IT consulting specialist Globant (NYSE:GLOB) was an obvious beneficiary of the digital workplace trend in 2020, as major clients tapped the company to help navigate an extremely difficult year altered by the pandemic. The company's shares rose 105% last year as it posted vigorous year-over-year top-line expansion of 22% and an operating margin of nearly 10% in the first three reported quarters of 2020.
Globant now trades at 11 times forward-one-year sales, pushing its stock into slightly pricey territory compared to its publicly traded IT consulting peers, which generally tend to trade at price-to-sales ratios of between two and 10. In 2021, I'm focused on Globant's professional headcount as a primary indicator that it can continue to justify its premium.
The company refers to its employees as "Globers," and its IT professionals form the portion of the employee base that drives revenue growth. These professionals provide on- and off-premise consulting, while also spurring internal innovation within Globant's "studios," i.e., specific consulting services areas under the digital transformation banner. At the end of the third quarter of 2020, the company reported a total headcount of 14,340 Globers, of which 13,436, or roughly 94%, were innovation, technology, and design professionals.
Like its competitors in the technology consulting space, Globant was forced to strike a balance between utilization and headcount growth in 2020. In the spring of 2020, at the height of COVID-19 uncertainty, Globant saw its utilization begin to taper off. Given the costs of having skilled IT consultants sitting around idle, the company curbed its pace of new employee additions. In the second quarter, after factoring in normal attrition, the total number of IT professionals on Globant's payroll actually decreased by 1.5% sequentially over the first quarter.
The slack in utilization turned out to be temporary, as Globant's largest clients resumed their appetite for services. Globant has a client concentration that poses both a business risk and an opportunity: Its top 10 customers represent about 45% of total revenue. Despite this concentration risk, the close relationships with a handful of top-tier clients like Walt Disney and Alphabet's Google helped Globant maintain a growth trajectory during the pandemic, as I discussed in more detail last year.
By the third quarter, Globant had managed "a solid return to pre-pandemic levels of employee additions." The company has resumed what translates into a dependable equation: Its sales potential is tied to its capacity. Long-term demand is fairly stable among its client base, and it's also aggressively adding new consulting relationships to its book of business. In other words, the more IT professionals Globant hires, the more demand it's able to meet.
Two related items to watch
For investors who plan to watch expansion in Globant's IT professionals count this year, it's important to also keep track of the company's attrition rate, which offsets new hires. Globant will shoot to keep its attrition rate, which has recently averaged between 12% and 14%, in check. While this may sound like a high amount of employee turnover, it's actually an admirable level to maintain, as industrywide IT consulting attrition rates tend to average between 15% and 25%.
Shareholders will also look for Globant to continue a stream of steady, bolt-on acquisitions. The company primarily grows its workforce organically, with dedicated investment in recruiting, but it supplements hiring with frequent strategic acquisitions of smaller consulting organizations in promising vertical sectors.
For example, the organization acquired life sciences-focused consulting firm gA in August 2020, and Spain-headquartered Bluecap, a consultancy aimed at the global financial services sector, in mid-December. Between the two transactions, Globant added 1,260 IT consultants to its roster in 2020.
Here's a final statistic to ponder: In the third quarter of 2020, Globant's revenue grew 21% year over year, while total IT professionals on board increased at a rate of 28% over the same period. Clearly, the company's top line is tied to professional consultant capacity that can be deployed to clients. As long as Globant can beef up its professional staff through aggressive recruitment and strategic acquisitions, it has a lever to maintain the growth profile that's rewarded shareholders handsomely to date.