Globant SA (GLOB) 2016 Q4 法說會逐字稿

Good day and welcome to the Globant quarter-four and FY16 earnings conference call.

(Operator Instructions)

Please also not that this event is being recorded.

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

Thank you, operator, and thank you all for joining us on our call to review our 2016 full-year and fourth-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; 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 our performance internally and the easiest way to compare Globant to our peers in the industry. You will find a reconciliation of IFRS and non-IFRS measures at the end of the press release we published on our investor relations website announcing this quarter's results.

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

Okay. Thank you, Juan. Good afternoon, everybody, and thanks for joining us today. I'm pleased to be here to review with you our business and financial performance for the three months and 12 months ended on December 31, 2016. At the end of the call, Alejandro will share with you our outlook for 2017.

Our revenues for 2016 increased to almost $323 million, a robust $27.2 million year-over-year growth. This robust growth was driven by strong demand for digital solutions across the different customers that we serve. Europe and the United States led this growth from a regional perspective, while Travel and Financial Services industries had outstanding performances.

For the first time in our history we have two customers with annual revenues in excess of $30 million. We finished 2016 with 6 accounts over $10 million, 11 over $5 million, and 60 over $1 million, compared to 5, 10, and 51 respectively for 2015. This is a clear indicator of our ability to scale up our key accounts.

Q4 was another good quarter for the Company. We exceeded our guidance in terms of revenue, with $87.3 million, representing a 21.9% year-over-year revenue growth. Banks and Travel were key contributors to this growth.

Top 10 accounts performed strongly, with some of our 50-square accounts outperforming the rest of the Company. Later during the call, Alejandro will share more details on our financial performance.

Now, let me go over the state of the market and share some news about Globant. We continue to see a strong demand around digital services. Different research has pointed out the sustained growth and opportunities coming from digital transformation projects. In one of its latest reports, Forrester predicts that in 2017 transformation budget will allocate the billions.

Something similar is shown in the recent research from IDC called IDC Marketscape: Worldwide Digital Strategy and Agency Services for Digital Customers Experience 2016 Vendor Assessment. The research states that digital customer experience continues to be a top business imperative. Enterprises spending on professional services for this initiative are growing at 20% CAGR through 2020, generating over $32.6 billion in revenue for service providers.

We are proud to mention that this report has named Globant as a leader in digital customer experience. The study points out that, worldwide, Globant is seen as most capable in digital journey design, activation, and measurement.

Globant is also considered by clients to be one of the strongest firms at incorporating cloud into engagement deliverables, helping clients visualize and design process improvements that supports digital journeys and using new data sources to form and deliver digital strategies. These reports continue to show a huge opportunity for Globant, considering our unique positioning as a leader in digital journeys and digital transformation programs.

To reinforce these differentiators, we are constantly analyzing new trends. Our goal is to help our customers stay fit for future challenges. We recently published our the latest trend report at trends.Globant.com with some key topics for 2017.

Within our studios, we have the talent to sustain our leading position in these emerging trends, including first, Connected Ubiquitous Experiences. This type of experiences will continue to mature and evolve. The majority of consumer devices are now connected and working seamlessly as users rely on them.

The challenge continues to be focused on the creation of experiences with minimal friction. The year we will see the rise of new interfaces and a higher need for synergy between devices providing immersive experiences.

According to Gartner, new input-output mechanisms will emerge using audio, video, touch, taste, smell, and other sensory channels, such as radar, to extend beyond human senses. Experiences will become ever-present, omni-relevant as they flow through the user's day. They will be embedded into the context rather than being disruptive, analyzing data as it becomes available.

This is a trend affecting not only consumer experience, but all aspects of our lives, even our work experience. One example of this is the work that we are doing for a [living] retail company.

To transform their talent supply processes, we are working on the creation of a [chap] application, which will be a virtual assistant that uses a machine-learning approach. It helps candidates have a better communication and improve candidate engagement during their recruiting process.

Deep learning and predictive analysis. Data available from existing channels and from new input sources will trigger a rise in deep learning and predictive analysis. Systems can learn and change future behavior, leading to the creation of a more intelligent device and programs.

The artificial intelligence market is estimated to grow at a CAGR of 53% from 2015 to 2020. The global predictive analytics market is expected to grow at a CAGR of 27% from 2015 to 2020. In this context, our connected computing studio has expanded its services and capabilities to lead this opportunity in front of our customers.

To mention some examples, the studio is working with a financial institution that is looking to innovate using audio processing techniques to transform the way their employees access data. At the same time, the studio is a helping global retailer company to transform their business model from a consultant sales approach to direct sales one. They are leveraging the huge amount of sales data and machine learning techniques to help the company understand, identify, and better engage with their clients, recommending products that are better suited for them.

