Good day, everyone, and welcome to the Globant Q4 and Full Year Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ms.
Paula Conde, Investor Relations Officer. Ma'am, please go ahead.
Thank you, operator, and thanks, everyone, for joining us today on our call to review our 2018 full year and 4th quarter financial results. 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, Chief Executive Officer and Juan Urthiague, Chief Financial Officer.
Before we begin, I would like to remind you that some of the comments on our call today may be deemed forward looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks 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 results. I'd like now to turn the call over to Martin Migoya, our CEO.
Thank you, Paula. Good afternoon, everybody, and thanks for joining us today. Happy to be here to review our 2018 full year and 4th quarter performance. At the end of the call, Juan will share our financial outlook for 2019. 2018 was another very successful year for our company.
We achieved a robust revenue growth, while improving profitability and cash generation. Our full year revenue for 2018 amounted to $522,300,000 representing a 26.3% year over year growth. At the same time, revenue for the Q4 2018 amounted to 140,100,000 dollars a new record for the company as an increase of 21.4% compared to the same period in 2017. This remarkable revenue growth was driven by the acquisition of new customers and by the expansion of our deals with current customers. Most of this growth comes from media entertainment, finance, technology, travel, consumer, retail and manufacturing.
This expansion across verticals signals that digitalization is reaching more industries. It is opening new opportunities for a pure play company in digital and cognitive technologies like we are. During the last 12 months ended December 31, 2018, we render service to 373 customers, 90 of which had annual revenues over $1,000,000 compared to $82,000,000 1 year ago. During the last 12 months, we had 5 accounts above $20,000,000 in annual revenues and 9 accounts over $10,000,000 in annual revenues. We continue to grow the size of our accounts aligned with our 50 Square strategy.
Finally, our adjusted diluted EPS amounted to $1.74 $0.50 for full year and the 4th quarter, respectively. Later during the call, Juan will share more details on our financial performance and our guidance for the rest of the year. Our sustained growth show that we are on the right path to address demand and market needs. Companies are still looking to transform their business as new users and requirements arise. At the same time, we see that many organizations try to transform themselves, but some are not following an effective approach.
For many, it becomes difficult to build a digitally native culture from scratch or change the status quo of the current IT department. It is hard to be successful using our practices to create innovative technology products. As Forrester points out, transformation starts with developing the right set of strategy choices and the ability to help shape digital thinking and a digital culture that supports continuous innovation. It is cemented through effective change management. As a pure digital and cognitive player, Globant is the best partner to help organizations transform their businesses.
We do this with a comprehensive approach that includes: evolving their culture, we can help them get ready for new paradigms with our future organizations and agile delivery studios 2nd, creating digital products through all our studios and our agile ports, we can create digital journeys from the inception of idea to the complete execution. 3rd, bringing digital and cognitive to the back office With our AI, cloud computing and cloud implementation practices, we can accelerate IT departments to be more reactive to ever changing business needs. And 4th, creating a full digitally native culture. We can also take over the entire technology organization and evolve it to the next level. We can turn it from a traditional IT department into a full digitally native and agile organization.
This model demands for players that can offer a strong expertise in some of the most demanded technologies. To continue expanding our capability, last month, we announced the acquisition of Avanxo, a leading cloud transformation company. This operation enables us to expand our broad expertise in corporate process optimizations and cloud technologies. Avanxo shares our vision on how to deliver profound digital and cognitive informations. They pioneered the cloud system integration market in Latin America.
They became the 1st independent platinum consulting partner of Salesforce in the region, and they're also an advanced consulting and MSP certified partner of Amazon Web Services. The company has 310 IT professionals exceptional skilled in cloud capabilities. They work for renowned brands such as AB InBev, Zulamerica, Ecopetrol, Sika, Alliance, Terpel, Samsung, La Meridional, Audi, Saudi Mac and several others. We have found an amazing team that complements our model, and we are confident that the acquisition will help us propel our positioning as leaders in the digital and cognitive arena. We also continue to put a lot of focus on latest technologies and trends to provide the best practices and services to our customers.
In this sense, AI remains our top priority. We launched several initiatives to develop what we call an augmented Globant, where we're shaping our internal areas, leveraging AI to improve our business and better serve our customers and employees. We also recently published our AI manifesto available at staterelevant. Globant.com. This set of principles reflects what we believe and encourage within Globant.
They serve as a guide to our projects as we expand on our digital and cognitive approach. In parallel, we launched 2 reports to cover different trends that will shape business needs in the future. The first one is Globant's newest Sentinel report that focuses on the importance of culture when going through a profound transformation. The report shows how to build a culture that enables innovation and relevance across organizations. To read more about this, visit sentinel.
