Globant S.A. Q4 FY2023 Earnings Call

Good day, and welcome to Globant's Fourth Quarter 2023 Earnings Conference Call. I am Arturo Langa, Head of Investor Relations at Globant. Please note this event is being recorded and streamed live on YouTube. 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, Co-Founder and Chief Executive Officer; Juan Urthiague, Chief Financial Officer; Patricia Pomies, Chief Operating Officer; and Diego Tartara, Chief Technology Officer. 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 risk 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 would now like to turn the call over to Martin Migoya, our CEO.

Good afternoon, everyone. I'm happy to be here to report our earnings results from Q4 and the full year of 2023. As we mark our first 20 years, we are very proud of what we have accomplished as a company. First, our quarter's results. In Q4 2023, Globant made $580.7 million in revenue, representing an 18.3% increase year-over-year and 6.5% quarter-over-quarter. We continue to demonstrate our ability to grow profitability, to generate cash, and to manage our robust balance sheet. Total revenue for 2023 was a record $2.1 billion. This was above our guidance and represents 17.7% year-over-year growth. Last year, we entered over 10 new markets, each with exciting growth opportunities for both our clients and delivery networks. We also began exciting relationships with more than 250 new clients. We keep expanding and diversifying our service offerings. The Globant concept means the simplicity of having a trusted end-to-end partner, one that can craft multiple solutions with a larger breadth of services, platforms, and capabilities. Over the past year, we have launched seven new studios in line with the expanding needs of the market. I am encouraged to see that Globant’s global recognition continues to spread. Brand Finance has recently named Globant as the world's fastest growing IT brand and the fifth strongest IT brand globally. The future growth of our total addressable market remains promising. After an uncertain 2023 for IT spending, Gartner estimates momentum to return in 2024 with 6.8% expected growth globally. From cloud migration to data management strategy, digital branding projects to AI initiatives, companies are resuming investments to stay ahead of the innovation curve. We see this change reflected in our pipeline. Clients are requesting a wider scope of transformation projects that require more sophisticated and dynamic solutions. As we close 2023, we saw a higher demand for projects with AI components. The AI-related business is outpacing the total growth of our service offering. According to Forrester, generative AI will have a 36% CAGR through 2030 to finally capture 55% of the AI software market. Gartner estimates that by 2027, 90% of service providers will use generative AI for software development services, including code compiling and optimization, automated debugging, and automated quality assurance testing. Globant has been significantly investing to take advantage of the estimated $450 billion opportunity we see in AI services. Since the consolidation of our AI studio, we have built up capabilities in the space that are ready to apply now that AI is going truly mainstream and with IT service companies as the proxies for adoption. Globant has completed over 500 AI-centric projects in nearly every field of AI, including predictive analytics, natural language programming, computer vision, and custom-made neural networks, among others. In generative AI, we have been leveraging many of the large language models since 2017 in internal applications, powering efforts behind code enhancement, feedback, and testing tools. This has given us a lot of support and a head start in developing and deploying GenAI. One example is our work with the Latin American e-commerce powerhouse of Mercado Libre. We are leveraging generative AI and machine learning for provider assistance, fraud and anomaly detection, and generation of financial reports. We are particularly excited about this project due to the impact it can have on the Mercado Libre ecosystem, which includes fintech, logistics, digital marketing, and more. We also see a great opportunity to take advantage of the heightened appeal we see in spatial computing. This technology is blurring the line between the physical and digital experiences. Similar to the iPhone moment that GenAI had last year, spatial computing is gaining traction as new and exciting products, such as the Apple Vision Pro, are becoming widely available. This presents a timely opportunity for us because we have been working in the space since 2022, when we began our collaboration with Magic Leap. We drew on the expertise from several of our studios to partner with them to develop their Magic Leap 2 headset. Currently, GeneXus teams are developing an accelerator specifically designed for visionOS, the operating system of the Vision Pro. The accelerator will help create applications that inherently understand and adhere to the design and experience paradigms of visionOS. We will be offering a beta version to clients next month. As Globant has been able to deliver early on in the generative AI space, we are confident in our ability for a similar execution as the spatial computing sector grows. I am confident that Globant boasts one of the most sophisticated and proficient teams in the world to make this adoption happen. As a company, there are several growth drivers that will move us forward. First, our global footprint. Every year, Globant is more diverse. We are now present