Globant S.A. (NYSE:GLOB) Q2 2023 Earnings Call Transcript

Globant S.A. (NYSE:GLOB) Q2 2023 Earnings Call Transcript August 17, 2023

Operator: Good day, and welcome to Globant’s Second Quarter 2023 Earnings Conference Call. I am Arturo Langa, Head of Investor Relations at Globant. You’ve just seen our latest spot, showcasing our experience in artificial intelligence for today’s market. In our call today, all participants on this call will be on listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded and streamed live on YouTube. 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 Martin Migoya, Co-Founder and Chief Executive Officer; Juan Urthiague, Chief Financial Officer; Patricia Pomies, Chief Operating Officer; and Diego Tartara, Chief Technology Officer.

Before we begin, I would like to remind you that some of our comments on our call today may be deemed forward-looking statements. This includes our business and financial outlook and the answer to some of your questions. Such statements are subject to the risk 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’d like now to turn the call over to Martin Migoya, our CEO.

Martin Migoya: Thank you, Arturo. Good afternoon, everyone. I’m Martin Migoya’s digital twin. The real Martin, Diego, Pato, and Juan will join you afterwards for the Q&A. We are speaking to you today from Sydney, where we have come to connect with our local team as we continue our expansion in new markets, as well as to meet clients and partners at the FIFA Women’s World Cup of which Globant is a proud global sponsor. For transparency, there will be a notice at the bottom of the screen every time we appear or use any AI engine. We are happy to be with you again to discuss another great quarter. With our strong fundamentals, expanding array of solutions and platforms, and greater leverage of our global delivery network, we aim to continue to outpace our industry.

In Q2, total revenue was $497.5 million. It is the highest quarterly revenue in our history, representing 15.9% year-over-year growth, and 5.3% quarter-over-quarter growth. This has been made possible by the comprehensive relevance, scope, and depth of our offering, combined with the expertise, creativity, and dedication of our Globers. We are seeing strong sequential growth into the second half of the year, providing us with encouraging signs as we start thinking about 2024. We are also optimistic about the growth of our addressable market, estimated to reach up to $8.9 trillion by 2030 according to the report Digital Transformation Market Forecast 2023-2030 released by Fortune Business Insights this year. At Globant, our vision is to provide the best AI and digital transformations in the world and we want to do it through reinventing our technology professional services industry.

We work every day to ensure our clients stay relevant with the latest technologies, constantly innovating the way we provide these solutions, while being kind to our planet, to our peers, to humanity, and to ourselves. Clients that choose Globant are not only picking an AI and digital partner to fulfill their dreams but innovation itself, a new way to create and build technology with transparency and absence of nonsense and at the same time, maintaining a commitment to the environment and society. It’s a unique culture. Let me explain to you some of the innovations that separate Globant from our competitors. First, our inverted organizational chart and the autonomy of our Agile Pods, each with its own name, charter, mission, and proud identity as a team.

It’s the job of our whole management to support them in their success. Second, our Studios. These deep pockets of expertise have been central to our value offering on the latest technologies and their applications to particular industries. Our array of Studios has grown over time as we widen the scope of our services. To improve the synergy, we have now organized them into four Studio Networks. Digital, Reinvention, Enterprise, and Create. Doing so will foster better collaboration among our Studios as we continue to scale. Third, the Company-wide use of AI, both for our internal processes and in the solutions we create. And finally, our platforms, AI-powered software products that solve true challenges of our industry. In the AI space, we continue to leverage our expertise to expand services in order to meet the increasing demand.

Late last year, with the widespread interest in generative AI caused by new tools such as Chat GPT, we started to engage with our clients to help them embrace this technology quickly. Our teams worked closely with many of them to create a comprehensive map of initiatives to reinvent their businesses. Then we translated these initiatives into proofs-of-concepts that could be applied to achieve specific KPIs and expand their businesses. Now many of these are becoming real-life solutions that can be scaled globally and implemented Company-wide. In particular, we see two types of solutions. First is what we call Augmented Knowledge, the capability to interact with unstructured data in a conversational way. Skilled professionals such as those in law or in finance will be able to access large amounts of data and quickly interpret it so that they can make better, more informed decisions.

