STOCK: GLOB | 2/25/21 FIRST FOCUS
GLOBANT S.A. (Ticker: GLOB) LBIRLBIRLBIR Recommendation RecommendationRecommendation
Stock Price: $222.57 (02/24/21) Company Size: $8.80B Author: Vineet Begwani
Company Rank: 220 Sector: Information Technology Industry: IT Software and Services
Globant is a digitally native technology services company that delivers digital and cognitive transformations for businesses.
IN THIS FIRST FOCUS WE’LL COVER:
Summary of the Business Globant provides outsourced IT professional Grab-and-Go services and software solutions to a number of THESIS business organizations to help them on their digital transformation journeys. An investment in Globant is a play on Recent Developments the growing need for digital The company delivered strong 4Q20 financial results transformation of businesses. The and provided a robust growth outlook for 2021. company is a leading IT professional services company that focuses on Competitive Environment helping businesses on their digital Operates in an intensely competitive market, but transformation journeys. Its differentiates itself as a pure play digital and continued success largely depends on cognitive transformations provider. The market is its ability to optimally manage its large enough for multiple players to grow. professional headcount to meet the Conclusions/Recommendations accelerated and on-going demand for Although the stock’s valuation at 10.9x TTM P/S is more digital engagements from both rich, we expect Globant to maintain a robust existing and new clients. profitable growth trajectory as it benefits from its strong client relationships and the growing spend of businesses on digital transformations. We assign Globant a “GREEN LIGHT” rating.
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
Data as of 02/24/21 unless specified
Revenue Fwd $1.47B Enterprise Value: $8.56B Market Cap: $8.80B (TTM): ($814.1M) Fwd (TTM) 6.0x YTD Return: 5.8% RSI: 51.69 Price/Sales: (10.9x) Gross Margin Revenue Growth 37.4% 23.5% ROIC (TTM): 10.0% (TTM): (TTM, YoY): 200-day Moving 52-Week High: $244.72 52-Week Low $70.83 $180.26 Avg.
EBITDA $87.0M CFO NA FCF ~$48.0M
Insider Transactions: NA
As a matter of fact, Globant maintains very close SUMMARY OF BUSINESS relationships with some of its top-tier customers, Globant SA is a Luxembourg based software including the likes of Disney and Google, and has technology services provider that creates focused more on growing within the existing platforms powered by native digital technology client base by leveraging the strong relationships, to deliver digital and cognitive transformations rather than growing the number of customers it for businesses. It provides its services to medium serves. While this has resulted in a relatively and large sized companies, which include lower customer count, which stood at 798 over marquee names such as Disney, Google, the last 12 months, the company has been able to Rockwell Automation, Santander, etc., through increase the number of multi-million-dollar over 16,200 employees (called Globers), including customer accounts rapidly. 15,290 IT professionals, present in 35 cities across 16 countries globally. Despite the global presence, the company derives a large majority of its revenues from North America as its revenues are concentrated with a few clients, primarily in the Banking, Financial Services & Insurance and the Media & Entertainment space in the US. Source: 4Q20 Investor Presentation Globant has also actively pursued strategic acquisitions either to grow into a new geography or to expand its area of specializations. It has acquired 20 companies so far and some of its recent acquisitions include BlueCap, gA, Belatrix, Avanxo, PointSource, Ratio, L4 Digital, etc. This, combined with expansion within existing customers, has resulted in tremendous top-line Source: 4Q20 FactSheet performance over the years. In fact, its revenues
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
have grown by an impressive 26.4% annually Pod, works directly with customers with a full since 2014. maturity path). The company, however, does not Revenue ($ Millions) yet have a single customer with over $100 million in revenues and its top customer, Disney, brought YoY: 23.5% in $89 million in revenue in 2020.
