Ci&T Inc

NYSE:CINT

Earnings Call Analysis

CI&T's Continued Resilience Amidst Modest Growth

CI&T steered through short-term economic challenges by reinforcing its commitment to digital revolution innovation, specifically through the implementation of its AI platform, CI&T Flow. In 2023, despite a slight growth in net revenue to BRL 2.2 billion, marked by a 4.1% increase at constant currency, the company succeeded in reducing revenue concentration from its top 10 clients from 67% in 2020 to below 40% in 2023, indicating a diversifying client base. Moreover, the adjusted EBITDA margin improved marginally to 19.3%. Looking ahead to 2024, revenue is projected to fluctuate between a decrease of 2.5% and an increase of 2.5%, with an adjusted EBITDA margin estimated to range from 17% to 19%.

CI&T Poised for Continued Expansion Amidst Economic Challenges

CI&T, a digital solutions provider, outlined in their Q4 2023 Earnings Call an ongoing commitment to growth and innovation despite a tough economic landscape. CEO Cesar Gon emphasized the company's efforts in launching CI&T Flow, an AI platform aimed at fostering digital transformation and accelerating corporate learning. With a reported net revenue of BRL 2.2 billion reflecting a 4.1% growth at constant currency, and an adjusted EBITDA margin slightly improved from last year at 19.3%, CI&T showcases a resilient business model bolstered by a robust cash flow from operating activities amounting to BRL 414 million for the year.

Diversification of Client Base and Revenue Streams

CI&T has made strides in strategically reducing client concentration, thereby diversifying its revenue mix. This approach led to a decrease in revenue dependence on their top client from 15% in 2022 to 8% in 2023 and the collective top 10 client revenue share dropping from 49.6% to 39.7%. Noteworthy is the increase in the number of clients contributing more than BRL 10 million in revenue, rising from 38 million in 2022 to 50 million in 2023. Their net revenue retention rate remained consistently high at 96% for 2023, indicating strong client relationships and service value.

Strategic Focus on Environmental, Social, and Governance Initiatives

President Bruno Guicardi showcased CI&T's dedication to their ESG commitments, proudly presenting their second ESG report that covers all three pillars—environmental, social, and governance—with notable accomplishments such as 100% carbon neutrality in their operations. Moving forward, these core values of sustainable and equitable growth remain integrated with CI&T's strategic objectives, manifested in efforts like reaching a 50.3% employment rate from underrepresented groups and offering career advancement opportunities for their 6,111 employees.

Financial Performance and Outlook

CFO Stanley Rodrigues reported a dip in net revenue to BRL 522.6 million in Q4 2023, which marked a 14.6% YOY decrease primarily due to reduced revenue from top clients and an evolving acquisition portfolio. Despite this, the full year net revenue rose by 2.1% to BRL 2.233 billion, illustrating the company's resilience and ability to navigate through fiscal challenges. Their EBITDA margin improved slightly to 19.3% in 2023. As CI&T is poised to enter 2024, they forecast a constant currency net revenue growth between -2.5% and 2.5%, with an adjusted EBITDA margin expected between 17% to 19%.

Optimistic Outlook Despite Revenue and Margin Pressures

For 2024, CI&T remains cautiously optimistic, facing uncertainties in the macro and corporate spending landscape. They plan for a stable Q1 followed by incremental growth and a standard growth trajectory resumption. Key drivers include traction with large clients, stabilization of their top client—which had previously posed a challenge—and repositioning of smaller deals towards larger client engagements. Also important to highlight is their expectation of resuming a standard growth trajectory, while considering factors such as cost inflation, lower price elasticity, and continued investment in their teams and the CI&T Flow initiative.

Earnings Call Transcript 2023-Q4

[Eduardo Galvao, executive]

Good morning. Welcome to CI&T Earnings Call for the Fourth Quarter of 2023. I am Eduardo Galvao, Head of Investor Relations at CI&T, and it's a pleasure to be here 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 at 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, which could cause actual results to differ materially from those expressed on this call. We caution you not to place undue reliance on these forward-looking statements because 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 non-IFRS measures disclaimer for more details. Today, we announced that we will restate our financial statements for the year ended December 31, 2022, as we identified certain noncash accounting errors related to deferred income tax liabilities associated with the tax benefit on goodwill. The corrective adjustments are noncash in nature. We will not increase the amount of income tax to be paid in the future and are not expected to impact net revenue or profit before income tax. While we expect that our results will be consistent with these preliminary and unaudited estimates, our actual results may differ materially from those preliminary estimates. Our agenda for today includes an update on our quarterly highlights, followed by some of our business cases. We'll then talk about our people and our quarterly financial results. Now I invite Cesar to begin our presentation. Cesar, please.

