Globant SA (GLOB) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Globant Q4 2017 Earnings Conference Call. (Operator Instructions) Please also note that today's event is being recorded.

At this time, I'd like to turn the conference call over to Ms. Paula Conde, Investor Relations officer. Ma'am, please go ahead.

Thank you, operator, and thank you all for joining us today on our call to review our 2017 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 Martín Migoya, Globant CEO; and Alejandro Scannapieco, Globant 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 very pleased to be here to review our business and financial performance for the 3 and 12-months ended December 31, 2017. At the end of the call, Alejandro will share our outlook for 2018.

Our revenues for 2017 increased to $413.4 million, a robust 28.1% year-over-year growth. This strong growth was driven by a large and expanding demand for digital solutions across the different customers that we serve.

On the vertical front, financial services and media and entertainment industries had outstanding performances.

For the first time in our history, we had 3 customers with annual revenues in excess of $20 million. We finished 2017 with 9 accounts over $10 million; 18 over $5 million; and 82 over $1 million compared to 6, 11 and 60, respectively, for 2016. This is a clear indication of our ability to strategically grow within our key accounts.

Q4 was another outstanding quarter for the company. We had revenues of $115.4 million, representing a 32.3% year-over-year revenue growth. Banks and technology verticals were key contributors to this growth.

Top 10 accounts performed strongly, with some nontop 10 accounts outperforming the rest of the company.

Later, during the call, Alejandro will share more details on our financial performance.

Now some highlights about the market and the company. 2017 was another outstanding year for us and I'd like to take this opportunity to thank our amazing team of Globers. They are responsible for our growth and for nurturing long-term relationships with our outstanding [growth] of clients, creating a great culture based on transparency, teamwork and innovation.

Last year, we were recognized by comparably as one of the 50 companies that foster the best team experiences. Comparably publishes annual best place to work list, showcasing the companies that receives the highest ratings. On top of that award, we were also included among the best companies for diversity 2017. We are extremely proud of these recognitions and would like to thank all our Globers for making this dream come true.

With regards to the market, we continue to see a strong demand from organizations looking to transform their businesses from the inside out. As this trend grows, it leverages the power of technologies like artificial intelligence. It is now a fact that AI will shape the future. According to Gartner, in 2021, AI augmentation will generate $2.9 trillion in business value.

Connected to this, during the last quarter of 2017, we published 2 documents on the future of our market and how we believe companies need to adapt.

First, a new edition of our sentinel report is available at sentinel.globant.com. In this report, we go back to basics to analyze the concept of transformation, we offer some concepts and tools to help organizations stay fit for the future.

Second, we recently published our yearly trend report, which can be found at trends.globant.com. We analyze concepts like AI, AR, VR and the future of organizations, which we believe is going to drive businesses during 2018. I invite all of you to read these documents.

To share these views with our customers and stakeholders, we have started to organize new ConVerge events in different cities.

ConVerge is a Globant top leadership conference for executives and industry experts. We get together to share new ways of doing business, hearing from inspiring speakers and learn about breakthrough technologies.

For 3 years, we have been running this annual event in the U.S, Now following the great results from this past event, we decided to take it into other cities. Last week, we held one addition in London and others are going to be happening in Buenos Aires in March and in Madrid in May to talk about augmented intelligence, the future of organizations and more. These gatherings are fundamental for all attendees to learn how to stay fit for tomorrow's challenges.

During the past months, we were involved in amazing projects with several customers. Let me share some examples with you. We just kicked off a new transformation program with Pernod Ricard, one of the largest spirits company in the world. The goal is to transform the way they view their business in this new era, how they engage with their customers, distributors and employees, and to define a unified digital strategy across multiple countries to have a flexible and scalable architecture.

Also, we work closely with both to give an iOS companion app for BOSEbuild Speaker Cube. The Speaker Cube is sold as disassembled hardware which young children, guided by the app, assemble themselves. In the app, we designed interactive instructional videos, featuring both employees who explain both how to assemble the Speaker Cube and how electricity is turned into sound. [They build] leverage, a Bluetooth connection as well as a microphone on the device, to unlock a step-by-step lesson in sound as children build their own personalized speaker. The [build] was a winner of a UX Design award and a Kapi award.