Third, virtual and augmented reality. This will be one of the most popular trends throughout the year. The launch of new hardware allows more companies to leverage the technology for their own purposes. Virtual reality experiences will be expanded to involve more sensors, going from a visual and sound experience to include most of our senses.

As an example of our work in this area, a top pharmaceutical company partnered with Globant to understand how virtual reality technologies could be used for a doctor-patient interaction training. The result was an immersive experience to reenact doctor-patient interaction. These technology trends are aligning with our studio models and will shape the way in which we disrupt consumer experiences throughout 2017.

Now let me do a recap of some new customers and projects that led our growth during Q4 and all 2016. One of the most interesting projects is the one we are doing for a global bank where we are involved in creating the first version of their new digital engagement platform. As part of this project, we are building a new experience for their customers throughout different touch points, including new probes and services for a more effective use of technology. The main goal is to create an omni-relevant experience for the organizations and user.

In the US, several new customers were added to our portfolio in Q4, companies coming from industries like media and entertainment, travel, and finance. These companies join the vast list of logos that incremented during 2016, all of them pretty much aligned to our 50-square strategy. On top of that, there are several interesting projects to mention.

One of the largest American multi-national consumer goods companies wanted to transform how they reached and recruit new talent. They use a process chain approach that moved candidates throughout a long and manual process. They wanted to change it to a candidate-centric recruiting process that will build lasting relationships as they get the best talent.

Globant worked to ideate an ecosystem of solutions that including artificial intelligence, [gamified] mobile and web touch points, digitalization and optimization of processes, and a new communication strategy. The goal was to help the company save time by automating the right processes, reducing the candidate drop off rate, and gaining [cross-brand] equity as they deliver a superior user experience.

Another example is the work we have done for one large company within the healthcare industry. Globant recently completed a sale force of comm implementation, would receive huge prices for the customer, since it is considered to be a very essential project for the customer-centric and patient engagement journey in their business.

Lastly, Globant is working with CNA National Warranty Corporation on the complete redesign and implementation of the company's website, with the goal of improving the overall user experience. The main mission is to make the website an [annulative] point of contact between CNA, National, its end users by delivering an improved user interface and incorporating next-gen features for mobile devices.

In Europe, we have also been working on a great deal of amazing projects not only in the finance and travel industry but also in the public and digital sector. This can be seen in a project that we are doing for metropolitan police in the UK. As part of our partnership with them, transforming law enforcement for a digital age, we have led a pioneering initiative on social media to prove the value of public police communication through new digital channels.

The result is a new way for the public to talk to the police, helping vulnerable victims of crime make contact for the first time. It also enables the public to self-serve and creates a visible police presence online, reassuring the public and deterring offenders. This is a world first in terms of strategy, planning, execution, and measurement and is one part of the immense public access strategy that is being delivered throughout 2017.

In Latin America we have also seen expansion with several customers and industries like finance and travel. As an example of our work, we can mention an engagement for one of the leading banks in Latin America, Banco Macro. We are working with them on a digital transformation strategy that involves change at different levels of the organization, from strategy to operations and tactics.

Through elevating the business vision of the commercial operations and technology area, we are focusing the bank in a client center strategy. We do this by getting quantity and quality information about the customer to have a meaningful relationship with them throughout their life cycle.

Within our services our platforms offering, we also see continuous growth, with several new customers in the portfolio. For instance, StarmeUp most recently secured Santander Group as its largest client. This organization is a leading retail and commercial bank based in Spain, with a meaningful market share in 10 core countries in Europe and the Americas and 124 million customers. For StarmeUp it represents over 180,000 potential users.

Additional StarmeUp clients span the range of banking, media, and technology companies in the US, Latin America, and Europe. On top of that, we are say that StarmeUp was recognized as a top mobile app for business by the W3 Awards as a silver winner. These awards honors creative excellence on the web and recognize the people behind awards-winning sites, marketing programs, social content, mobile apps, and online video. It is an exciting recognition that shows the value of our platform in regards to building company culture and employee engagement as part of the digital transformation strategy.

Now let me share some news related to our global presence. We continued our extension in our delivery centers in the US, Latin America, and India. Just yesterday we formally reopened our completed renovated and expanded playground in San Francisco.

The playground is Globant's digital journey accelerator, featuring tangible demonstrations of how digital experiences are dreamed. It is a place to welcome our customers to get inspired by new trends in technology, such as virtual and mixed reality sets, Internet of Things, embedded computing, and data analytics.

During the opening, we also hosted an exclusive talk by Mike Haley, head of machine intelligence at Autodesk, who shared his experience around machine learning and artificial intelligence. This center aims to expand our presence in the US by creating a unique space for innovation.

