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Edited Transcript of GLOB earnings conference call or presentation 15-Aug-19 8:30pm GMT

Q2 2019 Globant SA Earnings Call

Luxembourg Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Globant SA earnings conference call or presentation Thursday, August 15, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Juan Ignacio Urthiague

Globant S.A. - CFO & IR Officer

* Martín Migoya

Globant S.A. - Chairman, CEO & President

* Paula Conde

Globant S.A. - IR Officer

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Conference Call Participants

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* Ashwin Vassant Shirvaikar

Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst

* Bryan C. Bergin

Cowen and Company, LLC, Research Division - Director

* Joseph Dean Foresi

Cantor Fitzgerald & Co., Research Division - Analyst

* Margaret Marie Niesen Nolan

William Blair & Company L.L.C., Research Division - Analyst

* Moshe Katri

Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst

* Tien-Tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Globant Second Quarter 2019 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.

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Paula Conde, Globant S.A. - IR Officer [2]

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Thank you, operator, and thanks, everyone for joining us today on our quarter review our 2019 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, Chief Executive Officer; and Juan Urthiague, Chief Financial 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 risks and uncertainties as described in the company's earnings release and other filings with the SEC.

Please note that we follow IFRS accounting rules in our financial statements. During our call today, we will report non-IFRS or adjusted measures, which is how we track performance internally and the easiest way to compare Globant to our peers in the industry. You will find a reconciliation of IFRS and non-IFRS measures at the end of the press release we published on our Investor Relations website announcing this quarter's results.

I would like now to turn the call over to Martín Migoya, our CEO. But first, I like to congratulate him on being recognized as top CEO of the year in the results-oriented category of the CEO World Awards. It is a true honor for all of us Globers and shows how we're setting industry benchmarks for excellence. Congratulations, Martín.

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Martín Migoya, Globant S.A. - Chairman, CEO & President [3]

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Thank you, Paula. Hi, everyone. Thanks for joining us today. First, let me say that receiving the top CEO of the year award is a recognition to all our Globers. I'm very pleased and extremely happy about this recognition, and I want to extend that to all our people around the world that make this company really, really great. Together, we have created a unique culture. Our autonomous, agile and innovative teams are key to deliver the best solutions for our customers. So thank you very much for that.

I am pleased to share with you some updates on our business and financial performance for the 3 months ended June 30, 2019. At the end of the call, our CFO, Juan Urthiague, will share with you our outlook for Q3 and the rest of 2019. Q2 was another record quarter for Globant. Our revenues for the second quarter increased to $157.5 million, representing a 23.2% year-over-year growth. At the same time, adjusted diluted EPS for this quarter was $0.53. Our ability to nurture long-term relationships and to expand into multiple divisions within our customers are leading our growth. Before letting Juan dive deeper into our financial performance, let me go over some of our latest news. We continue to see strong demand coming from organizations as they look to transform their business. IDC has reported that direct digital transformation investment spending will be $5.5 trillion over the years 2018 to 2021. As digitalization and high customer expectations change, organizations need to adapt to stay relevant. Our passion is to help companies succeed in this new era. With this in mind, I'm happy to announce the launch of our new business hacking studio. We look to uncover nontraditional ways to create new business value. Traditional transformation programs tend to struggle to show comprehensive results, mainly because of the lack of tangible actions. Our business hacking framework aims to make transformation tangible and measurable. We want to make the change sustainable and find new ways to optimize culture and business impact. The goal is to focus on transformation from behavior to technology, impacting business metrics. It is a totally new approach that will be key to help make our customers successful. You can find more information about the studio on our website www.globant.com.

In regards to our business, we continue to see sustainable growth. During Q2, we added new logos from a wide variety of industries, including companies like American Airlines, InStride, [Kapi One] and leading organizations from media and entertainment and consumer package goods among other sectors.

