Globant SA (GLOB) 2017 Q2 法說會逐字稿

Good afternoon, and welcome to the Globant Second Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Paula Conde, Investor Relations Manager. Please go ahead.

Thank you, operator, and thank you all for joining us today on our call to review our 2017 second 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, global CEO, and Alejandro Scannapieco, global 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 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'd like now to turn the call over to Martín Migoya, our CEO.

Thank you, Paula. Good afternoon, everybody, and thanks for joining us today. I'm pleased to be here to review our business and financial performance for the 3-month period ended June 30, 2017. At the end of our call, Alejandro will share with you our outlook for Q3 and the rest of the year.

I'm happy to announce that during Q2 2017, we had another record quarter for Globant. Revenues for the full quarter amounted to $99.6 million, a robust 24.6% year-over-year net growth. We continue to see a strong growth trend in the demand of digital services, driven by businesses from a broad array of industries. As IDC points out, the proportion of digital-related consulting engagements will increase from about half of all business and IT consulting engagements in 2013, 2015 to approximately 70% of all engagements in 2020 or 2021, driving the total market for digital strategy and agency services well over $100 billion in opportunity worldwide by 2021. IDC has concluded that digital strategy is synonymous of business strategy, as digital approach has become foundational of all parts of corporate strategy.

This landscape continues to give us a huge opportunity, considering our positioning as leaders in driving business to digital. On top of this growing trend, we believe that we are at the forefront of one of the most radical changes since the disruption caused by the iPhone 10 years ago. I'm talking about the artificial intelligence revolution. Like many profound transformation in the past, artificial intelligence will shake the ground in the near future. It is expected to revolutionize the way end-users interact with technology and reshape the business landscape.

Artificial intelligence has been available for decades, but it's just now reaching an unparalleled moment of maturity. This is due to the recent advancements, specifically in machine learning and deep learning. These breakthroughs are becoming the main drivers of innovation in many industries and are powering the deep acceleration of artificial intelligence investments.

Related to this, during July, we launched our latest Sentinel report, which is available at sentinel.globant.com. This report aims to provide insightful evidence of consumer behavior and market trends. Given the impact and growth of artificial intelligence, this new addition is focused on this strength. In it, our experts describe tangible ways to incorporate artificial intelligence in 5 fields that are facing extreme transformations.

First, talent management. More and more artificial intelligence is used to find, recognize and engage talent through many different types of interactions.

Second, educational learning. Through artificial intelligence, we're able to produce tailored curriculum and materials for every student. We can track their progression in real time and understand their personality to structure their appropriate study groups.

Meaningful interactions. Artificial intelligence enabled devices to adapt to the users and to context. It can learn how you interact depending on the time, place and even your mood.

Process efficiency. With artificial intelligence, companies can better serve clients by treating them as their only clients, but on a massive scale.

And last, scaling interactivity. Artificial intelligence has recently enabled a conversational interface. It can understand variations of language automatically and act upon it. Soon, we may not even realize we're talking with a computer. The Sentinel report also describes that successful artificial intelligent products will be those that aid people in processing information or that facilitate decision-making. Artificial intelligence is best leveraged when treated as technology to supplement, not replace, human capability.

Related to this, we'd like to announce our third edition of Converge, our annual executive gathering. This year, the conference will be focused around the profound changes that artificial intelligence is bringing to the table.

Converge will take place on October 19 in New York and expects to gather experienced executives, creative thinkers and innovators to discuss business transformations. I invite all of you to join us and keep updated with the events agenda at converge.globant.com.

As we continue to adapt to new realities, we're presenting some updates with our studios. Globant Studios have always been the core of our value proposition. They bring together access around different technologies and trends. As I explained on the last earnings call, we have organized our studios in 3 logical groups to increase our customer focus: strategy; specialties; and foundation. Today, I'd like to dive into 3 studios that aim to address some of the most important trends of these days.

First, the Artificial Intelligence studio. This team aims to harness the power of artificial intelligence to create better experiences and services. We do it with state-of-the-art techniques such as deep learning, neural networks and traditional machine learning approaches. We believe that this studio is critical to all our future work, including our Services over Platform portfolio. In this sense, this team is working to implement new features on all our platforms that leverage the power of artificial intelligence.

Second, the Product Leadership studio, which I'm proud to present today. This team delivers value for customers from strategy through product delivery. It uses modern product management techniques to ensure products solve the right problems, meet user expectations and achieve business value.

