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Globant's Biggest Weakness Transforms into a Temporary Strength

By Asit Sharma – Aug 18, 2020 at 11:57AM

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The IT disruptor is generating growth in adverse conditions.

IT consulting specialist Globant (GLOB -0.03%) is proving that it's an indispensable partner to its base of large enterprise customers. The technology outsourcing company, which offers "digital and cognitive transformation" services, issued its second-quarter 2020 earnings on Aug. 13.

Globant reported healthy expansion on its top line as revenue rose 16% over the prior-year quarter to nearly $183 million. Gross margin dipped by 230 basis points to 36.2%; this was due to a slightly higher headcount of consulting professionals during the quarter versus optimal staffing for the level of sales achieved.

The lower gross margin hurt Globant's bottom line, as the quarter's $10 million in net income represented a net profit margin of 5.5%, or roughly 300 basis points below the 8.5% net profit margin the company booked in the second quarter of 2019.

Overall, however, the organization delivered a brisk quarter of growth, and it forecasts a higher expansion rate for the coming quarter: Globant expects revenue in the third quarter to grow 18.5% year over year, to $203 million.

An illustration of the earth  surrounded by circuit lines: digital transformation concept.

Image source: Getty Images.

Reaping an advantage from a structural weakness

As the continuing COVID-19 pandemic is slowly revealing, some technology companies are better positioned than others to flourish in a radically changed selling environment. Globant focuses on a relatively small base of customers -- the company served 805 customers over the last trailing 12 months. Of these customers, 113 accounts, or fully one-seventh of the base, generated annual sales of more than $1 million each.

To further nurture enterprise customers, management recently expanded its "50-Squared" objective, that being to generate business with 50 separate clients of $50 million in annual revenue each. The new "100-Squared" objective is to build a customer base that can eventually supply 100 accounts averaging $100 million each in annual revenue.

Now, before bumping up its targets, Globant was nowhere near achieving the 50-Squared vision, which by itself (if realized) would provide $2.5 billion in annual sales. Last year, Globant recorded $659 million in total annual revenue. So it's a bit curious, with so little progress yet made, that the company would pivot to the more audacious goal of deriving $10 billion in annual sales from 100 customers.

Perhaps management is stretching out the challenge in order to ensure that Globant can properly diversify its business. Customer concentrations have figured as Globant's most telling weakness over the past several years. For example, Disney, long the company's biggest account, provided nearly 11% of total revenue during the second quarter. Globant's top five customers provided 32% of revenue, and its top 10 relationships were responsible for 45% of revenue last quarter, marking increases of 5 and 4 percentage points against the prior-year period, respectively.

However, this long-term deficiency is acting as a growth catalyst during the pandemic. Revenue improvement from all accounts outside of Globant's top 10 hit just 8% year over year in the second quarter -- half the rate of the company's total revenue expansion, 16%. Thus Globant's biggest accounts as a group are growing in excess of 16%, and they carried results for the quarter. The company's top 10 clients in 2019, which included, in addition to Disney, Alphabet's Google, Electronic Arts, and Southwest Airlines, have deep pockets and are exhibiting no dearth of digital transformation and IT needs during the pandemic.

The revenue boost and cash flow provided by the top 10 customers is also helping Globant manage capacity issues. The company tends to hire IT talent prolifically, both to lay the groundwork for future revenue growth and to offset attrition that approaches 15% annually. However, caution around the pandemic caused Globant to slow hiring in the second quarter, and the number of IT professionals on its payroll decreased by 1.5% sequentially (while still jumping by 25% year over year) to roughly 11,600. Normal talent acquisition is already resuming. CFO Juan Urthiague observed in Globant's earnings conference call that the company has "turned [its] recruiting engines back on" and expects to report net employee additions on a sequential basis in the third quarter.

Over the long term, Globant will have to solve its customer concentration issues. Losing Disney or a handful of the top 10 purchasers would do real harm to its operations, so further diversification is a must. Yet for the time being, the technology disruptor's close relationships with companies undergoing major digital initiatives have propelled results during the COVID-19 pandemic.

 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Asit Sharma owns shares of Globant and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Globant, and Walt Disney. The Motley Fool recommends Electronic Arts and Southwest Airlines and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Globant Stock Quote
Globant
GLOB
$187.08 (-0.03%) $0.06
Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
EA
$115.71 (-1.50%) $-1.76
The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$94.33 (-3.20%) $-3.12
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$95.65 (-1.82%) $-1.77
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
LUV
$30.84 (-2.53%) $0.80
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$96.15 (-1.98%) $-1.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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