Globant.com. In addition, last Monday, we launched our 2019 Blockchain Technology Business Guide. This report is a resource for organizations considering investing in blockchain integrations. We survey more than 6 50 U. S.
Senior level decision makers and their priorities regarding blockchain technologies. The report determines what steps organizations need to take to go from being excited about blockchain to executing on blockchain. To read it, please visit blockchain. Globant.com. I'm glad to share with you that last month, we signed the Cybersecurity Tech Accord.
This agreement gathers 79 companies, including LinkedIn, Microsoft, Rockwell Automation and Salesforce under the same goal: to protect and empower civilians online and to improve the security, stability and resilience of the cyber space. Today, challenges make it important to have a global understanding of cybersecurity and its implications. We are aligned with the Accord's goal of providing the community with better information about current and future threats. We will continue creating digital products that put first security. In regard to our business, we have largely expand our portfolio, adding new logos such as Rockwell Automation, Eidos Montreal and Square Enix, among many others.
Let me also share a few examples of the new deals that show our consistent growth. Rockwell Automation selected Globant as a strategic software development partner to enable the digital transformation of the organization. The multiyear partnership leverages Globant Studios, Globant's product acceleration methodology and Globant's cultural transformation operating system to build the capabilities required to meet customers' most challenging expectations. Our expertise in the finance industry continues to grow. We have signed a long term agreement to BBVA Frances to accelerate their digital transformation in retail banking through new technologies and processes that will improve our customer experience.
For another leading bank in Latin America, we're working to transform their IT delivery area into an agile department. We're also supporting the expansion of this transformation initiative towards other division of the company. Also, we are working with a leading musical label to consolidate their music artist data between their internal data platform, social media and radio reproductions. The goal is to feed their current reporting system and do trends detection based on AI techniques. We're extremely delighted that organizations rely on Globant as they embark on a profound transformation.
The impact of our work is also recognized by prestigious awards such as the BIM Awards. Last year, we received 3 BIM Awards for the work we performed together with the London Metropolitan Police as part of their digital transformation. We won for transformation and consultancy in impact and the overall category. We also received the night biggest prize, the VIMA Advanced Grand Prix. These recognitions reflect the awards mission and they celebrate British digital work that pushes the limits across innovation, craft and impact.
Globant has also won 2 Comparably Awards of the Best Company Culture and Best Company for Diversity. Comparably releases a set of awards each quarter celebrating top rating companies and their leaders based on assessments by employees. These recognitions are a result of our commitment to our Globers. We take great pride in creating a workplace where people enjoy coming to every day that is being recognized by the community. Lastly, let me remark that our pipeline and backlog remains strong with a number of high potential new customers and several long term projects within our current customers.
We continue investing in our studios to remain at the forefront of innovation. We also keep expanding geographically to better serve organizations around the globe. We remain optimistic about our ability to deliver sustainable growth in the future. With that, I'll turn the call over to Juan Urthiague, our CFO, for a further detailed financial review on the Q4 2018 and also to provide guidance for Q1 2019 and for the full year 2019. Juan, please?
Thank you very much.
Thanks, Martin, and good afternoon, everyone. I will spend a few minutes taking you through the Q4 and full year 2018 results. Then I will talk about our outlook for 2019. Let me start by saying that we are very pleased with our overall results for the Q4 and full year 2018. Q4 was a solid quarter of revenues closing at $140,100,000 21.4 percent over the prior year and 4.1% over the last quarter.
Disney was once again our largest customer for Q4 2018 with remarkable growth. The account experienced a solid year with good perspectives of growth for 2019. Moreover, revenue for our top 10 accounts increased 20% over the Q4 of 2017 and revenues for customers 11 and beyond increased 22.5% over the Q4 of 2017. Our customer concentration numbers for Q4 remained fairly consistent with past quarters, with our top 1, top 5 and top 10 accounts representing 10.9%, 30.9% and 42.7% of total revenues compared to 10.4%, 28.5% and 43.2% of total revenue, respectively, for the Q4 of 2017. Our vertical diversification remained balanced across the different industries, with media and entertainment and financial services leading the pack accounting for 26.6% and 21.8% of revenues, respectively, and we continue to be well diversified in terms of customers and industries.
During the Q4 of 2018, 77.4% of our customers were in North America, the U. S. As our top country, 13.5% were in Latin America and others, Argentina as our top country and 9.1% were in Europe, Spain as our top country. During the Q4 of 2018, 85.6% of our revenues were denominated in dollars, protecting our top line against currency fluctuations. During the last 12 months, we render services to 373 customers.
