Earnings Call Transcript - CINT Q4 2022

Eduardo Galvao, Investor Relations Director

Good morning, everyone. Welcome to CI&T Earnings Call for the Fourth Quarter of 2022. I am Eduardo Galvao, Investor Relations Director at CI&T, and it's a pleasure to be here again to talk about our results. With me on today's call are Cesar Gon, Founder and CEO; Bruno Guicardi, Co-Founder and President for North America and Europe; and Stanley Rodrigues, our CFO. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After that, there will be a question-and-answer session for analysts and investors only. If you'd like to submit a question, please send it via e-mail to investors@ciandt.com. The presentation is available on the company's Investor Relations website at investors.ciandt.com. A replay will be available shortly after the event is concluded. Some of the matters we'll discuss on this call, including our expected business outlook, are forward-looking statements and as such, are subject to known and unknown risks and uncertainties, including but not limited to those factors described in our earnings release and discussed in the Risk Factors section of our annual report on Form 20-F and in other reports we may file from time to time with the SEC. These risks and uncertainties could cause actual results to differ materially from those expressed on this call. We caution you not to place undue reliance on those forward-looking statements because they're valid only as of the date when made. During this presentation, we'll comment on certain non-IFRS financial measures to evaluate our business. Please refer to the reconciliation tables of non-IFRS financial measures in the appendix for more details. Our agenda for today includes an update on our financial highlights followed by some of our successful business cases. We'll then talk about our people and ESG strategy and deep dive into our quarterly financial results. After the presentation, there will be a Q&A session. Now, I invite Cesar Gon to begin our presentation.

Cesar Gon, Founder and CEO

Thank you, Eduardo. Good day, everyone. It’s great to be with you. As we look back on 2022, I want to share our vision for the future. Innovation involves creating effective solutions to address complex human problems. The greatest opportunities emerge at the intersection of societal value changes and rapid technological advancements. This new technological landscape requires a fundamental shift in how we approach digital strategy, customer-focused design, and comprehensive software engineering. Previously, it was challenging to harness and expand the value of cutting-edge technologies. At CI&T, we focus on driving innovation for large, rapidly growing companies by rethinking how we integrate new technologies, management systems, and leadership strategies. We have made a lasting impact in the corporate sector. It is now clear that a robust array of emerging technologies, including artificial intelligence, the Internet of Things, blockchain, and 5G, are maturing and gaining traction among both consumers and organizations. We owe a debt of gratitude to the team at OpenAI for elevating generative AI into public and corporate awareness, which creates favorable conditions for accelerating AI adoption and driving the digital transformation trend. In this fast-evolving environment, CI&T plays a crucial role in helping our clients seize digital opportunities effectively; we refer to this as digital efficiency. This is the ideal moment for businesses to capitalize on years of foundational investments and turn them into scalable ventures. At CI&T, we are committed to enhancing efficiency for both our clients and ourselves. We have always been at the forefront of digital innovation with our method-driven approach. This is an ongoing journey, and we are poised to continue leading in the years ahead. Now, let’s discuss some of our financial highlights. 2022 was a pivotal year, and I’m proud of what we achieved. Our net revenue reached BRL2.19 billion, reflecting a 51% increase year-over-year, or 50.8% growth at constant currency. CI&T’s fast growth has stemmed from expanding our relationships with existing clients, evidenced by a strong net revenue retention rate of 126% in 2022. We welcomed 84 new clients, bringing our total to 178 clients generating over BRL1 million annually. Additionally, our strategic approach to mergers and acquisitions has played a role in our growth. Our adjusted EBITDA margin for the year was 19.1%, a strong profitability indicator given the integration of acquired companies. We finished 2022 with a net addition of 1,300 employees. I want to take this moment to thank all CI&T employees worldwide for their dedication to achieving these results. I will delve deeper into our financial outcomes shortly. Since our inception in 1995, CI&T has achieved successive profitable revenue growth for 88 years. We have endured various challenges, yet we have not only grown but emerged stronger each time. Over the past four years, from 2019 to 2022, our compound annual growth rate has been an impressive 48%. As we navigate uncertain times, I'm confident that CI&T is well-positioned to tackle ongoing challenges. Today, CI&T is more diversified in the markets we serve, with [indiscernible] accounting for almost 10% of our revenue compared to 2% in 2020. The U.S. and Europe are experiencing the fastest organic growth. More than 55% of our revenue now comes from developed economies, with expectations to reach 60% by the end of 2023. The revenue share of our top 10 clients has evolved from 67% in 2020 to under 50% in 2022, trending towards 40% by year-end. This diversification is the result of a disciplined and consistent addition of new clients to support our sustainable growth. In summary, we believe we will continue our profitable growth path while generating meaningful outcomes for our long-term objectives. Now let's discuss some updates and tangible examples of how we are creating value globally. I hope you find our client stories and highlights engaging. Now, I invite Bruno to discuss our talent management and ESG strategies.