And second is a field we call Converse AI, which allows an end user to interact with a transactional system in a conversational way. There are many relevant applications that can speed up the way we connect with our favorite consumer brands. For example, when booking a cruise, you may be able to organize itineraries with the help of an AI that intuitively offers and even schedules services that matter to you, while also handling queries for changes or refunds. I’m happy to see that our expertise in the field is also being recognized worldwide. In early June, IDC named Globant as a leader in AI in the IDC MarketScape for Worldwide Artificial Intelligence Services 2023, affirming our commitment to value-driven services through our comprehensive AI journey.

We will continue to expand and share our offering on AI applied to industries and different use cases in our portfolio called mines. I invite all of you to learn more about it by visiting ai.globant.com. Now, some news about our Studios Networks. I’ll begin with our Enterprise Studio Network. It has been exciting to see how our digitally native approach makes a difference in how our clients embrace large platform providers like Salesforce, SAP, Oracle, and even the hyperscalers. All of them have been moving at a rapid pace to embrace new technologies. Our combined expertise in these core technologies, with our understanding of emerging ones, has allowed us to be the partner of choice for our clients as they incorporate new multi-technology solutions.

Along this line, after announcing Google Cloud Studio on last earnings call, we have just publicly shared the creation of two new Studios, Amazon Web Services, and Microsoft. Industry analysts see a potential growth up to over $1.6 trillion by 2030 in cloud computing. So, with these two new Studios, we will be complementing our offering to better serve organizations worldwide. Diego will expand on this topic later in the call. I am also glad to see how Globant Create consolidates as another of our Studios Networks. In recent months, we brought our capabilities in digital marketing, sales, branding, and performance into this creative powerhouse that leverages AI to improve how organizations can engage with audiences. Growing our offering here has been instrumental in widening our relationships with our clients as we offer them even more services.

Globant Create got its first spotlight recently when we presented it at the Cannes Lions International Festival of Creativity. It was a unique opportunity to introduce our new Studio and at the same time celebrate Globant’s first Silver Lion won by our commercial 1000 Slides. If you haven’t seen it yet, I encourage you to watch it on our YouTube channel. And now to our platforms. I’m enthusiastic to see that the portfolio of Globant X continues to grow. Accelerated by AI and blockchain, we have now evolved each product from a stand-alone specific technology into more integral solutions. Our portfolio includes platforms like, Augoor, StarMeUp, MagnifAI, Sportian, the evolution of LaLiga Tech, and GeneXus. Let me share some exciting updates about this last one.

What was once a low-code development platform has now grown into a Suite of AI development tools. GeneXus now applies AI not only to support development, maintenance, and evolution of any given solution, but it also enhances the user experience of the solutions delivered. By incorporating this innovative array of tools, companies can swiftly integrate AI to their systems, operations, processes, and workflows, agnostic to any programing language. GeneXus can now deliver AI assistance that can leverage clients’ data set and business processes to craft exceptional customer experiences. Additionally, it enables company leaders to effortlessly sift through intricate data to make faster, more informed decisions. The use cases are endless. The vision of GeneXus is to simplify and future-proof software development.

That’s why we now ensure that every application delivered by GeneXus can seamlessly integrate with LLMs in a monitored and cost-effective manner. Year after year, we continue to live up to our foundational vision of expanding all over the world. Doing so has been an engine for growth with our clients. As we expand both our delivery and client networks globally, we can draw on these capabilities to give each particular client a customized delivery network that best caters to and surpasses their transformational goals. Globant now has offices in 70 cities in 30 countries, including eight new markets that opened in the past 12 months. Related to this expansion, we have recently announced a significant investment in a five-year strategic growth plan for Latin America, the region where we were born and a main focus of our delivery model.