Let me also share a few examples about what we're doing with some of our clients. For a leading fintech company, we're creating a set of applications that allow users to control features on their credit and debit cards. This engagement is a great example of multiple studios working together to deliver a set of exceptional products. We are creating the next-generation platform, addressing the expectations of high-demanding card customers. Realogy is the leading provider of residential real estate services in the U.S. It is focused on empowering independent sales agent to best serve today's consumers. Since 2017, Realogy has embarked on an application legacy modernization initiative. It focuses especially in the services and solutions for its affiliated agents and brokers. Globant has been partnering with them in this digital transformation program in areas such as data architecture, data science, analytics, user experience and front-end and back-end system development. We are also working with Stanley and Black & Decker IoT team in the creation of connected tools. For the gaming industry, Globant is developing a new, soon-to-be-announced AAA game with Warner Games that will be released later this year. Also, continuing with our strategic relation with Electronic Arts, Globant is co-developing a number of games including BioWare's Anthem and the EA Sports FIFA franchise.

Lastly, Globant recently began working with Machine Zone, the top grossing mobile game publisher of titles such as Final Fantasy and Game of War. To share our views of market trends, we have announced several initiatives in the past weeks. We have recently launched our latest Sentinel Report where we gather new user's behavior insights. This addition analyze conversational design and how technology can help brands move from their plain transactional experiences into a conversational world. The report focuses on the importance of engaging with users in a more natural and organic way. You can read the report at sentinel.globant.com. Also our CONVERGE event continue to led the discussion around future trends. During May, we held the (inaudible) edition about artificial intelligence. The event was attend by over 500 guests, who listened to speakers coming from Rockwell Automation, City Dynamics, Google and Amazon among others. We are also pleased to announce that on November 6, we host our annual VIP CONVERGE edition in New York. The event will bring together top business execs at the New York Stock Exchange for an intense innovative experience. We will dive into what the future looks like for augmented organizations that fully embrace the power of AI. I invite you to learn more about this event at converge.globant.com.

Also, I'm very pleased to share that we have announced an investment in Singularity University. Singularity University is a global community with a mission to empower leaders. The goal is to enable them to apply exponential technologies to help solve humanity's grand challenges. We will leverage their curricular around breakthrough technologies to further prepare our global talent for future challenges.

Lastly, I'm happy to share with you that we have recently announced acquisition of Belatrix Software, a leading Agile product development company with nearly 20 years of experience and presence in Peru, Columbia, Spain, the United States and Argentina. With this acquisition, we reinforce our leading presence in Latin America. Also, Belatrix has built outstanding solutions for an amazing roster of clients, which includes many Fortune 500 companies. Their customer portfolio will reinforce our 50-Squared approach, delivering strategic digital transformation to some of the largest organizations in the world. It will also strengthen our broad expertise in industries like finance, payments, insurance, healthcare and retail. Belatrix work with renowned brands such as FIS, PWC, NEC, Adobe, and AOL. The company has 600 IT professionals working with key trends such as digital transformation, Agile, product development and more. Let me remark that our pipeline and backlog remains strong, and we feel very confident about our ability to keep delivering sustainable growth in the future.

With that, I will turn the call over to Juan Urthiague, our CFO, for further detailed financial review on the second quarter of 2019 and also to provide guidance for Q3 2019 and for full year 2019. Juan, please? Thank you very much.

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [4]

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Thanks, Martín, and good afternoon, everyone. Let me start by summarizing the results of our second quarter and the 6 months ended June 30, 2019.

I will then discuss our guidance for both the third quarter and the rest of the year. I am pleased to announce another quarter of record revenues and a strong financial performance. Our revenues for Q2 amounted to $157.5 million, implying a solid 23.2% year-over-year growth. Our revenues in constant currency for Q2 2019 increased by 24% over the same period last year. This is primarily explained by the Argentine peso and the Colombian peso. During Q2 2019, Disney was once again our largest customer. Our relationship with them continues to be strong and healthy with several upcoming opportunities after the internal reorganization related to the Fox deal. We're excited about the fact that high potential accounts are scaling up and becoming large and meaningful within our customer portfolio. Our top 1, 10 and 11 MBM customers increased 15.8%, 13% and 31.4% over the second quarter of 2018. Our 50-Squared strategy to have a diversified base of multimillion-dollar accounts is working out in line with our expectations.

