Globant SA (GLOB) 2018 Q2 法說會逐字稿

Good afternoon and welcome to the Globant Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Thanks, operator, and thank you all for joining us today on our call to review our 2018 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 Martín Migoya, Globant CEO; and Alejandro Scannapieco, Globant's CFO.

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

Please note that we follow IFRS accounting rules in our financial statements. During our call today, we will report non-IFRS or adjusted measures, which is how we track performance internally and the easiest way to compare Globant to 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 results.

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

Thank you, Paula. Hi everybody, and thanks for joining us today. I'm pleased to be here to share with you some updates on our business and financial performance for the 3 months ended on June 30, 2018. At the end of the call, Alejandro will share with you our outlook for Q3 and the rest of 2018.

Q2 2018 was another record quarter for Globant. Our revenues for the second quarter increased to $127.9 million, representing a 28.4% year-over-year growth. This position us well to achieve our financial performance and goals for 2018. This robust growth was driven by top 10 and non-top 10 accounts, which deliver revenue growth of 30.5% and 26.8%, respectively.

Our ability to nurture long-term relationships and to expand into multiple divisions within our customers are leading our growth. We now have 92 accounts with over $1 million in annual revenues compared to 76 1 year ago. Later during the call, Alejandro will share some more details on our financial performance.

Now let me share some highlights about the market and the company. We're living in amazing times for technology. Never in history, we have witnessed 2 massive and disruptive revolutions happening at the same time. The digital and cognitive revolutions are affecting how companies connect with consumers and employees. Also, they're affecting how companies operate providing opportunities to make huge gains in efficiency.

To give an overview, the digital space is growing at 20% year-over-year according to IDC. The cognitive field is growing at 60% according to Tractica. On top of that, IDC estimates that by 2021, 75% of enterprise applications will use AI. We are in front of a massive opportunity, and Globant is in a great position to capture these opportunities. Creating solutions in this era is a totally different game, and technology isn't enough.

At Globant, we're committed to help our customers in their full organizational fitness life cycle. In order to be successful, transformations need to impact every single dimension of the organization, starting by providing the necessary tools and support for companies to embrace cultural and methodology transformations, follow with accompanying our clients as they define their new digital strategies to engage consumers and employees, then scaling on its construction and evolution. And the 2 final stages in the cycle pushing secure products to the cloud are making them available so that they reach the appropriate audience. After that, the cycle remains in an endless and progressive loop that ensures organizations stay relevant.

We delivered this cycle for our studio model, our Services over Platforms and our Agile Pods methodologies. Let me provide you with a perspective about what is happening with the professional services organizations market. As technology evolve, it was assumed that professional services organizations would evolve with it. However, this is not happening with the traditional players. Traditional IT outsourcing vendors and huge consulting companies are trying to reinvent themselves to catch up with this fast-changing landscape, but their culture remains the same. All IT and BPO typical engagements represent an enormous amount of their revenues. Even when they make acquisitions to affect their culture, it is difficult for companies that have hundreds of thousands of employees. It is like changing their DNA.

This evolution in professional service organizations is represented by Globant, a digitally native company organized around the new paradigms of innovation, entrepreneurship, digital technologies, AI and agility.

Reflecting this focus on our regional development, during Q2, we have seen major accomplishments. In Latin America, Pernod Ricard, South LATAM is going through a smart and dedicated digital information process. Together, we are working on activating a digital information framework that mobilized the whole organization to evolve through active learning. The focus of this mobilization engages culture, experience, agility, data and technology to create new behaviors and new outcomes within the organization. In the region, we have also added several new logos, including a leading travel company and different insurance companies with strong presence in the region.

In Europe, we're happy to say that we continue to be recognized for our innovation and digital information. We were shortlisted for the 2018 BIMA Award and for our work for the Met Police. On top of that, on our first submission, we were shortlisted for the business transformation Cannes Lions' Awards 2018, also for our work for the Met Police. It is a great recognition that reflects our passion and the projects tangible results.

Accompanying the region's growth, we have closed new deals with different leading companies such as Hogan Lovells and one of the world's largest fashion retailers. In the U.S., we continue to see sustained expansion. During Q2, we have won several new logos, including Avoca among others. Avoca partnership provides a software platform for delivering outstanding customer acquisition journeys in banking.

