CI&T - Earnings Call - Q1 2025

Transcript

Bruno Guicardi (Co-founder and President of North American and Europe Operations)

Thank you, Cesar, and good afternoon, everyone. I'm excited to share our progress regarding our people in this first quarter of the year. We entered Q1 with 7,400 employees, a 21.6% increase compared to Q1 2024. This growth demonstrates our commitment to strengthen our teams and cultivate the next generation of leaders in technology. As part of our NextGen program, we successfully onboarded 420 trainees. This initiative not only enriches our organizational culture, but also prepares today's AI professionals for the challenges they will face in the future. Another group of trainees will join us in Colombia in the second half of this year, broadening learning and growth opportunities for young talents in the region. These trainees will undergo comprehensive AI training and become billable in the second half of the year. Our focus on attracting and developing high-potential individuals is vital to our ongoing success.

By fostering a culture of innovation and continuous learning, we ensure that our teams are well-equipped to drive value for our clients and contribute to our collective growth. I'm excited to announce the launch of our 2024 Global ESG Report, which underscores our commitment to transparency and sustainable practices. As the video illustrated, we achieved significant milestones in 2024 that reflect our ongoing dedication to ESG principles. In addition, last year, we introduced our new environmental policy and engaged 3,700 community members through our volunteer programs. We're also proud of the third edition of the Black Leadership Career Acceleration Program, which supports the development of professionals of color. This report reaffirms our dedication to building a sustainable, innovative future. It highlights how we transform challenges into opportunities, creating value for both our business and society.

We invite you to explore the report and join us in our commitment to sustainability and inclusion. Now, let me share some insights into some of our services powered by generative AI. One offer we see significant traction is in modernization of legacy systems. These platforms are holding clients back and preventing them from adapting quickly to an ever-changing business environment. By leveraging AI, we greatly reduce risks and errors while exponentially accelerating modernization efforts. Another key offering is our AI professional services. This program provides clients with a safe and compliant generative AI platform, together with services to help them establish an adoption roadmap, training, and coaching programs, ensuring they can fully scale AI across the organization, harnessing its potential while minimizing risks. We are also unlocking efficiency through AI-first augmented teams.

This approach enhances productivity and delivers significant business outcomes, allowing our clients to operate with greater agility and effectiveness. We are at the forefront of this transformation. We have industry-leading AI adoption, with more than 85% of our employees already utilizing our AI-powered CI&T Flow platform daily to modernize systems, create agents, and drive tangible results for our clients. Now, I'd like to invite Stanley to share our financial results from this quarter.

Stanley Rodrigues (CFO)

Thank you, Bruno, and good afternoon, everyone. In the first quarter of 2025, CI&T achieved net revenue of $110.9 million, which represents a 4.9% increase compared to $105.7 million in the first quarter of 2024. When adjusted for currency fluctuations, our organic net revenue growth at constant currency was 13.7% year-over-year. This growth can be attributed to our focused internal initiatives aimed at enhancing client relationships and expanding our service offering. Our strategic emphasis on AI and digital transformation continues to drive new business opportunities and deepen engagements with our existing clients.

Now, let's review our revenue breakdown by geography and industry verticals for the first quarter of 2025. Our two main markets reported healthy growth on a year-over-year basis. Revenue from Latin America grew by 11%, while revenue from North America increased by 12%. These figures highlight our strong presence and growth potential in key markets.

In terms of industry verticals, revenue from financial services increased by 25%, and retail and industrial goods grew by 32%. This performance reflects our strategic focus on industries that are prioritizing digital transformation and modernization. Notably, our top 10 clients' revenue grew by 7.2% compared to the first quarter of 2024. This robust performance illustrates the effectiveness of our proprietary CI&T Flow platform, which has proven instrumental in delivering innovative solutions that meet our clients' evolving needs. We have been successfully onboarding high-profile clients, showcasing our ability to expand our engagement with top-tier organizations. Our commitment to nurturing these relationships has led to significant revenue contributions from our top clients. Currently, we have 10 clients generating over $10 million in revenue and 13 clients within the $5-$10 million range. This robust performance demonstrates our effective land-and-expand strategy, allowing us to deepen our partnerships and capture greater wallet share.