During this quarter, we continue to successfully cross sell services coming from our recent acquisitions. During the last 12 months, we have 12 accounts, about $10 million in annual revenues compared to 9 for the same period last year, and we have 97 accounts with more than $1 million in annual revenues compared to 92 1 year ago. We continue to expand our relationship with our key accounts aligned with our 50-Squared strategy. As can be seen by our industry diversification, enormous value proposition and service offering is attractive to companies across all industries and will remain pretty much balanced.

Our top 3 industry verticals for this quarter were: media entertainment with 23.1% of revenues; banks, financial services and insurance with 21.6% of revenues; and travel and hospitality with 15.2% of revenues. We are experiencing very strong growth in other verticals such as consumer retail and manufacturing and professional services with increases of more than 60% and 30% year-over-year, respectively, compared to the second quarter of 2018.

Our customer concentration for Q2 2019 improved during the last quarter with our top 1 account, top 5 account and top 10 accounts representing 10.4%, 27.2% and 41% of revenues compared to 11.1%, 32.5% and 44.6% of revenues, respectively, for the second quarter of 2018.

In terms of regions, during the second quarter of 2019, 75.2% of revenues were in North America with the U.S. as our top country; 16.1% in Latin America and others, Argentina being the top country; and 8.7% were in Europe, Spain as our top country. During this quarter, we saw strong growth and investment in digital transformation in Latin America. During the second quarter of 2019, 88.7% of our revenues were denominated in U.S. dollars, protecting our top line against currency fluctuations.

Turning now to profitability. Our adjusted gross profit for the period increased to $63.3 million, 40.2% adjusted gross margins compared to $51.3 million, 40.1% adjusted gross margin in the second quarter of 2018, showing solid gross margin levels. Sequentially, the slight margin decrease of 90 basis points versus the first quarter of 2019 was primarily driven by the usual salary increase window that took place during the second quarter of the year. We finished the quarter with 9,905 Globers, 9,215 of which were IT professionals. This represents a solid 606 increase quarter-over-quarter in a number of IT professionals. Attrition for the past 12 months was 15% compared to 20.7% in Q2 2018, showing a significant improvement in most talent development centers, particularly in Argentina.

Adjusted SG&A decreased 50 basis points compared to Q2 2018, accounting for 19.8% of our quarterly revenues. We have been very disciplined in managing our costs as we gain scale while we continue investing for the future, primarily to expand our sales coverage in our target markets. We have been able to dilute the SG&A despite the new tax on export of services in Argentina, included within this expense line. As a result, our adjusted operating income for the quarter amounted to $25.9 million or 16.4% of revenues compared to $20.2 million or 15.8% of revenues for the second quarter of 2018. Stable gross margin and SG&A dilution were key contributors to the mentioned operating margin expansion.

Share-based compensation expense for the second quarter of 2019 amounted to $4.9 million, representing 3.1% of the total revenues for the period. This expense is mainly related to the plan of restricted stock units granted to certain key employees and directors of the company as part of our long-term retention plan.

Financial income and expense net amounted to a loss of $2.5 million. This net result is composed of FX gains and losses resulting from the monetary assets and liabilities in local currencies, costs related to our hedging strategies, interest expenses from our credit lines and interest income from our portfolio of investments.

Our effective tax rate for the quarter was 20.9%, fairly consistent with previous quarters. Adjusted net income for the second quarter of the year totaled $19.9 million, 12.6% adjusted net income margin compared to $14.5 million, 11.4% adjusted net income margin for the second quarter of 2018. Adjusted diluted EPS for the quarter was $0.53 based on 37.7 million average diluted shares for the quarter compared to $0.40 for the second quarter of 2018 based on 36.7 million average diluted shares for the quarter. Growing at 33.1% year-over-year, EPS continued growing faster than revenues for this quarter.

Moving on to the balance sheet. Our cash and investments as of June 30, 2019, were $58.2 million compared to $86.2 million as of December 31, 2018. This decrease in cash was mainly explained by the usual seasonality in the first half of the year as we pay balances, holidays and income tax during this period past combined with the payment of the Avanxo acquisition. Our balance sheet remains strong with current assets of $241.2 million accounting for 43.2% of the company's total assets. Total common shares outstanding as of June 30, 2019, were 36.6 million.

