Q4 2023 Ci&T Inc Earnings Call

Participants

Eduardo Galvão; IR Director; CI&T Inc

Cesar Gon; Founder & CEO; CI&T Inc

Bruno Guicardi; Founder & NAE President; CI&T Inc

Stanley Rodrigues; Partner, CFO; CI&T Inc

Eduardo Hubi; Analyst; UBS

Gabriela Morales; Analyst; Itau BBA

Joseph Vafi; Analyst; Cannacord Genuity

Presentation

Eduardo Galvão

Good morning. Welcome to CI&T earnings call for the fourth quarter of 2023. I am Eduardo Galvão, 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 (Operator Instructions) 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 differe 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 will 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 non-cash accounting errors related to deferred income tax liabilities associated with the tax benefit on goodwill. The corrective adjustments are non-cash in nature, 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 this 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 Gon to begin our presentation. Cesar, please.

Cesar Gon

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. This year presented us with a series of short-term challenges due 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 artificial intelligence.
As we navigate through this challenging year, we focused on the reinvention of CI&T by partnering with our clients in launching CI&T/FLOW, our AI platform for hyperdigital. As the founder and CEO, my mission is to accelerate their 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 our strength and adaptability more than ever. Now looking forward, technological advancements have opened up the realm of new possibilities for business to enhance productivity and establish a competitive edge in an increasingly disruptive landscape.
My experience with large companies has 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 artwork 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 BRL2.2 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 BRL10 million and BRL20 million in revenue from 38 in 2022 to 50 in 2023.
We ended 2023 with an adjusted EBITDA margin of 19.3%, slightly better than in 2022 as a result of our diligent cost and expense management efforts throughout this period of lower growth. Finally, in 2023, we generated BRL414 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 US. This trend is expected to continue giving 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 plans. Stanley will provide more details on our financial performance shortly.
Now let's explore some client engagements and business highlights for the quarter.
(video playing)
I hope you enjoyed our client stories, updates, and highlights. Now, I would like to welcome, Bruno, to delve into our ESG initiatives and global talent strategy.

Bruno Guicardi

Thank you, Cesar, and good morning, everyone. I'm delighted to join you once more.
To date, we've released our second ESG report which outlines our initiatives, actions, and objectives in the environmental, social, and governance realms. 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 in mitigating our environmental footprint to foster a more sustainable world. I encouraged you download and read our ESG report which is now available in Investor Relations website.
In 2023, our initiatives continue to demonstrate steady progress. As we can see in this slide, we made important advancements in all three pillars, integrating this 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 measured 100% of our carbon footprint globally. And most importantly, we neutralized 100% of the carbon emissions generated by our operations worldwide through 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 were 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 Targets 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 50.3% of our people coming from underrepresented groups. Our commitment to 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 programs, skills, financial contributions in other initiatives.
In the governance pillar, we've made progress in strengthening our practices, especially in risk management 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 and 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 with 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 in 9.3%. And for the executive layer, the attrition is even lower at 3.6%.
As we look towards the future and focused 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 opportunity it would bring to leverage our company and foster innovation and 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 sharing CI&Ters for their continued support and trust in us as we were work towards a brighter future for our company and our people.
Now I invite Stanley to comment on our financial results.

Stanley Rodrigues

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 revenues stood at BRL522.6 million, a decrease of 14.6% year over year, primarily attributed to lower revenue from our top client and a decline in revenue from select clients within our acquisition portfolio.
For the full year of 2023, our net revenue totaled BRL2.233 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 client. Conversely, revenue from technology and data communications 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 one 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 client, 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 BRL10 million from 38 in 2022 to 50 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 five 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 BRL103.6 million in the fourth quarter of 2023 compared to BRL127.4 million in 2022. The EBITDA margin was 19.8%. For the full year of 2023, the adjusted EBITDA increased to BRL432 million, up 3.5% when compared to an adjusted EBITDA of BRL418 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 BRL414 million in cash from operating activities compared to EUR161 million in 2022 and the 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 Cesar back to comment on our business outlook for the year coming.

Cesar Gon

Thank you, Stanley. We expect our net revenue in the first quarter of 2024 to be at least BRL520 million on a reported basis, assuming an average FX rate of BRL5 per US dollars in the first quarter of 2024. For the full year of 2024, we expect our net revenue growth at constant currencies 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.

Question and Answer Session

Eduardo Galvão

All right. Thank you all for attending our call today. We will now begin the question and answer session. (Operator Instructions)
Eduardo [Hubi] UBS.

Eduardo Hubi

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

Cesar Gon

I can get this one. In terms of revenue for our 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 property spending environment. So we are planning a stable Q1, followed by incremental growth, not only in the following quarters of the year but also the following years, so resuming our standard growth trajectory.
Primary drivers, I think, I see two main drivers of forces. 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 growth along the year. And we have also a set of new clients that 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 two, let's say, de-risked factors in our projections. The first is our 2023 top one 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 replaced a number of small ticket deals especially from the acquired portfolio with 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 a lower price elasticity. And as we did last year, we are keeping our price cost discipline, as you can see in our above average 2023 numbers of EBITDA and cash flow generation. And of course, we continue to invest in our teams in a way to prepare for resumed growth and the AI CI&T/FLOW distribution.

Eduardo Hubi

Okay. Very clear.

Eduardo Galvão

Gabriela Morales, Itau BBA.

Gabriela Morales

We have two on our side. The first one is regarding the financial statement's restatement. Do you expect potential further restatement 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 recovering the IT 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

Well, I can get the first one. Thank you for the question, Gabriela. Well, with regard to the restatements, we estimate that we'll release the full earnings release in one week or so. And no later than the March 28, we will release the 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, right.

Bruno Guicardi

And just to add to add to that, Gabriela, it's important to mention that we expect all the adjustments necessary within this 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

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

Gabriela Morales

This is very, very clear.

Eduardo Galvão

Joey Vafi, Canaccord.

Joseph Vafi

Good morning, gentlemen. Thank you for taking my questions. First one is, I think I heard, Cesar, that you said that your largest clients going to be stable here in 2024. I was just wondering what is the outlook for maybe your two through five customers?
And then secondly, 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

Thank you, Joe. Regarding your first question, I think our top 1 client is forecasted and we see as stable along the year, and we are seeing a higher growth in our top 10 clients. We are forecasting mid to high single digit of 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 a way. Of course, we have the AI-specific projects. But in general, we turn every single engagement in an AI engagement with CI&T/FLOW. And also, along the year, we expect our -- 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 are already engaging with us with CI&T/FLOW. And also, we are, of course, work hand-in-hand with these clients discussing their AI strategy and roadmap 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 relayed somehow to AI. It's basically because our CI&T/FLOW strategy is our end-to-end platform for producing digital solutions.

Joseph Vafi

Great.

Eduardo Galvão

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

I can take that one as well. Well, thank you for the question. Historically, we have a -- we are running a business that generates a solid operating cash flow. 2023 is another year in this track record, a year without M&A, a year with lower growth, and as a consequence, lower working capital demand.
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, right, and mainly because we expect resuming our growth trajectory. So that will demand more cash in comparison to 2023. Seasonally, the 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.

Eduardo Galvão

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

Cesar Gon

Thank you all for participating in our call. Thank you my friends, Galvão, Stanley, and Bruno for joining 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 project of building CI&T. So stay well, and I'll see you soon.

Eduardo Galvão

Thank you.