[Cesar Gon, executive]

Thank you, Eduardo, and good day, everyone. It's great to be here again to talk about our results for 2023 and our business outlook for 2024. Past year presented us with a series of short-term challenges to the economic landscape, combined with the extraordinary opportunity to position CI&T as a co-author of the next chapter in the digital revolution, powered by our division Intelligence. As we navigate through this challenging year, we focused on the reinvention of CI&T by partnering with our clients and launching CI&T Flow, our AI platform for hyper-digital. As the Founder and CEO, my mission is to accelerate our path to value creation with a strong commitment to the long term. This vision is reflected in our team's exceptional dedication, creativity and resilience, showcasing strength and adaptability more than ever. Now looking forward, technological advancements have opened up the ramp of new possibilities for business to enhance productivity and establish a competitive edge in an increasingly disruptive landscape. My experience with large companies have shown me that the speed of change is directly linked to the speed of learning, both at the personal and corporate levels. To drive innovation, companies must focus on understanding the intersection of new technological possibilities and evolving consumer behaviors. The real disruption comes from leveraging both forces at the same time as seen with the current adoption of AI technology. To accelerate change, companies must prioritize learning about AI capabilities and consumer behaviors in the AI-powered world. The key challenges lies in increasing the speed of corporate learning. That's the inspiration of this AI hard work based on Raphael's Masterpiece, the School of Athens, symbolizing the spirit of the renaissance and the pursuit of knowledge. By the way, I invite you to take a look at my coloring the future of AI series on LinkedIn. Moving now to our financial and operating performance in 2023. Our net revenue totaled BRL 2.2 billion, a 4.1% growth at constant currency compared to 2022 within our guidance range. We have strengthened our relationship with existing clients, expanding the number of clients generating more than BRL 10 million and BRL 20 million in revenue from $38 million in 2022 to $50 million in 2023. We ended 2023 with an adjusted EBITDA margin of 19.3%, slightly better than in 2022 as a result of our diligence costs and expense management efforts throughout this period of lower growth. Finally, in 2023, we generated BRL 414 million from our operating activities, a solid figure that underscores the resilience and strength of our business model. CI&T has a notable track record of consistent revenue growth, profitability and robust cash generation. For instance, in the past years from 2019 to 2023, our revenue compound annual growth rate was a strong 35%. Over this period, our revenue distribution has shifted with nearly 60% of our revenue now coming from mature economies, primarily in the U.S.This trend is expected to continue, given the faster organic growth in these regions. Furthermore, a significant improvement was seen in the share of revenue from our top 10 clients. It decreased from 67% in 2020 to below 40% in 2023. We are confident in our ability to sustain our growth trajectory by delivering innovation and impactful results for our long-term clients. Stanley will provide more details on our financial performance shortly. Now let's explore some client engagements and business highlights for the quarter. [Presentation] I hope you enjoyed our plan stores, updates and highlights. Now I would like to welcome Bruno to dive into our ESG initiatives and global talent strategy.

[Bruno Guicardi, executive]