Now let's talk to the 6 months ended June 30, 2019. Revenue for the 6 months ended June 30, 2019, was $303.7 million, implying a 22.6% year-over-year growth. This increase was mainly boosted by our 50-Squared 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 $123.4 million, 40.6% adjusted gross margin compared to $98.2 million or 39.6% adjusted gross margin for the same period last year, an increase of 100 basis points. On a year-to-date basis, we continue to see the positive tailwind of the FX market corrections in Argentina and some other Latin American currencies. Adjusted SG&A is also showing a healthy dilution of 60 basis points, currently accounting for 20% of our revenues for the 6 months ended June 30, 2019.

Adjusted profit from operations for the 6 months period ended June 30, 2019 was $50.6 million, 16.7% adjusted profit from operations margin compared to $37.7 million or 15.2% adjusted profit from operations margins for the same period last year, representing an improvement of 150 basis points. Adjusted net income for the 6-month period ended June 30, 2019, was $38.4 million or 12.6% adjusted net income margin compared to $28.4 million or 11.5% adjusted net income margin for the same period last year, representing an improvement of 110 basis points.

Adjusted diluted EPS for the 6-month period ended June 30, 2019, was $1.02 based on 37.5 million average diluted shares for the period compared to $0.78 for the same period last year based on 36.5 million average diluted shares for the same period last year.

To wrap up, let me provide you with our guidance for Q3 2019 and the rest of the year, which includes the acquisition announced on Monday. Based on current visibility, we expect Q3 2019 revenues to be between $170 million and $172 million, implying a 27.1% year-over-year growth at the midpoint of the range. Adjusted diluted EPS is expected to be between $0.57 and $0.61, assuming 37.9 million average diluted shares outstanding for the quarter. Regarding the full year 2019, we are increasing our revenue guidance to a new range of $654 million to $660 million, an implied 25.8% year-over-year growth at the midpoint of the range. Based on this guidance, the implied revenue growth for Q4 would be 30.1% year-over-year at the midpoint of the range. In terms of adjusted diluted EPS, we are now expecting a range of $2.19 to $2.25, assuming 37.7 million average diluted shares outstanding for the full year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Tien-Tsin Huang of JPMorgan.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Do you hear me?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [3]

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Hello, Tien-Tsin.

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Martín Migoya, Globant S.A. - Chairman, CEO & President [4]

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Hey, Tien-Tsin. Yes.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [5]

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Yes. So no big surprises there, I'd say, listening to the remarks and looking at the results. I was curious, looking at how revenue landed versus your guidance. In the past, we've been accustomed to you hitting the top end of your revenue or exceeding it. This quarter, you came in at the upper end of guidance. So just thinking about that pattern change. Any change in demand? Or maybe amongst the larger clients that maybe surprised you a little bit? Or is this just, like I said, a rounding issue on the revenue side? Just curious to get your thoughts on that.

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Martín Migoya, Globant S.A. - Chairman, CEO & President [6]

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I mean when we guide, we guide trying to be neither conservative nor aggressive, trying to be very balanced. And I think that sometimes we surpassed -- with other things sometimes, we are just in the range or in the top of the range. So I think that this is the business, and there's not any demand concern that we have or the opposite. I mean we're seeing very strong demand, we are seeing the pipelines in a very healthy manner, in very healthy situation, and we are seeing Globant, in the competitive landscape, in a very good shape. Every time we are able to beat some of our competitors. We are really performing great. And we've had pretty tough comparisons during the first and second quarter this year. You need to pay attention to what's happening in the quarter 3 and quarter 4. And organic growth is really, really strong for the next quarters. So I am a big believer in these strong secular trends, and Globant is performing really great in this scenario.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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Excellent. Understood. It seems that way. So I wanted to ask also then, as I always do, I feel like, to you, Juan, just on the gross margin again, given all the action on the peso. Can you give us some help on how to manage that? And how gross margin might land in the next couple quarters here?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [8]

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Yes. As you know, it was division in Argentina for us. It's now less relevant. In terms of revenues, it's up about 4% of the total revenues and then in terms of costs, we now have about 30% of our freight count in Argentina. And in the last couple of quarters, we've been talking about hedging the peso. There's actually the opposite expectation and people were thinking that the peso was going to be stable. So we basically hedged at higher rates. So it just would seem, in the upcoming quarters, based on the current situation in Argentina is that inflation will probably catch up, and what we think is that the margins will stay towards the upper part of our guidance. We always talk about 38% to 40%. We think it's going to be close to 40% number. But again, you don't need to expect any significant improvement because we've been hedging and we will not get all the benefit of this depreciation of the peso. So you should expect stable margins, maybe a little bit higher but stable in any case.