This investment will be dedicated to three main verticals:, AI development, product offering, and the expansion of our local teams. We are opening a new Center of Innovation in Sao Paulo, Brazil. From there, Globant Subject Matter Experts will research AI and other top technologies like quantum computing to create practical applications to support our clients. This center will also be responsible for building new AI applications to improve Salesforce projects, one of our biggest strengths in the Brazilian market. We will continue investing in the development of our own products such as Augoor, MagnifAI, StarMeUp, Sportian, and GeneXus. Our focus is to keep leveraging AI to accelerate software development and improve digital experiences, increasing our go-to-market strategy and providing better outcomes for our clients.

Lastly, we will keep expanding our regional teams by adding 20,000 professionals in the region during the next five years. Our strong presence in more than 10 Latin American countries will continue to be a focus of our talent growth. In parallel, we are proud to say we have commenced operations in Portugal. We see great potential in that country to become a new talent hub for Globant to support our European expansion. We also look at Portugal as an interesting geography for business development, with several companies looking to transform their organizations and capitalize the country’s solid economic growth during the last years. I’m pleased to announce that on July 20th, we completed the incorporation of Pentalog to the Globant family. With this, we welcome 1,300 new Globers in France, Romania, Moldova, Mexico, Vietnam, and the US.

This expansion strengthens our presence in Europe, home to 80% of Pentalog’s revenue. Our growing footprint there is of particular interest as many of our global clients have growth projects in these markets. This week, we held our Global Tech Summit here in Sydney. As we are currently sponsoring the FIFA Women’s World Cup, this was a great opportunity to meet with partners, future clients, and to showcase the work we are doing in sports. I am very enthusiastic about our future. Currently, Globant has a very healthy pipeline, the largest in our history, and I look forward to sharing with you more stories on our execution. The non-stop innovation of our over 27,000 Globers continues to inspire me. Year over year, we are all able to prove that Globant is on the cutting-edge of global technology and expands its total addressable market with a growing expertise and constant curiosity.

I will now turn it over to the digital twin of Diego Tartara, our Global CTO.

Diego Tartara: Thank you, Martin. I’m very excited to be back with you to discuss our growing array of solutions and offerings. As Martin mentioned, AI is transforming the way we do business, provide services, and organize our teams. Many of you remember, years ago, how Globant was very vocal on the coming wave of artificial intelligence, long before the widespread adoption we see today. We are only experiencing the beginning of the full potential that AI will bring into everyday life. We have recently published two new reports on how AI will impact industries and how organizations can harness its power to improve the quality, efficiency, and velocity of their operations. I invite you all to take a look at how AI is changing the narrative on media and entertainment, and game-changers on the future of sports at reports.globant.com.

Now as we look out over the next few years, we see how quantum computing has a similar potential to be an exponential accelerator of computer processes, providing meaningful change that will separate the early adopters from their competitors. The shift from traditional computing to quantum can provide advantages in optimization, machine learning, scenario simulation, and cryptography. We can already see possible benefits in manufacturing, the life sciences, AI, finance, energy, and other fields. Quantum’s massive computing power, when combined with machine learning and AI, will play a crucial role in accelerating innovation. Although it is still in its early stages, we recognize the need for quantum readiness for organizations so that they can seamlessly integrate this technology.

They will need a proficient partner in order to ensure they reap the benefits. Given Globant’s signature blend between our rising industry knowledge and our longstanding tech expertise, we believe we can be that proficient partner for current and future clients. Now, some additional color on Enterprise Studio Network. Martin mentioned that we have created the new Studios of Amazon Web Services and Microsoft in order to leverage our decade of expertise and track record in each space. Let me share more context. Globant’s expertise covers almost all AWS technologies, from traditional infrastructure-as-a-service to platforms-as-a-service, data, AI, and analytics consulting, Amazon Kinesis Delivery, and DevOps, migration, security, and government migration.