in a total of 33 countries. No one country contains more than 20% of our workforce. This enables us with the adaptability to scale our projects as quickly as is required, regardless of time zone, culture, or logistics among our global delivery network. Our prominence in Latin America, our home region, is particularly beneficial right now, as more of the biggest companies choose this region due to its proximity, multilingualism, and adaptability. In the past months, we have made significant investments in Mexico and Brazil, the two largest economies responsible for 38% of Globant's revenue in the region, because we are eager to take up this demand. In Mexico, over the past year, we have established a new team specifically dedicated to life sciences to address the fundamental changes and growth of the sector in the region. In Brazil, we have almost doubled our team over the past year, betting high on keeping our leadership in enterprise applications, especially Salesforce, and reinforcing the economy digital transformation projects with the acquisition of Iteris. We are optimistic about our future expansion this year as we see a robust business pipeline and organizations' IT expenditures recovering compared to last year. Regarding our studios, the consolidation into our four studio networks is fostering ecosystems of ideas and expertise among our specialized business units. Cross-pollination between studios is strengthening the 360 nature of our solutions as well as creating a pathway to cross-selling. Beyond showcasing the amazing portfolio of services Globant offers, it mirrors our vision for the industry moving forward. For example, the most recent acquisition of GUT, which Diego and I will expand on later, is a step in our drive to reinvent the creative marketing industry through technology. Through areas such as our enterprise studio network, which has experienced a 4x increase in the past four years, we can serve clients regardless of their enterprise software of choice. Being cloud agnostic and vendor agnostic enables us to scale our adaptable solutions to each client. We see increasing growth interest in the sports and entertainment industry as the sector reinvents itself. Streaming is quickly becoming the number one way to view live sports. Additionally, companies will need to rely on zero and first-party data to maintain loyalty as fan engagement this year will likely become cookie-less. Globant has proven expertise in both areas as well as in creating comprehensive fan experiences from working with FIFA on their FIFA Plus platform to helping top sports teams understand their fan behavior. We have focused our expertise and growth in this space through our joint venture with LaLiga last year known as Sportian. By leveraging technology, data, experience design, and business strategy, we are able to create new experiences that emotionally connect with fans around the world and create tangible value for fans, players, sponsors, and sports organizations in a sustainable way. We have recently established the Sportian Advisory Board. The first members include Manu Ginobili, NBA All-Star and George Gregan, Australian rugby captain and World Cup winner. We look forward to working with them to make our mark in this fascinating and rapidly growing industry. In addition to our organic growth, Q4 saw the incorporation of exciting new members to the Globant family, including Gut in the United States and Iteris in Brazil. Announced in late November, Gut brings a fire of creativity to Globant. They were recognized as the 2023 Cannes LIONS Independent Network of the Year and Adweek's Breakthrough Agency of the Year. They work with over 60 clients globally, including AB InBev, Kraft Heinz, Coca-Cola, and Mercado Libre. Technology and creativity have never been more closely linked than they are today. We always say that Globant is where innovation, design, and engineering meet scale. And we couldn't be more excited to bring the world's most creative global network into the mix. We are also thrilled to support Gut's global expansion and to keep Gut's leadership team in place with a continued focus on building culture and driving growth. Both companies will now work together to identify valuable cross-selling opportunities. The acquisition of Iteris, a Brazilian business and technology consultancy specializing in digital transformation, is a doubling down on our commitment to Latin America's largest economy. They have over 600 experts in industries including payments and banking, manufacturing, communications, education, retail, and healthcare. We keep expanding our connections with our community as well. With record attendance, we had our annual Converge event, bringing together fascinating and influential thinkers who are on the cutting edge of technology. I enjoyed my own conversations with Marc Benioff from Salesforce and key thought leaders on the future of technology and what it means to transform industries. You can check them out as well as the multitude of content at converge.globant.com. On a personal note as I close out, it was an emotional moment for us to commemorate our 20th anniversary at the New York Stock Exchange on December 4. Seeing this company grow from my three co-founders and me in a bar to a global team of more than 29,000 creative minds has been fantastic. However, I genuinely believe that we are just scratching the surface of what we can do. Company-wide entrepreneurship, creativity, and resilience will push us forward over the next 20 years. With that, I will hand it over to Diego Tartara, our CTO. Thank you very much.