Looking forward to 2017, we are seeing a robust level of demand from both current and prospective customers. This focus continues to be around emerging technologies and digital transformation programs, as these areas are key strategic initiatives for multi-nationals across the globe. We continue investing in our studios to remain at the forefront of innovation and will continue investing in the development of expansion of our services of our platform strategy.

Our pipeline shows a healthy incremental trend, and the market is improving relative to the end of the year, especially within the financial industry. We will remain optimistic about our ability to deliver sustainable growth in the future.

With that, I'll turn the call over to Alejandro Scannapieco, our CFO, for the detailed financial review on our fourth quarter the full year 2016 and also to provide guidance for Q1 and full-year 2017. Ale, please. Thank you very much.

Thanks, Martin, and good afternoon, everyone. I will spend a few minutes taking you through the fourth-quarter and full-year 2016 results. Then I will talk about our outlook for 2017.

Let me start by saying that we are very pleased with our overall results for the fourth quarter and full year 2016. Revenue for 2016 amounted to $322.9 million, implying a robust 27.2% year-over-year growth.

Southwest Airlines became our largest customer for 2016, with remarkable growth. Our number one account for 2015, Disney experienced a solid second half, which helped them to position in line with 2015 for the full-year, with good perspectives of growth for 2017.

We also saw good momentum among some of our 50-square accounts. We expect to see more benefits in the coming quarters. Revenues for top 5, top 10, and [11 to end] increased 30.1%, 26.8%, and 27.6% respectively, showing good growth across the board.

Adjusted gross profit for 2016 was very strong at $137.1 million, 42.5% adjusted gross margin, compared to $98.7 million, 38.9% adjusted gross margin for 2015, an improvement of 360 basis points year-over-year. This significant improvement is mainly due to a combination of the higher revenue per head and normalization of the FX market in Argentina. Despite a strong improvement year-over-year, we trended it down over the last couple of quarters as we faced increased FX headwinds in some of our Latin America delivery centers.

During this year, we achieved an important dilution in our (inaudible) SG&A as percentage of sales, decreasing from 25.5% for 2015 to 22.3%. We have been very disciplined in managing our costs as we gain scale while we continue investing for the future, primarily to expand our sales coverage in the United States and Europe. As a result of this, our adjusted operating income for 2016 increased substantial to 16.8% of sales from 9.7% a year ago, an improvement 710 basis points.

During 2016 we didn't perform any bond transactions, so no gain in bond transactions were recorded throughout the year. Financial income and expense net amounted to a loss of $3 million. This net result is primary composed of FX gains and losses resulting from monetary assets and liabilities in local currencies and interest on our investments and on our liabilities.

Other income and expenses resulted in a $3.6 million gain, resulting from the re-measurement of the liabilities related to our acquisitions. Our effective tax rates for the year was 28.3%, a significant decrease relatively to the previous year. The redaction over the course of the year was due to a more stable FX scenario in Argentina coupled with much lower inter-company balances and a more balanced distribution of assets and liabilities across the Company.

Adjusted net income for the year amounted to $40.3 million or 12.5% of sales. Adjusted diluted EPS for the same period was $0.0114, based on 35.4 million average diluted shares.

Let's now move to our Q4 2016 performance. Q4 was a solid quarter of revenue, closing at $87.3 million, 21.9% over last year and 6% over the last quarter. During Q4 2016, Disney became again our top one account for the quarter, displacing Southwest by a very small amount.

Our recently launched 50-square strategy has started to generate results, and we now have six accounts over $10 million in annual revenues. Revenues for customers 2 to 10 increased 31.9% over the fourth quarter of 2015 and 5.8% sequentially. Revenues for customers 11 and beyond increased 14.3% over the fourth quarter of 2015 and 0.2% sequentially. We expect a gradual transformation of the composition of this group of customers as we dive deeper into our 50 square process.

Our customer concentration numbers for Q4 remained fairly consistent with past quarters, with our top 1, top 5, and top 10 accounts representing 9.4%, 33.3%, and 45.8% of sales respectively. Our vertical diversification remains balanced across the different industries, with media and entertainment and financial services leading the pack, accounting for 23% and 21.4% of revenues respectively.

We continue to be well diversified in terms of customers and industries, with an increasing number of multi-million dollar accounts. During the fourth quarter of 2016, 78.9% of our customers were in North America, the US is our top country. 11.5% were in Europe, Spain becoming the top country. And 9.6% in Latin America and others, Chile our top country. Europe continues to outpace the rest of the regions in terms of growth.

During the third quarter of 2016, 88% of our revenues were denominated in US dollars, protecting our top line against currency fluctuations. During the last 12 months, we've rendered services to 340 customers. We now have 60 customers with annual revenues in excess of $1 million compared to 51 one year ago.