Another new studio is Agile Delivery studio. This team focuses on improving the way our customers work by leveraging our unique Agile Pods methodology. We provide customer-centered rapid evaluations and enhancement of products through an agile design and iteration process.

We believe that these studios complement our offering to provide more comprehensive service to our customers.

Now let me go over some interesting projects that we have been working on. We kept expanding our client relationship and long-term partnership during Q2, mostly due to our 50 squared approach. We have added new logos coming from industries like insurance, healthcare, travel and entertainment among others. In the U.S., there are many engagements to be highlighted. First, Globant is helping GlobalEnglish, the leading U.S. technology company delivering business English software to develop a new mobile platform for English language learners around the world. The platform will be powered by new technologies, such as Ionic and Angular and new algorithms and modules, which incorporate adaptive learning in the solution.

Second, during Q2, we started working with Epic Games, an American video game development company based in Cary, North Carolina. We partnered with Epic to provide game development support on their Unreal Engine titles.

Third, we also started working with Pampered Chef, a multinational, multilevel marketing company that offers a line of kitchen tools, food products and cookbooks. We are involved on a strategic initiative to improve the consultant experience, while supporting their current platform and native mobile applications. Also, Royal Caribbean has partnered with Globant to build their new guest digital experience for their cruises.

In Latin America, we have also seen an interesting expansion with revolutionary projects coming from a wide variety of organizations. Some of them include -- we started working with Copa Airlines, the flag carrier of Panama. They engaged with us to improve the travel experience for their customers, and we will continue to deliver great solutions for them in the near future.

Currently, we're also serving Itaú Chile, mainly around user experience strategy with different products of the digital ecosystem of the bank. With our expertise on agile methodologies, Globant is developing services that are present on their main website and other internal products.

Europe continues to demonstrate great growth, and these are some of the projects that are helping drive our expansion. We started an engagement with one of the leading financial institutions on the region, who embarked on a digital transformation program. Globant is now part of a multiple project with this company involving many of our studio practices. We're also involved in the development of a public engagement platform for a major government organization, which is intended to be the beginning of a fundamental digital transformation.

Lastly, we're working with a leading global insurer across multiple projects to define and execute their customer transformation program. This include the redesigning of a customer journey, building new services and influencing change programs.

With our Services over Platform, I'd like to introduce a new product that was integrated to our suite during Q2. Signal is a platform that bridges nearly every screen with a rich media experience. It is publisher-controlled and is differentiated by its ability to engage users. Its technology is cutting edge and is simple to manage. It offers the ability to build customer experiences to meet customer goals. We expect these products to provide a seamless solution for Tier 1, 2 and 3 media publishers looking to improve their technology approach to OTT.

Now, let me go over some news in regards to our company growth. To continue expanding our U.S. footprint during Q2, we acquired PointSource. This design and development tech agency is specialized in retail, supply chain and insurance services solution. Founded in 2004, PointSource is headquartered in Raleigh, North Carolina. The company has 76 professionals, highly skilled in digital transformation working for brands such as Johnson & Johnson, Allstate, Soccer.com, Kohl's and many others. PointSource brings business, marketing and technology together to create transformistic digital solutions. They share our passion for innovation, design and engineering. We are confident that this acquisition will foster Globant's goal of becoming the best punter in development profound digital experiences.

As we continue with the objective of strengthening our position as global leaders, we must build our teams to be best in class. With that in mind, we have decided to appoint Linda Rottenberg as a member of our Board of Directors. Linda is a Co-Founder and Chief Executive Officer at Endeavor Global, a global organization that empowers and drives entrepreneurship around the world. Linda was named one of America's best leaders by U.S. News and one of Times 100 innovators for the 21st century. Linda brings a lot of experience to the table. She is a highly recognized professional with a strong focus on innovation and business results. So we're confident that she will be a key contributor to our future success.

Lastly, let me remark that our pipeline and backlog remains strong with a number of high potential new customers coming from a wide variety of industries, including media and entertainment, travel and finance, among others. To sustain our growth, we will continue to invest on our 50-square model since it has proven to be the perfect way to engage with our most relevant accounts. We remain optimistic about our ability to deliver sustainable growth in the future.

With that, I will turn the call over to Alejandro Scannapieco, our CFO, for a detailed financial review on the second quarter of 2017 and to provide guidance for Q3 and the rest of the year. Ale, please. Thank you very much.

Thanks, Martín, and good afternoon, everyone. Let me start by summarizing the results of our second quarter and 6 months ended June 30, 2017. I will then discuss our guidance for both the third quarter and the rest of the year.