Driven by our industry-specific knowledge, this new AWS Studio will help our top stakeholders and our clients to create a comprehensive and scalable cloud platform that can tackle all of the new technology challenges like AI and spatial computing. We combine our global presence, strategic partnership with Amazon Web Services, and deep understanding of cloud technology and business strategy, to deliver innovative solutions that help our clients succeed. Our Microsoft Studio aims to enable organizations to obtain maximum value from their investments within the Microsoft AI, cloud, data, and analytics capabilities. It supports clients’ full adoption of a cloud strategy, taking the best out of Azure Data and AI, implementing migration and modernization processes, and leveraging the Suite of Microsoft’s Intelligent Business Applications such as Dynamics 365 and Power Platform.

This Studio is also a partner for companies that need to take their IT operations and responsibilities to Azure-certified Subject Matter Experts that will monitor, manage, and maintain clients’ IT infrastructure and systems. In this space, we are proud to say that together with Sportian, the evolution of LaLiga Tech, and Microsoft, we have launched a pilot of generative AI applications to reinvent sports tactics and broadcasting. Using Microsoft Azure Open AI service, this joint effort will improve available sports data and enhance the experience for millions of fans all over the world. Among other features, this collaboration facilitates the creation of multi-lingual subtitles adapted in near real-time for all live sports matches and improves metrics availability and data visualization for each team’s Head Coach and their assistance.

This offering started for football but will expand to other sports including basketball, rugby, and tennis. Now let me talk about how we are enhancing our clients’ operations by improving our product offering. Martin shared news about GeneXus. I will dive deeper into other products. First, Waasabi. This wallet-as-a-service has evolved and is now capable of offering organizations a fast track into the digital payments space. The platform’s architecture based on APIs sets up a payment aggregation and a digital wallet business in the white label format. It enables organizations to quickly enter the FinTech space without having to develop their own back-end from scratch. Waasabi is currently undergoing its first major launch with the Ecuadorian bank, Produbanco.

Our solution is the first embedded finance platform in Ecuador and Produbanco has become the depositary bank, and a reseller of Waasabi, offering it to its corporate clients who want their own solution for digital payments and collections. This project is particularly special to Globant, because through it, together with Produbanco, we demonstrated the power of FinTech in Ecuador and its potential to advance financial inclusion for the whole country. Next, I’d like to announce the relaunch of our platform, MAIDA, an AI assistant for IT service management. As we listen to the challenges of our clients, we find that many of them, particularly larger organizations, struggle with overwhelming and cumbersome IT ticketing systems. As an AI assistant, MAIDA optimizes and accelerates IT services by applying AI to streamline ticket management and simultaneously conduct process mining to find bottlenecks.

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This platform was born out of our work with one of the largest companies in the life sciences sector. This organization was experiencing a major challenge to map their priorities and procedures through their internal ticketing tool, receiving over 100,000 priority tickets per month. Our AI assistant anticipates ticket variations and connects them to the appropriate service management team. This resulted in 25% more efficiency in problem-solving, three times faster ticket resolution, and a two-day reduction in ticket management. Now, some more news on our continuing work with our clients. Over the past year, we began working as the technology partner for Iberia, Spain’s biggest airline, as they undergo their own digital transformation strategy.

The goal is to reinvent the technology area with a three-year project, which aims to ensure the future value of the engineering functions, enabling business resilience and rapid transformations. In addition to providing technology services, we have partnered to create a future talent program centered around developing the young talent in the region. Through this project, we are sharing with Iberia the Globant way of doing things, including our agile culture, our growth strategy, our industry-specialized capabilities to improve product performance, and our delivery models. The pharmaceutical industry has been steadily moving towards transforming traditional face-to-face interactions into digital experiences as new products are launched into the market.

We are working with one of the largest players in the sector on an approach to fully transform their go-to-market strategy. Following proven data-driven strategies, the new model relies on innovative digital experiences for healthcare professionals to boost their engagement with the Company. These new touch points will enable capturing data that will result in simpler, more intuitive, and personalized experiences, fostering stronger connections with this specific community while driving the success of their products. You may remember that last quarter we consolidated our Google Cloud expertise into its own Studio, part of the Enterprise Network. This quarter, we have major developments from the Studio with a leading toy company. After building a track record with them for quality of delivery through our work over the past two years, they approached us with a more urgent need to reconcile marketing and commerce analytics data for three product brands.