Globant is a key partner for Avoca in the implementation of the platform across different clients. Our constant expansion is mainly driven by our team, an experienced group of Globers with outstanding skills to deliver digital and cognitive transformations. Showing our thought leadership in the AI arena, we recently launched a new report on voice-activated technologies. This playbook aims to help organizations develop strategies for successful voice implementation and technology investments.

We surveyed more than 600 senior level decision-makers to understand their priorities. The report present several interesting conclusions as companies are still preparing to take advantage of voice technologies as part of their larger digital and cognitive transformation. I encourage you to read it by visiting, voice.globant.com.

Also, within the coming few months, we'll be holding our next 2 ConVerge event series about artificial intelligence. These gatherings aims to bring together the best creative minds in the industry to discuss trends and rethink the way we do business. On September 17, we'll have the ConVerge edition in Medellín, Colombia with speakers coming from Google, Amazon and Microsoft among others. Later on, on October 25, we'll host our Annual VIP ConVerge edition for business execs at the New York Stock Exchange.

During that event, we'll go beyond the AI surface to discuss real cases, ethics, implications and more. The speakers will include leaders from Autodesk and Salesforce and Jeff Ma, kingpin of the famous MIT BlackJack team. I invite you to learn more about this event at converse.globant.com.

In other matters, we are glad to say that we have been named a 2018 best place to work in the Global Enterprise International category. The business intelligence group identifies organizations that drive performance and challenge employees in an engaging work environment.

Globant was chosen for its collaborative nature and a unique work culture, largely due to StarmeUp. We are incredibly honored since it is a true testament to the trust that our employees have in Globant.

To conclude, demands continue to be strong. As our pipeline keeps expanding, we remain optimistic about delivering sustained growth. This paradigm shift demands for companies to rethink their strategies, their business and their go-to-market approach. We believe that we are in the best position to help them go through this process as a pure play in the digital and cognitive arena.

Our organizational fitness life cycle together with our studios Services over Platforms and 50-Squared model deeply differentiates us and make us the ideal partner.

With that, I will turn the call over to Alejandro Scannapieco, our CFO, for the further detailed financial review on the second quarter 2018 and also, to provide guidance for Q3 and full year 2018. Ale, please. Thank you very much.

Thanks, Martín, and good afternoon, everyone. Let me start by summarizing the result of our second quarter and 6 months ended June 30, 2018. I will then discuss our guidance for both the third quarter and the rest of the year. I'm very pleased to announce another outstanding growth and robust financial performance for the second quarter of 2018.

Our revenues closed at a new record level of $127.9 million, 28.4% over second quarter of last year and 6.8% over Q1 2018. During Q2 2018, Disney was once again our largest customer. Our relationship with them continues to be strong and healthy, with several different opportunities after the internal reorganization that they have had recently.

We're excited with the fact that high potential accounts are scaling up and becoming large and meaningful within our customer portfolio. Revenues for top 10 customers increased 30.5% over the second quarter 2017 and 7.2% sequentially. Revenues for customers 11 and beyond increased 26.8% over the second quarter of 2017 and 6.5% sequentially.

Our strategy to have a diversified base of multimillion-dollar accounts is working out in line with our expectations. During the last 12 months ended June 30, 2018, we rendered services to 355 customers, 92 of which accounted for more than $1 million of final revenues compared to 76 1 year ago.

During the last 12 months, we also had 9 accounts above $10 million in annual revenues compared to 6 accounts for the same period last year. We continue to grow the size of our accounts, aligned with our 50-Squared strategy. As can be seen by our industry diversification, Globant's value proposition and service offering is attractive to companies across all industries, and we remain pretty much balanced.

Our top 3 industry verticals for this quarter were media and entertainment with 24.5% of revenues; bank, financial services and insurance with 21.8% of revenues; and travel and hospitality with 17.5% of revenues. We continue to target specific accounts to that into our portfolio.

During this year, we added some new high potential accounts such as the leading provider of industrial automation and information products based out of the U.S., which also contributed to enlarging our exposure to consumer, retail and manufacturing space growing from 8.2% of revenues in the second quarter of 2017 to 10.1% of total revenues in the second quarter of 2018.