Thanks Martin and hello everyone. I'd like to begin with two major technology trends that present interesting growth opportunities for Globant. First, there's a growing synergy between the digital and physical worlds through AI-powered wearables. Products from companies like Rabbit, Humane, Ray-Ban, Meta, and Apple enhance decision-making for users and foster a more human-centric experience. Many of these products, such as the ML2, R1, or the Vision Pro, may revolutionize how we interact with technology in an intuitive way. Second, the integration of virtual and augmented reality into the digital experience. We see this trend gaining momentum through innovations like Disney's Holo Tile Floor. This technology enhances collective digital interaction for a more immersive experience, applicable to the metaverse, live-action shows, and many other instances. Organizations that want to leverage the best of both trends will rely heavily on AI and machine learning. This is where Globant's expertise comes into play to actively collaborate. We see a shift from isolated proofs-of-concept to full integration with experiences and processes. We have shared our vision of the AI market in our recently published Tech Trends report, which also expands on our perspectives on other disruptive trends, including quantum computing, robotics, blockchain, and immersive experiences. I encourage you to check it out at reports.globant.com. We continue to position our studio networks to expand and diversify our value offerings. The incorporation of Gut into the Globant family means a major growth step in our Create Studio network. As Martin mentioned, our ability to offer current and future clients new ways of engaging and surprising users will be dramatically impacted. Also within this network, we have created a new studio to focus on customer loyalty. According to Forrester, over 50% of leading companies plan to increase their current investments in customer loyalty programs in the next two years. Globant's new loyalty studio brings together our related experience in aviation, retail, and sports, among other sectors, as well as strong expertise across payment systems, digital wallets, digital currencies, blockchain, AI, and more. A recent prime example of our expertise has been our work with the LA Clippers. This program represents a non-traditional initiative designed to incentivize specific fan behaviors both at home and in the venue. Its goal is to consistently enhance motivation, energy, and engagement through a reward system. The loyalty engine seamlessly connects with the fan identity, multiple IoT devices to measure fan activity, and ticketing systems, among others. Our team collaborates on shaping the program strategy, integrating the loyalty engine into the platform, and developing the user interfaces for fans and staff, along with multiple use cases. Our Reinvention Studio network, focused on transforming not only clients' businesses, but also the industries themselves, has consolidated the new connected experiences studio. With today's multiple touchpoints for interactions between organizations and their customers, companies need to craft unique and meaningful experiences to boost revenue. According to Forrester, solid investments in customer experience can yield a 700% return over 12 years. With this new studio, Globant brings to the table its expertise from initiatives such as the technology-integrated experience at the Intuit Dome, the customer journey we designed for Royal Caribbean, and the digital pre-buying experience we developed for Nissan. As an end-to-end partner, Globant can make a profound difference in how brands engage with their customers throughout their entire journey. Also within the Reinvention Studio Network, we have made exciting new strides in the health and life sciences sector. Globant is finalizing agreements with three major pharmaceutical companies as their strategic partner in contract marketing and medical organization. The final product means combining the strengths of multiple digital studios, Globant X platforms, and enterprise tools from Salesforce. The end-to-end solution includes three main steps: digital insights, customized and omnichannel strategy development, and finally a dedicated team improving brand awareness and patient outcomes through effective communication and services. All projects are long-term, five years or more, positioning Globant as an industry leader in this competitive space. We are also working with one of the largest U.S. healthcare companies. They came to us because they were looking for a solution to detect events from camera images inside their hospitals so that they could make decisions more quickly and efficiently. Globant is applying AI to process images captured from cameras in real time. We generated synthetic data to train and test the detection and classification models. Before this project, this was carried out through the use of real data, which is a longer and more costly process. The project is being executed by combining the knowledge and efforts of our gaming, data, healthcare, and life sciences studios, and our delivery networks in India and the U.S. Globant's enterprise studio network continues to expand. Our unique position to address this market stems from years of developing our own capabilities, acquiring companies with enterprise application skills, and building strong alliances with global leaders such as Salesforce, SAP, Oracle, and ServiceNow. Globant has remained cloud agnostic and not industry siloed, making our solutions fully customizable and adaptable to every client. As an example, we are leveraging our Salesforce multi-cloud capabilities in our work with the Intercontinental Hotels Group. Together, we created a streamlined action plan with field and operation support users. The objective is to improve hotel performance through better tracking of engagements and actions. Through this work, we're delivering actionable insights to the IHG teams from over 10,000 data points. In our Oracle studio specifically, we were called upon by Oracle to establish a joint program to help their clients design and execute an AI enterprise innovation roadmap. The project catered to each client's business goals and even opened the possibility to work with the clients to rethink their businesses considering new AI paradigms. To execute, we combined Oracle AI platforms, including generative AI services, machine learning, and Oracle Cloud infrastructure for AI workloads with our GlobantX AI platforms. Oracle clients can also now use selected GlobantX solutions to empower their enterprise applications as we are currently publishing them in the Oracle Marketplace. Our unique digital studio network, which harnesses disruptive technologies including data and AI, blockchain, Internet of Things, quality engineering, and much more, has been named a leader by IDC MarketScape in their Worldwide Software Engineering Services 2023 vendor assessment. This acknowledgment is a nod to Globant’s engineering talent and its ability to drive high ROI for our clients and provide clear roadmaps to reduce business and technology costs. Now let me share some updates on GeneXus Enterprise AI, the platform that is revolutionizing how we and our clients approach corporate challenges. With this technology, we are developing a groundbreaking AI-based drilling assistant for Tech Petrol in the Latin American energy sector. This solution provides real-time data analysis, transforming drilling operations management, enhancing efficiency, and enabling precise real-time decision-making. At our GX30 event last quarter, we emphasized the incredible possibilities of generative AI to our global community. The entire GeneXus partner and development ecosystem is now fully aware of GeneXus Enterprise AI, and this is broadening our channels of sales as more organizations are directly exposed to the product. Thank you for your attention. I'll now pass it over to Patricia Pomies, our Chief Operating Officer.

