Episode 7: Globant

Kevin 0:01
Welcome to What Matters Most, Sands Capital’s podcast series in which we explore some of the trends and businesses that are propelling the pace of global innovation and changing the way we live and work today and into the future. Today, we are joined by Sr. Research Analyst Eric Black. And we’ll be discussing an Argentina-based business that sits at the intersection in the global digital economy between large corporations, software as a service, and other enterprise software providers. The company is Globant, the world’s largest pure-play design-led digital services provider. Eric’s research into global digital transformation uncovered a number of strong players in this dynamic and rapidly growing sector. In the end, Globant rose above the competitors for a number of reasons. Chief among them is the company’s laser focus on design. We’ll be exploring that advantage as well as what other aspects of the company make it special in today’s podcast.

Eric, thanks so much for being with us today. I’ll let listeners in on a little secret: Eric is joining us from our offices in London. So, Eric, I’m really excited to dig into this business with you. We don’t usually get a lot of questions about Globant from clients. It’s kind of a lesser-known business. So this would be a great opportunity for me and for our listeners to get more familiar with this space in general and then Globant’s position within it. Let’s go ahead and get started.

As we usually do, before we zoom in, let’s talk a little bit about the key nexus—that intersection, or nexus, as you call it—that intersection, as I described it. Give us a brief overview of what Globant does in a nutshell and a little bit more about the landscape that it operates in. What are some of the trends, tailwinds, or shifts we’re seeing that brought this to your attention in the first place?

Eric 1:43
Kevin, thanks for having me. I love talking about Globant. It is a company that, to your point, flies under the radar a lot and that we find very exciting. So Globant, at its core, is an IT [information technology] services company. Its clients are large, multinational companies—Fortune 500, Fortune 2000 businesses—that use Globant as a partner for tech-related projects.

Now, what makes Globant a little bit unique compared to some other companies is they don’t really compete on price primarily; they compete by adding value with cutting-edge technologies for their clients. So I think a lot of times people assume, especially in the West, that all IT service companies are labor cost arbitrage models, where you’re really trying to get low-cost labor in developing countries to compete on price and try to grow your business that way—by having international clients just cut their costs and give you their business. Globant is what’s called in this industry a “digital native.”

Globant was founded in 2003, after the dot-com boom. And that started off with a focus on high-end technologies, advanced technology at the time. So their original niche (and still the core of the company) is consumer—or user experience, I should say—a kind of digital interface. And they use that niche to grow a full suite of digital services—capabilities that allow it to provide advanced technological help to large clients.

Kevin 3:14
So I’m going to stop you there for a second, before we dive too deeply into the company. I’m going to guess that people listening to this podcast have actually used one of their services, especially if you’ve been to a theme park or maybe taken a cruise or something. Am I right in assuming that? And if so, describe what that is. Again, I think that’s really the interesting part of the business here.

Eric 3:40
Exactly. This sounds all theoretical, very theoretical and abstract. But one of their most famous products is something called the Disney Magic Band. So if you have a child and have been to a Disney theme park or cruise, as Kevin was alluding to, in the last, I think, five years, you’ve probably seen what this is. It’s a little band. It looks like a watch with the Mickey Mouse ears on it. But what it does is it allows—it syncs up to a digital profile for you and your family. So it ties to your credit card. It ties to any line passes you have reserved. It lets you get in and out of your room on cruises or hotels or resorts. And if you go to certain parts of the park, it’ll interact dynamically with, you know, statues of Mickey Mouse and things like that. And it might sound kind of simple, but this is an incredibly complicated device to build, maintain, and constantly tweak and update. And it’s become a key cornerstone of the Disney park experience. So yes, it’s a great example of the kind of thing Disney would use going forward.

Disney, at its core, is not a tech company, even though I’m sure they have a lot of technology people on staff and programmers on staff. They will get an expert firm like Globant to design, build, and maintain this. And when they do a good job for a company like Disney, they get more work. So Globant’s recently been helping more on Disney+, trying to make the technology and user experience there better also. They’ve worked for ESPN.com and ESPN’s apps. So they’re one of these companies that behind the scenes helps you enjoy Star Wars and the Marvel Cinematic Universe.

Kevin 5:14
Yes, and I’ve noticed those companies all have an expertise in a particular area, maybe not in tech or the digitalization of their user experience. But there are some companies I noticed in Globant’s customer lists that are tech companies. So what is Globant bringing to the table that those companies need that they can’t do themselves?

Eric 5:40
You know that there’s a common misconception, sometimes at the tech companies, that the tech giants do everything in-house. So Google has been a top client of Globant since 2006. And even for the big tech companies, there’s always going to be the need to flex up and down on certain projects, which doesn’t make economic sense to have yourself staffed fully for every potential project or skill set you might need. And there’s an element of wanting to work with other high-quality groups of programmers for that kind of outside second opinion.

As you can imagine, at an enterprise level, you’re very selective about who you let in-house to look at the things you’re working on and get a sense of how things work under the hood. So once you have a relationship like that, like Globant does with Google, they become—maybe counterintuitively—more valuable to Google because they’ve got an established knowledge of Google’s inner workings and the trust. And so yes, they do basically the same thing they do for Disney for Google, just on a—you can imagine—maybe a different level, a different set of projects.

