Earnings Call Transcript - CINT Q4 2024

Eduardo Galvao, Director of Investor Relations

Welcome to CI&T Earnings Call for the Fourth Quarter and Full Year of 2024. I am Eduardo Galvao, Director of Investor Relations at CI&T. Joining me today are Cesar Gon, our 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 Q&A session. 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. They are subject to known and unknown risks and uncertainties, which could cause actual results to differ from those expressed on this call. We caution you not to place undue reliance on these forward-looking statements as they are 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 earnings release for more details. Our agenda for today includes an overview of our 2024 highlights, followed by some of our business cases. We'll then talk about our people and our financial results. At this time, I'll pass it on to Cesar Gon to begin our presentation. Cesar, please?

Cesar Gon, Founder and CEO

Thank you, Galvao, and good day everyone. Before we dive into our quarterly results, I want to highlight a significant milestone in our journey—CI&T’s 30th anniversary. Since our founding in 1995, CI&T has aimed to be a globally recognized leader in tech services. Over the past three decades, we've successfully navigated various market conditions, achieving 30 consecutive years of growth. Today, we are a global force with 7,000 dedicated CI&Ters across 25 countries, collaborating with some of the world's most respected brands. I’m excited to share that Forrester Research has recently recognized CI&T as a leader in modern application development services, an appropriate honor as we celebrate 30 years of innovation and growth. Looking forward, our continued success is built on three strategic pillars. First, artificial intelligence is transforming industries with CI&T at the forefront through CI&T FLOW. Second, our culture of excellence, fueled by top-tier talent, gives us a key advantage. Lastly, our client-centric approach combines expertise and innovation to deliver lasting value and foster long-term relationships with our clients. Moving on to our financial highlights for the fourth quarter of 2024, we are pleased to report a record net revenue of R$656.5 million, a 25.6% increase compared to Q4 2023. At constant currency, net revenue grew 14.7% year-over-year. This impressive growth was driven by the exceptional performance of our top 10 clients, whose revenue increased 40% in Q4 2024 compared to the same period last year. These clients have been utilizing CI&T FLOW, our AI-powered platform, to enhance their digital transformation efforts. Regarding profitability, our adjusted EBITDA margin reached 19.5%, exceeding the industry average. Additionally, our adjusted net profit was R$78 million, reflecting a 41.3% year-over-year increase. For the full year of 2024, we achieved net revenue of R$2,368 million, marking a 6.0% increase compared to 2023. At constant currency, net revenue grew by 1.3% year-over-year. We ended the year with a strong adjusted EBITDA margin of 18.7%, demonstrating consistent operational efficiency. Our cash generation from operating activities amounted to R$467 million in 2024, underscoring the strength and resilience of our organic operations. We are enthusiastic about the momentum we have established and are committed to driving sustainable growth while continuing to deliver solid results for our clients and stakeholders. Now, let's look at some inspiring client success stories that showcase the diverse applications of AI. I hope these stories illustrate the impact we make for our clients. Now, I would like to invite Bruno to share insights on our global delivery model, the evolution of CI&T FLOW, and our talent strategy.

Bruno Guicardi, Founder and President for North America and Europe

Thank you, Cesar. Good evening everyone. It's a pleasure to be here once again. We finished the year with over 6,900 CI&Ters reflecting a 13% year-over-year growth. We have been utilizing AI to enhance our onboarding and training processes which has been key in maintaining a strong utilization rate throughout the year. In 2024 we focused on promoting from within, cultivating a dynamic culture of opportunity and empowering our teams to grow and embrace new challenges. As a result, our voluntary attrition rate stands at 10.7% while the leadership attrition rate remains very healthy at 3.5%. As we enter 2025, we are excited to welcome 450 new trainees, reinforcing our commitment to strengthening our team and cultivating the next generation of technology leaders. This program enriches our organizational culture and prepares the AI professionals of the present. We have had over 10,000 applications and will develop the first generation of AI-native coders. Another group will also join us in Colombia in the second half of this year, broadening learning and growth opportunities for young talents in the region. Now let me comment on one of our AI-powered offerings which has been a key driver of our recent revenue growth. In 2024 the role of AI in application modernization has evolved from being a nice-to-have to an essential tool for success. Legacy platforms slow down agility and are hurdles to innovation and our clients are turning to AI to overcome those challenges. AI brings great value to modernization efforts, greatly reducing risk and errors while increasing efficiency and speed in the process. Our clients are seeing exponential reductions in modernization timelines, enabling them to accelerate time to value and stay ahead of their competition. We are at the forefront of this transformation with our CI&T FLOW platform which modernizes legacy systems and unlocks innovation. Through generative AI, CI&T FLOW is driving significant efficiencies and speed gains. The platform minimizes risks by automating error-prone, time-intensive tasks and ensures reliability when migrating old systems to modern application architectures. Our AI-powered modernization solutions are contributing to stronger sales pipelines and revenue growth as more clients recognize the need to replace outdated systems that are killing efficiency. Now let me hand it over to Stanley to comment on our financial results.