Their own ecosystem was fragmented and not helping the organization achieve their KPIs. Thanks to our partnership with Google and our expertise on the Google platform and Data and AI Studio, we reconciled the data on each analytics platform, enabling the company to calculate business KPIs from a single source. In Latin America, we are working with the region’s largest bank, Itau Unibanco. Through GeneXus, we’re helping them release the first banking super app in the region. Our Globant team provided the platform, technology, and services to convert their current mobile application into a super app, integrating several partner services into the solution, boosting user engagement, and facilitating customer access to services and product payments without leaving the application.

Thank you, everyone, for your time and attention. I’ll now hand it over to Pato.

Patricia Pomies: Thank you, Diego, and good afternoon, everyone. It’s great to be back. Let’s kick-off with our clients. As you know, a major growth objective for Globant has been our 100 squared strategy aimed at generating new clients and also expanding the array of our relationships with our current ones to serve new geographies and even more services as we grow our collaboration over time. It continues to advance and show results, as this quarter, we were able to deliver our highest quarterly revenue ever, but with greater diversity in our top revenue sources. We now have 16 clients bringing in more than $20 million in annual revenue. We have 283 clients that provide more than $1 million of annual revenue, 21.5% more than one year ago.

Our largest account, The Walt Disney Company, declined by 2.4% year-over-year and 1.1% quarter-over-quarter, showing signs of stabilization. The rest of our accounts collectively grew by 18.1% year-over-year and 6% quarter-over-quarter. Globant is also widening its revenue sources geographically as well. In Q2, 60.6% of our revenue came from North America, 22% from Latin America, 14.1% from EMEA, and 3.3% from Asia and Oceania. As our 100 squared strategy is based on widening our services to our current clients, we remain laser-focused on our Net Promoter Score as a quantifiable assessment of our client satisfaction with Globant and their likelihood of referring us within their organization and their networks. In Q2, we achieved an NPS of 83 our best ever.

Our average NPS for the trailing 12 months has now increased from 79 to 81. As of June 30th, we were 25,947 Globers, of which 93.1% were IT professionals. With the full incorporation of Pentalog in July, Globant is now a team of more than 27,000 creative minds. Our annual attrition rate is currently 11.6%, the lowest in our history and the attrition over Q2 was 2.5%. We are committed to keep delivering the best experience to Globers and to enhance Globant’s identity as an accelerator with exposure to projects with beloved global brands in multiple geographies, regions, and industries, combined with a culture of diversity and innovation. We also aim to drive efficient utilization to manage proper head count, hiring, and attrition effectively.

As of 2Q ‘23, our utilization rate stood at 80.1%. At current levels, and with the labor market stabilizing, we are confident in our ability to have a healthy flow of talent moving forward. We are already starting to see positive indications of better hiring trends on an organic basis, and we anticipate these trends to continue into H2. Under the same objective and to strengthen our agility, we launched a new AI-based staffing assistant that runs on Slack, Globant’s preferred internal communication channel, and helps project leaders to build the best teams in seconds. This new assistant seamlessly works with Globant’s performance and career systems and proposes to each leader suitable candidates within the talent pool that best match each job request with all pertinent information.

In a fully conversational mode, Globant leaders can now use this assistant to create high-performance teams with specific skills and even set-up the interviews. This will speed up even more our readiness, maximizing the value of our talent pool, and ensuring quality of the delivery. To keep ensuring a vibrant career path at Globant and accelerate Globers’ exposure to new challenges, we developed a data-driven tool concept known as Readiness Model. It provides a holistic view to assess the readiness level of Globers for growth and promotion by encompassing and interconnecting all the core aspects of talent development, performance assessments, leader’s feedback, and technical skills among others. We are using this tool so that we can reward Globers who have gone the extra mile to upskill or re-skill themselves and have taken the driver’s seat of their own career by offering them new challenges with more agility.