Our 50 Squared strategy continues to drive growth, and we now have 5 accounts over $20,000,000 in annual revenues, 9 account over 10,000,000 and 90 customers with annual revenues in excess of $1,000,000 compared to $3,000,000 $9,000,000 and $82,000,000 respectively, 1 year ago. Turning now to profitability. We are seeing solid improvements compared to 2017. Our adjusted gross profit for the period increased to 58 $400,000 41.7 percent adjusted gross margin compared to $45,000,000 39% adjusted gross margin in the Q4 of 2017, also showing a sequential increase of 50 basis points compared to the previous quarter. The increase in adjusted gross margin was primarily driven by a higher revenue per head combined with FX tailwinds in most Latin American currencies.
We finished the quarter with 8,384 Globers, 7,821 of which were IT professionals, experiencing once again a record quarter in terms of net additions, with a total headcount increase of 577 employees. Attrition for the past 12 months was 18.2%, showing a sequential decrease of 100 basis points quarter over quarter. We continue to generate SG and A dilution. Adjusted SG and A decreased 60 basis points compared to Q4 2017, accounting for 19.3% of our quarterly revenue compared to 19.9% for the same period last year. Our adjusted operating income for the quarter improved relative to Q4 2017.
It amounted to $23,400,000 or 16.7 percent of revenues compared to $17,900,000 or 15.5 percent for the Q4 of 2017, a 30.9% year over year growth. Share based compensation expense for the quarter amounted to $3,400,000 This expense is mainly related to the plan of restricted stock units granted to certain key employees and directors of the company as part of our long term retention program. This expense represented 2.4% of revenues for Q4 2018 compared to 2.8% of revenues for the same quarter last year. Financial income and expenses net amounted to a loss of $1,500,000 This net result is mainly comprised of FX gain and losses resulting from monetary assets and liabilities in local currencies and interest income. Other income and expenses resulted in a $1,400,000 loss, primarily resulting from the remeasurement of investments in associates and contingent liabilities related to our acquisitions.
Our effective income tax rate for the quarter was 23.5 percent, in line with the average effective income tax rate for the full year. Adjusted net income for the Q4 of the year totaled $18,500,000 13.2 percent adjusted net income margin, an increase of $4,400,000 or 30.9 percent compared to the Q4 of 2017. Adjusted diluted EPS for the quarter was $0.50 based on 36,900,000 average diluted shares for the quarter, increasing from $0.39 a year ago. Let's now move to our full year 2018 performance. Revenue for 2018 amounted to $522,300,000 implying a robust 26.3 percent year over year growth.
We experienced good momentum among our 50 Square accounts, and we expect to see more benefits in the coming quarters. Revenue for our top 5, top 10 and 11 to the end accounts increased 40.1%, 32.5% and 21.9%, respectively, compared to the previous year, showing solid growth across the board. Adjusted gross profit for 2018 was very strong at $212,000,000 40.6 percent adjusted gross margin compared to $160,300,000 or 38.8 percent adjusted gross margin for 2017, an improvement of 180 basis points year over year. This significant improvement was mainly due to a combination of higher revenue per head and tailwinds from the FX currencies in Latin America. During 2018, once again, we achieved significant dilution in our adjusted SG and A as a percentage of sales, decreasing from 21.5 percent for 2017 to 20% in 2018.
We have been very disciplined in managing our costs as we gain scale, while we continued investing for the future, primarily to expand our sales coverage in the U. S. And Europe. As a result of this, our adjusted operating income for 2018 increased substantially to 16.1% of sales from 13.7% a year ago, an improvement of 2 40 basis points. Share based compensation for 2018 amounted to $12,900,000 2.5 percent of revenues compared to $14,500,000 3.5 percent of revenues for 2017.
This expense is mainly driven by our long term incentive program, as explained before. Financial income and expense net amounted to a loss of $5,600,000 This net result is primarily comprised of FX gains and losses resulting from monetary assets and liabilities in local currencies and interest on our investments and on our liabilities. This result was mainly driven by the significant depreciation of the Argentine peso during Q3 2018. Other income net resulted in a gain of $6,200,000 mainly related to the remeasurement of the contingent liabilities of certain acquired companies. This line item is adjusted for our non IFRS measures.
Our effective tax rate for the year was 23.5%, an increase versus 2017, mainly due to the impact resulting from the volatility of some currencies in LatAm. Adjusted net income for the year amounted to $63,700,000 or 12.2 percent of revenues compared to $46,100,000 or 11.1 percent of revenues in 2017. This represents a 38.4% year over year increase. Adjusted diluted EPS for the same year was $1.74 based on 36,700,000 average diluted shares compared to $1.28 in 2017 based on 36,100,000 average diluted shares. Moving on to the balance sheet.
Our cash and investments as of December 31, 2018 amounted to 80 $7,000,000 compared to $60,700,000 as of December 31, 2017. Our balance sheet remains strong with current assets of $214,000,000 accounting for 48.5 percent of the company's total assets. Total shares outstanding as of December 31, 2018 were 36,000,000 common shares. During 2018, we significantly improved our cash generation. Our free cash to net income ratio for the year reached 75%.