Our customer concentration numbers for Q2 2018 remain fairly consistent with past quarters. With our top 1, top 5 and top 10 accounts representing 11.1%, 32.5% and 44.6% of revenues compared to 10.1%, 31.6% and 43.9% of revenues respectively for the second quarter of 2017.

During the second quarter of 2018, average quarterly revenue per top 5 customers increased 31.8% to $8.3 million and average revenue per top 10 customer increased 30.5% to $5.7 million compared to $6.3 million and $4.4 million, respectively, for the second quarter of 2017.

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

In terms of regions, during the second quarter of 2018, 78.4% of our revenues were in North America, the U.S. as our top country; 13.1% in Latin America and others, Argentina being the top country; and 8.5% were in Europe, with Spain as our top country. Latin America continues to outpace the rest of the regions in terms of revenue growth.

During the second quarter of 2018, 86.4% 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 $51.3 million, 40.1% adjusted gross margin compared to $37.9 million, 38.1% adjusted gross margin in the second quarter of 2017, an improvement of 200 basis points. The increase in adjusted gross margin was primarily driven by a more favorable FX environment in Latin America and an increase in our utilization rates.

As you recall, Q2 is typically the season when most salary increases occur, and despite this, we're able to increase our adjusted gross margin 100 basis points sequentially compared to Q1 2018, as the benefit of FX tailwinds during Q2 outpace versus increases impact.

We finished the quarter with 7,279 Globers, 6,775, of which were IT professionals. Attrition for the past 12 months was 20.7% compared to 19.5% in Q1 2018, showing a sequential increase, mainly driven by Argentina.

Adjusted SG&A decreased to 20.3%, 260 basis points less than Q2 2017 and 50 basis points less sequentially.

This impressive year-over-year dilution contributes further to our operating leverage expansion. We have been very disciplined in managing our costs as we gain scale, while we continue investing for the future, primary to strategically expand our sales coverage in U.S., Europe and Latin America.

As a result, our adjusted operating income for the quarter amounted to $20.2 million or 15.8% of revenues compared to $11.6 million or 11.6% for the second quarter of 2017. The improvement in adjusted gross margin combined with adjusted SG&A dilution were the 2 main drivers for the significant operating margin expansion in the quarter.

Share-based compensation expense for the second quarter of 2018 amounted to $3.3 million, representing 2.6% of total revenues for the period compared to $5.9 million or 5.9% of total revenues for the same quarter last year. This expense is mainly related to the plan of restricted stock units granted to certain key employees and the directors of the company as part of our long-term retention program.

Financial income and expense net amounted to a loss of $2.1 million. This net result is composed of FX gains and losses, resulting from monetary assets and liabilities in local currencies, results of our hedging strategies and interest income from our portfolio of investments.

Other income and expenses resulted in $4.5 million gain, mainly resulting from the change in fair value of contingent consideration related to our acquisitions. We adjust our non-IFRS net income to exclude this effect 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 quarter was 21.5%, fairly consistent with previous quarters. Adjusted net income for the second quarter of the year totaled $14.5 million, 11.4% adjusted net income margin compared to $9.5 million, 9.5% adjusted net income margin for the second quarter of 2017. Adjusted diluted EPS for the quarter was $0.40, based on 36.7 million average diluted shares for the quarter compared to $0.26 for the second quarter of 2017.

During this quarter, EPS is growing higher than revenues. Adjusted diluted EPS for Q2 2017 previously reported as $0.27 turn now to $0.26. As we have broken down by quarter, the 2017 full year acquisition-related charges already recorded in Q4 2017.

Moving on to the balance sheet. Our cash and investments as of June 30, 2018, were $57.3 million compared to $60.7 million as of December 31, 2017. This stable level of cash was mainly explained by our decision to self-fund for the time being, M&A transactions including earnouts and CapEx, aim to expand our offices in Latin America, U.S. and Europe.

Sequentially, our cash and investment positions as of June 30, 2018, increased $12.2 million if compared to March 31, 2018. Our balance sheet remains strong, with current assets of $175.1 million, accounting for 45.6% of the company's total assets. Total common shares outstanding as of June 30, 2018, were $35.8 million.

