Earnings Call Transcript
CI&T Inc (CINT)
Earnings Call Transcript - CINT Q3 2023
Eduardo Galvao, Head of Investor Relations
Good morning, welcome to CI&T Earnings Call for the Third Quarter of 2023. I’m Eduardo Galvao, Head of Investor Relations at CI&T, and it's a pleasure to be here again to talk about our operating and financial results. With me on today's call are Cesar Gon, Founder and CEO; Bruno Guicardi, 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. 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 and the 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. 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 measures in the appendix for more details. Our agenda for today includes an update of our quarterly highlights, followed by some of our successful business cases. We'll then talk about our people and our quarterly financial results. 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 here again to talk about our results and achievements. Based in London for the past few months, I've superbly positioned myself for global travel. I've had the opportunity to visit many CI&T teams around the globe. This is a routine I've always valued, and I'm now able to resume in this post-pandemic world. Our team's spirit, rich global culture, enthusiasm for our vision and plans are truly heartening. These trips have been focused on introducing CI&T/FLOW, our AI platform for hybrid digital in cities like New York, London, Sao Paulo and Melbourne. These events presented our value proposition of radically enhanced productivity and customer experience through AI. It's been remarkable to witness the evolution of our platform since its July launch. We are proud to report that over 20 of our largest clients are now engaged, with more than 2,000 active users from CI&T and our co-built clients, utilizing the beta version of CI&T/FLOW. We are at the beginning of this exciting differentiation journey, yet, the early results have been very promising. Now let me comment on our operating and financial performance. Our net revenue reached BRL529 million in the third quarter of 2023 compared to BRL559 million in the second quarter of last year. The number of clients with annual revenue above BRL1 million in the last 12 months continued to expand, reaching 187 in this quarter and serving as a strong growth driver once the overall market conditions improve. The adjusted EBITDA margin reached 18.5% in the third quarter of 2023, which demonstrates our commitment to maintaining a lean organizational structure and optimizing our operations during a period of lower growth. In addition, we generated BRL254 million in cash from operating activities in the nine months of 2023. This strong cash generation further strengthens our financial position and provides us with the flexibility to invest in strategic initiatives that will drive future growth. Stanley will deep dive into these figures later. Now let's take a look at some examples of our client engagements and business highlights for the quarter.
Bruno Guicardi, Founder and President for North America and Europe
Thanks, Cesar, and good morning, everyone. It's a pleasure to be here again. Throughout this year, we have diligently balanced the supply and demand of skills with prevailing market conditions, keeping a streamlined organizational structure while preparing ourselves to resume growth in the near-term. We ended up the quarter with 6,100 CI&Ters, and our voluntary attrition rate continues in a downward trend. Above all, our leadership turnover rate remains at 4%, which plays a vital role in the continuity of our high-quality service delivery, and our ability to develop a new generation of CI&T leaders. Diversity and Inclusion is a cornerstone of our organizational culture, and in the third quarter of 2023, we made progress by introducing some key initiatives. For instance, we hosted the month of people with disabilities in September, welcomed a fresh cohort of students into our Career Acceleration for Black People program, and provided inclusive leadership training. Additionally, we organized numerous workshops, training sessions and events centered around enhancing cultural awareness and promoting emotional well-being. Now let's shift our focus to our environmental initiatives. CI&T is fully committed to championing social and environmental responsibility. Our primary objective revolves around generating a positive and lasting impact on society and environment. This quarter brought forth exciting news. In our first year on the Public Emissions Registry, the leading platform for reporting corporate greenhouse gas emissions in Latin America, the Brazilian GHG Protocol awarded us the Golden Seal of Quality. In our sustainability journey, we achieved a significant milestone this year by publishing our greenhouse gas emissions inventory in our ESG report. Since then, we have diligently strived to comprehend and minimize emissions, infusing environmental and sustainability responsibility across our organization. Leveraging initiatives such as our ESG powerhouse and collaborative projects with our business units, we actively integrate sustainability into every aspect of our operations. Our commitment involves consistently refining our approach to environmental matters in alignment with industry best practices. Now I invite Stanley to give you more details about our financial performance.