Turning now to profitability, we are seeing solid improvements compared to 2015. Our adjusted gross profit for the period increased to $35.8 million, 41% adjusted gross margin, compared to $28.1 million, 39.2% adjusted gross margin in the fourth quarter of 2015. The increasing adjusted gross margin was primarily driven by a higher revenue per head combined with the normalization of FX market in Argentina during last December when the new government came to power. Sequentially, currency fluctuations continue to create headwinds on our adjusted gross margin, particularly Argentina and Colombia, our two largest development centers.

We finished the quarter with 5,631 Globers, 5,219 of which were IT professionals. Attrition for the past 12 months was 19.3%, pretty much at the same level of last quarter, which was 19.4%. SG&A decreased 250 basis points compared to Q4 2015, accounting for 22.4% of our quarterly revenues. This impressive year-over-year dilution is a key contributor to our operating margin expansion.

Our adjusted operating income for the quarter improved substantially relatively to Q4 2015, it amounted to $13 million or 14.9% of revenues compared to $8 million or 11.2% for the fourth quarter of 2015, a growth of 63% year-over-year. Financial income and expense net amounted to a loss of $1.2 million, this net result is composed of FX gains and losses, resulting from monetary assets and liabilities in local currencies and interest income.

Other income and expenses resulting in a $2.6 million gain resulting from the re-measurement of the liabilities related to our acquisitions. Our effective tax rate for the quarter was 22.7%, in line with the last two quarters.

Adjusted net income for the fourth quarter the year totaled $10.9 million, 12.5 % adjusted net income margin, an increase of $1.9 million or 21.1% compared to the third quarter of 2015. Adjusted diluted EPS for the quarter was $0.31 based on 35.4 million average diluted shares for the quarter, increasing from $0.26 a year ago.

Moving on to the balance sheet, our cash on investments as of December 31, 2016, amounted to $59.9 million compared to $62.4 million as of December 31, 2015. At the same time, borrowings decreased to $0.2 million. Our balance sheet remains a strong, with current assets of $133.3 million accounting for 46.9% of the Company's equity. Total shares outstanding as of December 31, 2016 were 34.6 million common shares.

During 2016 we improved our cash generation. That generated cash was used for CapEx, [earn outs] related to past acquisitions, and initial payments of L4 and WAE acquisitions.

To wrap up, I would like to share with you our outlook for Q1 and the full year 2017. Let me start with the demand environment and the implication for our revenues. We continue to be bullish in terms of our service offerings, which we believe is fully aligned with market demand. At the same time, we are very optimistic with the progress we have seen in our 50-square accounts.

We regards to our margins, we will stick to the normalized range around 40% and 41% we pointed out in the last few calls. We will continue our training programs in (inaudible) technologies and the implementation of our 50-square strategy.

On top of that, the continuity of FX volatility around the globe, but primarily in Latin America, is expected to generate slight headwinds to our gross margins, as we have seen in the last few months. The Argentine peso is trading today at the same level it was a year ago, with inflation in excess of 30% for 2016, though clearly trending down.

Argentina, despite becoming less relevant, still represents 49% of our workforce. However, we will continue monitoring very carefully our SG&A expenses to gain additional dilution, with intention to offset potential hits on gross margin coming from FX headwinds. Finally, effective tax rate is expected to remain in the 22% to 25% range, in line with the last three quarters.

Now let me provide you with our guidance for Q1 2017 and the rest of the year. Based on current visibility, we expect revenues for 2017 in the range of $383 million and $393 million, an implied 20.2% year-over-year revenue growth at the midpoint of the range.

In terms of EPS, we are estimating a range of $0.0129 and $0.0139, an implied 17.7% at the midpoint of the range, assuming 35.9 million average diluted shares outstanding for the full year. Looking into Q1, we expect revenues to be between $86 million and $88 million and EPS to be between $0.24 and $0.28, 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.

(Operator Instructions)

Anil Doradla, William Blair

Hello, guys. So I had a couple of questions. The first one is around the gross margins. So obviously there are a couple of components, right? There is a component of the FX impacts, and then there's a component of potential salary inflations.

So can you help us understand how these two are interplaying? Historically what we have seen is that you revisit your salary targets twice a year, so given this particular environment that we are in where the peso has been relatively flat, how should we be looking at the interplays of your salary inflation plus the FX?

Hello, Anil, how are you doing? This is Ale. Exactly as you said, it's composed of two FX, so I would say pretty much all of the currencies in Latin America, especially for Q1, the outlook for the full-year is different. I'd say your dollar seems to be struggling among the year, but the outlook for Q1 still with the most of the Latin America currencies appreciating against the US dollar -- in fact, that has been the case on average 3% to 5% in most of the countries where we have delivery centers. So that's a big driver of that conservatism, if you wish, that we are baking into the margins.

