey guys, good afternoon. I just wanted to ask a follow up on 50 Square. I heard one of the prior answers corrected. It sounded like some relatively senior people in the organization are getting moved more towards account management roles, as opposed to client fixing or billable roles. So I just wanted to see if I heard that right. And if so what revenue and/or utilization impact of that should we be thinking about?

In terms of utilization, thank you very much for the question, in terms of utilization, it doesn't affect a lot because it's just a few people, all right? Which are expensive people, of course, because as you said, it's our most senior people that are being moved from one place into another. From revenue generating now into management and account concentration; so that's a move that has taken place.

We don't see that to keep ongoing, because we are almost done with the investments there. But as Ale said, we see that as the long-term investment. We like to set up the Company for the next growth wave. And if you want to do so, we need to invest some time and be able to move the right people into the right places.

By the way, we're moving some of our best talent into the 50 Square program. And that's something that is really remarkable to be able to make in the amount of time that we did it, it's really remarkable how we did and how efficiently we did it.

Okay. That's helpful. Just a follow-up question on L4. I understand it won't materially contribute anything to Q4, but how should we be thinking about an annual revenue run rate for that business, as we think about our 2017 models?

We usually don't disclose that, Jason, but you can do the math. They have 65 people, definitely their revenue per head, it's on the on-site side, so it's better than the average at Globant. We also expect to grow that business as well.

Yes, okay. We can make some assumptions around that. Just last question for me is what was the free cash flow in the quarter, if you have that?

We don't disclose the free cash flow by quarter. What we can tell you is that it was a good quarter in terms of cash flow generation. We also had the impact of some of the payment for earn outs and also the acquisition of We Are Experience.

Moshe Katri, Wedbush.

Hi, thanks. What was the revenue for billable headcount for the quarter and how much did that increase year over year? I think you said, you indicated that you had an increase.

We are running currently, Moshe, at $66,000 per year per employee, so you can assume it's growing at the 5% year over year, if you take the last 12 months.

Okay, so that's pretty impressive. Can we assume that that trend continues and to calendar year 2017 at this point?

It's hard to tell at this point. It's hard to predict. What I can tell you is that we're definitely making our way with the differentiated value more on the difficult side, more on the discover part of this. You know that we split our work on discover, we stay relevant, discover and build. And definitely the discover is helping us to actually work on these creation of digital journeys that are being priced at different levels.

So I would say we're optimistic in terms of the headroom for pricing increases into next year, but it's hard to predict how that number is going to look like.

You would say that this is going to be an important factor to offset some of the impact that you'll have from the investments that you're talking about, right?

It's going to be another factor. Definitely, we're being able to keep up with that margin range that I explained by definitely offsetting with pricing and with some cost allocation, whatever investment we're doing in 50 Square, and also the headwind that we had from effect in Latin America. So I would say it's a combination of all those variables.

Yes, understood. And then going back to the project delays, do you think this is a prequel to a longer-than-usual budget cycle looking into next year? And with a possibility that we're going to start the year with budgets being delayed?

Well, let's see how the aftermath of the elections happen. We connected that to the uncertainty of the election, but also that's what some of our customers told us. I don't see that happening at all, but we'll see.

There's not a single, as I said, there's not a single signal that tells me that the demand is softening at all. The other way around, pipeline went into historic high numbers at Globant. But there's some delays on projects. And some people are saying, okay, we will wait for a couple of months or we will wait for next quarter, something like that.

But we'll see into next year, I think the situation should be, like, much more relaxed and taken to a new playground.

All right. Last question, utilization rate did have an uptick. You did talk about Argentina. If I remember correctly, Argentina did have a much higher attrition level versus some of the other regions. Can we get some color on that? I think historically in Buenos Aires, the attrition was close to 30%. Did that go higher than that?

No, no. Your first question was about utilization or attrition, Moshe?

I'm sorry, I meant attrition, sorry about that.

Okay. So about attrition, it definitely has gone up a little bit. There's I would say probably some pressure on -- still coming from Argentina. It never reached the 30% that you mentioned. But definitely Argentina is running a little bit above the rest of the country.