Bruno Guicardi, Co-Founder and President for North America and Europe

Thank you, Cesar, and good morning, everyone. It's a pleasure to be here again to talk about our people and our operations. We ended 2022 with an outstanding mark of over 6,900 CI&T employees, a net addition of 1,300 people. Since 2019, we have nearly tripled our global team. Our strategy to attract and hire the most talented people is based on processes and practices we have been evolving for decades. More recently, we are penetrating new talent markets based on the 'work from anywhere' approach, which has proven to be a successful model in our industry. The working environment we created at CI&T, based on a culture of trust, allows us to retain our people for longer. Our attrition rate at the end of 2022 was 14% compared to 16% in 2021 and continues trending down on a monthly basis. The leadership attrition remains below 5%, guaranteeing consistency and quality in our delivery. In 2022, we strengthened our global presence with talented individuals from acquisitions in four different geographies, adding complementary expertise in industry verticals and technologies. We are proud to have such a diverse and global team of nearly 7,000 people, creating a company that stands out not only based on its growth and financial performance but also based on its human values and its contribution to improving the lives of the people we touch. Today, we published our second ESG report, detailing our initiatives, actions, and goals in the environmental, social, and governance front. ESG is a key pillar at CI&T, and being able to share our progress with our stakeholders is a matter of pride for all of us. Our ESG strategy is driven by a shared vision to create equitable advancement opportunities for everyone, provide educational and workforce experience for underrepresented groups, and reduce our environmental impact to create a more sustainable world. Our ESG journey began back in 2009 when we created a sustainability area. Since then, we have evolved our governance and created several programs and action groups, decentralizing this decision-making and empowering individuals at all levels. Since July 2021, CI&T has been a signatory to the UN Global Compact, reinforcing our commitment to sustainable development. In 2022, we conducted our first materiality analysis, which allowed us to clearly articulate our ESG strategy based on our stakeholders' valuable contributions. I invite you all to download and read our ESG report available on our Investor Relations website. Let me provide some data that gives us confidence we are on the right track. In 2022, 43% of the people we hired were from underrepresented groups. This trend shows our commitment to ensuring that CI&T represents the communities where we operate. On this International Women's Day, we're happy to share that women in top leadership positions increased from 23% in 2021 to 25.7% last year, with a goal to reach 30% by the end of 2025. We also impacted more than 22,000 people with our social initiatives during the year. This is a fantastic achievement and aligns with our vision of creating a more equitable world. We completed our first greenhouse gas inventory to measure the company's carbon footprint across Scopes 1, 2, and 3 for our Brazilian operations. Earlier this year, we neutralized 100% of these emissions via nature-based carbon removal projects, supporting the conservation and restoration of the Brazilian biomes. For 2023, we are committed to expanding our greenhouse gas emissions inventory to our operations in the U.S. and the U.K. Now, I invite Stanley to comment on our financial results.