As far as the inflation in Argentina, how we manage that, inflation is trending down, I explained that in the speech. What's happening is after the significant devaluation the appeared last December in 2015, there was a spike in inflation, but now all those things are trending down. So our expectation is that wage inflation is going to be pretty much aligned to the full-year currency devaluation.

We have two windows for salary increases. The first one that is the biggest one happens in April, and the second one is going to be towards October, but that's the smallest part. I would say it's two-thirds in the first window, one-third in the second window.

So we're trying to be a little bit conservative, but we have levers to offset the impact of potential wage increases outpacing the valuation in Argentina. We're growing nicely in other countries, especially in India, Colombia, and Mexico. Mexico became very competitive after their valuation after Trump took power in US. So I think there are a number of factors that make us believe that we are going to be still making the margin targets, as I mentioned in the call.

Very good. And Martin, a big picture question. 50-square strategy, reorganization of the sales force, it's all about scale -- can you give us an update on how you're doing? Have you populated most of the senior sales people to go after these 50 accounts, or there's still more hiring at a very senior level?

Hello, how are you, Anil? Thank you for the question. The (inaudible) platform it is already in place. We have delivered pretty much everybody that we needed to have for the accounts that we already have. Some new logos are coming into Globant, beautiful logos, so we will devote more people into those places, which we the already have. I don't expect people investing in the 50-square. All investment has been made already.

The deployment has been very smooth and as we predicted, the results are starting to be tangible now. As I said on my speech, we see some of the 50-square accounts outperforming by far some of the rest of the accounts. So that's a clear result that our strategy of focusing on the important customers but not forgetting about getting new customers that will become important in the future -- it's also yielding results, and it's very welcome in two different parts: first by our team and second by our customers. So that's the conclusion for what we are doing at the previous core program.

Very good. I think that's all for me, guys. Congrats on the results and looking forward to an exciting year.

Thank you very much, Anil.

Tien-tsin Huang, JPMorgan

Just following up on Anil's questions on gross margin, Ale. How much gross margin pressure could we see in 2017? I guess how far could it go down before you have trouble to offset that in terms of your SG&A leverage? I'm just trying to be a little more specific on how gross margins could fall relative to SG&A? Thank you.

I think the range is, as I pointed out think, it's going to be in that 40% to 41%. So if you compare that to the average gross margin for 2016, we're talking about 100 to 150 basis points. But we also plan to offset a big chunk of that through SG&A. We have been executing (inaudible) in the past.

Okay. But from a full-year standpoint, 40% to 41% -- I thought I heard a bit below that within the year. Okay. Just I guess overall, maybe for Martin, competitively speaking, I know a lot of firms are talking about digital now, you are a pure play. I'm curious if you have seen any changes competitively, whether it's in the form of changes in your win share or retention or pricing -- any kind of comments you can share would be great. Thank you

Thank you very much, Tien-tsin, for the question. Really everybody is talking about digital. It kind of became a buzzword. Not many have the real experience and exposure in terms their most talented people doing what we do. So I still remain very confident about our ability to deliver in the market, to win big deals against the big boys.

We are being much faster, smarter in our proposals, faster to adopt. So I think that -- and faster to move from our studios and create new value propositions. So remember, as a smaller Company we do have some disadvantages because we are smaller, but the fact that also being smaller gives you a terrible competitive advantage in terms of how fast you can move and how fast you can adapt.

So no change on the attrition side, which is meaningful. No change on our capability to seduce customers, hence seducing consumers, which is what we love to do. And there are not many companies out there that are talking about emotions.

We are talking about how to connect in an emotional way with consumers, and that's the real important differentiator that we are exposing to the market. And the brands and the customers are really liking it very much.

Joseph Foresi, Cantor Fitzgerald

Hello. My first question here is just around the revenue range for 2017. What puts you at the higher end of that range and what puts you at the lower end?

I think that we have also been -- we always been -- we are too in front of it here. We are just starting the year. We have very good prospects. We have very good accounts. I think -- look, if some of the 50-square program accounts gains the traction we are expecting for them to gain, we will very comfortable to be on the up on our range. But things happen over the course of the year.

So we choose to be, as we always are -- well, we think it will happen. So I insist on our guidance in terms of the midpoint of the range. However, as always we do as much as we come to move higher. So this is the way that you should expect that behaving.

Okay. And then just on hiring plans for 2016. We saw, I guess on a net addition basis -- I'm sorry, in 2017. We saw in 2016 kind of a very strong Q1, and then Q2 and Q3 slowed, and then Q4 was very strong. Can you give us visibility on what you're planning on hiring next year and how we should expect that to trend throughout the year?

Let me take that. I think what's happening in 2016 -- let's spend one minute on what is happening in 2016. There were a couple of -- we hired very aggressively in the first quarter, and in fact 234 net hires in the first quarter of the year. Then there was another second quarter of strong hiring.