Kevin 6:40
Yes, so that’s interesting. So again, I took us right into the weeds faster than we probably should have. Maybe step back a little bit and explain how Globant—I mean, you told us what their product is, but how did they make money? How did they earn, you know, an above-average rent in their industry?

Eric 6:58
Sure. So the basic financial model of this company is quite simple. You know, their business model is like a consultancy. They charge time and materials for the staff they lend, you know, lend to a client. So it’s a pretty simple business model—that way is a revenue per head, cost per head. And then you have some back-office costs that actually, as you scale up, those follow a percent of revenue. So it’s quite a simple business model.

But what’s really interesting is—even though these are time and material contracts and not officially recurring—in practice, they are recurring, I would argue. And the reason for that is the world is becoming more technology-dependent. Technology, as we know, is changing at a rapid pace. For every company, in every sector, you need to be managing your data properly; you need to know the cloud; you need to be understanding what AI [artificial intelligence] tools are available and how to use them. So once you have a trusted partner who can help you with some of that, you tend to give them more work. And the projects that they work on tend to grow in scope. There’s pretty much always more to update, always more to make more secure—cybersecure, you know—always more data to analyze. So that’s a basic type of material business model.

Kevin 8:17
Yes, so it allows, you know, even the tech businesses to focus on what they’re good at and let Globant, as you’ve commented, do the work of a consultant. I think that that’s really an interesting angle on the business, for sure.

You mentioned AI. We’re a few minutes into the podcast. I think we were very conservative, but we mentioned it. So take us through the AI angle here. What is Globant doing generally or specifically for some of their clients in terms of AI? I see that they’re involved in the healthcare industry and drug development industry as well with AI. I don’t know if that’s relevant or not, but maybe comment on some of the things they’re doing.

Eric 9:00
You know, a big debate about these companies in general—these IT services companies—is AI a tailwind or a headwind for them? Right now, how much of their work gets disrupted by AI, and how much of it just creates more work for them to do? And our view is that actually, the industry is getting divided into two groups: First, there are those that do lower-end work like call centers where AI is probably net a headwind for the company and going to disrupt a lot of what they do. But for companies like Globant that, again, are in the higher, more cutting-edge technology services and have an expertise in AI, this should be a tailwind that just gets them more work.

Globant’s been considered a thought leader in AI since the mid-2010s. They began publishing books about how AI can transform your industry back then. I’ve one on my shelf right here. And what Globant has done over the last several years is develop its own AI platforms and tools to use internally that it’s now selling to clients as an example of some of the things they can do. So one example is a tool called MagnifAI, spelled with AI at the end to be cute. But it allows for the testing of software—or testing of coding, excuse me—to be done automatically by AI and really helps the programmer.

They also, to your point, Kevin, have a number of healthcare clients, where they’ve already helped many of those clients build internal tools and data management capabilities. They’re now bringing their expertise in AI and their AI-trained programmers to try to speed up drug development and trial new ways to use the data their clients have to make their own processes more efficient.

Now, it’s all early days for all these projects. But it is real. And if you watch Globant’s earnings calls, they’re actually started off by AI-generated versions of the CEO, COO [chief operating officer], and CFO [chief financial officer] that look and sound like them that go through all the numbers. So AI is real, and they’re trying to be ahead of it.

Kevin 11:04
So you know, again, this is a big market, for sure. But I think it’s one of those markets that kind of— or technologies that—operates in the background. Like insurance, you don’t know you need it until you need it. Consulting helps businesses in kind of obscure and not always front-page ways. I know this isn’t kind of a pure consulting business.

But talk about how you came across the whole idea of digital transformation. I mean, walk us through your research process here. What got you into the general space and interested in it? And then, what, as I mentioned at the beginning, caused Globant to rise above the other players there?

Eric 11:45
So you know, we like to say at Sands Capital that good ideas can come from anywhere. And this one came from our colleague and former podcast guest Danielle Menichella’s family trip to Orlando. She had used the Magic Band, loved it, and learned that the company that made it was publicly listed at the time when we were looking for new technology ideas in emerging markets. And so she passed it on to me.

You know, when we first started looking at the sector, you know, IT services, to your point, it’s in the background and didn’t sound exciting. But the more we dug into it, the more we actually think it’s a favorable industry for long-term growth businesses. So first off, just so everyone’s clear, according to Gartner, IT services is a $1.5 trillion industry or will be in 2024. And the overall industry is expected to grow at a 10-ish percent CAGR [compound annual growth rate] for the next five years. Again, according to Gartner.

Now the subsegments where Globant is involved—digital transformation, cloud services, AI—are expected to grow faster than that. Right. And what’s interesting is—this is a highly fragmented industry, by the way, as you can imagine at $1.5 trillion—at the top-tier level (you know, what are considered tier one and tier two vendors for large multinationals, Fortune 500, Fortune 2000 companies), it’s actually quite oligopolistic.