Stanley Rodrigues, CFO

Thank you Bruno, and good afternoon everyone. I'm pleased to share our financial performance for the fourth quarter and full year 2024. In the fourth quarter of 2024, our net revenue achieved a record R$656.5 million, reflecting a 25.6% increase compared to the fourth quarter of 2023. On a constant currency basis, our net revenue grew a robust 14.7% year-over-year. This strong double-digit organic revenue growth exceeds industry averages, underscoring our competitive position and operational effectiveness. For the full year 2024, our net revenue totaled R$2,368 million marking a 6% increase year-on-year. Net revenue at constant currency increased by 1.3% compared to 2023. In 2024, net revenue from North America grew by 7.5% compared to 2023, driven by the successful expansion of large clients that we onboarded in recent years. In Latin America, revenue increased by 6.2% year-over-year, largely supported by clients in the financial services vertical. When analyzing our revenue by industry vertical, we saw particularly robust growth in the retail and industrial goods sectors which recorded an impressive 70% year-over-year increase. Revenue from the consumer goods sector rose by 14.9% compared to 2023. Additionally, revenue from financial services increased by 5.7% in 2024, primarily driven by our clients in Latin America. For the full year, our top client and top 10 clients accounted for 8% and 41% of our net revenue respectively. At CI&T, we aim to be the partner of choice for our clients, scaling our engagements as they mature to expand wallet share and foster long-term partnerships. In 2024, our focus has been on organic revenue growth and optimizing our client base by targeting large accounts with significant technology investments. Our top 10 clients, each generating a minimum of $10 million in revenue, experienced a year-over-year revenue growth of 9.7% in 2024. This increase underscores the efficiency and value we provide to our largest clients. We are particularly excited about the onboarding of new large clients with long-term commitments in the digital space. Our strong pipeline and conversion rates affirm that we are on the right path. Moving on to our financial metrics. In the fourth quarter of 2024, our adjusted EBITDA reached R$128 million, reflecting a 23.7% increase year-over-year with an adjusted EBITDA margin of 19.5%. For the full year, adjusted EBITDA totaled R$442 million, a 2.4% increase compared to 2023, resulting in an adjusted EBITDA margin of 18.7%. We have been diligent in managing costs and expenses, allowing us to enhance our sales initiatives while effectively diluting general and administrative expenses. As a result, we have consistently delivered strong profitability metrics in recent years. In the fourth quarter of 2024, our adjusted net profit reached R$78 million, reflecting a 41.3% increase compared to the same period in 2023. The adjusted net profit margin improved from 10.6% to 11.9% in the fourth quarter of 2024. For the entire year, our adjusted net profit was R$241.8 million, an 8.9% increase from 2023 with the net profit margin reaching 10.2%. This improvement was primarily driven by a reduction in net financial expenses given the lower net debt position and a lower income tax rate. In 2024, we generated R$467 million from our operating activities, a 12.7% increase from the previous year, primarily due to improved working capital management. This translates to a cash conversion to adjusted EBITDA ratio of 105%, underscoring our strong capacity to generate cash from organic operations. Our free cash flow, defined as net cash from operating activities less CapEx, reached R$317 million in 2024, up 16.9% compared to 2023, representing a free cash flow conversion to adjusted net income ratio of 131%. This robust cash generation enables us to pursue strategic priorities to accelerate our growth. Before I pass it over to Cesar to discuss our business outlook, I want to provide an update on a commitment we made earlier this year in the first quarter of 2024. Starting with our 2024 annual report on Form 20F, we will be transitioning our presentation currency from Brazilian Reais to U.S. Dollars. This change aims to better align our financial reporting with the global nature of our business operations and support our growth strategy as we continue to expand our presence in key markets. Cesar, back to you.