Thanks Diego, and hello, everyone. Since our inception, Globant's operational fundamentals anchored in a strong culture, engaged teams, and a unique delivery model have been pivotal in enabling growth, driving innovation, and delivering disruptive solutions to our clients. Now these pillars stand reinforced, ready to catalyze further expansion and boost our business moving forward. Our current global footprint is diverse and well-balanced across key dimensions. With our presence in 33 countries and several industry revenue streams, we are strategically positioned to capitalize on opportunities and navigate market fluctuations with resilience. Furthermore, we have recently enhanced our Agile Pod methodology, achieving a significant milestone by certifying almost 100% of our pods in AI. By leveraging AI through our specialized suite of products, we have augmented our analytical prowess and accelerated decision-making, granting us a clear competitive advantage. In conjunction, we have redesigned our people and staff areas to better support our pods, enhancing our agility and enriching the quality and creativity of our solutions to increase responsiveness to client needs. Let me share some key figures regarding our clients. Our 100 squared remains the compass for strengthening the relationships with our clients and offering more services as we grow our collaboration over time. To complement it, we have recently revamped our global account model so that we can scale up our partnerships with organizations that span multiple geographies, all while harnessing the talents of multiple studio networks. We currently have 16 clients bringing in more than $20 million in annual revenue and we now have 311 clients that provide more than $1 million of annual revenue, 20.1% more than one year ago. Revenue from our largest client, the Walt Disney Company, remained the same quarter-over-quarter. The rest of our accounts collectively grew quarter-over-quarter by 7.1% and 21.9% year-over-year, reflecting the increasing diversity of our prime revenue sources. In Q4, 57.4% of our revenue came from North America, 22.9% from Latin America, 17.2% from EMEA, and 2.5% from APAC. When assessing business verticals, no vertical accounts for more than 22% of total revenue. We proudly work across multiple sectors, ensuring a robust and balanced business model. Now to our headcount. As of December 31st, we were 29,150 Globers, of which 93% are IT professionals, representing an addition of 1,541 IT professionals on a sequential basis. Today, Colombia, our largest delivery hub, represents 20% of our global workforce, while the broader Latin region accounts for 70% of Globers and India 15%. We are excited to welcome new Globers from the Netherlands after the acquisition of Gut. Also, to amplify our position in Europe, we opened our first innovation hub in Berlin. Our attrition rate over the past 12 months is 8.1%, a record low, 1.4 percentage points lower quarter-over-quarter, and 8.6 percentage points lower year-over-year. As of Q4, our utilization rate stood at 80.2%, and as previously conveyed to the market, we continue to have positive net additions on an organic basis, which is a reflection of the demand we see. To foster a thriving culture that cultivates talent and consistently provides the best experience for our teams, active listening is essential. We are happy to share that we concluded Q4 with a solid uptick in the Engagement Index, tracking pride, sense of belonging, likelihood to recommend, and desire to remain at Globant, of 2 percentage points from our previous pulse check, reaching a truly positive overall score of 84%. As Globant continues to become a more global and diverse company, our culture must evolve as well. Recognizing the need for entrepreneurship and relationship building throughout our organization, we decided to add three new values to our corporate culture. 'Own the place' inspires the entrepreneurial spirit and trust powered by autonomy while encouraging every Glober to be proactive, passionate, and committed to growing the company. 'Cross-selling hero' aims to foster synergy. It encourages different teams to collaborate across our services, platforms, and studio networks. With this cross-selling mindset, we build bridges and amplify the impact of our solutions. Finally, 'AI hero' reflects the importance of AI in our company to everything we do and celebrates those that excel at applying and improving our AI capabilities both in-house and for our clients. I'd like to share a quick update on how we are leveraging AI internally. The platforms of Gino and Sensei presented to you on last quarter's earnings call have demonstrated substantial growth. Gino, our AI human capital partner, which helps managers build teams in a conversational way, has already supported 16,000 initiatives, 91% of which were successful. Sensei, our AI assistant for tailored professional skill development, completed more than 2,300 assessments in Q4 alone. Sensei has had a profound effect on how we skill up at Globant, with the average learning hours having increased by 40% year-over-year. And finally, some updates on our Be Kind initiative. Our Be Kind to Yourself holistic strategy showed great results. Over 79% of Globers expressed that they feel well physically, mentally, and spiritually when working, showing an increase of 3 percentage points compared to our last pulse. This quarter, we were recognized in the Financial Times, Statista Diversity Leaders ranking as one of the most diverse organizations across all industries and sectors. We continue to share our Be Kind to the Planet voice and sustainability best practices on the global stage. We participated in COP28, taking part in multiple discussions on innovation around carbon and biodiversity credits, energy transitions, water management, and climate. In all of these critical areas, Globant has a technology offering and a charted way for businesses to be both successful and beneficial to our planet. We're also proud to be working with the US Green Building Council, best known for its LEED certification product. Through our strategic multi-program partnership, we are developing a new platform for the USGBC that will simplify the Green Building Certification process for large construction projects. Through this new interactive platform, property managers and owners will be able to seamlessly and interactively assess and manage sustainability criteria regarding energy, water, air quality, and waste, among other factors. We are optimistic about the impact of our work, led by our sustainable business studio, as buildings are responsible for 30% to 40% of the global carbon footprint. Finally, we keep working to get more people involved with the tech industry. In line with our commitment to provide coding scholarships to 15,000 individuals worldwide by 2025, we have already awarded a total of 11,500 scholarships, over 4,000 during 2023 alone. Now, let me introduce Juan, our CFO. See you all in a minute for the live Q&A. Thank you.