The cash that we generated was mainly used for CapEx and earn out payments related to our acquisitions. To wrap up, I would like to share with you our outlook for Q1 and for the full year 2019. Let me start with the demand environment and the implications for our revenues. We continue to be bullish in terms of our service offering, which we believe is fully aligned with market demand. At the same time, we are very optimistic with the progress we are seeing in our 50 Squared accounts.
Finally, hiring remains strong. With regards to our gross margin, we will stick to our long term target of 38% to 40%, we pointed out in the last few calls. We will continue our training programs in cutting edge technology and implementation of our 50 Squared strategy. We will continue margin very carefully headwinds from a temporary withholding tax in Argentina. So we expect our adjusted SG and A as a percentage of revenues to decrease 10 to 20 basis points compared to 2018.
Finally, effective tax rate is expected to remain in the 21% to 23% range. Now let me provide you with our revenue and EPS guidance for Q1 fiscal year 2019 and for the full year. Based on current visibility, we expect revenue for Q1 2019 in the range of $144,000,000 $146,000,000 In terms of adjusted diluted EPS, we're estimating a range of $0.45 to $0.49 assuming 37,100,000 average diluted shares outstanding for the quarter. Looking into the full year 2019, we expect revenues to be between $635,000,000 645,000,000 and adjusted diluted EPS to be between $2.10 $2.20 assuming 37,400,000 average diluted shares outstanding for the year. Thanks everyone for participating on the call and for your courage and support.
Let's please now move into the Q and A section of the call. Operator, can you please queue questions? Thanks.
And our first question today comes from Joseph Foresi from Cantor Fitzgerald. Please go ahead with your question.
Hi, this is Drew Kootman on for Joe. I had a quick question on the growth for the top 10 outside the top 10 clients. It looks like it accelerated while the top 10 decelerated. Could you touch on what you saw in those groups and what you expect moving forward?
Yes. Hi, good afternoon. How are you doing? This is Juan. So overall revenues increased 40.26 percent year over year.
When I look at our top 10 accounts, we saw 20% year over year growth during Q4. And when we look at customers 11 to the end, we see a revenue growth of 22% year over year growth. So I think that we saw good growth across the board in our top 1, top 5, top 10 and even 11 to the end accounts. So I'm not so sure which is the number you're looking at.
I was looking compared to last quarter. I think the top 10 accounts, let me see. I think it was growing like 38%.
Look, overall, I mean, we grew 21.4% overall in the quarter. I think that when we look at I mean, I don't have the number that you're looking in front of me, but the ROE would see 21.4 percent for all the company, 22% for 11% to the end, And as I said before, 25% year over year. So I think it's still very good growth. There is nothing really to worry about. We see we continue to see good growth among our top accounts.
All our high potential 50 Square names are performing well in line with our expectations, and we are confident that all next year.
Okay. And then for the Argentina tax, could you go in a little more detail? I know you mentioned 10 to 20 bps decrease in SG and A. I was just wondering if it will affect anything else or just any more detail around that?
Yes, yes. So the new Argentina withholding tax basically has an impact on the exports that we do from Argentina. Argentina is now about 35% of our headcount and about 20% of our costs. That path is basically ARS 4 for each dollar of exports. In the guidance that we provided both for adjusted EPS and also when I discussed our expectations for SG and A, we are already including the impact of that tax.
And I think that that tax should be around $12,000,000 to $13,000,000 for the year at this point.
Sounds good. Thank you.
You're welcome.
Thank you.
Our next question comes from Dantan Huang from JPMorgan. Please go ahead with your question.
Hi, this is Puneet sitting in for Tien Tsin. So Juan, you talked about seeing higher revenue per head. Is it more of a function of mix as you diversify away from Argentina towards more on-site? Or are you also seeing like to like price increases, which is driving higher revenue per employee?
Yes, yes. So we closed this year at $74,000 per employee, which is a 3% year over year growth. But if you look at the breakdown, and you would probably see those numbers in the presentation that we will post in our IR website tomorrow, you will see that actually the offshore share of the total headcount increased during this year. So this is actually this is not a mixed driven increase. It's actually driven by higher pricing, which is also driven by the demand of the services that we have in our service offering.
Understood. And then one question we often get from investors is potential impact of macro uncertainty on clients' digital spending. Are you seeing any adverse impact on client decision making or spending on discretionary digital projects at all?
Puneet, this is Martin. How are you?
I'm good.
Fine. The overall, I would say, feeling that we have in the accounts, as I mentioned, is that the pipeline is still very strong. I mean, I'm not seeing that macro uncertainty being translated into the forecast or the spending that our customers are planning to do. I mean, this is something that we are seeing now and we're seeing that as the current quarter is going on too. During Q4, maybe a little bit of less of the high, high traction that we had on the previous quarter.