So at that level, clients prefer to work with a handful, usually mid-single digits—three to five—tier one vendors and a slightly longer list of tier two vendors. And that’s who they prefer to do business with over time. Those relationships tend to be very sticky. There’s a lot of trust involved, and trust is required in this industry. Consistency and track record are important.

And what’s pretty critical is these players will generally not primarily compete on price, right? So what matters most to the decider of who you work with, which is usually the CIO [chief information officer] or project manager, is: Will you get me the project on time? Will it work? Will you be there if something goes wrong? It’s a, you know—It’s not primarily on prices, the CFO is not making these purchase decisions usually. So as we learned in our initial reading on this industry, you know, it’s large, but it’s oligopolistic. You have a few big winners, and they tend to scale up with their clients. And usually, if they stay on the cutting edge of technology in whatever their niche is, they tend to grow and evolve for many, many years. And so our initial work on this company after Danielle flagged it was really to understand this industry, understand the dynamics—the growth dynamics and competitive dynamics—and see if it’s even an attractive place to look for good businesses. You know, much of this is before we even had a strong view on Globant.

Kevin 14:32
So interesting. OK, so it makes me think about my experience with not necessarily digital transformation but companies back years ago before digitalization of stuff. A lot of the consultants were pushing CRM or client relationship management suites of software mostly on premises before Salesforce moved to the cloud. And, I remember, I don’t have the exact statistics here, but the failure rate was significant in terms of installation versus whether it’s actually used post-installation. I worked for a large Fortune 500 company before joining Sands Capital a long time ago, and they spent years and millions of dollars putting in an on-premise client relationship management suite of software from one of the big vendors. And the day it went live was the day they started shutting it down. Tell me, you know, is that the same kind of path to product development in the digital transformation world? Or do these things more likely, more often than not, succeed and do what they say they’re going to do?

Eric 15:49
I think one thing: that’s I love that anecdote. But Globant has, you know, a negligible amount of client turnover in its book. You know, most of its top-20 clients have been partners for over a decade. And it’s very rare that Globant loses a client that’s not of its own volition. So you can see that is an indicator of what Globant does works, or you’re not going to keep them around.

But also, digital transformations, in many ways, and the way Globant operates is structurally very different from what you’re describing. You know, they really have embraced the kind of agile development methodology that is in the news and in headlines a lot a couple years ago. But really, they do a scrum-based approach where they cross-train teams in different skill sets into small groups of five to seven people and attack projects bit by bit, often with constant or near-constant communication with their client. So there’s a lot of flexibility to adjust what isn’t working. So this isn’t a type of work where Globant just goes into a dark room, works for three months, and comes out with a product that doesn’t work. That is antithetical to the way this company operates.

Kevin 17:04
Does that tie in with the design-first philosophy?

Eric 17:09
We think so, and I think management would argue that as well. But also, I think they just see it as necessary. You know, I think one of the challenges of the increasingly digital world we’re living in is everything’s changing all the time very rapidly. And you do need to constantly test what you’re building with the available data, with reality, with hardware, with your staff, or your client. So you do just need to be agile. So that old methodology of on-premise, here’s a packaged software product, it’s one-size-fits-all, doesn’t—it’s not what Globant does. Those companies still exist, but that’s not what you hire Globant for. You hire Globant to build some custom solution that works best for you.

Kevin 17:52
Let’s talk a little bit about the pandemic. You know, it’s kind of in the rearview mirror for the most part, at least the painful parts of it, but is it fair to assume that Globant got a bit of a boost during the pandemic because a lot of companies that thought that we don’t really need a digital presence, we don’t really need to connect with our end clients other than in person, all of a sudden realized, you know, if you’re not staying in touch and through whatever means available, you’re going to lose those customers. Was that a fair thesis? Did they get any kind of a bump or bonus during the pandemic in the work?

Eric 18:31
The pandemic, you know, as tragic as it was, was a massive tailwind for Globant and for the industry overall. To your point, there were some things…According to Morgan Stanley’s CIO surveys, only around a third of CIOs the year before the pandemic in 2019 thought migrating to the cloud was not a high priority. As you can imagine, during the pandemic, that had fallen to, you know, whatever, 20% or less, I can’t even remember when the number has fallen so precipitously. You know, a way to look at it is: Before, in 2019, before the pandemic, Globant ended the year with just under 12,000 employees. And at the end of 2021, it ended the year with just under 24,000 employees. So that was a huge acceleration in demand in that area that had been growing already. But absolutely, it was a massive tailwind.

Kevin 19:23
Yes, that’s interesting. This—the growth is interesting, but talk a little bit about their employee footprint too—I mean, they’re not just located in Argentina. I imagine they’re throughout the world close to their end client, or how are they? How do they attack this global marketplace?

Eric 19:42
Yes, so Argentina is where their headquarters is in Buenos Aires. That’s where the senior management team, by and large, sits.

Kevin 19:49
Why is that? Why Argentina?