Thank you and good afternoon, everyone. It's always a pleasure to reconnect and reflect on last year's performance. In 2023, we've achieved results that stand as evidence of our resilience, innovation, the dedication of all our Globers, and the trust of our clients. 2023 has been a year of dynamic growth and strategic execution. Our full year revenues reached a milestone of $2,096 million, a remarkable 17.7% year-over-year growth. In a challenging year, we went on the offensive and our bets paid off, reflecting our company's hunger for more, our focus on execution, and our commitment and passion for what we do. In 2023, we've not only grown our top line but also captured significant market share, which stands as a clear endorsement of our value proposition. We are optimistic about the future of the company. Our pipeline is strong and we see a positive change of tone regarding discussions of our clients' long-term strategies relative to the start of last year. We still have plenty of room to grow with many of our clients, and as we scale, we seek to add more and more companies who wish to have the Globant experience. Let's now review our solid Q4 and 2023 results. We are very proud of the positive top line growth we were able to deliver. 2023 revenues were up 17.7% year-over-year. This strong growth was mainly driven by an industry-leading 11% organic growth for the year. Also, we delivered another strong quarter of profitability, solid cash generation, and a strong balance sheet position. These results were driven by our strong execution across all of our growth pillars. In the fourth quarter, we've seen our revenues reach $580.7 million, a remarkable 18.3% year-over-year growth, which markedly outstrips industry averages and speaks to our strategic initiatives paying dividends. These results demonstrate our ability to navigate through headwinds with agility and capitalize on our diversified offerings and global reach. Our organic growth remains a core strength, contributing 11 points to our overall expansion for the quarter, signaling the effectiveness of our 100 squared strategy and our commitment to deepening relationships with existing clients while forging new ones. The performance across our verticals reflects our solid execution. We saw year-on-year and quarter-over-quarter growth across virtually all of our business segments in 2023 and in Q4 respectively. In a similar fashion, all of our key geographies performed strongly in Q4, witnessing a recovery when compared to the first half of 2023. Media and entertainment, energized by digital consumption trends at our biggest client, and our efforts in the sports and entertainment segment, saw a positive quarterly revenue expansion. Travel and hospitality grew strongly relative to Q3, supported by innovative partnerships and a resurgence in global mobility. Consumer, retail, and manufacturing also showed strong sequential growth as companies continued to invest in their digital transformation efforts in the space. Technology, after a period of moderation, has stabilized, reflecting the essential nature of our services in an increasingly digital world. We continue to be laser-focused on profitability. We closed 2023 and the fourth quarter with an adjusted gross profit margin of 38.1% and 38% respectively. For the full year, despite a tough pricing environment, currency fluctuations, and macroeconomic shifts, we've managed to maintain an adjusted operating margin of 15.2%, staying within guidance. Similarly for Q4, our adjusted operating margin stood at 15.3%, also within our guidance. This demonstrates our focus on operational efficiency and our ability to leverage revenue growth into meaningful profitability. Adjusted SG&A as a percent of sales stood at 17.8% in the full year 2023, versus 18.5% in 2022, representing 70 basis points of improvement. Our adjusted net income in Q4 reached $71.1 million with a 12.2% adjusted net income margin, up 30 basis points quarter-over-quarter. Adjusted diluted EPS for the quarter was $1.62, $0.02 above our guidance, representing a 15.7% year-over-year increase based on 44 million average diluted shares. Adjusted EPS for the year stood at $5.74, above our full year guidance, growing 13% versus 2022, and representing an adjusted net profit margin of 11.9%. We continue to believe that the long-term health of the company rests on growing while producing profits and we remain committed to this. Our balance sheet remains strong. We've strategically managed our net cash position, ending the year with $323.3 million in cash and short-term investments. As of December 31st, 2023, we had a total amount of $155 million drawn from our credit facility to finance some of the acquisitions done during the year. Our proactive approach to capital management has yielded a significant free cash flow of $192 million in 2023, compared to a cash generation of $102.1 million in 2022, reflecting our team's priority on sound capital management, liquidity, and financial discipline. Our free cash flow to adjusted net income conversion ratio stands at 76.8% and 121.1% on an IFRS basis. This strong cash generation provides the company with solid funding to focus on growth, reinforce our strategic investments, and reinforce our liquidity and net cash position. We remain committed to driving strong free cash flow generation. Turning to the future outlook, we remain cautiously optimistic for 2024. For Q1 2024, we project at least a 20.7% year-over-year growth in revenue, with a total top line of at least $570 million. For the first quarter of 2024, we expect our adjusted operating income margin in the 15%-16% range. IFRS effective income tax rate is expected to be in the 22% to 24% range. As discussed in a prior call, Pillar 2, which implies a minimum level of taxation at a 15% rate for all jurisdictions, has been approved in Luxembourg starting January 1st, 2024, increasing our overall tax rate. Our adjusted EPS for Q1 is expected to be at least $1.53, assuming 44.1 million average diluted shares outstanding for the quarter. Now let's move toward the full year guidance. We continue to be very confident about delivering another year of industry-leading growth. Our outlook considers a demand environment that, while showing signs of recovery relative to 2023, is still below a normalized level of demand. Based on current visibility, we are providing our full year 2024 guidance of at least $2 billion and $435 million, or 16.2% year-over-year growth. This guidance figure considers a neutral FX outlook. This outlook embeds a certain level of conservatism, but one that we feel is prudent considering the still fluid macro and industry conditions. For the full year, we expect our adjusted operating margin in the 15% to 16% range. 2024 IFRS effective income tax rate is expected to be in the 22% to 24% range. Finally, our adjusted diluted EPS for 2024 is expected to be at least $6.50, assuming 44.3 million average diluted shares for the year. As we conclude, I want to express my gratitude for the trust placed in us by our clients, shareholders, and the entire global team. The past year has been a powerful reminder of the strength inherent in our culture, the agility of our business model, and the transformative impact of our work. Thank you everyone for joining the call today and for your continued support and belief in our vision and strategy. We look forward to updating you on our progress throughout the coming year.