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Operator [9]

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Your next question comes from Maggie Nolan with William Blair.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [10]

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I wanted to follow up on the gross margin. So you've obviously done a fair amount of hiring in the last couple of quarters. So I'm kind of wondering if you can give us some more of the puts and takes in the gross margin. Are you seeing anything in the way of utilization, dropping in light of that hiring? And how much of that is offset by foreign currency benefits?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [11]

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Yes. I mean it's actually, I would point, as Martín was saying, we continue to see strong demand when we look at our pipeline for the rest of the year. We're very positive about the rest of the year. Based on that and based on the fact that we have some room and we have some room in the margins, we've been hiring already in anticipation because this is about hiring and training people and the new technologies require a lot of training. So we've been doing that. We are doing that. Utilization is a little bit down this quarter, it's about 81%. So it's about 1 to 1.5 percentage points below the last quarter. But again, based on what we're seeing for the second part of the year, we think that it's the right approach. Training more people -- we're showing with these numbers, 600 people net, all organic this quarter. It's the largest number of organic net additions that we can have. So in a very tough and competitive market, we continue to show that we are able to attract great talent and we are training these people for the project that we see in the pipeline.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [12]

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Okay. Great. And then thinking about the people and the environment there, the attrition was low this quarter. It was low last quarter. You mentioned that's been a focused area. So what in particular are you doing to bring that attrition down, particularly in Argentina where it's been problematic? And then should we consider this kind of the new norm, the new level of attrition that we should expect going forward?

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Martín Migoya, Globant S.A. - Chairman, CEO & President [13]

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What we're doing in terms of attrition and in terms of maintaining our people and maintaining our Globers, is not different from what we have been doing in the past. I think that the -- we have made more accent on understanding how ideas are being developed at Globant, and we have been demonstrating that. And our HR team has been doing a great job on that. Also, we have been pushing a lot the idea of our mission and our vision and becoming the best company in the world, doing what we do and then we change in some way that we are all doing what we love to do, which is creating self proposed and creating great experiences for our customers. And that is being picked up very well by people in the region and people in Argentina in particular. We're becoming the employer of choice due to the potential of expansion of their careers that we are providing. So that's the angular stone of the whole strategy at Globant. And it has been received very, very well by the people, and we've been doing more explanation and real cases. So those policies are really happening, and we have been striding a lot on our -- economy of our pods. That's something extremely important for us, for our people that are really delivering the things to our customers, being able to take decisions and to make our customers more happy with that. That's of the essence of what we do. So overall, I think there's pretty nice momentum happening at the attrition -- sorry, on the retention side. And that is being reflected on the numbers that we are seeing. Trying to answer your -- the new standard. Well, we are guiding between 15% and 16% for the year 2019. I don't know if that's going to be maintaining or not. We are not guiding specifically about the future -- for the future years, the attrition. But we are very positive and very optimistic about that number during this year and the impact that, that will have in our ability to develop the company.

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Operator [14]

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The next question is from Moshe Katri with Wedbush.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst [15]

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Juan, I think you disclosed year-over-year growth by top 1, 5, 10 and 11 clients. Can you repeat that again?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [16]

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Yes. So top 1 customer, which as you know is Disney, grew 15.8% year-over-year this quarter. On that one, I'd like to mention that we are seeing a much stronger second half. We are very optimistic about how the situation is changing at Disney. We've been talking about some of our key sponsors like Disney taking bigger roles in the new organization after the merge with Fox. So again, very optimistic about Disney in the second half of the year. Top 5 grew 3% that was driven by 1 airline, which did not grow this quarter. Top 6 to 10 grew 39%, so very strong growth in the 6 to 10. There is -- there -- we now have some very large organizations that just got into the top 10, one of which is a huge manufacturer software producer for manufacturing plants among others, but again growing at 39%. Top 10% grew 13%. Again, strong number. If we exclude this airline, the growth was going to be very close to the 20%. And then 11 to the end group grew at 31%. Again, this is part of the 50-Squared strategy. We have portfolio of customers, and what we can see is that in the 11 to 30, 11 to 40 customers, there is some glowing stars, some names that more and more you're going to see in the top 20, in the top 10. So all in all, except from 2 to 5, we saw strong growth. And those are the numbers for this quarter, Moshe.