Cesar Gon, Founder and CEO

Thank you, Stanley. Before diving into our business outlook, let me first provide a recap of our growth trajectory in 2024. We set out to achieve consistent sequential growth, overcoming the challenges of 2023. Our unique AI approach and CI&T FLOW were key drivers accelerating our recovery and positioning us for sustainable expansion. As we close the year, we are proud to have delivered on this commitment, setting a strong exit rate for continued growth in 2025 and beyond. Now let me comment on our business outlook. For the first quarter of 2025, we expect net revenue of at least $110.5 million, reflecting a 12.6% year-over-year growth at constant currency. This outlook corresponds to a 4.5% growth in U.S. dollars and 23.7% in Brazilian reais as we expect Q1 to mark the peak of FX impact throughout 2025 based on the volatility curve of 2024. For the full year of 2025, we project organic net revenue growth at constant currency in the range of 10% to 15% year-over-year. The midpoint of this range at 12% translates to an 8.4% increase in U.S. dollars and a 16.8% growth in Brazilian reais. In addition, we estimate our adjusted EBITDA margin for 2025 to be in the range of 18% to 20%. To conclude, I want to express my deep appreciation for our team's dedication and resilience. The way you have embraced our AI-first transformation over the past two years is truly extraordinary. Together we will continue to navigate change and drive CI&T forward, shaping a future defined by innovation, collaboration, and impact. This brings us to the end of our presentation. We may now begin the Q&A session.

Eduardo Galvao, Director of Investor Relations

All right, we'll now begin the Q&A session. The first question comes from Puneet Jain from JPMorgan. Hi Puneet, please go ahead.

Puneet Jain, Analyst

Hey, thanks for taking my question and good quarter. Let me ask Cesar, there have been a lot of concerns around the geopolitical macro news over the last few months. Are you seeing any pause or any caution in your client spending over the last few months? And if yes, then are there any differences in your outlook across the U.S. versus other regions like Brazil or Europe?

Cesar Gon, Founder and CEO

Thank you, Puneet, and thank you for your question. Overall we continue to see stable demand from our cohort that consists of particularly large organizations despite this ongoing macro uncertainty and even the recent discussions around tariffs. Stability is good for us because it's a favorable environment for our strategy of replacing underperforming competitors with our AI-driven solutions. One point that I continue to see is a shift toward AI-driven solutions, reinforcing our focus on AI. To give you a data point, right now we have a stronger pipeline compared to the same period of last year, roughly 30% higher. For me, this is a promising leading indicator for 2025. So we continue to be cautious, but in our cohort of clients, we see stability.

Puneet Jain, Analyst

So, no incremental delays or pause in your pipeline?

Cesar Gon, Founder and CEO

Not yet.

Puneet Jain, Analyst

That's good to know. And then can you review your use of cash? It's been a while since you pursued an M&A. Your peers have been very acquisitive adding assets in data AI, one of the strategic areas that you mentioned. Can you share what should we expect for the use of cash in 2025?

Cesar Gon, Founder and CEO

I can start and then Stanley can complement. First, I think we made a strategic decision to focus last year, 2024, on transforming CI&T into an AI-first company. I think this focus has been a key driver of our organic growth. By the way, organic growth has always been our primary value creation engine and it will continue to be so. But moving forward we may resume M&A as a way to speed up our organic growth. So our focus would be on targets that help us to expand particularly in the U.S., leveraging our nearshore capabilities in Brazil and Colombia, and adding new high-potential clients to our portfolio. Regarding capital allocation, Stanley, do you want to complement that?

Stanley Rodrigues, CFO

Yes, Puneet. Additionally, to any M&A that may happen in the near future, we are continuing our investments towards R&D, meaning our AI platform flow, which, as Cesar mentioned, has been delivering outstanding results, driving efficiency and leveraging our growth. So of course, we will continue investing in that. Also, given the high cash generation we project for this year, we also see that a good way to provide returns to shareholders is via share buybacks, preventing dilution from stock options compensation, or even increasing earnings per share, for example. We also are prioritizing paying down debt, reducing interest payments. I would say those are the main items.

Puneet Jain, Analyst

Thank you. Good luck.

Eduardo Galvao, Director of Investor Relations

Thank you, Puneet. The next question comes from Vitor Tomita from Goldman Sachs. Vitor, your line is open.

Vitor Tomita, Analyst

Hello and thanks for taking your questions. So I have two questions from my side. The first one is a bit of a follow-up on the question by Puneet on cash deployments. You also enlarged quite a bit your sales capabilities in 2024 with more dedicated sales teams. Should we see the level of selling expenses and sales investment in Q4 as a good guide for 2025 or do you see room to invest further in customer acquisition to further boost the growth as well? And our second question would be related to capacity utilization. If you could give us a bit more color on how that is trending at the moment. I recall from the opening statement that you mentioned it was strong going well, but if you could give us a bit more color on that, it would be great. Thank you.