Thank you, Cesar, and good morning, everyone. I'm delighted to join you once more. Today, we've released our second ESG report, which outlines our initiatives, actions and objectives in the environmental, social and governance routes. ESG stands as a foundational pillar at CI&T and the ability to articulate our thoughts and endeavors and share them with our stakeholders is a source of pride and fulfillment for us. At CI&T, we truly believe that our ESG approach reflects our core values and our belief in the interconnected growth of our business, our people and society as a whole. Our ESG strategy is underpinned by a collective vision of fostering equitable advancement opportunities for all, providing education and professional pathways for underrepresented groups and mitigating our environmental footprint to foster a more sustainable world. I encourage you to download and read our ESG report, which is now available on the Investor Relations website. In 2023, our initiatives continue to demonstrate steady progress. As you can see in this slide, we made important advancements in all 3 pillars, integrating these principles more deeply into our business strategies. Let me briefly describe our last year's accomplishments. In the environmental pillar, we're excited to share that we measure 100% of our carbon footprint globally. And most importantly, we neutralize 100% of the carbon emissions generated by our operations worldwide. They are nature-based carbon removal projects. That's applicable for scopes 1, 2 and 3, a great achievement indeed. Additionally, we've just launched our environmental policy outlining the principles we're committed to following to further reduce our impact in key areas such as climate, waste and water management, energy usage and our interactions with clients and suppliers. We're delighted to announce that we submitted this commitment to the science-based target initiative. As a people business, we recognize that a diverse and inclusive workforce is a fundamental driver of innovation and success. In this regard, we're able to finish 2023 with a 50.3% of our people coming from under representative groups. Our commitment to the diversity extends beyond our internal efforts. We actively participate in various social responsibility initiatives within our communities, aiming to foster practices that combat the marginalization of underrepresented groups. Last year, our initiatives reached 27,000 individuals, including educational projects to enhance program skills, financial contributions and other initiatives. In the governance pillar, we've made progress in strengthening our practices, especially in risk management and compliance. We completed the ISO 27001:2022 certification process, which is related to security and data protection. We are proud that our processes and controls are fully aligned with the information security practices within this framework. Moving on to talk about our people. We're proud to have a team of digital specialists who continually strive for excellence in innovation. We're committed to fostering a culture of entrepreneurship, where creativity and out-of-the-box thinking are encouraged, and we believe that investing in our people is the key to our continued and sustained success. We finished last year, we have 6,111 CI&Ters, which is relatively stable compared to the third quarter of 2023. In addition, our attrition rate remains at historically low levels and 9.3%. And for the executive layer, the attrition is even lower at 3.6%. As we look towards the future and focus on resuming growth, we are excited to be able to provide opportunities for career advancement and development for our employees. People are our most valuable asset, and we're committed to supporting them in their professional growth. As we pioneer the advent of AI within our industry, we're excited about the opportunities we're bringing to leverage our company and foster innovation in a great sense of belonging among our employees. Together, we can achieve great things and drive our company towards success. I want to thank all CI&Ters for their continued support and trust in us as we work towards a brighter future for our company and our people. Now I invite Stanley to comment on our financial results.

[Stanley Rodrigues, executive]