But I think that the overall it was pretty stable. And now I'm seeing the pipeline very, very strong. And in essence, remember, the digital demand is not coming from the company itself, but from their consumers pushing them to the changes or with the threat of changing the brand if they don't like it. So that demand is very strong. It's not based on just cost reduction, but on expansion of revenue.
So I don't see any change on that demand given the uncertainties that you mentioned. But I feel they are a little bit they are a little bit reverted already. So I feel good about that.
Got it. Thank you.
Thank you, Puneet.
Our next question comes from Ashwin Shirvaikar from Citi. Please go ahead with your question.
Thank you. Hi, Martin. Hi, Juan. Good afternoon. Good afternoon.
Hi, Martin. Hi, hi. Congratulations on the results. I want to start with asking about the growth forecast. So when I look at the 1Q top line growth estimate versus the full year, there is a slower growth on 1Q than the full year, and it seems to be because of the tough comp that you had.
But I want to confirm that there are no other factors. And also, I missed what you might have said about the Abraxo inorganic impact for the year.
Yes. I would like Juan to cover the Abanxo inorganic impact. I will cover your first question. When you're comparing, we're comparing against a pretty good quarter 4 in 2017. So Q4 2018 is compared against a very good quarter in Q4 2020.
So the comp is very complicated. But if you normalize that growth, it will be around 25%. If you normalize the growth of the of last year and compare the growth of the last quarter, compared with that, you will get about 25%. So it's nothing strange here. We're getting tough comps given the volatility on our growth rates during last year.
So nothing that is connected to the business itself. It's plain execution and pretty tough comps compared to Q4 2017.
And also to add on that, Ashwin, we are really happy with the acquisition that we did with Avanxo. We very interestingly, we have already seen actually already 3 contracts that we closed together with them. It actually brought additional capabilities into the company and our regions and all the business units that we have, have taken process together. So when we look at Avanxo and considering that, there's going to be a lot of a very quick integration between the two companies. Basically Avanxo is a company which came with about 300 IT professionals, all of them located in offshore locations, mostly Colombia, Chile sorry, Colombia, Mexico and Brazil.
So I think if you do the math with the offshore revenue per share and then you use utilization and all that, you would probably arrive to a number, which is about 200 basis points for the year.
Got it. Understood. And then the question I had was, it's about 6 months since the WPP ownership stake was sold or since WPP sold its ownership stake. I'm curious as to whether you are beginning to see any sales momentum at WPP's competitors as far as the digital advertising type of services? I know that before they acquired the stake, you used to have good relationships with some of the competitors.
So can you talk about that market?
No. We didn't change our behavior. Now before, we were trying to get the customers they get as part of the family, and now we're trying to get their customers as not part of the family. So I mean, it doesn't change anything. We're not seeing very often WPP competing in the technology space as we are doing with any of their companies.
So overall, no in terms of the business. And of course, we're not being we were not being refrained and we are not being refrained from trying to compete for those customers.
No, I meant competing for, say, business from Omnicom and IPG and companies like that. That's what I meant, not from
Honestly, on the customers we have and potential customers that we are competing, we are not seeing them at all. I don't know. This is just my situation right now. Maybe the next quarter we see them. But right now, we're not seeing that.
Okay. Thank you for your update. Thank you. Thanks.
Yes.
Go ahead. Thank you so much.
Thanks, Justin.
Our next question comes from Maggie Nolan from William Blair. Please go ahead with your question.
Hi, good afternoon. You guys are talking positively about demand and you gave that strong guidance for the year. And I know you're coming off of strong pricing and rev per head in 2018, but does this perhaps imply that you're expecting higher price increases compared to last year?
I think prices will remain pretty stable during this year. I don't see any upside on that specific side. Yes, we'll continue trying to gain more and more efficiency on the SG and A, of course, on our gross margins and looking for efficiencies everywhere as we always do and as we have been doing since our IPO when we did 32% on SG and A and this year we're doing 20% on SG and A. So this is a representation of what we of our mentality and how we like to conduct our business. In terms of pricing, of course, we can always try to increase them and to be better at that.
I would not expect it in a consistent manner to happen during this year.
Yes, there is no pricing baked to the guidance, no need.
Okay. And then as you look forward to your plans for 2019, how are you expecting that headcount diversification initiative to play out? Or how are you expecting to progress against kind of that goal you've laid out of having each location below 25 percent?
Yes. So right now, we have our operation in Latin America, which is still the largest operation that we have. Within Latin America, you are seeing Colombia growing very fast, Mexico growing very fast, and then some other smaller countries growing as well. And then you see Argentina growing at a very at a much slower pace and becoming smaller as a percentage of the total. Right now, Argentina is about 35% of the total.