It also fosters transparency and helps mitigate bias by clearly outlining the criteria utilized to assess and comprehend the readiness level of Globers as a guide for leaders. In doing so, we are being true to Globant’s entrepreneurial culture at all levels and areas of the organization. We launched this tool via our proprietary platform of StarMeUp this quarter. For Globers that want to take their career development even further into their own hands, our open career platform continues to provide Globers with the promotional opportunity right here at Globant and serves as our in-house tool to offer a new career path, team, and perspective. More than 500 Globers entered new fields within Globant in Q2 alone. In the past year, more than 2000 Globers have been able to find new challenges this way.

We are also enthusiastic about the increase in the utilization of our own learning and development hub, MyGrowth. There, Globers and their career mentors can track progress in specific skills relative to the expected proficiency at each seniority level. Powered with artificial intelligence, the tool provides a range of learning missions that enable Globers to expand their skills and reach new levels of knowledge in each working ecosystem. More than 15,000 Globers are regularly active on this platform and nearly 4,000 have increased their standing. Combing the use of MyGrowth with the continuous evolution and expansion of Globant University, the total Globant learning hours increased more than 30% year-over-year. Last but not least, our Be Kind initiative keeps driving impact on our greater community and broader Company stakeholders.

In 2020, we committed to offer 15,000 scholarships globally to people from different backgrounds to study technology by 2025. We have had particular focus on underrepresented profiles, including women and socioeconomic minorities in developing countries. Through our Code Your Future initiative, we have already offered a series of training opportunities to more than 10,000 people. And this last quarter, we announced 500 new scholarships in Malaga, Spain. Within this program, the Construye Paz initiative in Colombia makes me especially proud. Last year, I shared with you all that Globant launched a special scholarship program for individuals affected by the internal conflict in Colombia, who are transitioning towards peace. The program provides access to alternative forms of education, including boot camps, technical workshops, and soft skill lessons to improve their employability in the technology industry.

We have expanded this program to four cities and are currently training more than 120 new individuals. And finally, I’m happy to announce updates on the fourth edition of the Women that Build Awards. With the support of global partners like the NYSE, Salesforce, Women Corporate Directors, Udemy, and Coach Hub, this year’s nomination stage concluded with our largest response ever for the awards, receiving over 3,100 nominees and 123,000 votes. We look forward to sharing the stories of the winners so that we can promote more diversity and inclusion in our industry through their inspiring stories. With that, I’ll hand it over to Juan, to discuss our financials.

Juan Urthiague: Greetings, everyone. It’s good to be back here with you this afternoon. We are excited about the outcomes we achieved today, and we extend our gratitude to all our Globers and clients for their support and dedication in making it happen. We are pleased to report that in Q2 of 2023, we achieved our highest quarterly revenue figure, representing a solid year-over-year revenue increase of 15.9%, totaling $497.5 million. Our performance in the current environment is a testament to our commitment to delivering excellent results. Our adjusted operating profit margin met guidance expectations and we skillfully executed M&A initiatives to broaden our presence in Europe. As we previously indicated in our last earnings call, we are confident in achieving sequential strong revenue growth in 2H 2023.

Our Company continues to expand while client discussions about long-term strategies remain consistent. In the second quarter, our pipeline increased again and conversations with customers remained strong. Additionally, we continue to see some improvement in the closing of new bookings and the creation of new backlogs to fulfill short-term revenues. Our bookings in the first half 2023 are over 40% larger than those in the second half of 2022. Our revenues of $497.5 million represented a solid 5.3% sequential growth, with North America growing 3.9% quarter-on-quarter, EMEA at 10.2%, LatAm 6.7%, and new markets at 1.8%, bringing us to $970 million of revenue year-to-date at 16.8% year-on-year growth. Also, our Q2 2023 revenues are already above the Q4 2022 level, as previously forecasted in our last two earnings calls.