Another example is how, by leveraging machine learning solutions, Globant is helping [World NORTH] optimize the dynamics between tutors and students. These machine learning solutions are expected to expand future impact and bandwidth and improve student engagement.

On top of these projects, other outstanding logos have shown in our portfolio of customers, such as Airbus, FidelityEHR and Lloyds Banking Group. For Lloyds, for instance, we are working to help plan and deliver a customer-first strategy.

On a separate matter, I'm glad to share some news within our services, our platform offering. We have recently announced a collaboration with Google Cloud to offer an end-to-end OTT platform solution for the media and entertainment industry. This integrated offering leverages Google Cloud's Anvato Media Content Platform for content ingestion, metadata management, analytics and server-side ad insertion. It also leverages Globant's Signal OTT application platform for video app creation, curation and content management across all major consumer devices.

The integrated platform offers a complete end-to-end solution for media and entertainment companies who need to monetize their content on consumer devices beyond the television set. With this combined solution, customers can now rely on 2 proven players in the cloud and video industry for an integrated solution.

Within our future of organization studio, we're also proud to announce the launch of StarmeUp OS, an operating system made of smart applications that help organizations with digital transformation. The goal of this operating system is to help employees overcome inherently human limitations and create a space where they can have more meaningful interactions, empowering employees to make even more significant contributions.

By fostering a culture that puts employees at the center of change, organizations build a space where their teams feel empowered and collaboration and knowledge sharing are inherently improved.

StarmeUp OS comprises 5 solutions; StarmeUp, BetterME, BeThere, TakePART and BriefME. With this new launch, StarmeUp presents a most sophisticated interface, unifying the different applications and enhancing the user experience. More information is available at www.starmeup.com.

Lastly, our footprints have grown significantly during 2017 and the past quarter. We are proud to announce the opening of new offices in Madrid and the expansions of our presence in New York, Dallas and Seattle, just to name a few.

Looking forward to 2018, we continue to have a strong demand from companies looking to achieve digital transformations. We believe that our expertise and studio model positions us as a leader in this area and makes us an ideal partner for companies facing these transformations.

Our pipeline is strong, and 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 fourth quarter and full year 2017 and also to provide guidance for Q1 and full year 2018. Ale, please?

Thank you very much. Thanks, Martín, and good afternoon, everyone. I will spend a few minutes, taking you through the fourth quarter and full year 2017 results, then I will talk about our outlook for 2018.

Let me start by saying that we're very pleased with our overall results for the fourth quarter and full year 2017. This has seen another year of robust growth with solid results.

Q4 was another strong quarter of revenue, closing at $115.4 million, 32.3% over last year and 5.3% sequentially.

Revenues for top 10 customers increased 24.8% over the fourth quarter of 2016, and 11.6% sequentially, showing a healthy trend. Revenues for customers 11 and beyond increased 38.6% over the fourth quarter of 2016, showing our ability to increase these accounts at a higher pace.

Our 50-Squared strategy continues yielding positive results and we now have 9 accounts over $10 million in annual revenues compared to 6 accounts for the same period of last year.

Our customer concentration number for Q4 remained fairly consistent with past quarters, with our top 1, top 5 and top 10 accounts representing 10.4%, 28.5% and 43.2% of revenues compared to 9.4%, 33.3% and 45.8% of revenues, respectively, for the fourth quarter of 2016.

Our vertical diversification remains balanced across the different industries, with financial services and media and entertainment leading the pack, accounting for 23% and 22.8% of revenues, respectively.

During the last 12 months, we rendered services to 356 customers. We now have 82 customers with annual revenues in excess of $1 million compared to 60 one year ago. We continue to be well diversified in terms of customers and industries, with an increasing number of multimillion-dollar accounts.

During the fourth quarter of 2017, 78.6% of our customers were in North America, the U.S. is our top country; 14.6% in Latin America and others, Argentina becoming our top country, top in Chile; and 6.8% were in Europe, Spain being the top country. LatAm continues to outpace the rest of the regions in terms of revenue growth.