Cesar Gon, Founder and CEO

Thank you, Vitor. I will start with the first question and then Bruno can handle the second one. Yes, you are right. In the last couple of years we have been enhancing and expanding our sales structure and our sales approach across all four regions we operate. We will continue this process. It's paying off. I think we have a much stronger pipeline and commercial pipeline and visibility due to, of course, our effort and differentiation around AI and flow, but also a more proactive and intense sales effort. So, in general terms, you will continue to see increasing investment around sales and of course take advantage of the efficiencies we gain with AI and also diluting our G&A expense as we expand. Bruno can handle the second part.

Bruno Guicardi, Founder and President for North America and Europe

Your questions are around the utilization rate, right, Vitor?

Vitor Tomita, Analyst

Yes, yes.

Bruno Guicardi, Founder and President for North America and Europe

We estimate the utilization rate to keep at a very strong level as we finished Q4. So we see good levels of utilization rate between 85% and 89%. And there's a natural oscillation there, a seasonal oscillation over the quarters. But that's what we estimate to be in 2025 as well. So we don't see any differences there coming from 2024.

Vitor Tomita, Analyst

Very clear. Thank you very much.

Eduardo Galvao, Director of Investor Relations

Thank you, Vitor. Our next question comes from Thiago Kapulskis from Itau. Thiago, go ahead.

Thiago Kapulskis, Analyst

Hi everyone. Thanks a lot for jumping to ask questions. I have two questions as well and all related to the guidance. Right, so just want to get a little bit more sense of the puts and takes in the full-year guidance. In Q1, you guided for a dollar of 5.80 something. Just want to understand if you have the same assumptions for the dollar which has been very volatile during this period over the past few months. And also trying to understand a little bit if you are considering activity in the United States more specifically, given one of the questions that is happening here. So anything, any color would be interesting. And also one very last point as well. If you could give us color on the organic growth involved in that guidance, that would be interesting as well. Thank you.

Cesar Gon, Founder and CEO

Well, I can start, Stanley can complement.

Stanley Rodrigues, CFO

Yes. Well, thank you. Thank you, Thiago, for the questions with regard to FX, as Cesar mentioned in the voiceover, we understand that we are at the peak of that scenario of devaluation of reais. So for 2025, we are considering that stabilization. And of course, given that we have our business continuing to have a mix of different currencies underneath, right? So we have reais, we have U.S. Dollars and hard currencies in the top line while having a different mix in the cost. So those are not changing. And that's why we are always guiding using the constant currency which better translates the actual increments on the business. So with regard to the guidance we are providing, 12% constant currency for the full year is fully organic growth, right? Cesar, if you want to add there.

Cesar Gon, Founder and CEO

Sure. In terms of regions, we are guiding very strong growth in our two main regions, North America and Latin America. Mainly the U.S. and Brazil, and a more stable outlook for Europe mainly due to cautions regarding geopolitical and macro. A good expansion in Asia Pacific too. But mainly our two main regions, the larger region will be driving our growth.

Thiago Kapulskis, Analyst

Sounds good. Thank you very much for the answers, guys.

Eduardo Galvao, Director of Investor Relations

Thanks, Thiago. Our next question comes from Bryan Bergin from TD Cowen. Bryan, please go ahead.

Bryan Bergin, Analyst

Hey guys, good afternoon. Thank you. First question on the outlook for 2025 and really kind of the shape of the year. So we see we're guiding for the first quarter nearly at the midpoint of that constant currency range for the full year, 12 plus. I'm curious as you go through Q2 through Q4 as we think about the cadence of 2025, is there anything that is an important consideration? And at the same time too, when you think about your 2025 guide visibility, do you have a sense of what's contractually committed versus what you have to still go get in the pipeline?

Cesar Gon, Founder and CEO

Okay, thanks Bryan. Basically, I think we are consistent with our historical growth engine and seasonality. We are projecting a solid Q1 with a good year-over-year constant currency growth at 12.6% and we are forecasting continuing our sequential expansion from Q2 on at a very good pace. Regarding our visibility, we have good visibility, we are working with a reasonable range in our full-year guidance. So we considered that we are very conservative in a good way, also counting on a very strong commercial pipeline as I mentioned before. So good visibility but some caution regarding maybe intensified volatility. The upper range of our guidance is driven by our solid commercial pipeline while the lower range reflects caution in case of intensified macro volatility.