Stanley Rodrigues, CFO

Thank you, Bruno, and good morning, everyone. I'm glad to be here with you to talk about our financial results. Starting with our performance in the fourth quarter of 2022, our net revenue was BRL612 million, an increase of 34% year-over-year. Eliminating the FX variation, our net revenue grew 42% compared to the fourth quarter of 2021. Our adjusted EBITDA in the fourth quarter was BRL127.4 million, 25% higher than the fourth quarter of '21. Adjusted EBITDA margin was 20.8%, a reduction of 1.5 percentage points compared to the fourth quarter '21 due to higher SG&A expenses in the quarter. Sequentially, the adjusted EBITDA margin improved 1.6 percentage points from 19.2% in the third quarter '22 to 20.8% in the fourth quarter '22 due to better utilization rates and lower SG&A expenses as a percentage of revenue. The adjusted net profit was BRL54.5 million in the fourth quarter of '22, 4.3% higher than the same quarter in 2021. The adjusted net profit margin reduced from 11.4% in Q4 '21 to 8.9% in Q4 '22, mainly due to a negative foreign exchange variation of BRL25 million in the comparable period that impacted our financial expenses. Now let's deep dive into our annual results. For the full year of 2022, our net revenue was BRL2.9 billion, a 51.5% growth compared to 2021, of which 36% was organic growth and 15% was the contribution from the companies acquired in 2022. The negative foreign currency translation impact was 6.4%, so the net revenue growth at constant currency was 58%. The 2022 net revenue is 3.2 times the net revenue of 2019, recording a CAGR of 48% in that period. Let me break down the components of our high-growth profile. Our net revenue retention rate was 126% in 2022, demonstrating our ability to continuously strengthen our relationships with our existing clients through value creation. Additionally, we added 84 new clients with revenue above BRL1 million to our portfolio during 2022, of which about half were organic net additions. This cohort of clients will contribute to accelerate our revenue growth in the coming years as these engagements ramp up over time. Analyzing the numbers of our multimillion accounts, you can see that our growth engine, based on our land and expand strategy, has been robust. The number of clients generating more than BRL20 million annually doubled from 2020 to 2022, and analogous growth is also seen in our accounts generating more than BRL5 million and more than BRL10 million. The addition of new clients, combined with our strategic M&A approach, contributed to diversify our revenue base. Cesar already mentioned how we evolved our revenue breakdown over time in terms of geography and top client share. I would like to emphasize that we are growing faster organically in the U.S. and Europe, and recent acquisitions should speed up our growth within those regions. By the end of 2023, we expect about 60% of our revenues to come from these two economies, including the U.S. and Europe, while our top 10 clients' share should evolve to 40%. Now, talking about our profitability metrics, our adjusted EBITDA was BRL47.5 million, an increase of 28.8% compared to 2021. The adjusted EBITDA margin was 19.1% in the year, a solid result already including the impact of lower margins from the acquired companies and the increase in G&A expenses, driven by the strengthening of our back-office teams associated with our IPO. Most of these general and administrative costs are fixed expenses and should be diluted over time. Additionally, in the fourth quarter of '22, we reduced our real estate property lease based on the flexible working environment we have been operating, such as the hybrid mode and the work-from-anywhere approach. Thus, we expect lower lease expenses moving forward. In the fourth quarter '22, we noted a reduction in our SG&A expenses as a percentage of revenue compared to the third quarter '22. We are fully committed to optimizing our cost structure to take advantage of operating leverage opportunities and enhance our profitability. In 2022, the adjusted net profit was BRL213.6 million, 30.2% higher than 2021, while the adjusted net profit margin for 2022 was 9.8%. The incremental debt position at the end of the year was primarily to finance the NTERSOL acquisition. As we mentioned in our previous earnings call, last year we concluded our first wave of M&A, and we are now dedicated to integrating the acquired companies. In 2022, we generated BRL112.4 million in cash from operating activities, net of taxes. If we exclude acquisition-related cash outflows, the cash generated from operating activities net of taxes would have been BRL172.1 million in 2022. We ended the year with BRL282 million in cash and a solid financial position to support our growth. Now, I invite Cesar back to discuss our business outlook.

Cesar Gon, Founder and CEO

Thank you, Stanley. As I mentioned, we are optimistic about the growing number of technology advancements and the necessity for companies to continue to increase their investment in digital initiatives. Nevertheless, the global economic situation remains fraught with uncertainty. As our clients define their budgets for 2023, we see consistency in maintaining their current digital investments and programs, but we noted a more conservative approach towards opening new initiatives. We also see less tolerance for low performance and a focus on efficiency, increasing the room for CI&T through digital efficiency and more opportunities to replace low-performance competitors, including a greater willingness to nearshore services. Reflecting this macro scenario in our projections, we expect our net revenue for the first quarter of 2023 to be at least BRL590 million, representing a 20% growth year-over-year. We also anticipate sequential growth throughout the year. For the full year of 2023, we expect FX-neutral net revenue growth in the range of 13% to 17% year-over-year. We expect our adjusted EBITDA margin to be at least 19% for the full year of 2023, maintaining our current margin level. Our 2023 outlook is based on the current market conditions and reflects the uncertainties we see in the demand environment. Finally, I sincerely thank our stakeholders, clients, investors, partners, and CI&T employees for their continued support and commitment to our long-term shared vision and goals. Thank you all for attending our call today. We now conclude our presentation and may begin the Q&A session. Thank you.