Eric 19:53
The founders are Argentine. It’s a great city, good steak. I don’t know. But they’re from there also, so a lot of reasons to stay. But Argentina is today around 19% of their headcount. But most of the company has gone outside of Argentina. Colombia is around just over 20% of headcount as of last quarter, India’s 15% of the company and growing, the rest of Latin America outside of Colombia and Argentina is about 30% of headcount. And then 15% of their staff is scattered around North America, Europe, the Middle East, and they’ve recently begun a more concerted push into Asia. So their strategy is a mix of what’s often called “nearshoring,” which is where you are in a lower-cost geography than your client but in a similar time zone, and “offshoring,” which is traditionally often associated with India, where it’s a lower-cost center, but a very different time zone.

Let’s get to their clients: 60% of their revenue, as of last quarter, comes from the United States and North America, which is primarily the United States; around 20% comes from Latin America; around 20% from Europe, the Middle East, and Australia. So there they are in different geographies, or their development centers, I should say. Most of their programming staff are in different geographies than their clients. But they have this Latin American core. And what’s particularly exciting about them is they’ve successfully been able to scale up and expand in India already, in part in smaller countries in Eastern Europe. And we think they can continue to do that in Asia. And the more global your footprint, not only does it just give you access to more high-quality talent all over the world and high-demand areas. But it means you can support clients in different geographies in their time zone or at least have part of their support in the same time zone. So that should also unlock more demand for them going forward. But it’s absolutely a global company.

Kevin 21:53
You know, one of our criteria is a value-added focus, which is really just another way of saying, you know, we get to know the management teams. Maybe talk a little bit about this particular team running this company. Where do they rank in your mind?

Eric 22:06
Sure. Globant is run by a founder-led management team. The four founders are still with the company. And the team is led by Martin Migoya, who’s been the CEO from day one. He’s the CEO and chairman. He’s in his early 50s.

This is one of the most passionate management teams I’ve ever met in my career as an investor. They talk Globant; they love Globant; their entire net worth is tied up in Globant. And if you want to see someone get excited about some AI tool, I don’t know anyone you’d want to hear it from other than Martin and his team. I really can’t say enough, sing their praises enough. They’re highly responsive to investor requests whenever we talk to them, which is always a good sign. But they truly have an excellent track record of being driven while being flexible. You know, it’s amazing what they built, in our minds. And based on our conversations, I think they understand where they need to bring in talent in order to grow the business and where they can develop homegrown talent. And so I, we generally, internally at least, rank them quite highly among the very good management teams that we invest in at Sands Capital.

Kevin 23:23
That’s great. Again, “founder-led, founder-run” that always, mostly raises—let’s call it a flag, I will call it a flag, it’s a flag. So maybe think on the governance front. How do you feel about the fact that the founders are still running the business? Are they the right people to be doing it at this stage of growth?

Eric 23:42
We definitely think, I definitely think Martin is the guy to lead this company. He really is the beating heart and soul of the culture. He has a strong team around him that definitely does not give off the vibe of yes people.

And I think our risk, quite frankly, is that Martin is the CEO and chairman of the board. We’ve engaged with him in the past about eventually relinquishing one of those roles. He is on board with that at some point, at least in our conversations. But really, I think there might be a bit of a key-man risk in theory, since he is a founder with two key titles at the company. I mean, we’ve met with enough of the C-suite around him and a number of country heads and senior directors and level below him. It’s a pretty high conviction. There’s a very deep bench at Globant, which you’d expect from a high-quality, kind of, you know, IT services company. So we’re less concerned about that. And he works out a lot. He’s got a rock band that’s on Spotify if anyone wants to check them out. But so we think he’s still energized and ready to run this company for many years from now.

Kevin 24:48
Well, so just talking about that human capital as an advantage and then, of course, the geographical reach that maybe is a nice way to segue into what is in your mind those—the characteristics of the company that make them special? And I guess more, more specifically, what’s the competitive moat? Because it is, you know, a huge market, as you said. I’ve got to think there are some established competitors and there are some up-and-coming competitors. What’s going to keep Globant out ahead of those?

Eric 25:21
It’s a great question. And this is a tough industry where the competitive advantages are intangible, right? This isn’t an airport where it’s the monopoly that is the only way to fly into Bangkok or anything like that. So I think there are three key advantages to Globant that are self-reinforcing.

One is the brand, right—Globant’s 28,000, just under 28,000 employees all over the world today. But they’re well known in their industry, especially in their core geographies. And they’re well known to developers and aspiring programmers in school and to clients. And that’s pretty important.

So they become an employer of choice in an industry where there’s a shortage of labor, right? As I mentioned earlier, the IT services market is expected to grow at around 10% per year going forward. The global developer population, programmer population is only expected to grow around mid-single digits during that time period, so you have a structural shortage of labor. And it’s very hard to get access to that top-quality labor, the top-tier programmers, the top students, especially if you’re not one of the now Magnificent Seven, you know, hyperscaler tech giants, right? So Globant has that advantage, especially in its core geographies in Latin America and core cities in India, but increasingly globally.