Bryan Bergin, Analyst

Okay, okay, very good. And then the second question here is on Gen AI impact in client engagement. So where you are further along in the usage of Gen AI and agentic solutions in your delivery, how is that impacting the commercial or the contracting terms in those engagements? Is it different than what you've seen historically? Maybe just give us some color there.

Cesar Gon, Founder and CEO

Sure, Bryan. I think as expected, AI is progressively becoming embedded in all aspects of digital project development now, whether for efficiency, for customer experience, or even for data and decision-making. What we see in our demand is, I would say, half of our demand is applying AI to speed up legacy and application modernization, cloud migration, several data engagements, like preparing the foundation for a future AI-driven world. The second part of the demand is about improving customer experience journeys for consumers with the new possibilities around AI, designing and building new digital products, and also a growing number of use cases using Gen AI focused on hyper-personalization, like the ones we showcased during our presentation. So half we classify of the demand based on AI, we classify as horizontal demand, and half we classify as vertical demand, and I believe that it will remain along the year.

Bryan Bergin, Analyst

Okay, thank you guys.

Eduardo Galvao, Director of Investor Relations

Thanks, Bryan. Our next question comes from Ernesto González from Morgan Stanley. Hi, Ernesto.

Ernesto González, Analyst

Hi, thank you for taking our questions. It's one on our end. We saw some slight sequential weakness in North America and a little bit more in Europe. Could you please walk us through what you saw in each of those markets relative to the third quarter? Thank you.

Bruno Guicardi, Founder and President for North America and Europe

I can take that one. In Europe, as Cesar mentioned before, we're seeing, I think, being shaped by the current geopolitical and economic environment in Europe that's been dealing since the beginning of 2024. But for North America, it is just a regular seasonality and volatility, but it's small. We don't consider that critical going forward to 2025. As we mentioned, we're going to get strong growth coming from that region. That's our biggest region at this point.

Ernesto González, Analyst

Sure. Thank you.

Eduardo Galvao, Director of Investor Relations

Thanks, Ernesto. Our next question comes from Gustavo Farias from UBS. Gustavo, go ahead.

Gustavo Farias, Analyst

Hi guys, can you hear me?

Eduardo Galvao, Director of Investor Relations

Yes.

Gustavo Farias, Analyst

I have two on my end. The first one regarding specifically some new legislation in Brazil impacting LatAm. If you could comment on the effects of the return of payroll taxes and how you are seeing the reactions from clients, if you are able to be able to pass through this to prices? And to what extent this is embedded in your guidance for 2025? And my second question regarding what Cesar mentioned about AI-related projects, efficiency-related versus more client-facing projects, let's call it. What kind of scenario of those profiles of projects, AI-related projects are you considering for 2025? How are you seeing this evolve going forward? Thank you.

Stanley Rodrigues, CFO

I can take the first question, Gustavo. Thank you for asking. Regarding payroll taxation in Brazil, it begins in 2025 and will gradually increase over a four-year period until 2028. This gradual implementation has allowed us to proactively prepare and engage with our clients ahead of time. We are fully committed to minimizing the impact through productivity improvements and cost-saving initiatives. We are on track to achieve our EBITDA margin guidance of 18% to 20% in 2025, meaning we are already considering these factors in our guidance. Through the various initiatives I mentioned, we are effectively managing this change in Brazil without any negative impact.

Bruno Guicardi, Founder and President for North America and Europe

I can take the second one on the profile of the demand, Gustavo. Thanks for the question because that's a big opportunity for us there, right? One could think that there is a small amount of infrastructure that needs to be done to prepare for this new world of AI, right? So in terms of data and applications. The reality is there is just a massive amount of backlog there that our clients still have in data and applications sitting in very old infrastructure that needs to be modernized in order for them to actually really accelerate towards a Gen AI future. That profile, I think, will give us a couple of years of demand in terms of just the preparation infrastructure needed to be put in place for that future. So I don't see that profile changing very fast going forward. That's to make it simple.

Gustavo Farias, Analyst

All right, thanks for the answers and congrats on the results.

Bruno Guicardi, Founder and President for North America and Europe

Thank you.

Eduardo Galvao, Director of Investor Relations

Thanks, Gustavo. So that concludes our Q&A session. I'll now invite Cesar to proceed with his closing remarks. Cesar?

Cesar Gon, Founder and CEO

Thanks, Eduardo, Bruno, and Stanley. Thank you all for joining us on our call. I'd like to extend my gratitude again to all CI&Ters across the globe for your hard work and achievement in this quarter. A special thanks to our clients for choosing CI&T as a partner to co-create this exciting new chapter of AI-driven innovation. Stay well. See you soon.