Q2 was a solid quarter of revenue, closing at $99.6 million, a robust 24.6% year-over-year net growth, and near $100 million in a quarter for the first time ever. During Q2 2017, Disney was once again our top 1 account for the quarter. Our relationship with them continues to be strong and healthy, as we keep working on new exciting projects and with new divisions. On top of that, the implementation of our 50-square strategy continues to produce results and we now have 6 accounts over $10 million in annual revenues. Revenues for customers 11 and beyond increased 30.3% over the second quarter of 2016 and 11.8% sequentially. We expect the gradual transformation of the composition of this group of customers as we dive deeper into our 50-square program.

Additionally, during Q2, we added a number of strategic accounts to the portfolio, including among others, 3 large insurance companies, 2 in the U.S. and 1 in Europe, a couple of healthcare companies, 1 airline in Latin America and 1 media and entertainment company, all accounts that could potentially transform into 50 square over the long term. Finally, once again, the vast majority of our second quarter revenue was generated from customers that were already working with us in the prior year. A trend that repeats over time as we dedicate time and resources to farm our existing customer base and maintain long-term relationships with our customers. Our customer concentration numbers for Q2 2017 remained fairly consistent with past quarters, with our top 1, top 5 and top 10 accounts representing 10.1%, 31.6% and 43.9% of revenues compared to 10%, 34.2% and 46.4% of revenues, respectively, for the second quarter of 2016. Our vertical diversification remains balanced across the different industries. Our largest industry for the quarter was media and entertainment with 24.8% of revenues followed by banks and financial services with 23.8% of revenues.

During the second quarter of 2017, 78.5% of our customers were in North America. The U.S. is our top country. 12.3% were in Europe with Spain as the top country and 9.2% in Latin America and others; Chile, our top country. Europe continues to outpace the rest of the regions in terms of growth. During the second quarter of 2017, 87.6% of our revenues were denominated in US dollars, limiting the impact of currency fluctuations on the revenue side.

During the last 12 months, we rendered services to 331 customers. We now have 76 customers with annual revenues in excess of $1 million compared to 57, one year ago,

Turning now to profitability, we're still experiencing some margin pressure as there were FX appreciation movements in some of the regions where we operate, such as Uruguay, Mexico and India. And despite certain devaluation of the Argentinian peso towards the end of the quarter, wage inflation in the country continued to outpace devaluation. Recent performance of the government in midterm primary elections might also play a role towards flat or minimal currency depreciation in Argentina.

Our adjusted gross profit for the period increased to $37.9 million, 38.1% adjusted gross margin compared to $34.1 million, 42.6% adjusted gross margin in the second quarter of 2016. The margin decrease year-over-year was primarily driven by three factors: First, Q2 2016 still enjoyed the benefit of the significant depreciation of 53% that occurred in Argentina in December 2015, our main development center. After that, the Argentinian peso remained pretty much flat, being outpaced by wage inflation despite the efforts from the government to reduce overall inflation in the country. Second, Uruguay, Mexico and India, where we hold 23% of our headcount, appreciated their currencies compared to the second quarter of 2016. Finally, there was a strong headcount growth in promising locations that slightly changed the cost mix. The margin decrease versus the first quarter of 2017 was primarily driven by the usual salary increase window that took place during the second quarter of the year. We finished the quarter with 6,223 Globers, 5,772 of which were IT professionals. Attrition for the past 12 months was 18.1% compared to 18.9% one year ago, showing a nice improvement year-over-year linked to our diversification efforts. Our SG&A for the quarter decreased 42 basis points compared to Q1 2017, accounting for 22.9% of our quarterly revenues, although increasing 45 basis points on a year-over-year basis compared to Q2 2016, mainly driven by some investments in our on-site sales force together with further development of our delivery capabilities in the U.S. and LatAm. We will continue to be disciplined in managing our cost, while we continue to invest to expand our footprint in the United States and Europe.

Our adjusted operating income for the quarter amounted to $11.1 million or 11.1% of revenues compared to $13.7 million or 17.1% for the second quarter of 2016. Q2 2017 has a very tough comp since our gross and operating margins of Q2 2016 were positively impacted by the large depreciation of the Argentine peso that occurred in December 2015 and benefited the first half of 2016, as discussed before. Margin pressure was another factor that impacted the lower adjusted operating income. Other income and expenses resulted in a $0.7 million gain, resulting from the remeasurement of the liabilities related to one of our acquisitions. Our income tax for the quarter amounted to $1 million and imply an abnormally high effective tax rate of 31.2%. The increase in effective tax rate is the consequence of the impact of an extraordinary impairment of tax assets recorded for the period, which had no impending income tax, but generated a lower profit before income tax base. If we were to exclude such loss from [DVT], the effective income tax rate for the quarter would have been 20.5%, which is in line with our expectations for the year. Adjusted net income for the second quarter of the year totaled $9.6 million, 9.6% adjusted net income margin compared to 12.7% for the second quarter of 2016.

