Globant’s Second Quarter Results Exceed Street Expectations

Globant reported fiscal second-quarter results that exceeded our and Street expectations. Revenue increased 14.6% sequentially, to $49.4 million, beating our $48.8 million estimate and the Street consensus of $49.0 million. Upside in the quarter was driven by continued growth at the company’s top 10 customers, and management believes the growth in this customer base is sustainable given the companies’ large IT budgets and their affinity for Globant’s expertise in emerging technologies.

Pro forma earnings per share of $0.20 came in $0.03 higher than both our and the Street’s estimate, with strength in the quarter driven by a better-than-expected adjusted gross margin and some leverage on the SG&A front, which management believes will continue in the near term as the company ramps down from additional operating expenses that were being incurred in preparation for its IPO. Given the positive commentary regarding the company’s record pipeline (larger deals and longer duration) combined with the continued expansion at existing customers, we remain confident in Globant’s ability to grow its top line well above the industry average over the next several years.

Globant shares trade at 15.0 times our calendar 2015 EPS estimate of $0.82, a discount to the blended ITO peer group trading at 16.1 times. Over the next several quarters, we believe the company’s focus on emerging technologies and further penetration of its large customers will enable Globant to continue outgrowing its peers. If management is able to keep delivering strong results, we expect to see multiple expansion and believe the stock should trade at least in line with, if not above, its peer group. We maintain our Outperform rating.

Globant’s revenue grew 32.2% year-over-year and 14.6% sequentially to $49.4 million, beating both our and Street expectations. Upside in the quarter was driven by strong demand in Latin America (specifically Brazil, Colombia, and Chile), which grew about 64% annually, and the company’s ability to mine additional engagements within its large customers. Management highlighted a clear trend in how budgets are being allocated at its clients. As certain cost saving initiatives and operating efficiencies are being achieved, companies are putting the savings into customer engagement budgets, which plays into Globant’s strengths. Globant is seeing strong traction in its financial services, media and entertainment, and travel verticals, along with the new wearables studio (which has already signed a deal). We believe the company’s focus on emerging technologies will continue to strengthen the pipeline, increase bookings, and ultimately drive revenue growth.

Adjusted gross margin increased 140 basis points sequentially and 360 basis points annually during the quarter to 42.3%. Adjusted EBITDA margin increased 420 basis points sequentially to 17.2% due to the aforementioned gross margin improvement along with lower-than-expected selling, general, and administrative expense. Pro forma operating margin was at its highest level since 2010, and we believe there may be additional leverage in the company’s model. Management highlighted its expectation for sequential increases in margins heading into the September quarter due to significant reorganization and IPO expenses no longer being incurred by the company.


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