During the fourth quarter of 2017, 82.5% of our revenues were denominated in U.S. dollar, protecting our top line against currency fluctuations.

Turning now to profitability. Our adjusted gross profit for the period increased to $45 million, 39% adjusted gross margin compared to $35.4 million, 40.5% adjusted gross margin, in the fourth quarter of 2016. The margin decrease year-over-year was primarily driven by FX headwinds in some of the countries in which we operate, combined with some wage inflation.

Sequentially, our adjusted gross margin was stable compared to Q3, despite the usual window for selling increases during the last quarter of the year.

We finished the quarter and the year with 6,753 Globers, 6,279 of which were IT professionals.

Attrition for the past 12 months was 18%, compared to 19.3% 1 year ago, showing a nice improvement year-over-year, mainly driven by our decentralization efforts.

Adjusted SG&A decreased 270 basis points compared to Q4 2016, accounting for 20% of our quarterly revenues. This impressive year-over-year dilution is a key contributor to the partial offset of FX margin pressure experienced during 2017.

Our adjusted operating income for the quarter amounted to $17.9 million or 15.5% of revenues compared to $12.6 million or 14.5% for the full quarter of 2016.

Share-based compensation expense for the quarter amounted to $3.2 million. This expense is mainly related to the plan of restricting of stock units granted to certain key employees and directors of the company during Q2 2017, as part of our long-term retention program. This expense has been trending down the last couple of quarters as a percentage of revenues, reaching stable levels during Q4.

Financial income and expense net amounted to a loss of $0.9 million. This net result is composed of interest income and FX gains and losses, resulting from exposure of monetary assets and liabilities in local currencies.

Adjusted net income for the fourth quarter of the year totaled $14.1 million, 12.2% adjusted net income margin compared to 10.9% for the fourth quarter of 2016. Adjusted diluted EPS for the quarter was $0.39, based on 36.3 million average diluted shares for the quarter.

Now let's move on to our full year 2017 performance. Revenues for 2017 amounted to $413.4 million, implying a robust 28.1% year-over-year growth.

Disney was, once again, our largest customer for 2017, with very healthy growth and positive outlook for 2018.

We also saw good momentum among some of our 50-Squared accounts and very strong performance among nontop 10 customers.

On the vertical front, financial services and media and entertainment industries were key contributors to growth.

In terms of regions, during 2017, Latin America outpaced other geographies, as we have gained some very interesting new accounts in that region.

Adjusted gross profit for 2017 was $160.3 million, 38.8% adjusted gross margin compared to $136.7 million, 42.3% adjusted gross margin for last year.

During 2017, we faced FX headwinds in some of our Latin America delivery centers, combined with wage inflation in Argentina, but we were still able to maintain gross margin within our desired range.

During this year, we achieved good dilution in our adjusted SG&A, decreasing from 22.3% for 2016 to 21.5% of sales, again, within the targeted dilution for the year.

During 2017, our main investments in SG&A were related to expansion of delivery centers in the U.S., Colombia and Mexico and additional sales coverage, primarily executed during the first half of 2017.

We have been very disciplined in managing our cost, as we gain scale, but we continue investing for the future, primarily to strategically expand our sales coverage. As a result of this, our adjusted operating income for 2017 amounted to $56.7 million or 13.7% of revenues.

Share-based compensation expense for 2017 amounted to $14.5 million, mainly driven by the new long-term retention program, as explained before.

Financial income and expense net amounted to a loss of $3.1 million. This net result is composed of interest income and FX gains and losses resulting from exposure of monetary assets and liabilities in local currencies.

Other income and expenses resulted in $4 million gain, mainly resulting from the change in fair value of contingent consideration related to our acquisitions.

We assess our non-IFRS net income to exclude these effects because we believe these impacts are not indicative of what we consider to be the core of our business.

Our effective tax rate for the year was 20.6%, a significant decrease relatively to the previous year. This reduction was mainly driven by a more balanced distribution of assets and liabilities across the company.

During Q4, we also had a onetime noncash expense related to lower deferred tax assets, given the reduction in U.S. corporate income tax rate, which was more than offset by lower tax estimates in other countries.

