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Globant (NYSE: GLOB), an IT consulting major, soared 60% since the beginning of this year, compared with the 5% gains for the S&P 500, keeping investors very excited. Globant is an outsourcing company that uses technology to incorporate various mobile apps, software products, and sensors that empowers the clients to decipher the cognitive behavior of users. Globant discovers the user’s ‘digital journeys’ and builds platforms based on that.
Second-quarter revenue beat expectations
The company’s second-quarter results have been mixed. Globant’s revenue climbed 16% year-on-year (YoY) to about $183 million. However, the company’s margin was under pressure. Its gross margin slid to 36.2% on account of increased hiring of professionals.
This in turn also impacted its net margin which was 5.5% compared to 8.5% in the same period a year ago. The company’s earnings per share also dropped to $0.51 as against $0.53 a year ago.
However, its revenue and earnings surpassed analyst expectations. This has been a trend for the past two quarters which is quite commendable considering the ongoing coronavirus crisis. Due to the new normal, the company has clearly benefitted from the growing demand for AI and enterprise customers migrating into the digital space.
Encouraged by its second-quarter performance, the company has predicted a higher expansion rate for the upcoming quarter. According to Globant, its Q3 revenue is likely to surge more than 18% and reach $203 million.
A strong base of few but loyal clients
One of the strengths of Globant is its loyal base of customers. The company enjoys a steady stream of revenue from its loyal but small base of customers. Disney (NYSE: DIS), Globant’s biggest account, contributed 11% of its revenue in the second quarter. The top five customers accounted for 32% of total Globant sales in Q2.
Interestingly, the company has a 50-squared vision, according to which it targets that 50 different customers would account for $50 million in yearly revenue, each. Even before Globant could achieve this target, it also has set another target of "100-Squared". On the same lines, this is the company’s objective to earn $100 million in annual revenue from 100 different accounts.
The fact that the top 10 customers of Globant other than Disney, such as Southwest Airlines (NYSE: LUV) or Alphabet’s Google (NASDAQ: GOOG) are the ones with good IT spending power and should act as a tailwind amid an imminent recession.
The company’s customer base is constantly expanding. In 2019, Globant’s customer base stood at 822, more than double from 373 in 2018. Media and entertainment contributed nearly 24% of its revenue, followed by the banking and financial sector accounting for more than 20%.
Diversification in client base and revenue growth is a must
However, on the flip side, we feel that going forward, Globant must also move away from putting too much power in the hands of a few customers. The company must diversify its customer base and must work more towards creating long-term alliances with enterprises who have just embarked on their digital journeys.
The current COVID-19 crisis has led enterprises to trim their IT spending. However, things are poised to change. While Gartner says that the global IT expenditure will drop 8% in 2020, and regain momentum in 2021. After the lockdown eases, companies will recover their revenue level and increase spending on IT infrastructure and digital transformation processes.
The company has already increased its workforce owing to the constantly growing demand for projects. An exodus towards digitization is most likely to benefit Globant in the long term. Even market analysts are upbeat on the stock. Piper Sandler boosted its price target on the stock to $193 from $181 with an ‘Overweight’ rating.
For now, the stock could face some volatility, however, in the coming days, it is likely to see increased benefits. This could also result in the company seeing better margins in the future.
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