Adjusted diluted EPS for the quarter was $0.27, based on 36 million average diluted shares for the quarter in line with our expectations.

Moving on to the balance sheet. Our cash and investments as of June 30, 2017, amounted to $36.3 million compared to $59.9 million as of December 31, 2016. This decrease in cash is mainly explained by our decision to practically self-fund for the time being M&A transactions on CapEx to expand our offices in Latin America, U.S. and Europe. Borrowings totaled $10.3 million as of June 30, 2017. Our balance sheet remains strong with current assets of $131.4 million, accounting for 39.2% of the combined total assets. Total common shares outstanding as of June 30, 2017, were 34.9 million.

Now, let's talk about the 6 months ended June 30, 2017. Revenue for 6 months ended June 30, 2017, was $188.3 million, implying a 22.9% year-over-year growth. Growth was boosted mainly by nontop customers and new customer wins in the financial services and insurance space. Adjusted gross profit for the 6-month period was $72.5 million, 38.5% adjusted gross margin, compared to $67.1 million, 43.8% adjusted gross margin for the same period of last year. On a year-to-date basis, we continue to experience the headwinds of FX market in most Latin American currencies combined with wage inflation in Argentina. Adjusted SG&A level accounted for 23.1% and 22.2% of our revenues for the 6 months ended June 30, 2017 and 2016, respectively. This year-over-year increase was mainly driven by investments in expansion of U.S., Colombia and Mexico delivery centers and some more self covers.

Adjusted net income for the 6-month period ended June 30, 2017, was $19.3 million, 10.2% adjusted profit margin. Adjusted diluted EPS for the same period was $0.54 based on 36 million average diluted shares for the period.

To wrap up, I would like to share with you our outlook for Q3 and the rest of 2017. We continue to experience sustained demand for our digital offerings, and we also see traction from our strategic accounts. Business environment is healthy, and we're glad to see the evolution of our 50-squared accounts strategy. The continuity of the FX volatility around the globe but primarily in the different regions where we operate require us to take a conservative approach in our guidance for EPS. In terms of margins and as we explained in our last earnings call, we still expect some margin pressure and short-term volatility, all of that baked in our guidance. We continue to experience headwinds on the FX front from some of the countries where we operate, such as Mexico, Colombia and Uruguay where currencies are expected to remain flattish or with a slight appreciation versus U.S. Dollar during the current year.

In Argentina, there has been some depreciation of the peso lately, but wage inflation continues to outpace devaluation. We've seen the short-term appreciation of many Latin American currencies and the Indian rupee shouldn't last long, as the U.S. administration has been taking some action, such as the increase of interest rate, tax reforms proposals, among others, that will likely strengthen the U.S. dollar eventually.

Despite this short-term volatility, we will continue managing our margins and investing in the long term, training our Globers on emerging technologies and expanding our footprint in our target markets. We will continue expanding our footprint outside of Argentina, a factor that will enable us to keep diversifying the talent base and balancing our cost structure with a better handle on margins. As always, we'll continue managing very carefully our SG&A expenses to gain additional dilution along the year, with the intention to offset potential hits on gross margin coming from the previously described picture.

Finally, effective tax rate is expected to be in the 20% and 22% range, in line with previous quarters.

Now, let me provide you with our guidance for Q3 2017 and for the rest of the year. Based on current visibility, we expect Q3 revenues to be between $103 million and $105 million, implying a 26.3% year-over-year growth at the midpoint of the range. EPS is expected to be between $0.32 and $0.36, assuming 36.2 million average diluted shares outstanding for the quarter. Looking into the year, we now expect revenues for 2017 in the range of $397 million and $403 million, an implied 23.9% year-over-year revenue growth at the midpoint of the range. In terms of EPS, we reinforce and maintain a range $1.22 and $1.30, assuming 36.1 million average diluted shares outstanding for the full year. Given the FX volatility and wage inflation environment already described, we have decided to maintain the wide range of the EPS, as it could be driven towards the lower end if such headwinds continue or towards the higher end, if such situation reverts.