As we conclude, I want to express my gratitude for the trust placed in us by our clients, shareholders, and the entire global team. The past year has been a powerful reminder of the strength inherent in our culture, the agility of our business model, and the transformative impact of our work. Thank you everyone for joining the call today and for your continued support and belief in our vision and strategy. We look forward to updating you on our progress throughout the coming year.

Thank you, Juan. And hi, everyone. As we go through the question and answer section of this call, I will announce your name. At that point, please unmute your line and ask your questions. Please mute your line after your question is done. I would also ask to please limit your time to one question only. Thank you very much. And with that in mind, the first question comes from Tien-Tsin Huang from JPMorgan.

Thanks. Good to see you all. Maybe I'll start and ask just about some of the guidance, especially for fiscal ‘24, particularly Q1, considering the sequential decline. I know there's a lot of complexity with FX and M&A, but can you just comment on visibility and what we should consider for the first quarter in sequential growth for the rest of the year?

Thank you, Tien-Tsin. For the first quarter, we guided $570 million, which is around 20.7% year-over-year growth. That is a 1.8% sequential decrease. That decrease, when we reported back in November, we spoke about some one-offs that we had in Q4 related to licenses. Then there was another impact that we got from the significant depreciation of the Argentinian economy, which resulted in the renegotiation of contracts with some of our customers. So when we combine those two events, we ended up with a slight sequential decrease heading into Q1. Going forward after Q1, we are seeing sequential growth of around 45% every quarter, leading us to around 16.2% year-over-year growth, which we believe is a very strong growth for the year.

Okay, now that's clear. Thanks for going through that. And then maybe my follow-up, I'll ask an AI question, if that's okay. I know you mentioned 500 projects around AI. So can you comment just on average deal size, how tight is that, or how dispersed that is? I'm just curious about what the deal projects look like and if it drives any pull-through for other larger projects at this point.

I'll take the first part, and then we'll let Diego respond. Hi, Tien-Tsin, how are you? So in this space, we are seeing what everybody's talking about, and that's pretty clear. It has been clear for the last quarters. Still, I believe the projects are exploratory. We are seeing some evolution in them and an evolution in demand. I think during this year, at some point, we will see large digital transformation projects in the AI space coming. For now, companies are exploring how to use it. But I would divide the adoption of AI into specific portions. One is how people adopted it to create content of any kind—how to program faster, how to write code faster, how to write text faster. Everybody's using AI for that and generative AI for that, which is ideal. Companies are already leveraging those things. And then the big discussion is how we start using that in the internal processes to optimize what we do inside the companies. That's something we are managing at every single pod level, at which an AI champion is taking care of all the AI initiatives for 100% of the projects we do for our customers. I would now turn it over to Diego for comments on the size of the project.

So I think, Tien-Tsin, the most important thing is how this behaves. What we are seeing and what we are tracking is the penetration of AI into our clients and into our projects. That a project has an AI component does not mean that it's an AI project—it's a business project. It's solving a problem that typically was being solved by other means, now with the use of AI. That is expanding dramatically. And it's exactly how we see it from day one. This will be everywhere; this is not like a niche for some specific type of projects. With regards to that, the growth of the AI studio is definitely by far outpacing that of the company. We are continuing to see a lot of those projects focused on productivity—doing what we used to do in a more effective, much faster, cheaper way, with the use of AI automation and content generation. But we're seeing two different trends. The first is a slight increase in the type of projects that are consumer-facing and involve some AI components, such as suggestion engines, chatbots that aid the user, and automatic generation of certain types of content for the user. The second is that the projects we're now working on, even concerning productivity, are becoming more complex. This is actually very good. We are trying to solve deeper, complex problems. Now the data problems we are facing are feeding the same types of things, but from a much more complex ecosystem. That becomes a data problem, which is part of the solution. The models are much more complex. We're working with ML Ops to improve that over time. So we are witnessing those types of projects maturing and evolving. This is a continuation of what we've been telling you since last year. This will eventually take some time, but we see that within this year, we will definitely see the switch into AI being used for new business lines like new revenue streams and new consumer-facing applications, etc.

The next question is coming from the line of Ashwin Shirvaikar from Citi.

Good to see you all. Hi. If I can go back to sort of the previous question, because you mentioned obviously the one-time license, you mentioned the impact of Argentina's devaluation, but there's also two acquisitions. Is there something different about the seasonality of those acquisitions perhaps? Or how would you quantify the various pieces? And if I can get you also to comment on, when you say a positive change of tone in conversations with clients, what form is that currently taking? Are these discussions about bigger projects? Is the ramp faster that you're discussing? Because there is a lot of confidence about 2Q through 4Q.

Yes, regarding the first question, when we look at the impact of licenses and the situation in Argentina, we estimate that there is an ongoing renegotiation of contracts that we don't know where that's going to end in some cases, which could account for $15 million to $20 million. Then we had the positive impact of Gut and Iteris. Typically, Q4 tends to be a stronger quarter for those companies. In the case of Iteris, they mainly operate in Brazil, while Gut tends to have a very strong end of the year, followed by a slightly lower beginning of the year to subsequently become stronger. When we talk about conversations with customers, we see improvement not just in discussions about savings and efficiencies but also about building new products and features, which indicates innovation in general. We believe that's a positive change of tone in conversations, and we have several customers in different sectors who are already engaging in large and very attractive projects. That also gives us confidence that bookings are starting to trend positively in Q1.