Eduardo Galvao, Investor Relations Director

Thank you, Cesar. Thank you all for joining us today. We'll now begin the Q&A session. I'll announce each participant's name; once you hear it, please unmute your line and ask your question. When you're done, please mute your line. The first question comes from Ashwin from Citi.

Ashwin Shirvaikar, Analyst

My question is if you could provide various incremental revenue metrics for '23 in terms of how the revenue projection breaks down organic versus inorganic? And given that you are now more diversified, how do you see growth across your various regions?

Cesar Gon, Founder and CEO

Let me start by giving you the components. Our projected growth for 2023 is estimated at 9% organic growth and 6 percentage points coming from M&A. We are forecasting an incremental sequential quarter increase throughout the year. In terms of geographies, we are seeing more traction in the U.S. and Europe, based on market conditions and the fact that we acquired excellent companies in those geographies. This provides us with planned opportunities for upselling and cross-selling and organically expanding these newly acquired platforms for growth. So basically, we expect sequential expansion throughout the year.

Ashwin Shirvaikar, Analyst

As a follow-up, could you characterize the visibility that you currently have? Many companies have mentioned that things slown down dramatically in December; has that normalized recently?

Cesar Gon, Founder and CEO

Sure. Based on my conversations with our clients, I believe the overarching demand indicates a mix of optimism and caution. We continue to see the imperative for companies to increase their investments in digital initiatives. However, December and early January presented uncertainties that impacted our clients' budgeting processes. As they define their budgets for 2023, we observe consistency in maintaining current digital investments and programs, but a more conservative approach regarding new initiatives is evident. We've also seen an increased focus on efficiency, which opens up opportunities for CI&T's value proposition in digital efficiency.

Eduardo Galvao, Investor Relations Director

Next question comes from Tyler DuPont from Bank of America.

Tyler DuPont, Analyst

Are you seeing any change in client contracts or what clients are looking for? Have you observed any elongations or client delays in new or existing projects?

Bruno Guicardi, Co-Founder and President for North America and Europe

What I see is changing in the nature of the use case. There is a greater prevalence on proven use cases, focusing on Horizon 1 and Horizon 2 initiatives, rather than more experimental initiatives we refer to as Horizon 3. For example, in financial services, companies are focusing on more concrete initiatives like customer experience, online banking, and open finance. There is definitely a more pragmatic approach on digital engagements, resonating with CI&T's value proposition of combining strategy and engineering through short cycles to achieve tangible results.

Tyler DuPont, Analyst

Regarding the go-to-market strategy, can you speak to the revenue contribution mix between winning new logos and upselling/cross-selling within the existing client base?

Bruno Guicardi, Co-Founder and President for North America and Europe

2022 was an impressive year for expanding our portfolio. Our net revenue rotation reached 126% for the year, and we added 84 new clients, long-term clients with revenue above BRL1 million. We had a good combination of land and expand strategies. In 2023, we see a similar mix where we expect approximately 85% to 90% of our growth will stem from expanding our current relationships, with the remaining 10% to 15% from new logos. It's crucial to maintain the discipline of adding new logos, as this will be important for sustainable long-term growth.

Eduardo Galvao, Investor Relations Director

Next question comes from Puneet Jain from JPMorgan.

Puneet Jain, Analyst

You had a strong new client addition and expansion in existing clients. How do we view those metrics against the backdrop of the deteriorating macro environment last quarter?

Bruno Guicardi, Co-Founder and President for North America and Europe

As I mentioned, there's a change in the use case dynamics. We typically see our new engagements starting with strategy and transitioning to design and full-stack software. Now, around 70% of our initiatives are focused on enhancing digital efficiency and replacing or adding CI&T's innovative approach to ongoing projects that are already running. This marks a shift from initiating new projects to optimizing and improving existing engagements.