Colombia at 25%, became the 2nd largest location. And we see LatAm overall today, LatAm is overall about 80% of our headcount. We see that going slightly down over time. And we see India, which is right now 12%, growing to between 15% 18% over the next 2 years. And then we have a very small recent operation in Eastern Europe where we are starting there, and we want that to start showing into the headcount map over time.
Then the U. S. And Europe, we continue to want to have those locations combined between around 12% of our headcount. So that's overall what we are looking for.
Very good. Thanks and congrats.
Thank you, Maggie. Thank you, Maggie.
Our next question comes from Avishai Kantor from Cowen. Please go ahead with your question.
Yes. Hi. Can you give us maybe an update on the traction in the early days of the services over platform offerings? And maybe you can share some internal goals, what should how should we look at revenues, let's say, 2, 3 years from now coming from that platforms offerings?
Yes. I think the traction overall is very good. I mean, we are receiving the customers that we are doing every that we are visiting and the customers that this platform is opening for us is really very, very interesting because once you enter there, you get coverage. I mean, pretty much everybody knows you. And when everybody knows you then doing business inside those accounts is much easier.
So it opened doors. It generates more awareness about our brand, and those things are extremely important. In terms of growth of the platforms, last year, it was about 1% of our revenue, and we have the expectations in the next 4, 5 years to for that to become about 5% to 10% of our revenues.
This is
something that we have as an internal objective. It's not something that we will disclose year by year. But our objective is for that to become a pretty consistent part of our revenue and our strategy of growth because when we enter into an account selling some of the plans we have to enhance the culture or to change or evolve the culture into digital culture, then the most probable scenario is that they end up buying other things, which are our traditional services, and that's very profitable for us. It's a very, I would say, it's an excellent way to enter customers that we have discovered. So we're very happy with the initiatives, and we will keep on pushing more and more things on our platforms to be successful.
Okay. And then regarding the strong growth at your top client, is that coming from the park side of the business? Is that driven by the studios and media side of the business? Is that a combination? What's really driving that what seems to be very strong growth in the last few quarters?
Yes. Last year, Disney had a great performance. It grew about 40%, which is pretty impressive for a certain account of this size. We don't expect this to keep growing forever at 40% a year. So as you may imagine, this is something we need to be very careful about.
But this is very healthy, the relationship and now the expansions that they are getting with the acquisitions that they are doing is something that will impact us in a very positive way. But we need to be careful with that. I think the growth is coming from everywhere. I mean, all the accounts like the one that I just announced Rockwell a few minutes ago on my speech, Robert will be a pretty good account, a pretty solid account in the next few quarters. And growth is coming from hunting and from farming and from many different if you see how we are diversified across many industries, you will see that the balance among many different verticals is very good and has been very good in the history.
That means that our growth comes from media entertainment, financial sector, travel and leisure, now manufacturing, also from well, from every segment that we have pressed in. So you see there like the common factor there is that the need is across the board. The need is across the board. The need of a company like LoRaWAN is across the board. So I will not mention, Avishai, a single line or customer or industry that is pushing more than others.
Understood. Thank you very much for the detailed answer.
No problem. Thank you, Vishay.
Our next question comes from Moshe Katri from Wedbush Securities. Please go ahead with your question.
Thanks. How should we think about wage inflation in 2019? I think you've indicated where Argentina is in terms of total headcount. I think we've been waiting for the reform party to kind of contain wage inflation. Maybe you can talk a bit about that.
And then how does this affect non GAAP EBIT margin? I think the EBIT margin number in Q4 was very, very strong. Maybe some color on that as well. Thanks.
Yes. Hello, Moshe. How are you doing? This is Juan. So right now, the company is much more diversified.
Hence, Argentina being at 35% of headcount and about 20% in terms of costs, it's now less of an issue. In the past, inflation in Argentina had may have a significant impact on our numbers because we had about 50% or 70% at the time of the IPO of our headcount in Argentina. But the strategy to pursue diversification that we followed during the last 4, 5 years now put us in a much bigger situation. Having said that, Argentina is expected the inflation that the government is estimating for the year is about 25%, which is, of course, the highest inflation that we will have across the board. And then for all the other countries, we are talking about single digit inflation.
Maybe India could be about 10%, but all the other countries are going to be about 3%, 4%, 5% for the year. We believe that we still have room. I mean, currencies continue to depreciate. The dollar is very strong. So we believe that the impact of solar inflation will be offset by currency depreciation in most countries.
And in the case of Argentina, what we have already done was hedging for the first half of the year, basically selling dollars forward. So we are covered for the first half of the year in the case of Argentina.
So what sort of
FX tailwinds are factored in your guidance for the year in terms of percentage points?