Okay. And the second question, this may be about Diego's comment with regards to increased complexity. I guess that might apply to not just AI but also to other projects as well. Your fixed-price contracts now account for 21% in total, whereas a year ago, it was 17%. That's a pretty good size jump in terms of how maybe you're engaging with your clients or how they are engaging with you. Could you provide a deeper explanation of that trend?

Yes, definitely. In many occasions, when we engage with clients—especially with our reinvention studios—we can now go deeper into the solution for different industries. We tend to repeat certain types of solutions, which allows us to secure richer contracts where we can commit and put some skin in the game. This enhances certainty among our clients and reflects maturity in the relationship that allows us to increase that portion of fixed price contracts. While it's still not significant in total proportion, it's a visible and healthy trend.

The next question comes from Tyler DuPont from Bank of America.

Sorry about that, is that better? It's like every year, it's a Zoom and I still can't figure it out. Thanks guys. So I'd be curious if we can just start by double-clicking on the types of conversations you are having with clients as we begin 2024 with respect to visibility, particularly with budgeting decisions as we start to firm up for the beginning part of the year. What are the types of projects that clients seem to be focusing on, and are there any specific callouts worth mentioning?

Yes, I would take the first part. We are witnessing much more positive conversations than a year ago, and that's remarkable to see the difference between the first quarter of 2023 and the first quarter of 2024. So that's encouraging and keeps us excited about the opportunities moving forward. More projects are emerging across the board from AI to Metaverse or spatial computing, as well as traditional digital transformation or optimizations. We're executing any kind of process in the four studio networks. On the enterprise side, we see good growth coming from Salesforce, from ERP re-implementation, or transformation. We're seeing positive trends in the cloud migration space. Then in the digital space, everything from traditional consumer engagement platforms to digital experiences, including AI. We're moving forward quickly into pitching nearly every single customer we have out of the 1,600. We are confident we will be able to cross-sell across our service lines, which has been extremely important. Demand is also evident in healthcare, life sciences, retail, and travel and leisure. All sectors are seeing increased interest.

I would like to add to what Martin said: conversations have shifted toward the revenue-generating side of things. While last year focused heavily on streamlining operations, which is positive in itself, we are now seeing full commitment and investment in long-term, transformative projects. Even in the Enterprise Studio, we are beginning discussions about full migration to cloud services, which can be costly and lengthy projects. We see clients willing to make these commitments moving forward.

Okay. That's helpful, thank you. And just as a follow-up, I wanted to discuss the sequential math. As we look through top-line growth for 2024, the exit rate appears to be around the 12%-13% neighborhood. How should we reconcile that growth profile versus the historical commentary of high teens to 20% plus?

Yes, keep in mind that in the first part of the year, we're talking about growth of around 20% for both quarters. In the second half of the year, we are trying to provide a number that feels comfortable at the start of the year. There are still many uncertainties, and we didn't want to set the bar too high based on how the economy evolves. We are starting where we feel confident and see that the sequential growth is quite reasonable given our history. This is how we arrived at a robust year-over-year growth of 16.2%.

The next question comes from the line of Moshe Katri from Wedbush.

Hey, thanks. You’ve clearly had exposure in Latin America. I think your numbers are strong here. Can you comment on how big this can be for you guys, given that the region is doing better economically relative to North America and Europe? Latin America had almost 20% growth last quarter. Some color on that would be helpful.

I don’t know if you can hear me, Moshe, because it cut out in the middle, but I would try to articulate the first part of the question, and then I will let Juan respond. Latin America is, in my opinion, a very important region moving forward, strategically speaking, for the US and for North America in general. For us, Latin America is central not just for delivering but also for evolving our business. As you have seen with the acquisition of Iteris, we are playing again in Brazil, and I believe that kind of thing will keep going. We're actively looking to expand our footprint in Latin America. It's not just an untapped market in terms of delivery, but also an improving market that will keep gaining strategic importance globally. This is Globant’s response to what's going on geopolitically in the world, and we are fortunate to be well-positioned. Juan, do you want to add anything?

Yes, Latin America is about 22% of our revenues. When we look at Brazil and Mexico, those are huge economies, and they are not even the biggest markets for us within Latin America. This means we have a considerable opportunity to significantly expand our presence in the region. There are very large companies that are growing very nicely, some of which we named during the earnings call, where we are performing extremely well. We see the same needs and investment type in those companies as we're observing in the US and Europe. We are confident about our ability to grow in Latin America.

Okay. And just for a follow-up on gross margins. We've had some gross margin pressure throughout calendar ‘23. What should we look for in terms of gross margins in calendar ‘24? Some of it was obviously from FX headwinds. Has that trend reversed?

Yes, unfortunately, the FX in Colombia, Mexico, and Brazil continues to be stable. It hasn’t deteriorated further, but the trend has not changed—it remains stable, as it was during Q3 and Q4. Thus, we continue to face those headwinds and expect margins to remain stable relative to 2023 throughout 2024.