In this quarter, we recorded an adjusted EBITDA of $19.6 million, which is a 15.2% increase compared to $17 million in the first quarter of 2024. The adjusted EBITDA margin improved to 17.6% in the first quarter of 2025, up from 16.1% in the same quarter last year. This improvement was primarily driven by lower selling, general, and administrative expenses, reflecting our ongoing commitment to operational efficiency and cost management. Importantly, cash generated from operating activities was $19.6 million in the first quarter of 2025, representing a 100% cash conversion from adjusted EBITDA into operating cash. This strong cash conversion highlights our ability to generate cash from our operations, providing us with the flexibility to invest in strategic initiatives and support our growth. Adjusted net profit increased by 14.2% to $9.6 million in the first quarter of 2025, up from $8.4 million in the first quarter of 2024.

The adjusted net profit margin rose to 8.7% in the first quarter of 2025, compared to 8% in the first quarter of 2024. This improvement was primarily driven by lower SG&A expenses, along with reduced net finance costs. Our adjusted diluted earnings per share was $0.07 in the first quarter of 2025, marking a 16.6% increase from the previous year. This growth in adjusted diluted earnings per share demonstrates our ability to translate increased profits into shareholder value. Additionally, our free cash flow to adjusted net income ratio stood at an impressive 151.6%, underscoring our strong capacity to generate cash flow from our operations. Now, I invite Cesar back to comment on our business outlook.

Cesar Gon (CEO)

Thank you, Stanley. In the second quarter of 2025, we expect our reported net revenue to be at least $115.5 million, equivalent to an 11.9% year-over-year increase on a constant currency basis and 6.5% growth in reported revenue. This estimate assumes an average FX rate of BRL 5.79 to the US Dollar in the second quarter of 2025, compared to BRL 5.21 to the US Dollar in the second quarter of 2024. For the full year of 2025, we are reaffirming our guidance. We expect our net revenue growth at constant currency to be in the range of 9%-15% year-over-year. In addition, we estimate our adjusted EBITDA margin to be in the range of 18%-20%.

This outlook is supported by a solid commercial pipeline, strong sales conversion, and the secure expansion of our top 10 clients in our two largest markets, the US and Brazil, along with ramp-ups of high-potential new accounts. To conclude, I want to express my heartfelt appreciation for the dedication and resilience of our team. Your commitment to our vision has been truly inspiring. As we look ahead, our ability to collaborate, innovate, and transform will continue to define CI&T and drive our success. This brings us to the end of our presentation, and we may now begin the Q&A session. Thank you.

Eduardo Galvão (Head of Investor Relations)

All right. We'll now begin the Q&A 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 Vitor Tomita from Goldman Sachs. Hi, Vitor.

Vitor Tomita (VP)

Hello, and thanks for taking our questions. Two questions from our side. The first one would be more on the, given all the further shift in macro perspectives globally, if you have any updates on how clients are feeling about IT investment, I guess, both in the US and in Brazil. Our second question would be on the solid year-on-year margin expansion this quarter. You cited some SG&A efficiency initiatives that help support that margin expansion. If you could give us a bit more color on those, it would be great. Thank you.

Cesar Gon (CEO)

Thank you, Vitor. I can get the first one, and Stanley can address the second. In terms of demand environment and commercial activity, I think the demand remains stable despite this ongoing macro uncertainty in all the regions we are playing, especially the US and Brazil. I think, as I always mention, stability continues to create a favorable environment for our strategy of replacing underperforming competitors with our AI-driven solutions. Secondly, in terms of commercial activity, we have now a 30% higher commercial pipeline versus the same period last year that allows us to be very confident in our growth guidance. Stanley, can you get the margin?

Stanley Rodrigues (CFO)

Thank you for the question. Since last quarter, last year, first quarter last year, we had improved basically all the, basically, we have maintained all the costs while the business grew significantly with regard to SG&A, which is your question. Also, in the first quarter last year, we had some costs related to restructuring, and that they are not occurring this year. I would say mainly those two items, in general terms, are requiring this efficiency that you see in SG&A.

Eduardo Galvão (Head of Investor Relations)

Very clear. Thank you very much.

Thank you, Vitor. Our next question comes from Gustavo Farias from UBS. Gustavo, go ahead.