Thank you, Bruno, and good morning, everyone. I'm pleased to once again present our financial results to all of you. In the fourth quarter of 2023, our net revenue stood at BRL 522.6 million, a decrease of 14.6% year-over-year, primarily attributed to lower revenue from our top clients and a decline in revenue from select clients within our acquisition portfolio. For the full year of 2023, our net revenue totaled BRL 2.233 billion, representing an increase of 2.1% year-on-year or 4.1% at constant currency within our guidance range. We are pleased to report our continued focus on reducing client concentration and diversifying our revenue mix. One key reason for this strategic shift is our success in gaining wallet share within our largest clients. Looking at the revenue distribution by geography, North America remains our largest market, accounting for 44% of our total revenue in 2023. Mature economies currently adds up to almost 60% of our total revenue, providing resilience to our business. LATAM represents 41% of our revenue and continues to be an important region for growth. In terms of year-over-year revenue growth, we saw positive trends in multiple regions. North America experienced a 5.9% increase. Europe grew by 9.1% and Asia Pacific surged by 28.6%. While revenue from LATAM declined by 5.2%, it remains a key area to leveraging opportunities for growth. Our revenue mix by industry verticals showcases our commitment to diversification. While revenue from financial services remained stable, we saw a reduction in revenue contribution from consumer goods due to lower revenue from our top clients. Conversely, revenue from technology and telecommunications grew by 17.4% year-over-year driven by the expanded client base resulting from our recent acquisitions. In 2023, we significantly improved the distribution of revenue from our key clients, reducing revenue concentration. The revenue share from our top 1 client decreased from 15% in 2022 to 8% in 2023, while the collective share of the top 10 clients reduced by 10 percentage points from 49.6% in 2022 to 39.7% in 2023. Looking ahead, this development signifies the diversification of our revenue streams as we broaden our client base and expand into new geographic regions and industries. Now turning our attention to our client base. In 2022, we saw significant growth in our client base, both organically and through strategic acquisitions. As we look to 2023, our focus has shifted towards maximizing wallet share within our largest clients, cultivating strong relationships and continually expanding our market reach. This is evident by the expansion of the number of clients that are generating revenue exceeding BRL 10 million from BRL 38 million in 2022 to BRL 50 million in 2023. Despite facing economic challenge, our net revenue retention rate remained strong at 96% in 2023, showcasing our ability to navigate tough financial landscapes. Over the past 5 years, our net revenue retention rate has been an impressive 120%. This underscores our resilience and our capability to consistently deliver value to our clients, adapting our strategies as needed, thereby fostering long-term growth and profitability. Moving on, allow me to provide an overview of our financial performance for the fourth quarter and the full year of 2023. Our adjusted EBITDA was BRL 103.6 million in the fourth quarter of 2023 compared to BRL 127.4 million in 2022. The EBITDA margin was 19.8%. For the full year of 2023, the adjusted EBITDA increased to BRL 432 million, up 3.5% when compared to an adjusted EBITDA of BRL 418 million in 2022. The EBITDA margin rose to 19.3% in 2023, slightly higher than 2022. Throughout 2023, our efforts were concentrated on identifying opportunities to optimize our costs and SG&A expenses. This enabled us to sustain healthy margins during this lower growth period. As we move into 2024, we remain cautious in managing our expenses to adeptly navigate the prevailing environment. Finally, in 2023, we generated BRL 414 million in cash from operating activities compared to EUR 161 million in 2022, an expansion of 158% year-over-year. This represents a cash conversion to adjusted EBITDA of 96%, demonstrating our robust capacity to generate cash from our core business activities. Such a robust cash generation allow us to reinvest in our business in strategic opportunities that will drive sustainable growth, such as the flow platform and other AI-related projects. Now I invite Caesar back to comment on our business outlook for the year coming.

[Cesar Gon, executive]

Thank you, Stanley. We expect our net revenue in the first quarter of 2024 to be at least BRL 520 million on a reported basis, assuming an average FX rate of BRL 5 per in the first quarter of 2024. For the full year of 2024, we expect our net revenue growth at constant currency to be in the range of minus 2.5% to 2.5% year-over-year. In addition, we estimate our adjusted EBITDA margin to be in the range of 17% to 19%. Thank you all for attending our call today. We now conclude our presentation and begin the Q&A session.[Presentation]

[Eduardo Galvao, executive]

All right. Thank you all for attending our call today. [Operator Instructions]. The first question comes from Eduardo Rubi from UBS.

[Eduardo Rubi, analyst]

Well, I would like to better understand where taking into consideration for the revenue and margin guidance, please?

[Cesar Gon, executive]

Thank you, Eduardo. I can get this one. In terms of revenue for guidance, I think we are considering that we are coming out of a very unusual year. So there is still uncertain in the macro and corporate spending environment. And so we are planning a stable Q1, followed by incremental growth, not only in the following quarters of the year, but also in the following years. So resuming our standard growth trajectory. Primary drivers, I think I see 2 main drivers. First is we have some of our large clients gain traction. So to give you a data point, our top 10 clients are expanding mid- to high single digit. There is to grow along the year. And we have also a set of new clients that landed we landed in the second half of last year that are now ramping up like Domino's Pizza, as you saw in our highlights. And also, I would mention to, let's say, derisk factors in our projectors. The first is our top 1 2023 top 1 client is now stable. That was one of the challenges of last year.And if you see our last 12 months, I think we gradually replace a number of small deals, especially from the acquired portfolio with good number a good number of large clients. So these are basically the primary drivers for our revenue guidance. In terms of margin, I think we are expecting and projecting cost inflation, combined with lower price elasticity. And as we did last year, we are keeping our price cost discipline. So as you can see in our above-average 2023 numbers of EBITDA and cash flow regeneration. And of course, we continue to invest in our teams in a way to prepare for resumed growth and the flow just revision.

[Eduardo Galvao, executive]

Our next question comes from Gabriela Morales from Itau BBA.