Another is distribution. You know, not every company can get access to the CIO and top project managers at a company like Disney or FIFA or Discovery, right? There’s a very select group you’re already in. And so those two, and that helps retain these two advantages—excuse me, reinforce each other. So by working with the top clients, these big MNCs [multinational companies] doing the most exciting work, that helps you get access to the best talent and best rising talent, which in turn helps you get better work from your top-tier clients. So once you’re in this position, that’s your virtuous cycle that has competitive advantages that keep self-reinforcing.

And the other big advantage is scale. This might just seem like you just hire a bunch of people and do it. It’s very hard to manage 28,000 people across 30 different countries. You have to have a real organization. If anything, that’s the secret, you know, the key kind of value-added quality of Globant is being able to marshal and manage this talent. And it’s not easy to do. And it’s not easy to do credibly for clients.

So you’ve got this track record, you have this ability to hire and scale its improvement across geographies, you have relationships with top companies all over the world and the ability to build new relationships because of those relationships. And also, it becomes a virtuous cycle, where as long as you don’t dramatically fail to execute, you know, on a project or fall behind on technology and what the latest technology trends are, these competitive advantages do support each other and are sustainable.

Kevin 28:26
I know that one of their largest competitors is Accenture. And when you describe Globant’s advantage, you’re also kind of describing what Accenture is pretty good at too. So why does Globant, in your mind, win over Accenture in the space?

Eric 28:43
So Accenture is a phenomenal business, a great comp of Globant’s, and I think the dynamic in this market is that it’s not a winner-take-all industry. As I mentioned at the top, it’s an oligopolistic market, which means you should and do have several big winners in the space. Of the publicly listed companies—and probably privately, Accenture is by far the largest company in IT services and consulting, and it’s a phenomenally well-run business, but it’s exposed to all parts of the consulting and IT services supply chain value chain from literal consulting to the high-end digital services Globant does to the BPO [business process outsourcing] cost-reduction stuff that legacy IT players do not, whereas Globant’s more of a pure play on digital transformation.

The other thing is, if we think of Accenture as the gold standard in this industry, Globant’s the next rising star and is a clear leader in this kind of user experience digital interface niche. Interestingly, along with Accenture, it’s often who they say they compete against, but again, this is a multi-winner market, and we like Globant’s direct exposure to some of the fastest-growing trends in the industry.

Kevin 29:51
That pure-play angle is definitely Sands Capital in a nutshell. I’m thinking this will be a stretched metaphor or reference. But it seems to reflect our transition from big pharma to more targeted biotech businesses. You could get biotech wrapped up in big pharma, but you’ve got all the other stuff too—the good and the bad. And, you know, once you started finding companies that were just pure play in a particular space, and you got what you wanted without the baggage, those tend to be great businesses over the long term.

Eric 30:29
I would agree. And, you know, if you’re an investor looking at the space, there’s no reason not to look at both. You can look at the high-quality, full-suite players that are going to be slower growing and stable, like an Accenture, like a Tata Consultancy. But if you want to find the more innovative—I would argue faster growing—companies that are really at the forefront of digital transformation, that’s where Globant really shines as it’s really a disruptor in this space. It’s structurally taking market share from legacy players in a way that Accenture is, but that’s a much more mature company.

Kevin 31:07
On that same note, let me flip the script and play devil’s advocate here. You know, they seem to have carved out a nice niche within the oligopoly as one of the primary players. What in your mind is coming down the line that could disrupt that position, not just for maybe Globant but for all the key incumbents right now?

Eric 31:32
Technology is always the big one in this space. You know, I think often these companies find themselves in a lot of trouble if either they have too much client concentration risk, which Globant has kind of grown out of, or if they fall behind on the technology curve, and they aren’t leaders in whatever the next-generation technology is. So the real threat to Globant would be if they are not as adept at using generative AI tools, the gen AI tools that are being developed now and come out and the ones we haven’t thought of over the next several years, and they anchor too much to legacy tech, what become legacy technologies that no one cares about. Now, with their culture, internal training programs, and digital experience focus, we think that’s highly unlikely. That’s probably the perennial risk for a company like this.

There’s a shorter term on that, which is, of course, business cycles and cyclicality. Globant is taking market share, but it is still like IT budgets are impacted by the broader macroeconomy. No one’s fully insulated from that. But that’s more of a short-term concern. I don’t think we’re worried too long.

Kevin 32:40
Did they have some of the same headwinds as a lot of the tech or at least software companies did that were supplying software to big enterprise customers over the last year or so, where there was, you know, you can almost call it a mini tech recession as big enterprise IT departments reevaluated their spending priorities? They kind of slowed down on cloud migration and stuff like that. Did that affect Globant? Just like it’s a 2022 to 2023 issue?

Eric 33:11
It definitely did. It’s not as bad as some technology companies. But if we look at its revenue growth in 2020 and 2021, it grew revenue 37% and 45% year-over-year, respectively, and in 2022, it grew revenue 15%. And in 2022, they were expecting that to be close to 10%. So a massive deceleration in growth.