Regarding the recent U.S. tax reform, at this point, we expect it to be neutral for 2018. Therefore, we maintain our 20% to 22% margin for effective tax rate, while we continue researching on potential impacts of the U.S. tax reform in 2019 and onwards.

Adjusted net income for the year ended December 31, 2017, amounted to $46.1 million, 11.1% adjusted profit margin. And adjusted diluted EPS for the same period was $1.28, based on 36.1 million average diluted shares for the period.

Moving on to the balance sheet. Our cash and investments as of December 31, 2017, amounted to $60.7 million compared to $59.9 million as of December 31, 2016. This stable level of cash was mainly explained by our decision to practically self-fund for the time being M&A transactions, including earnouts and CapEx, to expand our offices in Latin America, U.S. and Europe.

Sequentially, our cash on investments position as of December 31, 2017, increased $16.6 million as compared to September 30, 2017.

Our balance sheet remains strong with current assets of $156.1 million, accounting for 43% of the company's total assets. Total common shares outstanding as of December 31, 2017, were $35.2 million.

To wrap up, let me provide you with our guidance for Q1 2018 and for the full year 2018. We continue to experience sustained demand for our digital offerings and we also see traction for our strategic accounts. Business environment is healthy and we're glad to see the evolution of our 50-Squared accounting strategy.

In terms of gross margins, [we speak] to the normalized range around 38% to 40% we pointed out in the last few calls. The continuity of the FX volatility around the globe, but primarily in the different regions where we operate, combined with the still significant levels of wage inflation in Argentina, require us to take a conservative approach in our gross margin.

We will continue diversifying our talent base, which will enable us to have a more balanced cost structure with a better handle on margins, while we continue investing in training our Globers in cutting-edge technologies and implementing our 50-Squared strategy.

As always, we will continue managing our SG&A expenses very carefully to gain additional dilution, with the intention to offset potential hits on gross margin coming from the previously described scenario.

Finally, effective tax rate is expected to remain in the 20% to 22% range, in line with last year.

Based on current visibility, we expect Q1 2018 revenue to be between $113 million and $115 million, implying a 28.5% year-over-year growth at the midpoint of the range.

Adjusted EPS is expected to be between $0.31 and $0.35, assuming 36.4 million average diluted shares outstanding for the quarter.

Regarding the full year 2018, we expect revenues in the range of $495 million and $505 million, and implied 20.9% year-over-year revenue growth at the midpoint of the range.

In terms of adjusted EPS, we're expecting a range of $01.52 and $1.62, assuming 36.7 million average diluted shares outstanding for the full year.

Thanks to everyone for participating on the call and for your coverage and support.

Operator, can you please queue questions? Thank you.

(Operator Instructions) And our first question today comes from Tien-tsin Huang from JPMorgan.

I want to -- good revenue results here. I think it was the biggest revenue [beat] that we've seen in some time. I'm curious, what drove the upside maybe versus your guidance? Did you see anything unusual budget flush, et cetera? It seemed broad-based but just wanted to better understand the upside on revenue?

First, let me take that. I think Martín is trying to get into the phone (inaudible). I think it was a mix of -- you there, Martín? We can't hear you. So let me take the question. I think it was a mix of effects. There were some key accounts that were growing faster than expected and some key projects, some budget flushes, as you mentioned, that came in, in the last quarter of the year. So I think it's -- everything is kind of circled around the 50-Squared strategy and how we are nurturing and farming the [key] relationships. And that helps, definitely, to articulate some larger projects in the quarter. But I would say, overall, the environment, it's quite healthy in several of the different accounts. And not only the top 10, but we also -- if you take a look at the nontop 10 accounts, it was a very healthy growth in the quarter as well.

And then, Ale, maybe for you just on the margin. I know you gave some stuff here but just maybe can you help us a little bit as the year -- maybe the quarters or first half versus second half, given the comparisons are a little bit -- are choppy, I guess. Then maybe share the wage inflation assumptions as well for Argentina?

