Globant SA (NYSE / LUX: GLOB) is a poorly organized roll-up of digital IT outsourcing companies. GLOB receives the highest valuation in its sector by convincing investors it achieves consistent 20% p.a. organic sales growth. However, our forensic analysis disproves management’s bold claims, and suggests that its growth is in fact rapidly decelerating below target. Once investors realize GLOB uses aggressive accounting and financial presentation methods to paper over a cash degenerative business, while insiders quietly unload millions of dollars in stock, we expect shares to be materially re-rated lower by 40% to 50%.
Cash Flow And Adjusted Earnings Metrics Reported By Globant Are Potentially Deceptive: We warn investors not to rely on Adjusted EBITDA as a cash flow proxy. Globant’s bulls will point to a growing upward trajectory in Adjusted EPS and EBITDA. We caution investors to be skeptical, since Globant’s Adjusted EBITDA of $64.6m in 2016 translated into a paltry $7.4m of free cash flow. Globant does not even provide investors regular cash flow statement reporting. Globant does not appear to generate recurring cash flow from outsourcing technology services. Rather, it generates cash from trading investment securities. Globant regularly trades securities and its stellar track record has generated a cumulative $68m of cash flow in the period from 2011 to 2016. In regards to earnings, we have provided an adjusted income statement based on Globant’s core business of outsourcing IT and software solutions. We arrive at EPS results that are on average 36% lower since 2013 than the Adjusted EPS that Globant reports. Recent 2017 IFRS results declined 15% YoY, and didn’t grow at all based on our normalized Adjusted EPS calculations.
Evidence of Accounting Games: Globant lacks consistency with adjustments and add-backs, and even tries to convince investors to ignore depreciation and amortization expense when presenting its adjusted results. We have found instances where the same category of expenses are not treated uniformly in its reconciliation of Adjusted Net Income; Globant makes the adjustment when it is favorable to add back the one-time item and ignores the adjustment when it is unfavorable. There is also a pattern where Globant continuously revises IFRS or adjusted numbers. The 2016 financials have been published three times (4Q16 press release, FY16 20F, and the 4Q17 press release) and we identify changes in each subsequent release. We also found potential evidence of manipulation in quarterly earnings to meet consensus expectations. Globant’s 4Q16 Adjusted EPS was originally reported within its guidance and matched consensus expectations of $0.31 When 4Q17 was reported on 2/15/18, we found that its 4Q16 Adjusted EPS was subsequently revised to $0.27 which would have represented a $0.04 miss versus consensus.
Insiders Selling Is Staggering: Insiders have sold (or transferred) over 70% (+$80m) of shares since Globant’s IPO in July of 2014. We think investors may be unaware of the magnitude of selling by Globant’s founders and other insiders. Globant’s status as a foreign private issuer allows it an exemption from reporting the customary insider disclosure via Form 4s to the SEC. Globant chooses to file paper forms with the SEC via Form 144s. Ironically, since the Luxembourg dual listing in August of 2016, Globant now files insider selling transactions electronically with the Luxembourg stock exchange. We find it peculiar that Globant now files insider selling transactions electronically with the Luxembourg exchange and does not follow that same protocol with the SEC. Further, the four founders all set up both revocable and irrevocable trusts. All four founders in aggregate transferred over 3.0m shares (~$40m and ~10.4% of total share count) to irrevocable trusts at some point between August 2014 and January 2015. We believe that this transfer was done quietly with the potential motivation to allow for further insider selling
Corporate Strategy Initiatives Are Not Showing Signs of Progress: In 2016, Globant introduced a new company wide model called 50-Squared. The main goal of 50-squared is to focus Globant’s team on the top 50 highest potential accounts that have the capacity to grow exponentially over time. We took a close look at its top 5 clients. Four of its top clients (excluding its top client, Disney) only grew by an average of 2% in 2017. We don’t see evidence that this strategy is gaining acceptance with its most important clients.