Now let's talk about the 6 months ended June 30, 2018. Revenue for the 6 months ended June 30, 2018, was $247.6 million, implying a 31.5% year-over-year growth. Growth was mainly boosted by top accounts and new customer wins as our portfolio of high potential customers continues to grow at a very healthy pace.

Adjusted gross profit for the 6-month period was $98.2 million, 39.6% adjusted gross margin compared to $72.5 million, 38.5% adjusted gross margin for the same period of last year, an increase of 110 basis points. On a year-to-date basis, we continued to see the positive tailwinds of the FX market corrections in Argentina and some other Latin America currencies, combined with an improved utilization rate.

Adjusted SG&A is also showing a healthy dilution of 260 basis points, currently accounting for 20.6% of our revenues for the 6 months ended June 30, 2018.

Adjusted profit from operations for the 6-month period ended June 30, 2018, was $37.7 million, 15.2% adjusted profit from operations margin compared to $22.5 million, 11.9% adjusted profit from operations margin for the same period of last year, representing an improvement of 330 basis points.

Adjusted net income for the 6-month period ended June 30, 2018, was $28.4 million, 11.5% adjusted net income margin compared to $18.4 million, 9.8% adjusted net income margin for the same period of last year, representing an improvement of 170 basis points.

Adjusted diluted EPS for the 6-month period ended June 30, 2018, was $0.78, based on 36.5 million average diluted shares for the period compared to $0.51 for the same period of last year based on 36 million average diluted shares for the period last year.

To wrap up, let me provide you with our guidance for Q3 2018 and the rest of the year. We continue to experience sustained demand for our digital offerings, and we also see traction for our strategic accounts. The continuity of the FX volatility around the globe, but primarily in the different regions where we operate, combined with still high level of wage inflation particularly in Argentina, require us to take a conservative approach in our guidance for EPS.

In terms of our gross margins, we still expect a normalized range around 38% to 40%, as we pointed out in the last few calls and as we have been able to maintain over several quarters. Diversification of our talent base will continue to be part of our long-term strategy and that should enable us to have a more balanced cost structure, while we continue investing in our 50-Squared strategy and training for our Globers in cutting-edge technologies.

As for adjusted SG&A, we expect additional sales coverage expansion, though we'll continue gaining dilution compared to last year. Finally, we expect effective income tax rates to continue within the 20% to 22% range. Based on current visibility, we expect Q3 2018 revenues to be between $131.5 million and $133.5 million, implying a 20.8% year-over-year growth at the midpoint of the range.

Adjusted EPS is expected to be between $0.41 and $0.45, assuming 37 million average diluted shares outstanding for the quarter.

Regarding the full year 2018, we expect revenues in the range of $514 million and $518 million, an implied 24.8% year-over-year revenue growth at the midpoint of the range. In terms of adjusted EPS, we are expecting a range of $1.65 and $1.69, assuming 36.9 million average diluted shares outstanding for the full year.

Thanks, everyone, for participating in the call and for your coverage and support. Operator, can you please queue questions? Thank you.

(Operator Instructions) The first question comes from Puneet Jain with JPMorgan.

Good quarter, guys. So your top client grew nicely in the quarters after hitting $50 million in revenue run rate in Q1. How much potential there is at that client account? And also, if you can talk about what's driving high growth there?

Puneet, this is Martín. So thank you for the questions. I think the relationship with our main customer is extremely healthy. They are expanding into -- and we are expanding the operation to other areas, and they have pretty bold projects to keep on expanding the digital experience into many other countries and locations, et cetera. So I see a potential of expansion, which is still pretty good. I cannot wait -- as we always say, we cannot wait to repeat those enormous growth rates as we have had experimented in the past, continues to be in the future, but there are other accounts that are taking over. Just remember, the top 10 accounts grew on average more than 30% year-over-year. None of those accounts are accounts that -- they are accounts that we have had for years. So this is the cool trend that we are seeing at Globant. So I see very good potential at Disney, and I don't expect to keep on repeating the same growth as we have been doing in the past, but I see good growth coming from it.

Got it, got it. That's good to know. And can you also share qualitative comments on the recent round of salary increase in 2Q? And assuming much of that happened before currency depreciation, what do you expect for wage inflation in the next round?