Stanley Rodrigues, CFO
Thank you, Bruno, and good morning, everyone. I'm glad to be here once more sharing our financial results with all of you. In the third quarter '23, our net revenue was BRL529.1 million and it compares to BRL559 million in the third quarter 2022. The variation in net revenue was mainly due to the unexpected budget replanning of our top client and part of our acquired portfolio. For the nine months '23, our net revenue increased to BRL1.7 billion, up 9.9% at constant currency compared to the same period of last year. When analyzing our revenue distribution by geography, North America is our largest market, accounting for 44% of our total revenue in the nine months of 2023. This is a testament to the strong presence and success we have achieved in this region. Latin America is another significant market for us, representing a substantial share of 41% of our total revenue. Europe follows with a revenue share of 10%, while Asia-Pacific holds a 5% share. In terms of verticals, the financial services segment continues to be our primary source of revenue, contributing 29% to our total revenue in the nine months of 2023. Additionally, the consumer goods sector is a significant contributor, accounting for 20% of our total revenue, exemplifying our ability to deliver transformative solutions in this industry. The technology and telecommunications vertical contributes 18% to our revenue, showcasing our proficiency in meeting the unique needs in this rapidly evolving sector. Finally, our revenue share from our top client improved to 10% today from 16% in the nine months of 2022, and the top 10 clients' revenue share improved to 42% from 52% in the same period. This is due to a variety of factors, including the cautious approach in the enterprise spending environment, as well as the successful onboarding of new roles. Most importantly, as we look forward, it represents the diversification of our revenue streams as we expand our client base and enter into new geographic regions and industries. Talking about diversifying our client base throughout the last 12 months, we have successfully onboarded 40 new clients that are generating revenue exceeding BRL1 million. We are excited to share that these new clients will serve as a catalyst for our growth as these engagements expand and gain traction over time. The consistent net revenue retention rate of approximately 123% over the past five years is a strong indicator of the value we provide to our clients. This rate exemplifies our ability to not only retain new clients but also expand our engagement with them over time. This aspect plays a pivotal role in ensuring our sustainable growth trajectory. Moving forward, we will continue to prioritize both the acquisition of new clients and the nurturing of existing relationships. Now, let me detail our financial performance for the third quarter '23, and the nine months '23. Our adjusted EBITDA was BRL98 million in the third quarter '23, compared to BRL105 million in the third quarter '22. The EBITDA margin was 18.5%. Analyzing the results year-to-date, the EBITDA increased to BRL328 million versus BRL290 million in the nine months 2022, up 13.2%. The EBITDA margin rose to 19.2% in the nine months '23 from 18.4% in the nine months 2022. These results demonstrate our strategic focus on optimizing our SG&A expenses. Through a systematic and disciplined approach, we have actively identified operational optimization opportunities resulting in a reduction of these expenses. This has helped to offset the impact of our gross margin, reflecting our commitment to maintaining financial resilience and efficiency. It is important to note that we have adopted a cautious approach throughout this year, recognizing the need to navigate the current market dynamics with prudence while preparing our resumption of more aggressive growth in the coming years. As we continue to adapt and refine our strategies, we are confident in our ability to position ourselves for sustained growth and long-term success. Our adjusted net profit was BRL45 million in the quarter versus BRL67 million in the third quarter 2022, mainly due to higher net financial expenses, which I will explain in more detail. In the third quarter '23, net financial expenses were BRL20 million, BRL13 million higher than third quarter '22 as a result of three factors: lower foreign exchange gains in the comparable period, which is a non-cash effect; a derivative gain from an interest rate swap that benefited our results in the third quarter '22, and higher debt position as part of our M&A strategy. The foreign exchange variation and derivative results tend to balance out throughout the year. Our adjusted net profit in the nine months '23 increased by 10.5% to BRL176 million from BRL159 million in the same period of 2022. Finally, our cash generated from operating activities rose to BRL254 million in the nine months '23 from BRL29 million in the same period in 2022. And our free cash flow, excluding the CapEx of our net operating cash flow, increased to BRL163 million, substantially above our cash consumption of BRL81 million in the nine months 2022. The consistent generation of strong cash flow empowers us to continue investing in strategic initiatives that will further drive our growth and enhance our competitive advantage, while simultaneously maintaining flexibility in our capital allocation priorities. Now, I invite Cesar back to comment on our business outlook.