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Moshe Katri, Wedbush Securities Inc., Research Division - MD of Equity Research & Senior Equity Research Analyst [17]

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So in the 2 to 5 category, how much do you think that impacted your top line growth for the quarter? And then in that respect, looking at the second half or guidance for the year, how much of that is specifically organic growth?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [18]

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Yes. So in the 2 to 5, it's about $2 million that we should have had or even have within that group. But again, when you look at the top 10 and the 11 to the end, you still see very solid growth, 11 to the end, at 31%, so strong number. And then for the question about organic and inorganic, it's becoming more complicated to answer that because as you know, we integrate very, very fast. In the case of Avanxo, the company that we acquired back in February. We already serving 10 customers together. So it's not easy to say if the revenue is organic or inorganic because in most cases, those are customers of Globant that now we have been able to cross sell the services with people that came with the acquisition. So for the year, we guided 26%, $667 million, a little bit more than -- I mean depending on how you account for the organic and inorganic, a little bit more than 20% will be organic, probably within 20% and 21%. Again, depending on how you account for some of those numbers and the rest could be considered coming from the acquisitions. But again, the amount of cross-selling and the way we are integrating the companies is very, very healthy. I mean we are very, very happy how the Avanxo acquisition and the Avanxo integration is going on. As I said, several customers are being selled with our cross-selling. I mean solely a lot of cross-selling. And now with the new deal, the company that we just acquired, we are already thinking about very, very fast integration.

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Operator [19]

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Next question comes from Ashwin Shirvaikar with Citi.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [20]

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So my first question is just going back to Belatrix. Could you talk a little bit about the capabilities that the acquisition brings? And is this -- do they serve mostly local plants in Latin America? Or is it similar to what you do with servicing U.S. clients? And then one on the acquisition. You raised the midpoint of revenues, $16 million. So just to clarify on the previous question. Of that $16 million raise, we are calculating $13 million to $15 million maybe coming from acquisition. Is that correct? Or is that too high? If you could comment on that.

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [21]

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I think the lower end -- I mean again depending on how you account the cross-selling at the lower end of the original.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [22]

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Okay. Got it. And the capabilities on Belatrix and how it does catch up?

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Martín Migoya, Globant S.A. - Chairman, CEO & President [23]

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Ashwin, I will take that. The answer to that is pretty interesting. We have seen -- in the last years, we have been seeing some, for years now, a pretty interesting company, a pretty disciplined company. They are a pretty interesting supplement to the operations we have in Latin America. They have offices in places that we had very small offices in. So in Mendoza in Argentina and Peru, and also in Barcelona in Spain, they have very good operations and are a very good complement for us in terms of geographic expansion and dispersion and also being able to cover our geography in a much more efficient way. So that's one rationale coming from the geographical expansion and coverage. The second one is connected to our 50-Squared program. And that's the -- they have certain -- several customers, which are extremely interested that could really become 50-Squared accounts. And we saw that inside that company, we said, "okay, this is pretty interesting because those customers could take us years for us to develop." So we saw a pretty nice shortcut in terms of including several 50-Squared accounts that we didn't have. And last was the abilities specifically speaking, very nice to put on the financial and insurance sector, also in the health and -- sorry, health and retail. Those sectors are sectors where benefits were very strong, given the experience they have. Also on the payment sector, they have a pretty solid customer, one of the largest payment processing companies in the planet is their customer. So we're very excited about the acquisition, very excited about the quality of the people, which is the last part, but not least, is the quality of the people and the cultural fit we found in the Latin. So it's -- I think it's a great addition to our teams. It's an immediate plug and play. There's not a huge integration risk connected to that and there's still a lot of cross sell to be done in each of the categories that we are seeing. So for me, it was a pretty simple decision. It is a pretty large company but it is something that will really help us to grow faster in the industries and in the geographies that we are operating.