CAGR ('14-'20): 26.4% 814 LB•LOGIC We note that Globant does 659 not yet have a single customer with the 522 targeted revenue of over $100 million 413 2 323 under its 100 strategy. We think the 254 2 200 targets under the 100 strategy are overly ambitious at this time, but will be 2014 2015 2016 2017 2018 2019 2020 encouraged to see a few customers bring
in that kind of revenues anytime soon. Source: 4Q20 Investor Presentation
LB•LOGIC We are impressed by From a profitability standpoint, Globant Globant’s robust revenue growth generates stable gross margins in the 40% range trajectory over the years, which is a and is also profitable on the operational and net result of a number of strategic income line. It also generates stable free cash acquisitions and its ability to grow the flows and maintains a strong balance sheet with wallet share from its top-tier customer ~$298 million in cash and investments and just base. However, a large chunk of its about ~$26 million in borrowings as at the end of revenues come from a selected set of December 2020. customers, exposing the company to risks inherently associated with a high Total Addressable Market (TAM) level of revenue concentration. ◼ The addressable market opportunity for Globant is large and growing rapidly as businesses are Going forward, Globant plans to continue to seek shifting their priorities toward digital growth via strategic acquisitions, as well as engagement on an ongoing basis. The COVID-19 organically via acquisition of new clients and pandemic has accelerated the shift as businesses expansion within existing clients. For expansion are pushed to transform and adapt to the new within existing clients, Globant has devised a 1002 scenario, and technology has become the key to strategy, whereby it strives to achieve 100 augment their capabilities. accounts, each with potential annual revenues of IDC estimates that by 2022 more than 60.0% of over $100 million. It plans to do this by increasing global GDP may be digitized, with growth in the number of projects, cross-selling and every industry driven by digitally enhanced penetrating deeper within customers through its offerings, operations and relationships and about Agile Pod model (under the model, a team, or
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
$7.0 trillion will be spent on information technology through 2022. While IDC pegs the global spending on digital transformation technologies and services at $1.3 trillion in 2020, according to a recent report by Morgan Stanley, the global spending on digital transformation projects is projected to grow at a CAGR of 21% to $879 billion in 2025 from $337 billion in 2020. Source: 4Q20 Investor Presentation LB•LOGIC Globant’s addressable The agile podular structure eliminates the need market opportunity is significantly large for command-and-control methods. This and growing rapidly as businesses shift provides teams full independence in customer their priorities toward digital interaction, while being fully accountable for engagement on an ongoing basis. This service delivery. This ensures high service quality provides it a significant runway to and enhanced value to clients. continue its strong growth trajectory in the future.
◼ Special/Unique Characteristics of the Company
As opposed to the traditional IT service models, Globant has a unique service delivery model, wherein it utilizes a Studio approach (Studios are deep pockets of expertise on the latest technologies and trends), an agile podular team Source: 4Q20 Investor Presentation structure (Agile Pods), and artificial intelligence Artificial intelligence augments Globant’s (via its “Augmented Globant” initiative) to technological capabilities and helps it to speedily provide a superior value proposition of its digital deliver digital and cognitive transformations for transformation services to its customers. businesses in the fast-changing technology The company’s 27 Studios enable it to build, industry landscape. enhance and consolidate expertise around a variety of emerging technologies and deliver RECENT DEVELOPMENTS insights from different industries to create Strong 4Q20 Top-line Growth with Improved disruptive software solutions, which can also be Revenue Concentration and Geographic Mix: leveraged to create cross-selling opportunities Globant delivered solid top-line growth in 4Q20 across customers in different industries. as its revenues grew by 26.2% y/y and 12.3% q/q
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
to $232.6 million, and beat its own estimate of industrywide average attrition rates of 15% to $220 million provided during 3Q20. The growth 25%. Going forward, the company views 14% to was driven by a 14.8% y/y and 10.4% q/q 16% attrition rates as normal. expansion within its largest customer Disney, as well as a solid 27.7% y/y and 12.5% q/q growth in the rest of the accounts. The company also LB•LOGIC The ability of IT continued to increase the share of wallet from the professional services companies to meet demand from their customers is top five and top ten accounts, which grew at highly dependent on their ability to robust rate of 40.2% y/y and 40.8% y/y, keep their headcount at an optimum respectively. Importantly, revenue concentration level. Higher level of attrition offsets improved during the quarter, as the top one, top new employee additions and adds to 5 and top 10 customers represented 10.7%, 30.0% unwanted costs, while lower level of and 42.9% of the revenues, respectively, their utilization also tends to compared to 10.8%, 32.2% and 45% in 3Q20. pressurize operating margins. Globant prudently managed its headcount Geographically, Europe was the standout during the COVID-19 led demand performer as revenues from the region grew slowdown by keeping its hiring levels 142.9% y/y and 43.6% q/q. Latin America and low and has now increased its other regions also saw strong growth of 54% y/y headcount addition efforts while and 22.4% q/q. As a result, the geographical nicely managing the attrition. This revenue mix also saw an improvement, with positions it well to meet increased demand from its clients in future and North America accounting for 65.9%, Europe keep its strong growth trajectory intact. accounting for 9.8% and Latin America and other regions accounting for 24.3% of the revenues. Robust Employee Additions, Historic Low Attrition Rates: One of the most important Stable Gross Margins; Operating Margins metrics that drives Globant’s revenue growth, the Benefitting from OPEX Leverage; Healthy Free professional headcount, stood at 16,251 at the end Cash Flows: Globant saw a marginal 30 bps of the quarter and included 15,290 technology decline in its adjusted gross margins to 39.6% in design and innovation professionals. 