I think our margins -- we have been able, despite certain FX headwinds that we have over the full year -- not specifically in the last quarter, but over the full year, we have been able to keep up with the level of margin desired, that was the target range that we pointed out several times, the 38% to 40%. What's happened in the last quarter is that there was still some appreciation of certain currencies, some others, the value gains that you saw there in the case of Argentina that you asked. Argentina is still running at high levels of inflation, it's going down and the government is definitely working towards lowering inflation. But it's little by little, and the pace of the evaluation of the currency was a little bit below the pace of inflation. So actually, what's going on in Argentina is still a little bit of headwind of a net increase in cost per head in U.S. dollars. Having said so, we continue executing our decentralization strategy. We can all already see some of the payoff of that strategy where the cost structure is much more balanced across Globant overall. So we think we are going to be able to keep those gross margins stable despite of any potential headwind that we may have from one particular country.

Our next question comes from Ashwin Shirvaikar from Citi.

My question is on contract size and checks that we do indicating that contract sizes are increasing for the kinds of projects that you guys have taken on. On -- broadly speaking, digital transformation but each of these [things] like IoT and AI and so on and so forth. Can you comment on that? And how much is that a driver of growth for you guys versus going out and finding new clients and so on?

Let me take that, Ashwin, while Martín is trying to fix the sound system. What's happening, I don't think it's purely related to the contract side, I think it's a matter of how these were getting into the relationships with our customers. So the further we get into those relationships, the easier it is for us to have better visibility on opportunities and the size of the relationships and projects. That's what has been happening across different accounts. And definitely, it's a matter of trying to get into those accounts deeper and deeper. And when we gain the trust of our customers, they typically open up different areas and different business opportunities for us. And that, at the end, is what's causing the contract size to be bigger and the opportunity for us to penetrate other divisions. That has been a constant in many of the top 20 accounts, in many of the 50-Squared accounts. So I would say, it's more related to the fact that we are becoming a strategic vendor of many of these customers. And when -- once that happens, they open up the gate for us to get more projects, and more excitable projects. As far as the other piece of the question that is more related on the cutting-edge technologies and the newest technologies, we can also see the impact of that. It's like probably several quarters ago, some customers were trying to do some prototypes and proof-of-concepts on AI, on machine learning. Once they get comfortable that they can get something meaningful, something sizable, something that is going to be a tangible return on investment, they start expanding those projects. And we are clearly seeing the effect in our revenue growth.

Got it. And then the second question's on M&A and sort of two-part. One is, what was the -- I missed what the impact of inorganic contribution was in the quarter and in 2017? And then looking ahead, obviously, you have sort of similar cash balance as you had before; M&A, as a use of cash, should we expect something similar to this pattern that you have followed, a lot of tuck-in type deals?

Okay, let me take question by question. On the first one, I mean we don't really disclose the organic, inorganic, as you know, we quickly integrate the companies that we acquire. But if you do a quick math on the 2 acquisitions that we made in 2017, PointSource and Ratio, roughly 110 people. If you take the average rate for -- a typical rate for the U.S. and you time that by 80% -- 82% utilization, probably you're going to get to 400, 450 basis points of contribution for the full year 2017. So still organic growth was very strong in the year. We ended up the year growing 28% and probably 400 to 450 bps of that came from the acquisitions of PointSource and Ratio. As far as the cash use, we have been pretty much self-funding all M&A transactions, both the acquisitions and the earnouts. Typically, one of the main uses of our cash has been to keep expanding the company, so most of the CapEx goes into our new offices and an expansion of existing offices, together with M&A. So you should expect that to continue, looking for these opportunistic M&A transactions, tuck-in and strategic acquisitions, yes.

Our next question comes from Avishai Kantor from Cowen.

My first question, I believe you disclosed in previous calls, what is the percentage of the headcount which is based in Argentina?

Now it's 39%, Avishai.

39%. And then regarding the EPS guidance range, what needs to happen for you to reach the upper hand of the guidance range?