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) The first question comes from Ashwin Shirvaikar with Citibank.

Good performance on the top line, again. My question, Martín, was with regards to you had a comment on project size and the opportunity set for digital increasing. As these digital projects become more mainstream, could you comment on your ability to scale these projects from a talent-hiring perspective?

Yes, sure, Ashwin. Thank you very much for your questions. I think that the demand is becoming mainstream as you said. I would take examples on some of our biggest accounts and some others that are not our biggest accounts. We have, I would say, pretty much no problem to scale the projects, given that our pods -- our Agile Pods are meant to that. I mean, we have within the whole company now about a 1000 pods that are working, each one with their own name, with their own specification of values, mission statements, all those things. And when those pods mature, it happens something that we call mitosis and that mitosis means that we will separate those teams into -- when they have more senior members, we separate those teams into 2 different teams. And that's the way that we have to scale. It's not about just hiring people and training them and putting them into work, but it's about making the mitosis in the same way as cells replicate itself to generate another one with the same DNA that is equally efficient. So I think that, that approach that we are following is extremely important to scale on our customers, and it's also one of the reasons why our customers are selecting us.

Got it. Yes. And so the second part of it was, as you raise revenues but not the bottom line and you, obviously, mentioned a fairly long list of reasons, Ale, in that. I just want to confirm that what you meant was it's entirely FX. It's really not pricing, it's not mix. There's nothing going on -- it's basically FX volatility that you are concerned with, with range?

Go ahead, Martín.

No, no. Go ahead.

I just wanted to confirm that as we pretty much all of the fact that and all of the margin pressure that we're facing is the fact. It's a fact in most of the currencies in Latin America that appreciated for the first 6 months of the year and in Argentina, it's a combination. There is very little devaluation in the first 6 months. Then there was a little bit of further devaluation, but that was after the end of the quarter and that's combined with the still wage inflation in the country.

Got it. Okay. And a quick third question. Stock-based comp was really high in the quarter. I don't think it's been on a quarterly basis at this level. What -- what's driving that? And is that sort of a new sustainable level? What's going on? Can you comment on it, please?

No. It's a one-off effect. It's pretty much related to the issuance of (inaudible) tickets of unit program for certain key employees. So you shouldn't expect that as a normalized level going forward.

The next question comes from Anil Doradla with William Blair.

And congrats from my side on the solid top line. So Martín, you talked about the pipeline being solid. You highlighted about 3, 4 end markets. Is there any particular end-market that stood out that perhaps exceeded your expectations that is worthwhile highlighting where you're getting very solid traction?

I would highlight 2, one is entertainment, well, within the sector of media and entertainment, and the other one is finance. But we're seeing -- it's very interesting because we're seeing like the demand being expanding in pretty much any industry. Now, also in industries like, for example, industry automation or automotive industry, every industry needs to go through these transformations. So we're seeing that effect and also we're seeing that the effect is being across all industries. Now, which are the places in which we are performing in a much more -- we are growing more are media and entertainment, finance, also travel. The travel space is also growing very fast. So those are the 3 areas that I would suggest or mention.

Okay. And Ale, I understand you have salary adjustments twice a year and I think it's April, October. So there is one coming in October. Is that right? Did I understand that right?

That's correct.

Okay. And so the way I look at it is the FX headwinds, is it fair to say that it takes basically maybe 6 -- 6 to 9 months for the salaries to catch up with this new norm of FX. In other words, as you come to the October salary year time frame, that's when you would be able to get more in line with the currency situation. Is that a fair assessment?

Well, typically, the big chunk of the salary increase, I believe, in Argentina where we have -- that's the only country where we have 2 salary windows. In the rest of the countries in Latin America and India, we have just one -- single window. In the case of Argentina, the big chunk of the salary increase happens in Q2, in April. So it takes several months because you have the uplift and the jump in the costs in Q2 and then as the currency slowly devalues, then you catch up. So it takes probably between 4 and 6 months in order to catch up. The second salary increase in October is -- it's probably 1/3 of the total salary increase of the year. So it probably is going to take you less in terms of months to catch up, assuming that there is a smooth pace of devaluation of the currency. Hopefully, that clarifies.

Right. So it's fair to say that the range that you've given out, short of some significant moves in the FX front, it's fair to say that you have a good handle. I know it's a wide range, but we should be okay right now after passing 3 months after -- the April was the last time. So I'm just trying to basically quantify the degree of confidence we should have on that range.