Ale?

Puneet, let me take that one. What we are expecting particularly in most of the countries, is definitely very, very stable figures for wage increases. Argentina now accounts for less than 35% of our cash count and roughly 26% of our costs as of the last quarter. Definitely, the numbers for wage increases that we expected when we started the year are different. So there are more now and probably on the mid-20s to high 20s. But at the same time, the pace of the evaluation of the currency has been very aggressive. So I think at the end of the year, probably, we're going to be more than offsetting any particular wage increase. What we tend to do when we face these particular situations of a runaway of the currency and then afterwards the pass-through to inflation, typically is that we take advantage of the second window of salary increases that happen in Q4 for Argentina, that's the only country where we have 2 windows. And we try to assess salaries in such a way that we remain competitive. But as I said, we fear that the pace of the evaluation has been growing faster than wages and we expect that trend to continue for the rest of the year.

The next question comes from Ashwin Shirvaikar with Citi.

So my first question is, can -- I wanted to break down the revenue growth on components. If you can provide, sort of, a headcount growth versus pricing benefit and any comment on utilization and also sort of the contribution of acquired revenue. I believe PointSource, which is no longer going to contribute as acquired entity.

Yes, Ashwin, thank you for the comments. As far as top line growth, it's pretty much driven by the top accounts. If you compare that to headcount growth, headcount is growing probably at 20% plus, whereas, top line is growing much faster. There has been an increase in utilization in the quarter 200 basis points in utilization, 84% was the utilization for the quarter, which is typically 200 basis points above the traditional average for Globant. So very good full premium utilization in the quarter. And the last part of your question regarding PointSource, keep in mind that we acquired PointSource by the middle of the quarter. As you say, it's the only remaining acquisition that we had in the quarter, we haven't done any further acquisition for the past year. So that the contribution from PointSource in the quarter has been really, really irrelevant, very minimal.

Got it, okay. And then it seems that the average size of your existing relationships, it continues to grow. The opportunity set seems robust. And in fact, when I look at sort of the beyond top 10, it might even be happening to the work you're doing for clients that maybe they're not on your 50-Squared list. Is this accurate? And how much do you have to invest in sales or relationship management to continue to manage this? And as the projects and relationship get bigger, does that improve your revenue visibility?

Martín, you want to take that one?

No. Yes, it's okay. The line is okay. Ale, can you take that?

Yes, of course. So what's happening, Ashwin, is that as we launch 50-Squared, we have a strong focus also on the non-50-Squared accounts because our goal there is to get as many as we can, 50-Squared accounts. So we farm, and we dedicate a lot of time to those non-top 10, non-top 20 accounts, where we have several 50-Squared accounts. We try to assemble teams at the very beginning and when we start the relationship, and we start growing probably working with just one single division, a handful of projects. We try to assemble teams that we share based on the studio expertise and based on some vertical expertise sometimes and we start growing from there, then these accounts become meaningful. We start assembling these fully dedicated teams and trying to penetrate other divisions, but that's the common pattern for every single account at Globant. You know that since we launched 50-Squared, we're dedicating a lot of time, efforts, people and sales efforts to increase the relationships with not only the top 10, top 20 accounts, but also with the non-top 20 accounts. So that quality shift is already happening, as you said. If you take a look at the growth rate so far, non-top 20 accounts, they're growing probably a little bit less than the top line for the whole company, but still growing at very healthy rates. And they're definitely part of our focus. Some of the accounts are not yet 50-Squared, but we believe, and we truly trust the teams that are farming those accounts to make them 50-Squared in the years to come.

And it's safe to say, your revenue is definitely going up because of this?

Yes.

Yes, per asset.

The next question comes from Maggie Nolan with William Blair.

I'm wondering how the wave of market is in your chosen geographies, is there any noteworthy change in the competitive environment now compared to over the last year or so?