I think, again, it's pretty much related to the fact that if we are able to keep gross margins stable, [definitely SG&A] dilution should help us to gain operating leverage to expand operating margin and that's probably to grow EPS at the same level of our top line or even above that. So I think that the key trigger here is to keep gross margin stable, as I explained to Tien-tsin. There have been a number of several factors affecting gross margins from different currencies. I think, the beauty now about our cost distribution is that we're much more balanced than in the past. So it's becoming easier to handle the different fluctuations that we may have in the currencies and even in some countries with wage inflation. I would say, and again, coming back to the question of Argentina, that probably the only outlier in terms of wage inflation in all of the countries where we operate is Argentina. So that's also good news and we're decentralized in Argentina. Argentina has been lower and lower as a percentage of total headcount.

And then, it's impressive -- really impressive revenue growth and revenue base, could that be related to some market share gains in the business of doing apps over the top TV channels on other vendors like Roku, Amazon, Apple TV? Can you expand a little bit on that?

Well, there are several factors there, Avishai. Some new relationships and partnerships. I mean we talk about the Roku partnership, we also talk about the partnership with Google. All those things are working and are allowing us to enter into new doors and new divisions. So that's [steering] some of the growth. But again, as I explained before, I think the key driver here has been to deeper penetrate the relationships and to become a strategic partner. Also, the market that we have now in U.S. on-site with our customers is much stronger. So what's happening is that, that is allowing us to capture new opportunities and to be able to [walk the aisles] with our customers to have daily talks with them, trying to understand and to foresee what are the opportunities for Globant to keep selling and cross-selling our studios. So that's definitely what's propelling our growth and we have strongly focused on the nontop 10 accounts, which is also now yielding some results.

Alejandro, can you hear me?

Yes. Now, yes.

Yes.

Go ahead.

Finally, okay. So, no -- just -- sorry, because I was mute for some reason by the conference center. So, no just going into that question, I would love to add that there's a very good match between what we offer and what our customers need. And if you see when you go into the customers and we convince them and we show how we would think and why we would think and how we make connections in an emotional way with consumers so and so forth. This is exactly what they are looking for. And that match, many times, make us win on top of other competitors. So I would say that, that match is the most -- the single most important thing that we have seen for sustainable growth. Then how that is translating to many different accounts, as Ale was explaining, well in many different shapes. But again, the exact match between the massive digital transformation that is happening and the need of our customers and how to transform their culture into a new area, this is exactly what they are looking for, this is exactly what Globant does.

And then longer term, can you build a little bit of a SaaS-like business in supporting those OTT TV channels?

Sorry, I didn't get the question. Long-term?

Longer term, regarding -- can you build a SaaS-like business that supports OTT TV channels? This is regarding the work for top TV channels.

Yes, we don't call it SaaS. We think we are a services organization, not a product organization. And we are pushing our concept of services over platforms. And we have several platforms that can really -- and are growing very, very fast. One of them is, as I mentioned on the earnings release, I mentioned the StarmeUp OS, which is composed of many different platforms. And those platforms serve, mainly, as the game changer to change the culture of an organization, while they need to transform digitally. So we see that segment of business, as I said, growing and that will drive some business during 2018. And we see from 2016 to '17 a massive growth in that area and we're expecting that to happen in 2018, too. Now how much of that it represents, well it's still in the early days, but it is growing very, very fast.

Our next question comes from Maggie Nolan from William Blair.

I wanted to ask about your new vertical from last quarter, the automotive vertical. Can you talk about your work in -- within automotive and any projects that you're particularly excited about that could become meaningful to you?

Well, we are initiating conversations with big automotive company and we have some customers in that segment. It's representative, it has grown fast. All the same aspects that we have mentioned and for other customers. They have a massive challenge on how to engage with their consumers and drivers. And we're helping them in many different aspects to get connected to them better, how to host better the mobile devices that they have, how to direct better with the connected car and how the future of electric cars will play into many different areas. So we are excited about these new segments and we're expecting to have some interesting interactions.

Okay, great, and then just wanted to ask about the current pricing environment.

Pricing environment remains pretty good for us. There is not a lot of pressure that we see. Of course, competition is hard and we always say that. But we feel that -- we feel that the pricing that we are having is very good pricing compared to other competitors. Normally, we win because of our professional proposal, it's not a price selection issue. And I think that this strong muscle that we have in the U.S. now will keep on increasing the probabilities of us being able to charge better for our services and increase our revenue per head.

Our next question comes from Moshe Katri from Wedbush Securities.