Cesar Gon, Founder and CEO
Thank you, Stanley. While enterprise spending sentiments remain cautious, we are glad to be supporting a growing number of clients with their core digital initiatives as they design and prepare their AI investments for the years ahead. For the fourth quarter of 2023, we expect our net revenue to be in the range of BRL519 million to BRL540 million on a reported basis. The midpoint of this guidance range indicates stable sequential revenue. For the full year of 2023, we are narrowing the range within the previous guidance. Now, we expect our 2023 FX neutral net revenue growth to be in the range of 4% to 5% compared to last year. Finally, we are maintaining our expectations for the adjusted EBITDA margin of at least 19%. In such a volatile year, we have focused on maintaining our solid profitability, generating a significant amount of cash, and evolving the AI capabilities of our team as we resume our solid growth trajectory. Thank you for attending our call today. We now conclude our presentation and we'll begin the Q&A session.
Eduardo Galvao, Head of Investor Relations
All right. We'll now begin the question-and-answer session. I'll announce each participant's name. Once you hear your name, please unmute your line and ask your question. Then, when you're done, please mute your line. The first question comes from Ashwin Shirvaikar from Citi. Hi, Ashwin. Please go ahead.
Ashwin Shirvaikar, Analyst
Thank you, Eduardo, and good morning, everyone. I appreciate the comments. Let me start by asking about the decrease with the top client. Is this related more to furloughs or temporary reductions, or is there something more significant happening with the client? Also, do you have any insights on when spending from the client might return to more typical levels?
Cesar Gon, Founder and CEO
Good day, Ashwin, and thank you for your question. Great to see you. Well, I think as Stanley mentioned, it was an unexpected budget replanning for our top client, and we believe we have a very stable situation, that's what we are foreseeing. This top client has been with us for more than ten years now. So I think we are still the most strategic partner for digital, and I think it's just a result of a very volatile year and they decided to adjust budget and that's why we saw this decline. So now we foresee a stable situation.
Ashwin Shirvaikar, Analyst
I see. Okay. And as you think more broadly past the one client, any early thoughts that you can give us as to how you're planning for 2024? What we've heard from others is a slow start to the year with the hope that higher backlogs should convert in later parts of the year. Are you consistent and are there things that you can say that provide higher visibility into forward comments?
Cesar Gon, Founder and CEO
Sure. I think, Ashwin, a good way to see the current demand environment for our services, I think there are equal forces acting in different directions. The first one is macroeconomic pointing to still a cautious spending of our clients. But there is a second force that is the new tech revolution driven by AI that is pushing our clients and every single company to increase their investments around digital to capture efficiency first and then prepare the company for inevitable customer behavior disruption that is going to happen because of the competitive environment in a world powered by AI. So, macro environments constraining, AI pushing demand. And our recommendation is simple, capture efficiency with CI&T/FLOW, of course, opening budget and space to engage in the new customer experience game. If we exclude the variations that Stanley mentioned, we are observing new demand indicating growth across the board. So we are confident to deliver a very stable and strong Q4 marking what I believe is the start of our standard sequential growth through 2024 and accelerating as we progress in the year, that's our current visibility under the current market conditions.
Ashwin Shirvaikar, Analyst
Understood. Thank you, all.
Eduardo Galvao, Head of Investor Relations
Thank you, Ashwin. Our next question comes from Ernesto Gonzalez with Morgan Stanley. Ernesto, please go ahead.
Ernesto Gonzalez, Analyst
Hi. Thank you for taking our question. It's an international expansion just to see how it's doing relative to your expectations. And anything you can comment going into year-end and into 2024 would be great. Thank you.
Cesar Gon, Founder and CEO
Bruno, do you want to handle this one?
Bruno Guicardi, Founder and President for North America and Europe
I'm not sure if I got the question. Can you repeat it?
Ernesto Gonzalez, Analyst
Yes. How they're doing relative to your expectations for the year? Have you seen any improvements in demand and trends or anything you can comment going into year-end and 2024?
Bruno Guicardi, Founder and President for North America and Europe
Yeah. We don't see a lot of differences in demand across regions. It looks very similar across the board. Some sectors are a little softer than others, mainly the tech sector, which was a relevant one for us. The traditional big Fortune 1000 clients are stable, but smaller tech companies are softer. But that's across the board, it doesn't have any difference across regions. And so that's what I've seen everywhere.
Ernesto Gonzalez, Analyst
Really clear. Thank you.
Bruno Guicardi, Founder and President for North America and Europe
No problem. Thank you.