No, we haven't seen any major change. Colombia is performing very well and Mexico is performing very well. Argentina is performing very well, too. India is doing great for us. And we are gaining in places like Colombia, Mexico and India, where we're growing very fast. We're gaining a lot of momentum in terms of the project that we are bringing there and in terms of the opportunities that we bring into those professionals. So we are seeing Globant gaining momentum and gaining attractiveness on those markets. Also in Argentina, in the interior of the provinces where everyday being becoming better and better. So I see a landscape which is pretty favorable for us. We're recruiting record number of people every month and -- but there is the reason for that. There are 2 factors that really attract talent into Globant being the first, the kind of projects and the kind of customers we have. We are working with the best brands in the planet. And that's very relevant for the professional careers of people. And the second thing is, we're providing, like, 5 dimensions of change for our people. They can change on verticals, going from one vertical to another. We can change the projects, if they love the vertical, but they care about 1 customer. They can go to another in the same vertical because we have pretty deep penetration in the verticals at work. They can even change their career, stop being a perfect manager and become a client partner or stop being a client partner and becoming a deep technical expert on something that they love. They can change countries, they can change -- well, many different dimensions that they can choose. So Globant is prepared for that and it's prepared for every Glober to be able to choose and the organization will try to help, of course, in a mature way and we cannot leave the things undone. But Globant is becoming one of the best place to work as I stated on my previous review, one of the best place to work in Latin America and in the regions in which we operate, including India and the others and Europe and U.S. too.

Okay. And then on utilization, you had pretty high utilization levels this quarter and last quarter as well. Do you think that these are kind of new normal levels? Or do you think that you'll move back down towards your average utilization either this year or even into next year?

I think...

I think over time, we have been improving the way we handle our efficiency across the team. So I think the fact, I mean, Martín mentioned that now we're much more well diversified across different locations and that definitely is helping us to manage better the shallows in the accounts, the juniors in the accounts, some of the hours that we spend in the fixed-price contracts, in the time and materials contracts. So we are confident that we have maintained these kind of the levels of utilization. I think it's -- this is a result of hard work and the diversification among different locations where we have gained in scale.

The next question comes from Avishai Kantor with Cowen.

Great execution, guys. My first question and I might have missed that just to clarify. So your Q3 revenue guidance and essentially, your Q4 revenue guidance that's all organic now, right , since the PointSource anniversaried about a year ago?

That is exactly right, Avishai.

And my second question, the margin performance, and you mentioned, Martín, you said that India is doing great. Is part of the margin performance related to you being able to share shift some of the work between some of the Latin American countries to India, let's say, in a higher percentage compared to previous terms?

This is not -- I mean, it's one of the portions, but it's not that important, I think that we are moving -- we grew significantly in India. But I think the improvement in margins are coming from different places, first from internal efficiencies that we are doing and how we operate. And second, from some kind of tailwind that we are getting on the exchange, for example in Argentina and for example, in other places. So the 2 main factors are: One, operational efficiencies we gain; second, the movement of some things of India and the tailwind on the exchange rate. Ale, do you want to add something into that?

I think it's precisely that, it's a combination of factors. Utilization has also helping us to much better margins as well.

Okay. And my next question, we spoke a lot about Disney, we spoke a little bit about Disney, and you mentioned that you're growing, expanding into some new interesting areas of some of your key clients outside of Disney. Any specific examples that you can share or at least areas, I know sometimes it's hard, but any specific areas that you saw action.

Yes. it's a difficult. But as I mentioned, we're exploring other countries with other areas within the company, other companies that they have acquired and they are acquiring. So the expansion is in many dimensions, it's not just one -- not just one area and we keep being, you know, one of their preferred vendors there based on performance.

So basically -- so it's you, basically, you being able to leverage recent acquisitions, which took you into new areas combined with the 50-Squared plan, basically the combination of both, this is what's driving it?

Exactly right.

The next question comes from Joseph Foresi with Cantor Fitzgerald.

This is Mike Reid on for Joe. Do you think you can give us more detail on where you might be gaining more traction in some of the emerging technology studios such as artificial intelligence and Internet of Things?

Yes, we have our studio. Just to clarify your question, you want to expand on the artificial intelligence studio?

Yes, just maybe some areas where -- in particular where those are beginning to gain more traction.