Just going back to the margin discussion. Ale, what sort of -- and I think, Tien-tsin may ask you -- may have asked you that question. What sort of assumptions are embedding for wage inflation in the model for 2018? And then, should we expect -- what should we expect for non-GAAP EBIT margin? I know you spoke about gross margins, but specifically non-GAAP EBIT margin to look like this year?

Moshe, as far as assumptions, I can tell you that in most of the Latin American countries where we operate, and India, we're talking about mid-single digits inflation, combined with probably a level of depreciation of the currencies, especially after the increase in the rates in U.S. and some of the expectations of what's happening with the U.S. dollar all over the world. That's kind of the guideline that is embedded and baked into our guidance. As far as Argentina, it's always the question, we're typically forecasting something in the mid-teens range, but it's pretty much aligned with the forecast I was providing and the targeting that was provided by the Central Bank in the country. And we're expecting that a devaluation that's going to be pretty much close to that mid-teens. So that's kind of the forecast in terms of wage inflation and for currencies in the several different countries where we operate. As far as EBIT margin, again, we expect it to keep gaining operating leverage, as it's happened in the last quarter of the year. I think, overall, the conditions for wage inflation and currencies is a little bit more stable than what we had in 2017, that combined also with a fact that we have decentralized our headcount in several different locations, so we're running towards our target of having probably no location above 25%, 30% of the total headcount of Globant. So all those variables combined, I think we're going to be expanding operating leverage probably between 50 and 100 bps this year again.

Our next question comes from Joseph Foresi from Cantor Fitzgerald.

This is Mike Reid on for Joe. I wanted to build on that and ask where some of this SG&A and operating leverage is coming from? And where you might expect to see further leverage and efficiencies come from?

It's mainly coming -- the SG&A leverage is mainly coming off the fact that, first, we're very disciplined in how we manage our expenses. We still keep investing in the self-organization. We have built up the structure to serve a much larger company, a company at a scale with several different processes that we have put in place. Now we also have shared services between mainly 2 countries that are Argentina and India. So that's helping us a lot to dilute the SG&A as we grow the company. And it's also a matter of the scale. As the company grows its scale, we are definitely being able to dilute the SG&A and we expect that trend to continue, yes.

And then maybe geographically, what's driving the Latin America's real strong growth, is that organic and inorganic? And then, again, it looks like in Europe, the revenues may have fallen a little bit and if you could speak to what might be causing that?

No, Latin America is 100% organic. There is no acquisition that we have run that has revenues in Latin America. So it's about companies in Latin America really needing to transform their business and to make it different. And they are realizing now that they need to change and they need to change fast. So that we have example of the agreement we announced with YPF, which is the biggest petroleum company in Argentina, that I think it will drive an important growth for us in Latin America during 2018. And in the same way, other big companies that we have as customers that are pushing for that transformation to happen. So that's for Latin America. Europe, I don't see any reason why we are falling there -- indeed are we're falling there, I don't think so, we are not. And...

In fact it's dropping slower than LatAm. That's what's happening. LatAm outpaced Europe.

Okay, yes. Yes, it's growing, but it's growing slower, so there's not a fall, I don't know if I got the question right.

I was just going by the quarterly numbers of Europe as a percentage of revenue, seemed to fall pretty precipitously, but I guess that's just a function of the Latin America growing so much faster.

Yes, yes, that's the point. And Europe is growing, but it's growing slower. And in the past quarter, Europe was growing faster than Latin America. And sometimes those things happen, but Latin America and Europe are 2 places that we have a lot of investment being done. So we have a big faith that both of them will be good growth places for us.

Our next question comes from Gregorio Tomassi from Itaú BBA.

I have a couple of questions. First one is about, in your strategy, how do you think about -- and quantitatively, how do you think about the progression of revenues from services over platforms? Meaning, how important it is to grow it, how much growth do you see from this coming? And what [place] do you see to have from your total revenue plan in the next years, basically? That's the first question.