We decided to slow down a little bit to manage certain FX headwinds that we had and still protect margins. From time to time we tend also to kind of balance the talent pool -- we call the bench the talent pool. So that's what we did in 2016.

Having said that and forward looking to 2017, without all the engines in place, we have created that are definitely outpacing the growth of Argentina -- like India, like Columbia, like Mexico, even US -- the combination between the acquisitions that we have made during 2016 plus the organic hiring that we are doing in the US in different places. So I think we have all the engines ready to be very aggressive and very robust in terms of accelerating hiring whenever it is needed. So the prospect for hiring for this year -- it's a very good one.

Okay. And just going back to the digital movement. Maybe you can frame for us what inning you think we are in. Early stages, people were talking about companies going digital, and we are hearing more and more about AI and automation. So maybe you could just give us some idea of what inning we would be in -- what phase we're in. Are we leaving phase I, heading into phase II, and your thoughts about that? Thanks.

I would separate that by continents. The United States and North America in general is in a pretty advanced stage. Advanced in terms of they already know that they want it. They have some plans that maybe they have already started. But now they need to build it and really transform their businesses through digital.

If you go more to Latin America, then you would find that there's a weaker understanding. However, there are some leading companies that are already talking about that, and we can engage earlier on the process in those places. In Europe, it is happening something in the middle. I think in Europe it still in stage -- United States is stage 2 out of 5, Latin America is stage 0 out of 5, and Europe is stage 1 out of 5. So similarly, I think digital transformation needs to go much deeper.

Now, I think -- look, the transformation still started to happen on the consumer and consumer-facing place. But now we need to take over pretty much everything. And you know our Internet of Things studio has a pretty important role there because pretty much everything will start pushing information into the web and pretty much everything will need to be understood by artificial intelligence and deep learning and by providing results that are relevant for consumers beyond just interaction or [instance] of use of making an emotional connection with the consumer.

So that's the next wave that it is coming on digital transformation, which will be even bigger than the initial portions that we already see, much, much bigger. So companies will need to invest a lot there, so that's why we are so bullish about the market, so bullish about the future of the -- top two of our -- particularly two, three of our studios [we did] Internet of Things, big data, and artificial intelligence, or cognitive computing as we call it -- those we think need to work together now to understand the data that machines are producing to create more relevant experiences for consumers and to create real new solutions for consumers.

This is what we are seeing. This is where we are investing money to be on the forefront of those things, from image recognition to [bib] learning, (inaudible) that recognize any kind of scenario. I think you may have seen the Amazon Go video that has launched in which you enter into the supermarket, you just pick the things, and then a bunch of artificial intelligence and a bunch of cameras look at what you did and just put on your shopping cart what you had just picked up from the shelf. And then you just walk out the place, and your account is charged.

So those kind of experiences in which the artificial intelligence, the Internet of Things, the big data are collaborating to refuse the friction between the consumer and the brand is something that is right now happening at this moment, at this very moment, on the leading company. Now these need to roll out pretty much everywhere. So we're in front of a new revolution coming from the digital revolution, so we're living in really amazing times for this, really amazing times.

Thank you.

Very welcome. Thank you for the question.

Ashwin Shirvaikar, Citi

Thank you, guys. My first question is on 50-square. Just trying to obviously understand it a little bit better. If you could walk through the decision process at the client level. So I'm imagining someone like Disney or Southwest has a senior relationship manager sort of exclusive to the account, I guess. How many accounts has that set up so that when you add revenues you can see a scale benefit, and how do you decide that can help us model this out a little bit better?

Look, I cannot disclose right now how many of those accounts we have already deployed. But what I can tell you is that the model is as follows. Each time we have an account, which we call it tier-1 or tier-2. Tier-1 means that they have a huge potential to keep on growing, and it's really material for our company. Tier-2 means for us that it has a huge potential, although it's not currently really material, it's more revenue we have been producing and earlier stage of accounts.

So we have those two kind accounts, and from time to time we review which accounts is on each of the buckets. But the teams are deployed on every single of those tier-1 and tier-2 accounts are already [tip top], and they are working. And they are exploring new opportunities and exploring new accounts -- it's funny, but sometimes things happen that one guy goes from one big account into another big account, and then that guy that went into the next account call our guys from the 50-square program to develop new business at his new company, which was not our customer.

So again, the team is in place. Some of the things and movements that we experimented during the third and the fourth quarter of last year are erased as we made a lot of movements. The customers are really happy with this. I don't know, but it is a movement that really is paying out.

We are happy with the results. But I don't know which other information you need to put into your models. This is how it works, and this is how we decided.