Yes, absolutely. Yes, artificial intelligence for us has been like a place in which we started gaining a lot of traction. We are treating that as a platform, we are not selling artificial intelligence by the hour like we do in other projects. So for us the promises of expanding our platform efforts on artificial intelligence are extremely important. Then I would like to say that we are like in the middle of all the algorithms and platforms that are out there in the market, and are -- we are like the connection between all those platforms and algorithms and our customers. And we're routing the best possible algorithms pretty much in real time sometimes depending on the challenge. To be able to understand better, which is the algorithm that will answer better a question on specific areas. Let's say, image recognition or character recognition, or speech detection or text simplifications or whatever area you would like to add on the artificial intelligence side. So the offering that we are providing to our customers there is totally different. We're packaging this solution for our customers in a totally different manner. So it's very well-received among our customers this new expansion. Together with other studios like the Cybersecurity Studio, which is gaining a lot of traction too and also the studio around, as always is Mobile, and we're gaining a lot of traction too is our Future of Organizations studio and our Agile Delivery studio. Those 2 studios are studios that aim mainly to change the culture of the organizations and to affect and to provide tools to make a much better digital information and cognitive transformation to not just the technology, but also the tools to transform and affect your culture of your company. So those are -- that's like a abstraction of the things that are growing faster these days within Globant.

Got it. And then second, just any changes in demand environment or spending at financial services maybe particularly at banks?

Expanding in financial services, sorry...

Any changes in the demand environment, or spending. Any update there? Is that kind of the similar to how it's been?

No, it's similar. We haven't seen any backlash there. Indeed, we are seeing now budgeting sessions for many of the banks. Expenditures looks pretty healthy for next year, too.

The next question comes from Frank Atkins with SunTrust.

Wanted to see if I could get a quick update on the hedging program and given the degree in movement in some of the major currencies and inflation. Are you contemplating any changes to the hedging program?

The current hedging program that we have in place is typically placed to cover some of exposure that we have in local currency to some net monetary assets in some countries, particularly in Mexico, Colombia and Argentina. But that's not the big exposure towards local currency, so those are small hedges. We typically use the combination of some local future markets to assemble some features there or NDX should that the case be. Then on the salary side, definitely the perspective that we see for this year, if we take the year-to-date numbers every single country is running at higher devaluation than the pace of wage inflation and even in the case of Argentina, where wage inflation is still high, the pace of the devaluation is running faster. So typically in those countries we're not hedging the cost side of the salary. But then we are doing some hedging to forward contracts on the net monetary asset position, but those are small hedges.

Okay. That's helpful. And then has there been any changes in any of the pricing environments for the particular studios?

No, we haven't seen any change neither -- I mean, the typical pressure. I mean, we're competing against other companies out there. But I haven't seen any massive change or any significant change on the pricing environment. Indeed, our revenue per head is growing quarter-over-quarter. So we're pretty happy with that, and that's a reflection of remember, when talking about pricing at Globant, we're talking about most of our resources offshore because we have just 10% of our people on site. So when you see compare apples-to-apples, we have almost 2x the pricing that traditional IT outsourcing vendors have. So we're selling something different. So -- and we are not seeing that much pressure. I mean, there's such a demand for talent, for teams, for pods, for knowledge that I think companies are starting to realize that it is not a big deal around negotiating a price, but it's better to get the project on time.

Okay, great. And if I could ask one more about cash flow. What in your view is a healthy cash flow conversion rate and where do you think this is going kind of longer term as you look at the cash flow trajectory?

Our goals there, Francis, is to improve year-over-year, I think the -- for us, the use of our cash in the early days has been important in terms of assembling delivery standards in many different places, we are using the CapEx that we needed in order to grow fast. I think we're reaching to a point where the improvement of free cash flow generation and free cash flow conversion should improve every single year. Again, you're going to see the filing in large number tomorrow. I think we had a very weak Q1 that is typically seasonality but then a very strong Q2 in terms of free cash flow generation and that should be the trend going forward. If you ask me, it's still too early to get into that high 70s or low 80s of some other bigger size companies, but that should be the trend for us going forward. So we should get there in the -- within the next 2, 3 years.

The next question comes from Arvind Ramnani with KeyBanc.

I just want to kind of revisit the question on artificial intelligence, but you provided some color. Maybe can you parse out like when you look at AI offering, how much of it is basic like RPA type of offering versus kind of more of the cognitive part of AI versus kind of basic like analytics. If I just kind of break out these 3 components RPA, cognitive and analytics and how that kind of feeds into your AI practice, that would be helpful.