4Q20, which was primarily a result of slightly Encouragingly, Globant saw the largest organic lower utilization of its IT professionals when increase in IT professionals in its history in 4Q20 compared on a y/y basis. However, utilization as it added 1,854 new IT professionals, was relatively stable over the previous quarter, representing a 39% y/y growth. This came on the which coupled with strong demand pick-up, heels of moderated hiring efforts over the past resulted in 60 bps sequential improvement in the few months in view of the pandemic led demand adjusted gross margins. slowdown. The company benefitted from significant OPEX Also encouraging was the fact that Globant leverage during the quarter, as despite a 24.5% managed to keep its attrition rate in check, as the y/y increase in the adjusted SG&A expense past 12-month attrition was at a historic low level primarily due to the expansion of sales coverage of 13.0% in 4Q20 vs. 14.6% in 4Q19. This in its target markets, mainly in Europe, the higher compares favorably with IT services revenue base led the company’s adjusted SG&A
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
to come in at 19.9% of revenues, representing 30 COMPANY MANAGEMENT bps y/y and 10 bps q/q decrease. This led to a Globant was founded in 2003 by Martin Migoya, 24.5% y/y increase in adjusted operating profits, Martin Umaran, Guibert Englebienne and Nestor resulting in an operating margin of 16.3%, a slight Nocetti. Since then, the founders have decline from 16.5% a year ago, but a significant successfully led the company from a small start- 100 bps improvement over the previous quarter. up to an organization with more than 16,000 Adjusted net income for the quarter was $28.5 professionals and a global presence. million or $0.70 per share, and represented a Martin Migoya helms the company’s affairs, margin of 12.3%, a decline from 13.1% in 4Q19, serving as its Chairman and CEO since 2005. His but 50 bps improvement from 3Q20. prior IT industry operational experience is with The company also generated healthy free cash companies such as Repsol-YPF, Origin BV flows of $20.7 million during the quarter and (Holland) and Tallion. He is also a well- allocated $50.9 million of its capital toward recognized though leader in the IT service acquisitions and $50 million toward repayment of industry and has multiple awards to his name. its credit facility, further improving an already Mr. Migoya won the 2008 Konex Award for most strong balance sheet. innovative entrepreneurs, was named the Emerging CEO of the year by Latin Trade in 2011, Encouraging Outlook: Globant provided an received Entrepreneur of the Year Award from encouraging outlook for 1Q21 and reinstated its Ernst & Young in 2013 and was named the CEO full year 2021 guidance. For 1Q21, it expects of the year at the 2020 Sadosky Awards. revenues to grow by 34.7% y/y to at least $258 million, adjusted operating margin to be in 15% Here is video of Mr. Migoya from the Globant to 17% range and adjusted EPS to be at least $0.79. Converge 2020 virtual event. For the full year 2021, the company expects Martin Umaran serves as the company’s Chief of revenues to be at least $1.47 billion, representing Staff since 2013 and is responsible for an above historical average growth rate of 28.6% coordinating Globant’s back office activities and y/y. Adjusted operating margins are expected to also looking after its M&A process and strategic remain stable in the 15% to 17% range, while the initiatives. From 2005 to 2012, he served as adjusted EPS is expected to be at least $3.20. Globant’s Chief Operations Officer and Chief Corporate Business Officer and was in charge of managing the company’s delivery teams and LB•LOGIC The 4Q20 performance projects. Mr. Umaran has extensive experience in and the strong outlook is a testament of business and operations management for the company’s fundamental strength. technology and logistics industries. While the operating margins are still lower than historic levels, we believe Guibert Englebienne serves as Globant’s Chief continuing improvements in revenue Technology Officer since 2003. As the head of growth profile and utilization of IT technology department, he also leads Globant's professionals will help the company Studios and is entrusted with fostering improve its operational profitability, innovation backed by his deep knowledge of going forward. emerging technologies. He is one of the industry's most influential technology leaders, and his
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
inclusion in the 2011 Powerful 25 list of Globalization Today is a testament to this fact. LB•LOGIC Globant is at the forefront of the market as a pure play in the Nestor Nocetti serves as the EVP of Corporate digital and cognitive transformation Affairs, and oversees the company’s relationship space. We think the company’s close with governments and industry chambers to relationships with marquee customers, expand its global presence. Prior to his current its strong global footprint and a role, he was Globant’s EVP of Innovation Labs, successful track record of growth are where he led the development of an advanced testaments of its strong competitive positioning. skills matching tool “Glow”, which was recognized as one of the Best IT Projects in the InfoWorld Awards in 2009. Further substantiating its strong competitiveness in the IT professional services space is a recent LB•LOGIC We like the fact that IDC MarketScape study, which recognized Globant’s founders, who know the Globant recognized as a worldwide leader in company inside out, still continue to Customer Experience Improvement. manage the business.