Understand. Understand. And we really feel comfortable with the guidance that we're providing and the rates that we're providing. Of course, we see volatility. We still see volatility in the currency. I mean, the currency started -- particularly, in Argentina, it started with a very steady devaluation in the past month.

(technical difficulty)

I think we lost Ale.

But again, to summarize the question that Ale was saying -- that you asked to Ale, we're seeing -- we're pretty confident with that. Also, we're going to be learning the whole process. But I would say that we are confident with that. There is some volatility happening in the main core cities in which we're operating, and we're expecting that volatility to settle. But the range is something that we always provide and we feel confident with that.

The next question comes from Moshe Katri with Wedbush Securities.

Can you quantify the margin impact from wage inflation during the quarter? And then what was wage inflation in general in Argentina? And what are you expecting that to be by the end of the year?

It's a blend. It's a blend because you have the effect of what's happening in Argentina but you also have the effect of Latin America currency's appreciation against the U.S. dollar. That means you take the Mexican peso on a year-to-date basis is appreciating almost 15% against the U.S. dollar. So it's a blend. Of course, a big chunk of the FX effect is coming from Argentina. Wage inflation in the country is running at mid-20s, low 20s, while the pace of devaluation year-to-date has been only 5%. That has been kind of the combined effect.

Okay. And then as a follow-up, 2 things. One, is there any possibility to factor that -- these increased costs and future engagement in terms of how you contract these? And then, just remind us, what was your headcount in Argentina as a percentage of total headcount?

I would assume that your -- when you're talking about factoring that into the contract, you mean in the engagements with our customers?

That's correct.

Should that be the case -- yes, should that be the case, honestly, the way we're trying to manage this is basically by decentralizing Argentina and expanding our talent base. First, because we believe in decentralizing the talent and looking for the talent in many different places and enlarging our capabilities, our skill sets and the possibility of taking up larger deals. But the side effect of that is that we're decentralizing Argentina and we're lowering the reach of Argentina. I think the government in the country is doing many different things to lower inflation. So we're very optimistic in the mid-run in terms of how inflation is going to turn out in 2018. But in the short run, it's us managing cost by moving projects from different locations. Now, we have the ability to play perfect in many different places, all across Latin America, India and also U.S. So that should be kind of the leading driver. We don't want to mess up our customers with renegotiations because of certain wage increases in one of the countries where we operate. It's just that we need to manage that.

And then the headcount mix in Argentina?

Headcount mix, as of today, is 43%. So it's running probably -- if you compare that to one year ago, we're running 9 percentage points, 900 basis points below. So Argentina, every single quarter is decreasing as a percentage of total headcount. We said that we'd like to have probably no location above 25% of our headcount. It's going to take time with Argentina, but every single quarter we're decreasing Argentina as a percentage of the total.

The next question comes from Tien-tsin Huang with JPMorgan.

Just to add on Moshe's questions around the contracts. From a pricing standpoint, any change in your pricing philosophy, given what's going on with inflation and labor mix and perhaps competitiveness in hiring talent?

Look, there's some changes that -- some changes that we're doing that we have been making them from the beginning of this year, ending last year, which are changed to follow a little bit more our costs, but I would say that given -- in general, contracts are being renewed at new prices. So we're not seeing any pressure on the pricing side. Indeed, we're seeing our prices on new contracts are going up nicely without any injury on demand. So we see that as a very interesting effect of -- it's a mix between our 50-squared program and the pure digital positioning that we have. So I don't know if that answers your question?

It does. It's helpful, Martin. And then just as a quick follow-up. Just the revenue guidance change. How much of that is inorganic from acquisitions versus any other organic changes? Sorry, if I missed that. I just want to make sure I got that.

Organic. Organic, it's most of it. Inorganic, it's just a bit on the guidance. Organic, it's most of it based on some customers that are tractioning quite very well.

The next question comes from Joseph Foresi with Cantor Fitzgerald.

When you talk about scaling, do you expect to do more M&A? And how should we think about the balance between M&A and margins?

Look, for us M&A has purely strategic movement. It's never about the volume. And we said this many, many times. So if there is any strategic move that we can do like the acquisitions that we did in the past, I would say a year or 1.5 years, have to do with expanding our footprint in the U.S. And we are very committed to that, and now we have a pretty decent footprint in the U.S. compared to what we had. So if there is any strategic reason to do it, we will do it. Otherwise, we will refrain from doing it. So we see now our footprint in the U.S., which is quite healthy. So we will keep on searching new strategic areas to expand our business, and of course, we're looking into more strategic areas to expand our businesses. But it will not keep on happening on the same way that we saw it until now. Unless we find something very unique, of course.