Yes, most of it is cognitive. RPA, it's a space that we are exploring. We have not a huge indent into RPA. We considered that at some point, RPA will be replaced by traditional machine learning, machines learning how to recognize documents and things and screens and automating the work in much more efficient job. That's our view -- long-term view on RPA. That doesn't mean that at some point we won't enter into that, but I'm much more focused on cognitive machine learning stuff. Machine learning projects we are presenting to our customers in a productive way. That, of course, sometimes includes some data analytics and nonsupervised machine learning that takes some kind of patterns within some set of data that we get from our customer. But right now projects are more around bots that can answer in a very efficient way questions from customers as recent as tax fraud and to customs. We are more in the side of teaching machines how to recognize fruits, to supervise them and to analyze them in an efficient way. How to teach machines, how to recognize attrition or talent, those are the things and projects we are proposing proactively to our customers and it's being very well-received. And again, it's not that we are using one technology or another technology, it's not that we are using Microsoft or Amazon or Google. We're trying to use all of them, and we're trying to make a layer of abstraction for our customers. So they can use artificial intelligence without the need of researching, which is the best algorithm for each particular solution at every single moment. And this is one of the most interesting value adds that we have for our customers.

Great. And in the prepared remarks, you kind of talked about your kind of a lot of AI work being discipline and making sure they all don't convert to time and material. Can you talk a little bit about what kind of essentially pricing model you have for these -- for these engagements? And also, explain how your sales team that is essentially incented to basically sell on T&M, how are you changing the mindset to focus on selling more of value?

Look. I mean, for years, we have been pushing and we have been saying that for us it's extremely important as a company and as a next-generation service -- professional service organization to provide our services in the best possible way. That means that our company has been talking about platforms and using platforms and increasing the revenue on platforms for many years already. And we haven't done it through acquisitions. We did it organically, which is really, really amazing. So all our sales force has been trained for many, many years already in trying to sell -- our platforms were started by selling the StarmeUp OS, which has already hundreds of thousands of users, if not millions, in the platform. Now the idea is that we will be charging, now let's say that we put a machine learning system that is watching cameras. And those cameras are detecting, let's say, in a city are detecting fires or accidents or assaults or any kind of crime or reports or a gunfire. Well, every detection that we generate with our algorithms is being charged on a per camera basis per month, just to give an example. So there is a setup fee that the customer pays. But then the ongoing work of those algorithms that we do we charge the customer in a totally different manner. It's not per the hour but per detection on the system. I think that explains a little bit your -- the perspective of Globant. So sales force is already trained and we are selling a new platform for their portfolio.

Yes, that's pretty helpful. If I can just squeeze one last one in. You have been kind of leading this whole digital -- you've been leaders in the whole digital space for a long time now. But can you maybe explain like which of your studios are seeing high -- kind of really high growth above 50%, 60% whatever the number is versus kind of which other studios have gained scale and some of the growth rates are not as high. Yes, basically can you explain which ones are seeing the highest growth?

Yes. Look, there are some studios that as always are growing faster than others. So we are seeing a lot of growth on artificial intelligence, we are seeing 4 digits growth on artificial intelligence. We are seeing triple digits growth on Future of Organizations. We're seeing high double digits on Mobile. We are seeing a lot of demand on the cloud ops and the cloud environment operations. We're seeing also a huge growth on the Cybersecurity, that is the studio that we just launched. So we are seeing very high growth on some studios. And some, for example, other studios that used to be quite, I mean, aggressive in terms of growth have now has been merged into artificial intelligence like big data, that is moving all the growth into our artificial intelligence studios. And then some others are growing slower, for example, gaming for us is going slower because the gaming industry is growing, but it's not growing as fast it was in 2008, 10 years ago. So that studio is very healthy, very profitable, but it's growing slower. And then we have some other studios that are growing slower, too. So we have -- out of our 20 studios, I would say we have many that are growing fast and some that are growing slow. So that's a kind of picture.

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

Thank you very much, operator, and thank you everybody for your attention that you devote every quarter to us. Really looking forward to see you on the next earnings call. Thank you very much.

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