Eduardo Galvao, Head of Investor Relations
Thank you, Ernesto. Our next question comes from Puneet Jain with JP Morgan. Puneet, please go ahead.
Puneet Jain, Analyst
Hey. Thanks for taking my question. I have a question for Stanley, regarding margins. It's like, obviously, you are doing a lot of cost-cutting this year, including cuts in SG&A. Is that margin upside sustainable? And what are you seeing on pricing or expect for gross margin as we move into next year?
Stanley Rodrigues, CFO
Hi, Puneet. Thank you for your question. In this quarter, we are experiencing a transition phase and have reached a low point. We believe we are moving from this depressed market into a period of stabilization and growth. Regarding margins, we expect them to return to our historical levels in the coming quarters. On sustainability, we find our operations in cash management, margins, and costs to be quite sustainable. Our focus has been on preparing for growth, especially by leveraging AI. We've made significant progress with strategies aimed at optimization to enhance the consumer experience that will foster growth. We are committed to maintaining this sustainable approach in our cash management and overall operations.
Puneet Jain, Analyst
Got it. And then, are you seeing any differences across regions or across verticals as it relates to clients' willingness to start new projects, specifically in AI area?
Cesar Gon, Founder and CEO
Okay. Go ahead, Stanley.
Stanley Rodrigues, CFO
Yeah. We have 20 of the biggest clients already in the FLOW platform, doing all the experimentation, initiating the trajectory on top of optimization. Some clients are already willing to jump to the next phase, which is towards consumer experience.
Cesar Gon, Founder and CEO
Sure, Stanley. I think CI&T/FLOW helps CI&T go-to-market strategy in two ways, Puneet. In terms of the efficiency, productivity, we are already replacing competitors based on tangible gains around tech efficiencies leveraged by CI&T/FLOW. This is the main opportunity for now and 2024, and I see a big opportunity for many years ahead because it's not a sprint, it's a 10-year marathon around the revolution in software development and software engineering powered by AI. The second opportunity is the demand associated with the advent of new business use cases by industry. This is already happening, but it's still in the early days and I believe it will be really relevant in terms of revenue from 2025 on, as the technology gains maturity and stability, and the competition environment reshapes.
Puneet Jain, Analyst
Got it. Thank you.
Eduardo Galvao, Head of Investor Relations
Thank you, Puneet. Our next question comes from Carlos de Legarreta with Itau BBA. Carlos, please go ahead.
Carlos de Legarreta, Analyst
Hi. Can you hear me?
Eduardo Galvao, Head of Investor Relations
Yes.
Carlos de Legarreta, Analyst
Sorry, I'm not sure my video is working. I'm connected from mobile. Thank you. Good morning. Thanks for taking the call and the question. I have two quick questions. The first one, if you can talk about the utilization rate and its evolution, how do you see that going forward? And secondly, if you can comment on how the digesting of the acquisitions that you made in 2022 is going, I mean, there was at least four of them, so if you can talk about that, giving us some color at the qualitative level, that would be very helpful. Thank you.
Bruno Guicardi, Founder and President for North America and Europe
I can take that one. Carlos, thanks for the question. The utilization rate has been high as we've been adjusting the workforce according to demand. So it has remained high and we are forecasting that, as we kind of resume growth, we'll continue high, and we already have a couple of hundred positions open so we see some potential growth in the near future. That's a metric that we track very closely, and even in the previous quarters when low demand hit, the utilization rate was still very high. To your second question, what was that again? Sorry, Carlos.
Eduardo Galvao, Head of Investor Relations
Digesting the acquired...
Bruno Guicardi, Founder and President for North America and Europe
We're very happy with the speed of that integration. How we seamlessly integrated the business teams and the delivery teams across the board with all the acquired companies. The highlight of that process is that some of the acquired companies had a bigger exposure in tech, as I mentioned before, which is a segment that has soft demand right now. But in the highlights, we have already seen the thesis of those acquisitions working. We have many clients that were coming from those smaller companies that had under a million dollar type of engagements, scaling rapidly to $5 million to $10 million engagements, really tapping into the scale and complementary capabilities of CI&T. We see this happening in the U.S. and in EMEA. So we have many cases, and we feel like going forward, we will continue to look for more opportunities to enhance our M&A efforts in 2024 with a potential second wave of M&As coming as soon as market conditions and prices appear favorable.