So we see that as an accelerator for the revenue that we can create in other things at Globant. If you see, we don't disclose exactly which are the revenue growth coming from that perspective -- from that area. But if you see, in all the cases, it has been like the door opener for many other services, again, we provide to those same customers. So I see like a progression of revenue coming from Services over Platform, growing much faster than all the rest of the regions because it's still small. But every year, it's a little bit more important and we have been pushing this concept for many years now and now we have a pretty solid offering that we didn't have before when we decided to enter into that. And it's 100% organic. I mean the platforms and the ideas and the things are unique things that we have collected from our experience working with customers. So they are pretty unique platforms that are not direct competition on how we can tackle in the problem of changing the culture while changing digitally your company. So I have a lot of hope that this will be big for us in a few years, but let's go step-by-step and let's have the right expectations. We are thinking that this still is small compared to other areas or other studios that we have but it's growing fast.

Would it be fair -- as a follow-up question, but would it be fair to say that you perceive more your Services over Platform opportunity more than accelerator or client opener, et cetera, rather than a response to your need to have more recurrent revenues, meaning are you worried about the level of nonrecurrent revenues that you have?

It's a great question. We have never been worried about the recurrence of our revenue, because we made last year, 10 years with Google, this year we're making 10 years with Electronic Arts. And 10 years with some other big customers that we have. And this is about long-term relationships and we love to serve our customers and to build those long-term relationships. So I'm not concerned about the recurrence of the revenue because we have demonstrated over the years that we are capable enough to make that happen. I think that our customers now need different things than when we started -- or -- than 5, 6 years ago and we need to provide those things and we need to be able to go fast and to be able to deliver that kind of solution -- those kind of solutions that, otherwise, they cannot do it, or it's very expensive for them to do it. And we are providing them in a very convenient way and in a very fast way. At the same time, it's working as a door opener. So it's like a balanced -- very balanced situation. But again, I'm not concerned at all with the idea of the recurrent revenue. We have been having recurrent revenue for years and years from one -- some of the most amazing brands in the planet. So I'm not really concerned about that.

Our next question comes from Arvind Ramnani from KeyBanc.

Kind of overall -- overall can you tell us how you are feeling this year versus last year? Specifically, can you comment both kind of conversations with the existing book of business as well as your pipeline? And to the extent, you can quantify any of these, that will be great.

We don't quantify the pipeline. I said that the pipeline is strong, and it's strong, it's stronger than ever. We see a big trend towards transformation and artificial intelligence projects and our projects and our customers are requesting that a lot. That's something that we can talk about. And the potential bookings and the contracts that we are winning are really amazing and just a big automation company, which has won a big multiyear contract, multimillion dollar contract, and we beat one of our biggest competitors out there that have been in the account forever. So those are the kind of things that are important to understand from the perspective of Globant. Now how big or how small is the pipeline or how much is our conversion there, those are very, very confidential numbers that we won't disclose.

And ladies and gentlemen, our final question today comes from Frank Atkins from SunTrust.

I wanted to ask a little bit about the banking and financial services vertical. I think in your prepared remarks, you talked about some strength there. And further than that, have you seen any client behavior changes as a result of the regulatory tax changes as clients may be evaluating higher CapEx spend in the U.S?

No, we haven't seen that yet. I think it's too soon to see that, that change on budgets or money allocation. I think it's too soon. I mean maybe during 2018, we will start to see those things, at least, on the things we do. And we see the finance vertical, like a very strong vertical for us, and they're investing a lot of money and they're concerned about all the threats and things that are happening and how to react and connect to their consumers. So that's our sweet spot. And they are pursuing, also, how to digitally transform, how to become more nimble, more agile in those things. Globant is also able with our studio around the actual transformation. It's also able to help a lot and that has been an important driver of business with banks for us. So overall, we see a very good traction on the financial sector, not yet any impact on the tax transformation so on and so forth that we see. We will keep on seeing in the next coming months and quarters. But so far, I haven't seen any. I don't know, Ale, if you want to add anything into that?

No, fair enough.

And ladies and gentlemen, that will conclude today's question-and-answer session. At this time I'd like to turn the conference call back over to Mr. Martín Migoya for any closing remarks.

Well, thank you very much, everybody, for joining again our call. Very happy with the quarter and looking forward to see you on our next earning call. Thank you very much.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.