But, as you’ll notice, even though IT budgets for many companies didn’t grow or even contracted, Globant has still been able to grow part of that through M&A [mergers and acquisitions]. But most of that, we believe, is organic. And that’s that share gains story where Globant, as companies have had to tighten their budgets, yes, there’s some focus on cost takeout, but there’s more of a focus on vendor consolidation and reassigning what dollars you have to the partners that are going to help you grow and transform your company as you exit a recession. And Globant has been a key beneficiary of that as much as it’s been a bad time to maybe be an investor going into a down cycle in a company that’s being hit by cyclical headwinds. They have so far been, we think, proving our thesis that they’re going to be taking wallet share in this industry.

Kevin 34:24
What about expense control? You noticed that they doubled their headcount over the pandemic. A lot of tech companies did that in anticipation of a straight line up into the right sort of growth dynamic and then got caught. Not caught but maybe too much capital expense as the market or revenue started to slow down. We refer to that internally here as the bullwhip effect. Is that something that they confronted, and how have they dealt with it if they have?

Eric 34:59
Not to the same degree as a lot of our tech companies. And that’s because most of Globant’s costs are structurally variable. So there’s very little really SG&A [selling, general, and administrative] costs or R&D [research and development] costs as a percent of revenue. It’s a small piece of the company. Their big costs are on staff, you know. Their COGS [cost of goods sold] are how much they pay their developers.

So when the labor market got tight in 2022/2023, their gross margins were kind of the best proxy for their profitability. They fell, I’d argue, from around 39% in 2019 to around 36% earlier this year, so significant but not as bad as some and still highly profitable companies.

And what’s now been happening is the labor market, especially in tech, has loosened considerably—less so for what Globant does, to be completely transparent, because they are looking for almost always, you know, highly specialized staff. But still, they’ve been able to process those costs very well. And it’s part of the beauty of these business models—unlike many technology businesses, these are very profitable companies, highly free cash flow generative, and, in Globant’s case, pretty much no debt on the balance sheet. So they’re variable costs. So they are able to scale up or scale down their cost structure pretty quickly with changing market dynamics.

Kevin 36:25
So you know, in your description of this business, it’s as you mentioned, it’s operating in intangibles, right? It’s not a factory, it’s not a store. So give us some insight into how you cover a company like this. What do you do differently for Globant than what you might do for brick and mortar or a company that has tangible products?

Eric 36:46
Yes, so at Sands Capital, we value on-the-ground research, which, to your point, is difficult when it’s an intangible advantage you’re trying to analyze. So you know, our initial process was to understand the industry, as we just discussed, and make sure we understood the dynamics and competitive landscape.

With this company, what we then did was we work with expert networks. We were able to recruit people we could speak to who used to work for the company, used to work for Globant, used to work for competitors or clients of Globant or peers. And we did, honestly, dozens of many hours of these types of calls to make sure we got a holistic picture of how Globant is viewed by the labor, you know, the programmers, how Globant’s viewed by customers, and the type of work Globant does and how that’s evolved over time. And that helped paint a picture of—not only a consistent picture that was very positive on Globant and their cutting-edge capabilities but also filled out the overall industry competitive dynamic.

And then, once we had a better understanding of that, we visited some of their offices. A big issue with a company like Globant is: As you go global, how do you maintain a high-quality development standard and delivery standard? You know, it’s one thing to just do it from Argentina and some nearby countries, how do you also do it in India? So I went to their India office, toured it, spent hours with the management team understanding the incentivization structure, the integration processes, how they trained staff, and then once that was a positive and with that came a very positive interaction. It was basically what we expected in a very different vein from the legacy IT players in India, who we also met with.

And then the last step in this process was me getting the portfolio managers down to Buenos Aires to meet with the senior management and really making sure we understood the corporate culture there, and we made sure it was similar enough to what we saw in India that there really was consistency across geographies. That was a stressful process as an analyst. I’d say that at Sands Capital, there were a lot of internal biases and assumptions that this was a commoditized industry in which we couldn’t find great businesses. Now, our work had shown, we argue, that that wasn’t the case. But there was still skepticism.

So I remember bringing down all these portfolio managers to Buenos Aires. We got to their headquarters, and we’re waiting for management. And so some of the staff are showing us around, and the first thing they show us is there’s this machine they’re excited about. We go into this little laboratory-like area, and it’s like a little claw from like a children’s—it’ll be something your kid would make for a third-grade science project. And one of the PMs [portfolio managers] just turned around and stared daggers at me and whispered, “I can’t believe you’re dragging me all the way to Buenos Aires for this.” Fortunately, the meeting ended up being fantastic, and we ended up investing shortly after that meeting. But honestly, it’s a lot of touch points with a company like this. And since we invested in it, I’ve gone to offices all over the world—all across Latin America, India, Europe. And really you’re constantly trying to test for that quality of staff. You know that commitment to excellence, that consistency, and you’re constantly talking to former clients, competitors, etc.

Kevin 40:08
And another data point that shows you the power of this company and their brand: Looking at their investor page on their website, they note that they are in 2023, they were the fastest-growing IT brand and the fifth strongest brand globally, according to their own report. So take that with a grain of salt, but you know, brand value. They noticed somewhere between around $1.6 billion in 2023—38% or 33% growth in brand value. So you like them, but so do a lot of other people. Clearly.