Sure. Understood., I guess, maybe asking it a different way. How should we think about margins in 2018? And do you have any specific margin targets or long-term outlook that you can share with us?

We have been talking, Joe, about the normalized margin range between 38% and 40%. I think the margin pressure that we're facing this year is a little bit extraordinary. I think it's a combination of several factors I pointed out and I described during the call. So the combination of appreciation of Latin America currencies plus this combination of very slow devaluation in Argentina combined with wage inflation. But we're continuously executing our plan of decentralizing in Latin America and also in India. We are moving projects to several different places. And that at the end is definitely giving us some edge in terms of unbalance, in terms of how we manage markets. And on top of that, what we clearly see is that brand-new technologies, particularly those related to the most emerging technologies, the AI, some machine learning things, cognitive computing, are allowing us to charge better rates. Also, some of the acquisitions that we have made are contributing to having a better profile on our rate. So all of that combined, with also with the smart and efficient use of resources, make us to believe that 2018 is going to be a better year in terms of margin profile, but still within that range of 38%, 40% that I mentioned.

That's helpful. And then the last one from me. I guess, I'm wondering are you concerned about talent at this point, particularly in Argentina. Obviously, wage inflation is up. You did the stock. Stock comp went up, which would probably retain some more people. So maybe can you comment on just about being able to retain the talent there? If you can give us an attrition rate in Argentina versus the global on your report, that would be great.

Attrition is trending down. We don't provide the numbers of attrition every quarter, but we provide once a year. Please correct me, Ale, if I'm wrong. But it's trending down, so we have good moves on that front. On the other side, we have no problems with talent given that we are spread around in a base of talent that is very, very big. Just in America, it's 600 million people, and also we have presence in India with 1.2 million almost -- 1.2 billion people. So we have no lack of talent or conditioning to get talent from Argentina or from any of the other kind of 17 countries in which we operate. So we think that we will keep on expanding and having great access to talent. We feel that also we are a great choice for keep the career of our Globers relevant, given the kind of projects we have, given the kind of customers we have. And working for Globant, they realize that -- they're realizing that they can gain that with some of the best brands in the world. They can stay relevant because they work with the latest technologies and using the latest concepts on software product creation. And that's the attractive of being part of Globant and people know that. And our people know that and the people from the market also know that, and they value that. So that's why I don't see any constraint right now in terms of talent in any of the countries in which we operate.

If I may complement that answer, Joe, attrition this quarter went down to 18%. There was a pretty nice decrease on attrition. As we decentralize, definitely, the attrition tends to be better as a whole company.

Ale, so do you have the attrition rate in Argentina?

It's running mid-20s, while the rest of the countries are pretty much in mid-teens.

The next question comes from Frank Atkins with SunTrust.

Wanted to first ask, in the prepared remarks, you talked a little bit about positive trends in the financial services sector. Can you give us some color there as to what's driving that better performance, maybe some of the services you're hearing from the clients or some of the types of clients you're driving?

Yes, absolutely. There are several strategies in which banks and other financial institutions are going after digital transformation projects. In some cases, they create a new company and they just start from the scratch, creating a new kind of bank like happened to one of our customers. In other cases, they focus on making a total transformation of how they see the creation of software programs, how they can run their companies. They're now thinking about running their company as a product itself, which is quite interesting. On some other cases, we are seeing total transformations in terms of management of the organization to get focused into this -- into this new trend, which is leading to projects which are inside the same company, inside the same financial institution, but with many different -- very different stakeholders than before. And then, some other more traditional banks are going the way trying to transform their internal IT departments into something more agile and more nimble to be able to catch up with the speed of development they need in this new [day]. So of course, all of this has a common denomination -- denominator, which is regulatory things always speed down the go-to-market strategy, big IT departments, big spending with traditional vendors that they need to start changing and all those things takes time. But we're very happy with the progress we're making in that industry, and overall, I see that as a very high potential industry for Globant in the next -- in the coming years.

Okay, great. That was helpful. And then can you talk a little bit more about the strategic rationale and the capabilities around the PointSource acquisition? And any more color you could give us on either revenue contribution or margins relative to the core would be helpful as well.