Right. I was kind of hoping with regards to the late year, late 2016 investments that were made -- so it's good to hear, first of all, that you have everything that you need in terms of investments already done on the sales front -- well, not everything, but most. But on a year-over-year basis, what's the step-up, I guess, in dollars spend just because you did not have this for all of last year?

No, it's already done. All the people that we need is already in the Company, even for those (inaudible) to come. And even more, many of those accounts have been -- will be tracked and will be developed by people that we are currently have in the Company doing some other accounts which are not tier-1 or tier-2.

Okay.

It became like aspirational for our people to be there.

Right. No, I understand. Separate question on the supply side. There are sometimes companies that use offshore labor, they do provide exchange rates that are assumed in the guidance at least for the supply currencies. Is that something you can share your assumptions on, either at this time or on a future call? And I guess the question there is, given continued policy uncertainty in the US, if we see future volatility in these supply currencies, how quickly can you react to that?

Okay. That's a fair question, Ashwin. We have been concentrating on executing our debt centralization plan very well over the last two years. If you asked me that same question probably three or four years ago, the answer would have been different.

I think at this point we have achieved a level debt centralization and diversification among the Company and building up teams that are very strong in terms of quality, in terms of the skill set in different places that would allow us to react very quickly to any potential shake in the currencies, we are looking into that. We are looking into what might be the potential effects and things. I think where are going through that part of having a much more globalized company and, in fact, will be able to react quicker if needed.

Understood. Got it. Thank you.

Avishai Kantor, Cowen and Company

Thank you for taking my question. My first question is that, again focusing on 50-square, so now that it sounds like you have most of your consulting sales and client management capabilities at your top line that you wanted to add in place, do you see any signs of ability to compete on larger-scale, potentially longer-duration contracts?

Thank you for the question. The short answer is yes, but it is not that we didn't see it before. When we are talking about the 50-square program, it is not just about getting deeper, getting longer-term, bigger deals, which is of course always what we have been pursuing. But it is also about being able to explore more areas within the Company, getting to more of the subsidiaries of those companies that are extremely large, and be able to develop that relationship in a closer and deeper way with those customers.

It should not imply a change in how long the contracts are or how big the contracts are. Of course maybe sometimes we can get a bigger deal, like it's happening now with one of the 50-square accounts. But it's not that the program is just for that.

That is for granted any other relationship we have in Globant. Every time we talk about a customer, our initial intention is to get additional confirmation program of 100 people. This is obvious, and this is how our salesforce is trying to position it.

Sometimes we need to start with smaller projects, more opportunities, so on and so forth, but the long-term idea is that whenever we have a 50-square program, right, account, we have a better relationship, we have the best-in-class relationship compared to all the rest of our competitors. So this is the idea with the 50-square program. It should take the relationship with our customers to the next level, based on perfection on delivery. That's the idea.

I understand. And then my next question, does the 2017 guidance factor any changes in the ability to raise pricing for existing or new clients compared to what it was in 2016?

Hello, Avishai, this is Ale. There is very little assumption of price increases. That doesn't mean that we can have certain (inaudible) in terms of the pricing.

What's happening with the pricing is we're not feeling any pricing pressure. Some of the new businesses are coming with good prices.

The quality of the delivery that we do with our discovery practice that we shape up after the acquisition of WAE, the UK company. It's also at the very high level in terms of pricing, so I think it's done and putting that into the bundle of getting larger in certain accounts where you need to face potential discounts. I think on and on, we have baked-in a very conservative assumption in the revenue guidance for 2017.

Great. Thank you so much for those clarifications.

Frank Atkins, SunTrust

Thank you for taking my questions. I wanted to ask what you're hearing from clients in the financial services sector. We've heard mixed results from peers, some seeing challenges, others seeing opportunities in terms of the changes in interest rates and potential deregulation. What are you hearing from your financial services sector clients?

What we are hearing is a very bullish scenario. They are optimistic about the future. They need to spend smartly the money that they have. So we are seeing like a gradual improvement of the scenario from last year.

In general, they needed to invest a lot on digital transformation of their businesses, and they need to compete now with newcomers like the [Finta] Company, so and so forth. So they need to do the transformation, so they are investing money. They will keep on investing money, and we foresee good sign-out for this year.

Okay. And as my follow-up I wanted to ask about Europe. You posted some nice revenue growth there. Where are the opportunities in Europe coming from, and what do you see going forward?

Sorry, I'm not sure I get the question right.

What are the opportunities that you are seeing in Europe for revenue growth? And what drove --

Europe?

Yes.

Europe. Well, we have a pretty good set of interesting customers in the financial sector in Europe, specifically. These large banks are undergoing very deep transformations, and they are -- as I mentioned in my script, one big bank in Spain, we are transforming pretty much all the digital bank for them, and we are redoing the whole platform, which is great. And we are seeing like a very bullish 2017, in particular in Europe on the financial sector.