Eric 40:48
A question I will often get now with this company that I never got back in 2019 is: What’s the insight? And, in the past, it was: Who are they? Why would you invest in IT services? Now, people who know the space know who Globant is.

I think we really have three big insights. One is that this is an oligopolistic industry, structurally. So once you’re in that oligopoly, and it’s a sticky relationship once you’re in there. The other is that we’ve shifted from a price-led model in IT services to this value-led model. And the third is that Globant has this virtuous cycle of competitive advantages that actually gets stronger over time. And there are some other companies that applies to in the space. There’s multiple winners in this industry.

But I think it’s that last bit, in particular, that’s not well understood—that yes, Globant is strong today, yes, Globant’s rising in the brand rankings. But, as long as it’s not mismanaged, that will continue to allow them to get more talent, get more exciting projects, and continue to further strengthen the brand. So I think it’s that duration of growth and the duration of the competitive advantage. And I’d argue how unique it is and how few companies are truly in this oligopolistic winner group that are the key insights here.

Kevin 42:06
I like that— I’m forgetting the name – what you just called it? [The virtuous cycle] There are few companies in the history of Sands Capital that fall into that category. But when you see it, it’s a powerful, powerful advantage for them.

Eric 42:26

Extremely. And often, it’s not something that’s immediately obvious. You know, it’s usually a lot of little things—in this case, I’d argue three—that come together and make that cycle happen. Yes, when you have it, I agree, it’s incredibly powerful. And say we’re very optimistic on the company for a very long time.

Kevin 42:42
We’ve covered a lot of topics here. I’m going to throw a few jump balls out as we end here.

Eric
I love it.

Kevin
Maybe give us some thoughts on the environmental, social, and governance front. How do they rate? Are there any issues, any flags that jump up, or any successes you’d note in the company?

Eric 43:08
Globant has been carbon neutral since 2021, which is a bit of an indication of, you know, this part of their business is structurally not very carbon intensive. But with their global footprint and countries that don’t have green energy infrastructure, we think that really shows their commitment to environmental best practices. Their disclosures—we are generally very happy with their disclosures on the website.

But, you know, a big thing for Globant as a company that grows by hiring staff is their labor rights and labor practices. Not only have we seen no issues historically with Globant, they tend to be very highly rated when we look at employee rankings, or studies of employees at these companies, but Globant actually is a leader in the industry in terms of gender diversity. So as of its last annual report, around 27% of staff are women, which is generally very high for an IT services company, and 32% of directors and manager-level staff are women as well. This has been part of a concentrated effort by Globant to improve gender diversity in the industry overall and in its own company. They have initiatives on sexual orientation diversity, on ethnic and national diversity. This also helps their core business. By being a more inclusive open culture, they—especially in the technology industry—they’re able to attract more and more talent and a broader suite of people to come to their company. So we actually see Globant as a great example of best practices that are also aligned with business interests.

Kevin 44:51
In terms of their customer base. Are they fairly selective or careful about what kind of work they do for individual clients or customers? Are there any state-owned enterprises that may want to build nefarious digital technology that Globant would be an enabler of?

Eric 45:14
Great question! To the best of our knowledge, no. So Globant has, you know, well over 1,500 different customers, but generally, what they focus on explicitly is Fortune 500 to Fortune 2000 businesses. Some of those in emerging markets might have state-owned ownership, like they work for Itau, for example, in Brazil. But these are generally not nefarious companies. And as far as we’re aware, no defense, no state security companies are on there in problematic geographies or in their client lists, though they do work with police departments in countries like the U.K. But from what we’ve heard, nothing that would raise any red flags.

Kevin 46:02
One question that pops into my mind too, just when a company at the large enterprise is building out a digital presence, they’re ostensibly building a door into their business that bad actors can enter through. Is cybersecurity an issue, or any kind of thoughts on that in terms of their approach to that issue?

Eric 46:26
Cybersecurity is a huge risk factor for them. It’s also a huge business for them. So they have a cybersecurity studio. And as much as we’d like to talk about Globant as a user experience-focused company, which it is, most of what they do is really the stuff around it. So their real value added to clients often is taking top-tier digital engineering, cybersecurity cloud practices and marrying it with true design professionals who have a deep understanding of that world. Cybersecurity is a massive business for them. Globant actually had a minor hack in 2021, sorry, 2022. Very few clients were impacted. And Globant was very quickly able to stop the hack. No significant data was leaked; no critical data was leaked. This is, I’d say, a perennial risk in this space but more of an opportunity for Globant. And I think they’ve proven with all the projects they do and their scale the fact that they’ve had almost no hacks ever. And when that happens, they react very quickly, which I think is a testament to their work. And they lost no clients from it, which, at the end of the day, if you know if your clients are comfortable, that’s what matters the most.

Kevin 47:42
Yes, hacks seem to be just table stakes now. Though I hate to say it, we live in a world where if you told me that a company XYZ hasn’t had a hack, I kind of wonder if, you know, we’re paying close enough attention.