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Ashwin Vassant Shirvaikar, Citigroup Inc, Research Division - Director and U.S. Computer and Business Services Analyst [24]

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Understood. That's good to hear. So -- and last question on -- from me is with regards to Europe. In Q1, you kind of announced the opening of new office in Paris. We've been clearly operating in Spain and England for some time. Can you give us the update with regards to sort of demand trends that you're seeing from there? And how the buildup of Europe is going for you?

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Martín Migoya, Globant S.A. - Chairman, CEO & President [25]

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Sure. Europe is going very well. We have seen pretty large customers -- well, we closed pretty, I would say, strategic and impact proposals. And I am pretty confident that we'll keep growing pretty fast. The office in France help us with some of the customers that we are looking for, including Disney, which operates in France, and I think it's a pretty good -- it's a pretty healthy operation overall. In London, we have -- is a base where we have one of the largest operations in terms of our consulting and now business hacking as they announced studio. So I think the overall perspective for Europe is quite good, it's very good.

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [26]

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By the way, Europe this quarter grew up 26.5%, Ashwin.

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Operator [27]

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The next question is from Bryan Bergin with Cowen.

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Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [28]

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I wanted to ask about your progress penetrating the B2B and then the industrial client basis. As I think I heard you call out one of them earlier. Are you seeing progress in others that you can comment on?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [29]

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Yes. The industry consumer retail manufacturing, specifically talking about manufacturing. We still grow north of 40% in that particular sector on this quarter, and we're seeing that over the course of the last few quarters as well. Now I think that the fact that the digitalization is now not just focused on consumers, but also on employees. And users of software, for example, in the case of Rockwell, which is one of the companies that we discussed a few quarters ago. There is an ongoing trend that is going to get bigger and bigger. Two years ago, we were just talking about digitalization of consumers, and now we are seeing other companies, companies like XPO Logistics, for example, which is growing a lot for us among others in that sector, J&J. Those are companies that have been performing really, really well, and we have seen that they are just -- they are not just focusing anymore on the consumer but also on internal employees and the users of their products, which may not be consumers. Sometimes our employees of other company. So we think that trend that have started about 2 years ago, it's only going to increase, and we expect more growth to come from those industries.

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Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [30]

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Okay. And just a clarification on coming there earlier on the hedge position. Is it -- when does that come off? Is that just through the election timeframe? How should we be thinking about, I guess, currency impacts potentially beyond '19 and your strategy around that?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [31]

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Yes. So as of now, we are hedged until the end of the year. So basically, what that mean is that for the first few months until mid-Q4, we are coming with that hedge that started before this depreciation, so we will see a benefit on that margin offset by some of the hedges that we did. And then for the last part of Q4, we closed new hedges at much higher rate. So for that part, we may see some improvement in terms of margins or some more meaningful improvement in terms of margins. But again, a few quarters ago, people were worried because the peso was flat, it was not moving at all. And by that time, we decided that hedging at about ARS 60 per $1, more or less, that was a good decision. Now -- and we have strong margins. As we have had in the last 4 quarters, north of or slightly above 40%. We continue to see margins around that level, but we are not going to see a significant improvement because we have hedged before. But again, we will continue to have very healthy margins. We're not seeing -- we're not going to have any negative impact either.

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Operator [32]

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(Operator Instructions) The next question comes from Joseph Foresi with Cantor Fitzgerald.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [33]

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I got a question. Well, couple of questions. But the first one is around pipeline and conversion-to-growth rate. I think you talked a little bit about the inorganic contribution. It sounded like the growth rate this year is probably 20% plus organic and then maybe a couple percentages from the inorganic. Based on the pipeline that you're starting to see build into 2020, what do you think is sort of the -- and I'm not asking for guidance, but the general idea around what organic growth should look like going forward? And do you expect acquisitions to be part of that conversation? And if so, what can we think about from a contribution there?