Yes, absolutely. I will give you the strategic rationale and then will let Alejandro to do the other part. So on the strategic side, first, it's a part of the East Coast where we pretty much -- we didn't have anything. And on the East Coast, we now have a delivery center, which is pretty solid, about 70 -- maybe a bit more than 70 professionals are working now at our office in Raleigh in North Carolina, which is a great place to scale up the talent here in the U.S. So that's one strategic geographic coverage factor. So that is complementing the other 2 acquisitions we did in Seattle. So now we have around 700 people in total in the U.S., which is a pretty decent name in terms of coverage and in terms of percentage of the total headcount of Globant. So that's one part. The second part and most important part is the complement that these guys from PointSource are bringing to the table. They have a lot of experience on insurance companies, which we can leverage and then they have a pretty interesting approach to digital transformation, which we can also leverage in some aspects with them. So those 2 are the strategic things and then the coverage and the size of their operation here in the East Coast is much better. Well, I knew you're right. That's why I'm staying here.

As far as contribution, Fran, what I can tell you is that definitely they are going to be accretive. They have been growing faster than Globant, they're of the smaller size, but they're growing faster than Globant and definitely from -- even from the margin profile for an on-site business, they have a pretty nice margin profile that is going to be contributing to that. And they are deeply penetrated, as Martín pointed out, into the insurance, retail and supply chain verticals, which is very interesting for us.

The next question comes from Arvind Ramnani with KeyBanc Capital.

This is Jason Washburn in for Arvind. You guys mentioned demand being propelled by emerging tech such as AI. Hello?

Yes, sure. Yes, around the AI, I think, we have a huge opportunity. The main thing is that we are living -- as the iPhone got 10 years ago and in the middle pretty much, we were expanding the same technologies over and over. Now, we are at the verge of a new total transformation and a new -- as the digital transformation is happening now, we feel that a quality transformation will happen in the future. And this is like the next big moment that pretty much every company will need to embrace because it's coming. Either you embrace it or you will be a victim of it. So what we feel is that we have been already started with our Cognitive Computing Studio about 2 years ago, and now, we're expanding how deep we want to go into that. Because we're now -- right now, it's very cheap and very easy to get into those artificial intelligence solutions to solve many problems that the companies may have, even on business process outsourcing to automating any kind of or helping with taking decisions in a better manner. There are hundreds of processes that could be automated by artificial intelligence and machine learning in the coming years. And that's a huge revolution that is going on top of the digital transformation. So as an independent company, we are not tied to any kind of particular platform like any of the big vendors are. We are able to tap into the best possible technology, if it is from IBM or from Google or from even Amazon or from whoever is providing this kind of algorithms or processing power to help us. So I feel that we're really in a great position to monetize this next big transformation. So that's why I'm not talking anymore about just digital transformation, but I think about -- I think more about digital transformation enabled through artificial intelligence or digital transformation plus cognitive transformation, and we are the ones that will make it happen. We have already many, many cases in which we are helping our customers with that. And also, we have instructed that pretty much every Glober needs to know about artificial intelligence and need to understand the rudimentaries of artificial intelligence to understand how to apply that into every single project and every single process even within our company. So I think there's a massive revolution that we're leaving technology. Again, technology is surprising us. It's growing faster. Sorry, it's growing much faster than what we expected a couple of years ago. So we decided to put full steam ahead on that and to start talking about that as a central part of the digital transformation as we believe it is.

Great. And then, I guess, what percent of revenues would you said are kind of driven by AI? And what kind of investment have you made up to this point in AI?

We have been making a lot of investments and a lot of projects with our customers. We don't disclose that information about percentages coming from that. We mix everything within -- because it is our core. So we cannot differentiate this is coming from artificial intelligence, because normally it's mix within the project that we're currently doing.

Okay. That's helpful. And then if I could squeeze in one more. What kind of margins, what leverage do you guys have in place to kind of help offset some of those headwinds?

Definitely, the leverage is on -- again on the decentralization and the balance by different locations. India is a very good lever to improve margins. We are moving several processes into India. Because the side effect, I mean, we're moving processes into India because we have the quality and the talent there. We're leveraging to expand some projects in Europe where the time zones help by doing some stuff in India. We are even doing some projects with some of our top customers in India combining that with Latin America. For instance, for Disney, we now have a couple of teams in India doing business. So that's a very good lever. And definitely, the other thing is pricing. Most of these emerging technologies can have some leverage on pricing. There are still no RFPs in that space. So you become shortlisted, and there aren't a number of investors who are capable of doing the kind of digital stuff. So that helps also to gain some leverage on pricing.

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

Yes, thank you very much, operator. Well, thank you very much, everybody, for joining us and looking forward to see you on our next earnings release. Thank you for your questions and for your understanding. Cheers.

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