We witnessed improving spending patterns across our top 20 accounts. Regarding our top account, Disney’s second quarter performance showed signs of stabilization with revenues flat sequentially. For Q3, we now expect sequential growth similar to the Company average in light of improving demand trends. We experienced sequential growth in our two to 10 and 11 to 20 client buckets of 1.5% and 6.8% quarter-over-quarter respectively. Additionally, inorganic contributions accounted for approximately six percentage points year-over-year growth in Q2, further improving our overall performance. From a vertical standpoint, we posted notable sequential growth in most industries. Our Media and Entertainment division experienced a 5.5% growth rate, driven by a positive performance not only in our Sports and Entertainment segment but also in a handful of large media companies.

As expected, Technology and Telecommunications saw a slight decrease of minus 5.0%, indicating a more moderated spending pattern still present across many of our high-tech clients. However, we are seeing signs of stabilization across this vertical looking into the second half of the year. Positive growth was seen in Travel and Hospitality at 7.1%, and Consumer, Retail, and Manufacturing at 7.8%, with a flattish performance in Professional Services at minus 0.2%. Our Banks, Financial Services, and Insurance vertical outperformed with an 8.4% quarter-on-quarter growth. We note our exposure to large global financial institutions across many business units and geographies. Healthcare demonstrated an exceptional growth rate of 18.8%, helped by our recent acquisition of ExperienceIT.

Our other verticals category grew by 2.3%. All in, this drove a solid company-wide quarter-over-quarter growth rate of 5.3%. We delivered another strong quarter of profitability and net income generation. In Q2 2023, our adjusted gross profit margin reached 38.3%, up 10 basis points quarter-on-quarter, with adjusted gross profit increasing to $190.6 million, a 13.5% year-on-year growth. We are experiencing some marginal cost headwinds driven by FX appreciation in most LatAm countries. Our adjusted operating margin for the quarter was 15%, within the guidance range we provided in May. Regarding adjusted SG&A, this stood at 17.9% of sales, down 90 basis points compared to last year’s quarter. As for below-the-line items, our IFRS effective tax rate for the quarter was 21.1%, slightly below our guidance as taxes came in lower than our initial expectation in specific geographies.

Our adjusted net income in Q2 reached $58.9 million with an 11.8% adjusted net income margin, up 10 basis points quarter-over-quarter. Adjusted diluted EPS for the quarter was $1.36, $0.03 above our guidance, representing an 11.5% year-over-year increase based on 43.4 million average diluted shares. Regarding balance sheet management, as of Q2 2023, our cash and cash equivalents and short-term investments amounted to $270.8 million. During the quarter, we expanded our revolving credit facility to $725 million from $350 million, and it remains fully undrawn by the end-of-the quarter, providing us ample liquidity and resources to continue to execute our capital allocation and M&A strategy. Year-to-date in 2023, we have produced approximately $7.1 million of free cash flow, a significant improvement from the $28.1 million used in the same period last year, owing to improvements in our working capital and tax management.

Moving forward, let’s discuss our outlook for the third quarter and the full year 2023. Our third quarter and full year outlook in incorporate the most recent trends in the business and the contribution from Pentalog’s acquisition, which finally closed by the end of July. I would first of all like to provide you with positive news. Our increased guidance for the year implies strong sequential growth in Q3 and in Q4, both in terms of total growth and on a like-for-like basis, markedly higher than the rest of the industry. This positive trend in our revenues, coupled with a more constructive market, gives us confidence to start thinking about 2024. We anticipate Q3 revenues of at least $545 million, reflecting approximately 18.8% year-over-year growth and a 9.5% sequential increase.

As we called out during the last quarter, we continue to perceive a positive evolution of our underlying revenue indicators and an encouraging pace of bookings and backlog formation throughout the first half of 2023 compared to the final months of 2022. Excluding the inorganic contribution from Pentalog, we expect over 6% quarter-on-quarter revenue growth in the third quarter. The implied sequential growth we expect for the fourth quarter is projected at approximately similar levels. The Company’s second half run rate projections are aligned with our long-term goals. In terms of the full year guidance, we now expect our full year 2023 revenue to be at least $2.094 billion, a solid 17.6% year-over-year growth and above our previous guidance figure.