And you're going to keep using SG&A expense leverage to offset that, just to protect your EBIT margins, right?

Yes, we will continue to invest to grow but do so in a healthy way to protect margins as much as we can. We hope that as the year progresses and the global economy becomes a little more optimistic about the future, there may be an opportunity for some pricing power to offset some of those FX headwinds we are experiencing.

The next question comes from the line of Divya Goyal from Scotiabank.

Good evening, everyone. Great quarter. I wanted to get some color on the fixed-price contracts based on some discussions we've had with your peers. It seems like there's increased focus in the industry on fixed-price contracts. Could you provide some color on that?

It's exactly that. Whenever we can identify visibility in our solutions, we can engage in those types of contracts without running into significant risks. When we have this opportunity, we think it's a very powerful tool to win clients and protect our margins as well. Our Reinvention Studios, which focus on deepening engagement with different industries, are fully centered on this strategy, and that’s reflected in the increase you've observed. Again, we're talking about a few points in total proportion, but it's a very healthy trend evidencing our positive work with customers. Typically, these engagements are transformational, with commitments toward what we deliver coupled with success criteria for the project.

The next question comes from Sean Kennedy from Mizuho.

Great, thank you. Hi, everyone, and thank you for taking my question. I wanted to ask about Globant’s Sports and Media Business. Can you discuss in more detail the sports opportunity, specifically how you attract new clients and durably grow the business?

For us, the media industry has been extremely important, and we have invested much in this space. I believe there's a significant opportunity not just to render services but also to provide platforms that accelerate solutions for our customers. Sportian, one of the companies we created associated with LaLiga, has proved to be a solid bet moving forward. The performance we've seen from Sportian has been rewarding in terms of growth, and we have been able to expand into other markets and sports. This initial venture into football has now also transitioned into rugby, tennis, and basketball. Notably, we've added Manu Ginobili as one of our advisory board members at Sportian. We recognize the potential across multiple sports and media platforms. Our partnership with FIFA has been instrumental in our evolution in this space, and we are becoming a prominent partner for FIFA in various technology projects. Anchored relationships with high-profile clients make it easier to pursue additional projects.

To add briefly, I believe sports has been one of the industries absorbing technology more rapidly. The way we consume sports is evolving; there's tremendous opportunity. While we often think about the in-venue experience, we must not forget that the audience consuming content from home far exceeds those physically in attendance, leading to increased engagement and technological opportunities. Our ability to adapt and implement advanced solutions in sports sets us on a path for transformative projects ahead.

The next question comes from the line of Arvind Ramnani from Piper Sandler.

Yes, thanks for taking my questions. I want to unpack how you're thinking about FY24. We heard much discussion regarding what’s organic, M&A headwinds, and such. For pure organic growth this year, what should I expect? What needs to happen for you to comment on the potential to exceed guidance by 300 to 400 basis points?

Yes, we started the year guiding 16.2% year-over-year, which I guess will be among the strongest in the industry. That number is composed of about 10%-ish organic growth and the rest from deals closed in 2023. When looking at the sequential growth forecast for the year, it implies quarterly growth of around 4% to 5%, yielding annualized numbers of about 20% by achieving that sequential growth. For us to take this number up, it depends on how the economy evolves. Should companies start to materialize some of the conversations we are having and invest in large CapEx projects, we may observe growth relative to last year. Given the constraints in the macro environment, we prefer to guide responsibly to what we feel comfortable achieving—still a strong number.

If I could quickly follow up on that. Last year, you wrapped up with roughly 11%, and based on today’s call, it seems like the sentiment is stronger than before. Would you agree that there's a level of conservatism built into that 10% organic number?

We are striving for balance with our forecasting, aiming to speculate responsibly given market uncertainties. Inflation rates have been higher than anticipated, and we need to stay calm at the onset of the year to understand how it will progress. We have a solid track record identifying trends and forecasting accurately. While we don’t want to miss any projections or create unrealistic expectations at this point in the year, I strongly believe we maintain a superior approach compared to peers ranked by growth outlook.

The next question comes from the line of Surinder Thind from Jefferies.

Thank you. I want to focus on organic growth here. As I reflect on some previous commentary, organic growth expectations seem to have diminished, despite the improving environment. While 2023 was a great year, you significantly outperformed competitors; however, the spread between your growth and others is narrowing. Can you elaborate on that?

Really? I don't see any significant compression in growth. By comparison, just this morning, one of our peers posted growth of about 2.5%. Here we are, expecting 16%, which is a considerable difference and a testament to our effectiveness. We continue to see improvement in client conversations, but we must also acknowledge that we cannot predict the timing of industry optimism and growth. Our numbers still well exceed our peers and reflect our concentration on sustained growth.

We believe starting the year with 10%-plus organic growth is a strong position. Of course, we would like to achieve more. But for now, we feel secure not overstretching ourselves relative to the uncertainties in the market.

Thank you, Surinder. That will conclude the Q&A section for today. Thank you all for joining the call. I will now ask Martin to provide some closing comments. Please go ahead, Martin.

Thank you so much. Thank you, everyone, for participating here. We are really happy with our performance in 2023 and our outlook for 2024. We look forward to continued communication in the next quarters. Thank you for your support, patience, and understanding. Goodbye.