Carlos de Legarreta, Analyst
Thank you, Bruno. And as a follow-up to that, I guess, the last comment you just made, what would be the conditions or the metrics that you will be looking at to assess that the outlook for M&A is getting better?
Bruno Guicardi, Founder and President for North America and Europe
We've been looking at pricing, so if the private market is already reflecting the reality of public markets, and of course, we're looking for companies or assets that are doing well. We want to see resilience in the target companies as well, companies that we can navigate during the soft demand environment. So those are the main two factors we want to see before moving forward with M&A processes.
Carlos de Legarreta, Analyst
Appreciate it. Thank you.
Bruno Guicardi, Founder and President for North America and Europe
Thank you.
Eduardo Galvao, Head of Investor Relations
Thank you, Carlos. We have two questions here that we've received by email. The first one is regarding CI&T/FLOW. How do you expect it to contribute to winning new clients or expanding the relationship with existing ones?
Cesar Gon, Founder and CEO
Sure. I can take this one. Again, we are very excited with the early results. As I mentioned before, more than 20 of our largest clients on the team, more than 2,000 people from CI&T and clients on board in the platform. We are now reaching a large number of use cases for efficiency in the platform. We have around 30 AI agents now, fulfilling our value proposition. We started with a foundation that handles privacy, security, ensuring AI is enterprise ready. On top of that, we bolster the teams with AI agents towards tech efficiency. This is the three layers of our value proposition: enterprise readiness, efficiency, and experience. In terms of the demand generated by that, we are tackling productivity—there's a need to replace poor performance competitors based on tangible gains around tech efficiency, therefore creating space in the budget. From next year on, we will onboard new clients in the platform. Right now it's available only for CI&T current clients. We are preparing everything in terms of capabilities and technology to scale from next year on.
Eduardo Galvao, Head of Investor Relations
Okay. The second question is, considering the strong cash generation this year, what are the priorities for capital to be deployed?
Stanley Rodrigues, CFO
Hi. I can take that one. Thank you for the question. On top of that cash generation, we should bear in mind that traditionally, we have a seasonality of generating a stronger cash flow in the second half of the year. We are deploying that cash mainly in three areas. First, we have our debt service. We are paying down debt to prepare our balance sheet for the next strategic moves. Second, we are investing in R&D with AI. As I mentioned, we are investing timely with the proper scope in that area. Third, we've been promoting a share repurchase as we see a great opportunity with the price currently and it's a way to return value to our shareholders as we don't have a dividend policy here. We also have some M&A obligations where we can use those repurchased shares to fulfill those obligations. So, those are the main three areas for capital allocation.
Eduardo Galvao, Head of Investor Relations
Thank you, Stanley. There’s just another question that came up by email on how do you foresee the evolution of our organizational structure in response to client demands and artificial intelligence?
Bruno Guicardi, Founder and President for North America and Europe
I can take that one. To Cesar's point before, the next ten years will completely reshape our industry. We're very pleased with the pace we're learning. There is no amount of hiring that can be done to actually get people that can anticipate what's going to happen. We must retrain our whole staff to meet this new demand. So, that’s where we are dedicating our efforts, to really move fast. Today, we have more than 2,000 people—almost a third of the company already involved with our AI powerhouses or one of the 22 clients already using FLOW, helping to reformulate their software development processes. We're striving to create conditions to support CI&T/FLOW, which is now open to 100% of the staff. This allows even more people to join and help clients figure out how to reformulate their entire software development processes. This transition will create immense potential for gains in speed and productivity, ultimately enhancing user experiences for our clients and their customers.
Eduardo Galvao, Head of Investor Relations
All right. That concludes today's Q&A session. I'll now invite Cesar to proceed with his closing remarks. Cesar, please.
Cesar Gon, Founder and CEO
All right, Eduardo. Thank you all for participating in our call. Thanks, Eduardo, Stanley, and Bruno. Once again, I want to thank all CI&Ters around the world for the hard work and achievements in the quarter, and a special thanks to our clients who are selecting CI&T to build this amazing new chapter of innovation powered by artificial intelligence. Stay well. See you in the next quarter.
Bruno Guicardi, Founder and President for North America and Europe
Thank you.
Eduardo Galvao, Head of Investor Relations
Thank you all for attending today.