No, we don't have any more tailwinds there. What we have is basically the assumption is that FX will whatever happened with FX is going to be offset by currency sorry, by inflation. So net net, we expect not to have neither benefits nor headwinds coming from FX on our margin. And
the non GAAP EBIT margin for the year?
We don't write that number, but I mean, what I guided was 38% to 40% gross margin, and I also guided about 19.8% to 20% SG and A. So that minus our D and A, which is going to be in the same range where we are today, will give you your operating margin number.
If you
do the math, it should be about 16%, something like that.
Okay, understood. Last question, Martin was talking about this, I think, last year. You have been looking at expanding more into Europe, and it's been an initiative that's been kind of a multiyear initiative. Where are we in that ongoing effort? Thanks a
lot. I think we're in very good shape. The business in countries like Spain and England has propelled a lot, plus now we have also the inclusion of another delivery center in Eastern Europe. So we are preparing to cover that in a pretty efficient way from those centers in Eastern Europe and the business is structuring very well, I would say, in 3, 4 countries in Europe. So revenue is growing in a pretty healthy way.
The engagements and the quality of engagements are really surprising in terms of what we are proposing to our customers, right? Full transformations and full like you cannot make a digital transformation if your culture is wrong. So at some point, if you want to do a digital transformation, you need to change your culture to change the whole thing. So we're seeing those kind of engagements where we can help those organizations to transform the culture, to do the digital transformation, to take them to the next level in a much more holistic approach than in other regions. So we're really very well surprised and very happy with the performance of our Europe team.
Great. Thanks. Thank
you very much. Thank you
very much.
Our next question comes from Frank Atkins from SunTrust. Please go ahead with your question.
Thank you for taking my questions. I wanted to ask first, nice progress on the cash flow conversion. Can you talk about a little bit how far there is to go on that? And what are your goals for cash flow conversion improvement as well as CapEx going into this year?
Yes. Thank you for your question, Frank. Yes, I mean, free cash generation was probably one of the highlights of 2018. Free cash to net income is about 75%. Free cash to adjusted net income is about 61%.
And that's pretty much doubling from the numbers that we had in 2017. So strong progress on free cash generation. For this year, our expectation is to stay at similar levels where we are today. We think that the number that we achieved during 20 16 18 was really very solid for our company. We expect CapEx to come down as a percentage of revenues a little bit more.
I mean, now we are being much more efficient in terms of CapEx. The size of the offices that we are building helps us a lot in terms of making some efficiencies in that CapEx spending as well as when we are negotiating contracts for laptops, for computers, for licenses, given that we are getting more scale, the per person or per seat cost is actually getting lower. So free cash, we expect it to be at similar levels where it was in 2018. And that might be held a little bit for from lower CapEx as a percentage of revenues. But it was one of the highlights of the year.
We are very happy with that number.
Okay. That's great. And can I ask a little bit about a sales force update? Can you give me a little bit of color in terms of how well you're staffed and how are the skill sets and staffing by studio, by region and then kind of the balance of farming versus hunting as you look into next year?
Yes, sure. We are very focused now in our regions. We have been expanding our coverage in a pretty systematic way and reinforcing those regions that we have within the organization to have the right coverage. The sales investment that we plan, although we are diluting SG and A, the S is growing, and we're planning to keep covering more and more customers and to get deeper into and closer expanding our teams in the U. S, our teams in Europe, our teams close to where we generate the revenues.
So the overall action is that also we are thinking that it's not just the sales guys that the ones that really cover the account and get the deals. I mean more than half percent more than half of the time deals are coming from our delivery teams. The teams are close to the customer, understanding what happened there, so on and so forth. So we are now like making this kind of transformation where we are pretending to have a much deeper sales force getting close to our customers. But that sales force not necessarily are traditional salespeople, but in essence, delivery people on the technical side, on the pressure management side that understands very well how the customer develops and are able to detect those opportunities and transform them into real business.
So this is the approach that we are having today. We're investing a lot of money there, not just on the sales force but also on the delivery side to have much better and deeper coverage. And that's reflected as a result on the growth rates that you are seeing in the top 10 and non zone top 10 accounts. So the 50 square program is still extremely important for us. We still believe and we have already the 1st customer that is in the $50,000,000 range, which is a huge achievement for us, and we'll keep on adding more customers to hopefully to that list.
And this is the update. We are investing a lot of money in improving that coverage.
Yes. Frank, just on that. In terms of hunting and farming, as you know, we have been focusing a lot on farming. And the farming number for 2018 was actually very, very high, close to 94%. So most of the revenue that we generated last year actually came from farming.
And we think that, that is a direct consequence of the 50 Square program. But again, as Martin said, we continue to hand some great logos and we will continue doing so as long as we believe that those accounts have high potential for the company.