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Juan Ignacio Urthiague, Globant S.A. - CFO & IR Officer [34]

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Yes. So when we look at here, a super, we are seeing probably around 21% organic around that number. Can be little bit more in Q4, it's probably going to be stronger than that. So we are seeing an acceleration in the second half of the year with Disney performing much better than the first half of the year among other accounts, but by also some of the non-top 10 accounts contributing into that growth. We are seeing an acceleration in the organic part, especially in the last part of the year. And again, we can absolutely say that in terms of the IPO, and we have been able to achieve over the last 5 years, the models remains valued, 20% plus organic that is kind of the base line scenario for us. That's where we start the year. And then because stable margins here in where we're seeing more and more of the 50-Squared accounts becoming $10 million, $20 million in revenues for us. And that is what makes us feel very comfortable with a 20% plus on the organic part. And then inorganic is part of the business at this point. You see that there is a need for new capabilities. There is a need for new geographies. There is a need for consulting skills. And doing deals around those lines, it's something that we're looking for. I mean sometimes you can close those deals, sometimes it's more difficult, sometimes valuations are an issue, sometimes they're not. But only you should expect us to continue with that model of 20% plus and some inorganic coming from some of the deals that we're pursuing.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [35]

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Got it. And then just with Disney, I know historically, some of your revenues been linked to park openings and the magic band in some of the work that you've done there. Is that part of -- still part of the growth story and return to growth, onboarding kind of new parks? Or has that business matured? And there is larger other pieces that you're doing and that you're counting on in the back half of the year?

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Martín Migoya, Globant S.A. - Chairman, CEO & President [36]

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Yes. I think there is something happening within these -- in various parts of technology, which is the integration they should merge that they did. And that, in some way, is creating like many new opportunities for us, which is of course inside the parks and resorts but also in other areas like direct-to-consumer international in organizations. Also, they are consolidating operations and the opportunities there for us are growing very, very fast. That's why Juan was mentioning about the third and fourth quarter of Disney, which is our largest customer catching up in a pretty interesting way. So that's something we're seeing in a pretty interesting way. And then with respect to the position of Disney, only the -- my personal opinion in the competitive landscape and space, I think they're doing great. There is something that it's really -- they are creating a massive brand with a massive reach for all ages, and we are part of that. So we're extremely happy of having Disney as a customer, and we have higher expectations about the future growth.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [37]

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Got it. And then I'm just going to sneak one last one in. You've been putting up this 20%-plus growth rate, maybe can you just describe for us what your projects look like today and heading into 2020 versus maybe what they look like 2 years ago? And what the differences are? I'm looking for stuff maybe outside of the 50-Squared plan. Because obviously they are changing on the inside the but on the outside it's harder to tell. So maybe if you can just elaborate a little bit on that?

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Martín Migoya, Globant S.A. - Chairman, CEO & President [38]

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Sorry. I didn't get out of the 50-Squared, which was the question? Sorry, I think I missed it.

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Joseph Dean Foresi, Cantor Fitzgerald & Co., Research Division - Analyst [39]

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Yes. I was curious as to like on the inside, how deals -- you feel deals have changed heading into 2020 versus what they might have looked like 2 years ago? Because obviously the growth rates have continued to be on the 20%, but I'm sure that the capabilities, the size, the scope, the focus even outside of 50-Squared has changed quite a bit.

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Martín Migoya, Globant S.A. - Chairman, CEO & President [40]

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Yes, absolutely. Look, Globant, as a company is a more mature company and our people are more mature people and the fact that they know much deeper insights on their business, in which we operate, are leading to a totally different kind of deals. Now that's why we're talking about a lot of deals that have real impact on the revenue side of our customers like we have hundreds of examples during the last 1.5 years or 2 years. So that's something that is changing a lot. Also we are seeing that given our scale -- now we're close to more than 10,000 people, close to 11,000 people, Globers. We're seeing like much better capability of the company to tackle much larger deals that before were not possible for Globant. So we're seeing that change in scale and that's benefit of the size really kicking in, in the deals where we're closing right now. So I hope that answers your question.

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Operator [41]

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

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Martín Migoya, Globant S.A. - Chairman, CEO & President [42]

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So thank you very much, everyone, for participating in the call. Thank you for your support and continuous interest in the company and for the coverage. And looking forward to see you on our next earnings call. Thank you very much.

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Operator [43]

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