I would say there a couple of elements there that are worth mentioning. First, in terms of inflation, the inflation environment still, it's is a little bit high because of some of the measures that were taken by the government as soon as they took power. But it looks like, looking forward, and as we're seeing the [correintation] going down, the picture for next year might be somewhat different and more optimistic.

On top of that, what we have seen lately, a very healthy devaluation of the currency that now seems to be lining up with what's happening all over the place after the US elections. So that might be also a positive sign for our margins.

But I would say we keep executing our plan to fight attrition and to keep attrition into that reasonable level. And definitely, that (inaudible) in the talent is going in many different delivery centers, not only in Argentina but also in the other delivery centers. And then if we have Argentina as a factor with the inflation coming down, then definitely that's going to be translated into a labor market, then attrition might go down in Argentina as well.

Okay great. Thank you.

Arvind Ramnani, Pacific Crest Securities.

Hi, just had a couple of questions. You mentioned softness and weakness at some clients because of the elections. Are you specifically calling this out because you saw change in client behavior that was surprising? And is this a temporary slowdown or more of a multi-quarter trend?

No, I think it's a temporary slowdown. I think it's absolutely temporary. And maybe from within the US, it's not seen in many different ways, but from outside the US, it was very clear that we show the amount of uncertainty that that created and we saw it very clear. But in any case, my bet is that it's totally momentary. And once the election is finished and when the election is finished, now everything should normalize.

Great, because we were very impressed with what we heard from your clients at Converge. And from attending that conference, it looks like clients have certainly charged up. But can I also understand when you have this client events, are there some tangible benefits, you go back and regroup and figure out this is what we need to do to drive growth? Or does it help reshape your strategy or vision? What do you guys typically do the one week after Converge in terms of running the business or going and doing customer follow-ups to sell more work? Or are you guys not really doing anything, or that's post this client event?

Look, we are all salespeople here, so we know how to leverage those events. And we had actually saw the presence of really great people, like see a global CO of HSBC and the people from BBVA, also people from Fandango, from NASA, from many other -- either customers or potential customers. And all of them were talking about either additional transformation center or how to make a build-to-discover proposal, or talking about only relevant experiences or talking about how to digitally transform some of the processes or some of the business that they have.

So I think was extremely positive, and it's the kind of event that are very special for us, because some of our customers get together. They all share experiences. They are part of the conference, and it's a very unique place, because you have -- like a place -- in the Silicon Valley these days, you have a lot of conferences around technology, and that's fine. You talk about the Oracle world or the Google IO or the Facebook Development Conference. Everybody's trying to boost their technology.

But there's not a lot of conferences out there where you talk about digital transformation and how to use those technologies to make successful journey, successful digital journeys for your customers. So the center of what we did last week was that, and I think it was very successful because of that.

Conversations with our customers are quite interesting at the event, so I think the overall impression is very, very positive.

Great and just last question for me. When I have been speaking to clients of yours, as well as to other [seamless] CTOs, my research is suggesting that these digital projects are becoming a lot more transformative, a lot more strategic, and therefore, much bigger in terms of the scope and even their opportunity compared to what digital projects were maybe like 18 months ago or two or three years ago. Scope certainly increased.

Are you all seeing some of that as well, where digital has become not just a one-off project, but people are thinking about it in a much more comprehensive way? And therefore, the project sizes have been increasing as well?

Yes, absolutely. [Perfect size] are increasing the pipeline, as I said, it's increasing. The period and the terms, what is going on is that in general, you've have got customers come to us with a white paper saying, we have this idea. We need this transformation and we need to help across the whole experience of the digital transformation.

That is yielding, by logic, it's yielding longer term proposals, bigger teams, and bigger executions as are needed. So that's the kind of change we are seeing from I would say two years ago. Two years ago, maybe projects were more lateral or something. Of course, there were always center projects like what we have with Disney or with other customers, but we are seeing now a much broader acknowledgement, because they need to go and do some big transformation on those companies. And we are the player to help them. So this is what's going on.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Martin Migoya for any closing remarks.

Okay, guys, thank you very much for your time and as always, any doubt you have, please contact us. We're always open to answer your questions. Thank you. Thank you. Thank you.

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