Eric 47:56
But the hack question really highlights how important, how digital our economy is and how important companies like Globant are for their clients. Because even if you have a great cybersecurity team internally at Disney, you’re not going to take the risk of only having them look at your cybersecurity. Whether it’s Globant or another company, you will have partners just to sanity check that because it’s so mission critical to your company.

I think a big thing people should understand about Globant is what they do is longer-term mission critical for any business. You know, I like the way you framed it: They make doorways to users and to clients and employees. That’s needed. You know, that’s not an option anymore in a modern digital economy.

Kevin 48:41
Yes, absolutely. And if it’s done well, it’s a great experience. If it’s not done well, it can significantly damage your brand for the customers, I am guessing.

Eric 48:55
That’s right. You’re not going to be cutting—focusing too much on—price when it comes to what’s the best app to interact with your customers or who’s the best vendor of cybersecurity services or consulting services. That’s usually not where you’re going to cut corners.

Kevin 49:10
Yes, reputations are definitely lost when you’re on hold at a call center or if your app doesn’t get you to where you want to go.

Well, that’s great. We’ve touched on a lot here. Anything you want to leave us with? Any issues or questions or topics that we missed?

Eric 49:31
You know, the one thing I want to reiterate is that people are constantly looking for growth businesses who invest in companies that are going to benefit from the way the world changes, especially with AI and digitalization. And yet everyone, appropriately, in many ways, focuses on the Magnificent Seven and the other tech giants.

But I think Globant is a great example of how there are just kind of below-the-radar companies that are great investments that are great businesses that also benefit from this trend and, quite frankly, enable this trend that actually allows big companies to take these cool new tools, whether it’s cloud or gen AI, or whatever the next thing is, and actually use them in their real business. So you know, just because these are under-the-radar companies doesn’t mean they’re not exciting and changing the world themselves.

Kevin 50:20
That’s really interesting. I don’t want to keep the conversation going too long. But it does bring to mind this idea that, you know, we’ve been honing for years here at Sands Capital around technology and the path to growth. There’s the concentration phase: New technology comes out; there are a few winners that are the key enablers to that technology. And then you have the diffusion stage, when that technology starts to work its way throughout the rest of the economy. And I think it sounds like you’re saying Globant is the kind of company that enables that diffusion. It doesn’t happen by itself. You have to have companies that can help facilitate the implementation of AI or the implementation of certain tech tools that are out there in the world. But they’ll just sit there out in the world unless a Globant comes in and figures out how you as a business can use these to the greatest effect.

Eric 51:15
That’s completely correct. And not only is Globant a key kind of winner of and enabler of the distribution phase. But because that’s what they do, the growth wall is pushed far out there. There’s not a single product or single technology they work on that once it saturates its market, they’re down to a steady, you know, X growth level. And then you don’t have to worry about a second act with this company.

We have to talk at Sands Capital about the growth of a company. There’s a first act, and then maybe there’s a second or third act, when they can come up with new things to do. Yes, Globant’s always, as long as there’s new technologies and Globant doesn’t take their eye off the ball, there’s always going to be new things for them to do. And so you’re constantly going to be diffusing new technologies.

Kevin 51:57
It’s that whole idea too, that things change, new things pop up. But there are a lot of things that stay the same. And one of those things that stays the same is that every company will have a problem that needs to be solved. And increasingly, those problems are on the digital front. And so as long as there are problems, there will be consultants, and there’ll be work for Globant to deal, it sounds like.

Eric 52:17
Well said, Kevin, and this is why you host the podcast.

Kevin 52:21
It just popped into my head there.

Well, thanks, Eric. I really appreciate this is a really interesting conversation about a company that I followed from a distance and didn’t know that much about, but as I dug into it, I realized it’s a company that makes my life better in ways that I don’t even think about.

Eric 52:37
Especially if you have kids and go to Disneyland.

Kevin 52:42
I am fortunate that my kids will have kids soon that will go to Disneyland. So I’m out of that realm. Or maybe I’m supposed to take their kids at some point.

Eric 52:49
But, anyway, Kevin, thank you for having me. It was a real pleasure.

Kevin 52:53
I appreciate it. This has been a lot of fun. I appreciate it, Eric. It’s probably nighttime for you. So it’s time to sign off.

Have you caught all of the episodes of What Matters Most? Make sure you catch Season Two episodes on Formula One, Dexcom, Entegris, Visa, Reliance Industries, and Axon Enterprises. You might be surprised by what you learn. Subscribe today and never miss an episode.

As of January 26th, 2024, Globant, Salesforce, Alphabet (Google) and Tata Consultancy were held in Sands Capital strategies. No other companies mentioned were held in any Sands Capital strategies at the time of recording.

The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed are current as the episode date and are subject to change. This material may contain forward-looking statements, which are subject to uncertainties outside of Sands Capital’s control. The securities identified do not represent all of the securities purchased or recommended for advisory clients. There is no assurance that any securities discussed will remain in the portfolio. You should not assume that any investment is or will be profitable. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. For more information, including a full list of portfolio holdings, please visit our website at www.sandscapital.com.