COMPETITIVE ENVIRONMENT Globant operates in intensely competitive market for technology and IT services that is characterized by a high level of market fragmentation, rapidly changing and evolving technologies and relatively few entry barriers. The company competes against large global consulting and outsourcing firms such as Accenture, Sapient, Thoughtworks and Epam; digital agencies and design firms such as Razorfish, RGA and Ideo; and traditional technology outsourcing providers such as Cognizant, GlobalLogic, Aricent, TCS, Infosys, Mindtree, HCL, Wipro and Luxoft. Source: IDC 2020. Although the competition is intense, there is enough play area for each of the market TREND ANALYSIS: participants, given the tremendous size of the VALUATION market. Globant successfully differentiates itself Globant’s stock has witnessed strong momentum by being a pure play digital and cognitive driven by the ongoing need for digital transformation services provider, and its very transformation of businesses, which has been close relationships with marquee customers and further accelerated because of the pandemic. The a strong global footprint are added advantages. stock has returned ~92% to its investors over the
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
past one year, and currently trades at a Price-to- not unreasonable for a company growing its top- TTM Sales ratio of 10.9x, which looks rich, but is line by over 25% year over year.
Comparative Price-to-TTM Sales Ratio 12.0x Globant 10.9x 10.0x Endava 9.0x Epam 8.0x 7.7x
Infosys 6.0x 5.7x Wipro 4.3x 4.0x Accenture 3.7x Cognizant 2.0x 2.4x
0.0x Feb/20 May/20 Jul/20 Oct/20 Dec/20 Feb/21
Source: Yahoo Finance, Seeking Alpha
earlier part of 2020, but it managed through the CONCLUSION / period by prudently managing its professional RECOMMENDATION headcount and returned to strong top-line Globant has delivered tremendous top-line growth and improved profitability toward the performance over the years, primarily driven by later half of the year. We expect the company’s its ability to expand within a relatively small, but growth profile to remain robust going forward, as a marquee customer base by leveraging very it takes advantage of the vast and rapidly close relationships with them and by delivering a growing market opportunity stemming from the strong value proposition via its Studio model and accelerated and on-going need of businesses for the agile podular team structure. It is also digital engagement. From a long-term operationally profitable and generates strong free perspective, we assign Globant a “GREEN LIGHT” cash flows. As with most other companies rating. operating in the IT professional service space, the pandemic led demand slowdown caused a blip in its growth trajectory and profitability in the
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
◼ Stock Chart for Globant S.A. (GLOB) $250.00 12.5x Price $222.57 $200.00 10.0x PS Ratio 10.9x
$150.00 7.5x
$100.00 5.0x
$50.00 2.5x
$0.00 0.0x Feb/20 May/20 Jul/20 Oct/20 Dec/20 Feb/21
GLOB Share Price PS Ratio
◼ Performance Data 2015 2016 2017 2018 2019 2020 RETURN ON INVESTED CAPITAL (%) - 22.5% 13.3% 18.6% 15.1% 10.0% GROSS MARGIN (%) 36.9% 40.8% 36.5% 39.3% 38.6% 37.4% EARNINGS (MILLIONS USD) 31.7 35.9 30.5 51.7 54.0 54.2 YoY Earnings Growth (%) 25.8% 13.2% -15.0% 69.5% 4.4% 0.4% REVENUE (MILLIONS USD) 253.8 322.9 413.4 522.3 659.3 814.1 YoY Revenue Growth (%) 27.2% 27.2% 28.0% 26.3% 26.2% 23.5%
◼ Valuation Data FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 SHARE PRICE (USD) 37.51 33.35 46.46 56.32 106.05 217.61 SHARES OUTSTANDING (MILLIONS) 34.2 34.7 35.2 36.0 37.0 39.7 MARKET CAP (MILLIONS USD) 1,283 1,156 1,637 2,026 3,920 8,643 PRICE/SALES RATIO 5.1 3.6 4.0 3.9 5.9 10.6
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
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0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS
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