Now, we have other sectors that are growing, too, like the retail and some others. So I'm bullish for 2017 in Europe. It grew a lot from last year to this year -- sorry, from 2015 to 2016, it grew a lot, our market share in Europe and I expect for that to keep on being the case for this year.

All right, great. Thank you very much.

Jason Kupferberg, Jefferies

Hello, guys. This is [Ahmed] saying for Jason. Just a quick question regarding your guidance for FY17. The revenue growth guidance is around 20% year-over-year. How much of that is inorganic from L4?

And then just related to that, the last few years you guys have grown revenues at high 20% rate, and then the commentary today has been nothing but positive, it seems like. And then your 50-square strategy is also starting to provide results, it seems like. So why would the growth come down from high 20%s to 20% next year? Is it just you guys trying to be conservative at this point at the early stage of the year?

Well, we did exactly the same last year. This is the visibility we have right now, and we want to be sure that what we tell to you it's what we can execute. There's nothing more.

Now, are we bullish about the situation of the market compared to last quarter? Yes, we are. So last year we started with 21%. Now we're 20.2%. We can deliver along the year. But expectations, I want to set the expectations on what I'm confident that we can do right now, which is that 20.2% on the midpoint of the range.

Okay. And is inorganic contribution around 1%, 2% from L4?

Ale, can you cover me on that?

Definitely. It's pretty much in that range. It was a very small tuck-in acquisition, as we disclosed. So you are pretty much in the range. Yes.

Great.

And then -- sorry, the acquisition is connected to our intention to keep on expanding our footprint in the US, and that's very important for us. That's really, really important for us.

All right. Great. And then just a follow-up on margins, what is the implied adjusted operating margins within your FY17 guidance? And from the call, it seems like any FX headwind, you think you can counter it with SG&A efficiencies and it seems like investments related to 50-squared are behind you guys. Are there any other positives or negatives to operating margins next year?

In terms of operating margins, we are thinking -- we don't guide operating margin, but we are planning to be probably slightly below 2016 and most of the effect is coming from FX, as you said, especially it still -- the most relevant effect on FX is Argentina. It's at the pace of -- the pace of wage inflation is still outpacing the pace of devaluation. We've seen that situation is going to be reversed, so probably the second half of the year inflation is trending down. That's one thing.

As you said, definitely most of the big investment in 50-square is gone. We have assembled most of the team. It could be the case that we get new accounts into the 50-square and we need to assemble a new team, but the big chunk of investment as pointed out by Martin is already gone. So all in all, I think we're targeting to have SG&A dilution as an offsetting factor so that we can come up with the [paying levers] of net income as compared to 2016.

All right. Perfect. Thank you very much.

Jason Washburn, Pacific Crest Securities

Hello, guys. This is Jason in for Arvind. Just wanted to ask you, what are your spending priorities as it pertains to building your tech capabilities in FY17?

To be very, very clear, Globant has always been investing in developing new studios or new capabilities here or training people. This is the core of the digital era.

The new technologies are changing so fast that you cannot stop investing there. I don't project to have a bigger chunk of investments than what we did last year, but what I'm saying is that we will keep on obsessed on how to seduce our consumers, on how to be able to connect with millions of consumers, and which are the technologies that are erasing those friction points that I was talking about, and to connect with them emotionally, and to connect with them in a different way. That is the differential that we have as a Company, and we will keep on investing there to have the best possible technologies and the best possible teams to create those frictionless experiences for our customers.

So this is the future of our investments. This is what we are going to be seeing all our efforts to train our people.

Great. And then just a follow-up. I know you spoke a little bit about your AI-related work. Could you maybe elaborate a little more on what you guys are doing in the space? Thanks

We have a full studio right around there. We are playing now a lot with technologies around recognition of things and actions that people do within different spaces and helping other systems to get more relevant information for the experiences that they are building for their consumers. That's one of the things in which we are investing most of our time.

Then also artificial intelligence behind analyzing data in terms of transparence of different assets coming from what is called Internet of Things -- different web-enabled devices, sensors, so on, so forth. So those are the two things which artificial intelligence is playing a big role within the solutions we are providing to our customers. But again we don't believe in a single solution.

I think artificial intelligence needs to be applied industry-by-industry in a very specific way to solve a friction with the consumer. I don't believe in having one single massive solution that is the perfect brain for every single situation like other companies do. I believe that having a specific solution for different industries for different scenarios is much more adequate in terms of artificial intelligence and the way to brought it to the market.

Great. Thank you.

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

So thank you very much, operator. Thank you very much, everyone, for participating on this call. I'm really excited about what's going on at Globant, so I expect to see you on our next earnings call. Thank you very much for your continued support and understanding. Thank you. Cheers.

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