[Gabriela Moraes, analyst]

We have 2 on our side. The first one is regarding the financial statement restatement. Do you expect potential further restatements going forward? Or all the adjustments should be made at once? And the second one is also a follow-up regarding the guidance. How do you see the recovery in the service market throughout the year? Like should we expect a better market in the second half of the year? And also, if you have some color regarding what you expect in terms of market environment for 2025 as well.

[Stanley Rodrigues, executive]

Well, I can get the first one. Thank you for the question, Gabriela. Well, with regard to the restatements, we estimate that we will release the full earnings release in 1 week or so. And no later than the 28th of March, we will release 20-F. So we will furnish the restatements for the quarters within an additional 6K in the same date, the same 20-F date. And of course, the full year restatements you will see in the 20-F for 2022.

[Eduardo Galvao, executive]

Just to add to add to that, Gabriela, it's important to mention that we expect all the adjustments necessary within these financial statements that we'll report with the 20-F. So we do not project any further restatement going forward. It's already all contemplated in the announcement we provided this morning.

[Cesar Gon, executive]

Let me address the second part of the second question. Thank you, Gabriela. In terms of the demand environment, I think we pursue a better environment when we compare to last year, the beginning of last year, part with cautious optimism, we see clearly a better commercial activity and pipeline compared to last year, also an enhanced visibility for the first half of the year. And we still see some level-off uncertain for the second level of the year. However, I think my perspective is that the conservative investment in digital in the recent years are now become evident in the competitive landscape. And if you add artificial intelligence, this equation is inevitable that companies in general will have to accelerate their digital strategy. So especially in the second half of the year and in 2025. So this is my perspective in terms of it.

[Eduardo Galvao, executive]

Our next question comes from Joe Vafi from Canaccord.

[Joseph Vafi, analyst]

First one is, I think I heard Cesar you said that your largest client is going to be stable here in 2024. I was just wondering what is the outlook for maybe your 2 through 5 customers? And then secondly, is it may be a little early, but is it possible to quantify how many perhaps points of revenue may be coming in 2024 from AI-related projects.

[Cesar Gon, executive]

Thank you, Joe. Regarding your first question, I think our top 1 client is forecasted and we see as a stable along the year. And we are seeing a higher growth in our top 10 clients. We are forecasting mid- to high single-digit growth in our top 10 clients. So including the stable top 1 last year. And the second question regarding our -- I think the way we are approaching AI is in such a comprehensive way that -- of course, we have the AI specific projects. But in general, we are turning every single engagement in an AI engagement with CI&T Flow. And also along the year, we expect 100% of our offerings will be somehow powered by AI, especially in the efficiency perspective. So it's really, I think, by now, we have 35 of our larger clients already engaged with us with CI&T Flow. And also, we are, of course, work hand-in-hand with these clients, discussing their AI strategy and road map around this disruption. So I think it's hard to predict. But I would say that probably by Q4 of this year, we probably will have 80% to 90% of all engagement of CI&T somehow impacted or related somehow to AI. It's basically because our CIG flow strategy that is our end-to-end platform for reducing digital solutions.

[Eduardo Galvao, executive]

So we have one question here via e-mail. Could you please provide more context on the cash generation for the year? And what should we expect going forward in that regard?

[Stanley Rodrigues, executive]

Well, I can take that one as well. Thank you for the question. Historically, we are running a business that generates a solid operating cash flow. 2023, it's another year in this track record. And here, without M&A, a year with lower growth and as a consequence, lower working capital demands. For the future, we should expect that we are in the range of 50% to 70% cash conversion from EBITDA as we have been performing historically. And mainly because we expect the resuming our growth trajectory. So that will demand more cash in comparison to 2023. Seasonally, cash generation is stronger in the second half. So you would expect in the first half of the year, a lower cash generation and towards the end of the year, second half a greater amount of cash generation.

[Operator]

So that concludes our Q&A session. Thank you all for attending our event today, and now invite Cesar going to proceed with his closing remarks. Cesar?

[Cesar Gon, executive]

Thank you all for participating in our call. Thank you here, my friends, Eduardo, Stanley, and Bruno, join me in this call. Once again, I need to thank all CI&Ters around the world for their hard work and achievement and also to support this amazing trajectory of building CI&T. So stay well, and I see you soon. [Presentation]