Okay, great. Thank you very much.
Thank you, Frank. Thank you. Our next question comes from Arvind Ramanay from KeyBanc. Please go ahead with your question.
Hi, guys. Thanks for taking my question. I just wanted to circle back on the studios you all have talked about and that's kind of central to your strategy. Are you able to share some specific metrics on the studios? Specifically, what I'm looking for, which of your studios are the largest?
And also then which are the ones which are growing the fastest?
Well, we're seeing growth in many different studios. Some small studios are growing much faster and some big studios that are growing slower because they are already big. So I think that the studios are managing pretty much all our talent. And as you know, there are deep pockets of expertise on the different areas that we are discovering. For example, we're seeing a lot of growth on the artificial intelligence studio.
We're seeing a lot of growth on the mobile studio. We are seeing also on big data and the consultancy studio where ideation takes place. And we are seeing some other studios like, for example, the new sales force studio that we got together with Avanxo, the cloud computing studio that are growing a pretty consistent manner. Although the performance is not stellar, those studios are very consistent year over year in the growth. So I think that also there are some other studios like cybersecurity that are pretty new and they are growing very, very fast because they are very, very small.
But also, I think that there are some other studios, like for example, gaming, which are very performing in an extremely great way, although the gaming industry itself is not booming, so it's not growing that fast. So there's a blend on performance, but little bit slower. So but then, for example, you have a future of organizations and our actual delivery studios. Those studios are rocking because they are present pretty much in every single proposal that we are doing. And that's something that companies really understand that need in a very deep way.
So this is an overall perspective of the studios and how they are performing.
Great. And from my understanding, your studios are not restricted by geography, right?
No. No.
No. Okay. And just to kind of follow-up on a question Maggie had asked earlier around this kind of expanding outside of Argentina and kind of with LATAM still being kind of an important geography, do you all feel like pretty good from wage inflation and FX perspective? Or is that something you all feel you'll need to still manage a little bit carefully?
Look, as I said, you know, higher inventory leases Juan. So Argentina, when we went public, represented 70% of our headcount. So we had a really exposure to whatever was happening in the macro over here, right? But now when we look at Argentina in terms of headcount, it's about 35%, and it's going to become even less in the upcoming quarters as a percentage of the total. We are much more diversified.
So and also, if you look at what's happened with the currency last year, it actually depreciated quite a lot, quite significantly. So overall, even though there might be some wage inflation in Argentina, the fact that Argentina is smaller and that we already have the tailwind from the depreciation last year makes us feel comfortable in terms of our gross margin expectations for Argentina and also for the region. When we look at all the other countries in the region, Mexico, Colombia, Chile, even Brazil, much more stable economies, you don't see the currency moving a lot. And typically, the currency depreciates a little bit with the dollar, and that helps us to offset the impact on salary increases that you have. But they're always talking about low single digit numbers.
So that's not an issue. So inflation right now is becoming less of an issue for us, especially because the only country where we face high inflation is becoming less relevant in the overall headcount structure that we have.
Great, great. And then just last question for me is kind of more about the kind of opportunity in SaaS and cloud. And there's certainly a view that the last kind of Chapter 1 of cloud was driven mostly by consumer facing apps and the public cloud and the next phase of SaaS and cloud will be driven more from the back end systems and then hybrid cloud. Just want to see if you all agree with that and are you all kind of repositioning your kind of capabilities to take advantage of that trend?
Yes. I think when we go to the customers, we equally listen about private and public cloud. And it's something that really is picking up our attention on how companies are kind of in some aspects doing some backlash to the typical cloud, but also the concept is very but the concept, although that is very strong. So they are trying to perform the same capabilities that they have using private clouds with their own within their own domain or within their own control. But we see the cloud movement in a pretty strong manner.
We are heavy users and most of our customers are heavy users of the cloud. We see a massive competition coming from the main players to fight for the leadership on that space, which I think is really attractive for the customers. And we see big savings also coming from the cloud. So the hybrid model is great. The private model is great.
But I think the concept independently is private, hybrid or public is the strongest part and what you need to pay attention to and what we are paying attention in our cloud studio. Connected to this, there's a lot of cybersecurity issues that need to be taken care. So it's like our cloud studio is very well connected to our cybersecurity studios because things happen where things are out of control and those 2 studios need to work together to keep the things under real control. So that's my take on what's going on right now with my customers. I don't know if that answers your question or not, but this is what my understanding of the reality right now.
Great. Thank you very much and good luck for 2019.
Thank you so much. Thank you so much for your question.
Ladies and gentlemen, that will conclude today's question and answer session. I'd now like to turn the conference call back over to Martin Maguire for any closing remarks.
So thank you very much everyone for participating in our call and looking forward to see you on the next one. Cheers. Bye bye.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.