This guidance figure considers about 180 basis points, 200 basis points of top-line growth from Pentalog. From a profitability perspective, we now expect our adjusted operating income margin in the 15% to 16.5% range for the third quarter of 2023. For the full year, we now expect our adjusted operating margin in the 15% to 16.5% range. IFRS effective income tax rate is expected to be in the 21.5% to 23.5% range for both Q3 2023 and the full year 2023. Our adjusted EPS for Q3 is expected to be at least $1.46, assuming 43.5 million average diluted shares outstanding for the quarter. Finally, our adjusted diluted EPS for 2023 is expected to be $5.72, assuming 43.4 million average diluted shares for the year. Thanks, everyone, for participating in the call and for your coverage and support.

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Q&A Session

A – Arturo Langa: Thank you, Juan, and hi, everyone. [Operator Instructions] So, thank you very much, and with this in mind, we will take the first question from Tien-Tsin Huang from JPMorgan. Tien-Tsin, please go ahead. Your line is open.

Tien-Tsin Huang: Hi. Thank you, Arturo. Yeah, good results, and the sequential growth outlook is encouraging. So, I’ll ask on that. It sounds like organic sequential, you’re expecting a similar outcome as we saw here in the second quarter, Juan, so I just want to make sure we caught that correctly. And I’m curious with this theme of short cycle projects or discretionary work being under pressure, but large deals coming through, what are you seeing maybe that’s different than the rest of the group? Love to hear your thoughts on that Martin.

Juan Urthiague: I’ll take the first part.

Martin Migoya: You take the first part.

Juan Urthiague: Yeah, thank you, Tien-Tsin for the question. So, yeah, I think that the numbers are showing like very good growth, especially compared to the rest of the industry. The number for Q2 in terms of sequential growth organic was about 4.3%. That is increasing actually a little bit into Q3, which is going to be around 6% organic sequential growth. And then when we look at the implied numbers for the fourth quarter, it’s about 5.5%, almost there as well. So, the sequential growth is clearly improving. I think it’s a consequence of the level of bookings and the level of deals that we have been signing since the beginning of the year and that trend that we started to talk about back in February stays the same and it’s actually getting slightly better.

We started to see again some deals getting closed. We started to see Disney — our largest customer Disney now getting better as well. So, all in all, as you pointed out, we are once again in the 4% to 6% sequential organic growth quarter-over-quarter, which is a positive indicator getting into next year.

Martin Migoya: Yeah, and on the second part of the question, Tien-Tsin, thank you very much for joining today. We are seeing a pipeline which is historically the highest and the pipeline is not composed by small projects but composed by pretty much larger deals done before, longer-term deals. So, we’re extremely happy to see that. In a wide range of customers from the top five to the 11 to 20 — sorry, top five — or sorry, top 10 and 11 to 20, In both segments, we are seeing very positive pipeline. And the change on the trend is pretty — is pretty good right now. I mean, it’s much better than on the first quarter, than when we announced our first quarter results. So, I’m positive for the rest of the year and it looks like the sun is rising a little bit. I mean, it’s not [Technical Difficulty] rising a little bit.

Tien-Tsin Huang: Got it. Yeah, well, it’s also early here in Australia. So, it’s probably the case. Real quick on headcount and I’ll cede the floor.

Martin Migoya: Exactly right.

Patricia Pomies: It’s really early here, but we are keeping here.

Tien-Tsin Huang: You guys are always working hard. That kind of actually segues well with my question. I guess maybe on utilization and headcount, can we expect headcount to grow here as we look to the balance of the year or is there room on the utilization side, maybe to balance demand that you’re seeing? I’m just curious what the plans are between headcount growth and utilization. That’s all I had. Thanks.