Puneet Jain, Analyst

Could you share insights on margins this year regarding wage inflation, supply pressure, pricing, and utilization rates?

Cesar Gon, Founder and CEO

I think this is a question for Stanley.

Stanley Rodrigues, CFO

With regard to inflation, we are seeing lower pressure compared to the previous year, with things settling down in the field. We have some seasonality in terms of margins because we adjust salaries in Brazil in the first quarter. Throughout the year, we can improve margins again when we implement price adjustments. In Brazil, we have built-in price adjustment clauses in our contracts, and we maintain high flexibility on pricing discussions to meet client needs. Overall, the environment looks positive for that.

Puneet Jain, Analyst

What should we expect for hiring trends in the near term?

Bruno Guicardi, Co-Founder and President for North America and Europe

We usually see slower hiring in Q1, with expectations for hiring to speed up sequentially in Q2, Q3, and Q4. Given the current economic downturn, hiring has become easier across the board, but remains competitive.

Eduardo Galvao, Investor Relations Director

We have a question here from Cesar Medina from Morgan Stanley.

Cesar Medina, Analyst

Amid macro uncertainty, are you seeing any signs of demand stabilization or improvement?

Cesar Gon, Founder and CEO

The FX variation results from our operation, particularly in accounts receivable in Brazil as we report in Reais. Thus, we have to recognize fluctuations in P&L whenever there are fluctuations in receivables in dollars. This mainly explains the variation seen in Q4. As for demand stability, we had mixed visibility during the budget process and are now seeing more solid engagements for critical digital projects.

Bruno Guicardi, Co-Founder and President for North America and Europe

In our budget consultations, we see strong engagement from clients regarding their existing critical digital projects. However, we remain cautious about new initiatives as we are still waiting for more visibility on demand recovery and market conditions. As we guide conservatively for a 15% growth, we rely on current conditions and ongoing discussions with our clients.

Eduardo Galvao, Investor Relations Director

We have a few questions here from the buy side, so I want to touch on the talent side. What’s the current level of the attrition rate?

Bruno Guicardi, Co-Founder and President for North America and Europe

Attrition, given the overall market slowdown, is trending down. It was 14% in Q4 compared to 16% before, and we continue to see this trend decrease. Leadership turnover remains well-controlled, sustaining our growth and quality in delivery. Additionally, we are diversifying our talent sources, decreasing our reliance on Brazil from 92% in 2021 to 85% in 2022, giving us access to a broader talent pool.

Eduardo Galvao, Investor Relations Director

The final question is about the potential disruption of generative AI in your industry. How are you preparing for that?

Bruno Guicardi, Co-Founder and President for North America and Europe

We see generative AI as a major disruptive force that affects many industries, including ours. We're already working with clients to synthesize and leverage information in various areas. For instance, in healthcare, we assist clients in medical information processing. Generative AI can enhance productivity across all areas — not just software development but also in design and research. We're actively exploring these tools to improve our operations and deliver greater value to our clients.

Stanley Rodrigues, CFO

As we announced previously, we've completed our first wave of acquisitions and are now focused on integrating these recent companies. We are emphasizing long-term organic growth, ensuring our cash generation remains healthy, and preparing for the potential next wave of M&A. In 2023, we will concentrate on integrating recent acquisitions while also seeking growth opportunities through M&A in the future.

Cesar Gon, Founder and CEO

I would like to add that we finished integrating NTERSOL as part of our growth strategy. Our focus remains on reinforcing organic growth, creating robust platforms for future success. We see significant M&A opportunities in our fragmented market for verticals, competencies, and geography. While we may see less activity in M&A this year, it's an integral part of our long-term strategy.

Eduardo Galvao, Investor Relations Director

That concludes our Q&A session. Thank you all for attending this event today. I'll now pass it to Cesar Gon to proceed with his closing remarks.

Cesar Gon, Founder and CEO

Thank you, everyone, for your time and attention. Thanks, Eduardo, Stanley, Bruno, for joining me today. I believe our results reflect the talent and hard work of our team, and I'm proud to work with all CI&T employees globally. We are confident in our solid foundations and will continue our journey of growth and value creation for all our stakeholders. Thank you once again for your support. Stay well, and we look forward to seeing you next quarter. Bye.