Gustavo Farias (Associate Director)

Hi, guys. Thanks for taking my questions too as well. The first one, if you could comment on the demand side, I would like to double-click. Considering that you have driven, delivered a beat on the guidance for Q1 in terms of constant currency growth, considering also that you are growing headcount, and you commented there is more to come in the second quarter, and also considering that results from tech peers in the US mainly have come, let's say, less than feared, how can we expect, how do you see the demand? Is there any upside for growth considering the full year? Is this year still considered a transition year for IT budgets in your vision? That is my first question. The second question, if you could comment on an update as well on the capital allocation priorities for the year.

Do you see any M&As on the radar or R&D continues to be a priority for capital allocation? Thank you.

Cesar Gon (CEO)

Thank you, Gustavo. Let me start with your first questions. Yes, we also recognize a better environment. What I can say is that the high end of our guidance assumes that we capitalize with the current commercial momentum, as I mentioned, our strong commercial pipeline, and also client growth trends we are seeing. The low end of our guidance reflects, let's say, a more prudent approach, given that we still see some macro volatility. If I double-click in the way I see demand overall, we continue to see a big trend regarding what we call horizontal demand. Maybe half of our, we can estimate half of our demand is basically legacy and application modernization, cloud migration, several data engagements where companies, our clients are preparing the foundation for a future AI-driven world. We see a lot of trends also in what we call vertical demand.

Improving customer experience to engage new customers, really build new digital products. We also see what I can call the first wave of AI-first transformation programs where we design a comprehensive program to help our clients to really accelerate their adoption of AI and also a growing number of business use cases around AI and generative AI folks, especially on hyper-personalization. This is the way I see. I think we are paying attention. We are capturing our pipeline, but still, I believe we still need to consider that we have some macro volatility in our forecast and estimations. Starting to answer your second question regarding capital allocation, yes, our priority is R&D in our AI-first transformation. Turning CI&T and CI&T Flow in our main drive for differentiation. We also, of course, in terms of M&A, continue to scan the market for opportunities.

I would like to mention that we are doing that with a very high bar. The reason for this elevated threshold is clear. Due to the AI disruption, many smaller companies are struggling to scale client relationships to the level required for meaningful AI transformation. With that in mind, our M&A folks continue to be on targets that can expand, especially our US presence, bringing in high-potential clients. Critically, we are looking for companies that offer the kind of client engagements where we can clearly see room for scaling CI&T AI solutions. That is a very high bar. Stanley, if you want to add something.

Stanley Rodrigues (CFO)

Besides R&D, as you already mentioned, yeah, I would add the share buyback program that we currently have in place. As we envision this high cash generation that we see for 2025, we see that it's always a good way to provide a return to shareholders via those share buybacks that prevents also dilution from our stock-based compensations and so on. Also paying down debt. This is also we've been executing all the debts, all the schedules for payments of our debts.

Gustavo Farias (Associate Director)

Thanks, Cesar and Stanley.

Eduardo Galvão (Head of Investor Relations)

Thank you, Gustavo. Our next question comes from Brian Bergin from TD Cowen. Brian, go ahead.

Brian Bergin (Managing Director)

Hey, guys. Good to see you. Thanks for the time. First question on your top 10 clients. I wanted to see if you could dig in more about the trends you're experiencing with some of your largest clients. If we look at what you report in US dollars, obviously that top client number is very impressive from a year-over-year growth standpoint. If we think about just the overall top 10 client portfolio, is it possible to talk about what constant currency growth is there just so we can kind of separate some of the effects? Again, just give us some of the puts and takes about some of those close client relationships at the top.

Cesar Gon (CEO)

Thank you, Brian. Great to see you again. First, I think, as you know, our top one client is a very large financial service organization. We are really expanding different businesses in areas of this client powered by CI&T Flow and our ability to demonstrate superior results across the board. It is a very strong and long-term relationship that we are fostering now and boosting with AI. In terms of our top 10 clients, I think if you exclude the top one, we still see very strong growth among our one to nine clients. I think it is around 11%. Maybe Gabo and Stanley can help me with this.

We are seeing the whole back of large customers evolving, not only the top one, but of course, we are very happy with the trust and the evolution of our partnership with all our clients, especially the large and long-tail ones.

Brian Bergin (Managing Director)

Okay. Okay. And then a follow-up on GenAI and client expectations and how that's evolving. You mentioned hyper-efficiency as one of the offerings you've leaned into most. Can you just talk about productivity assumptions from clients and how much it is kind of a pull motion from them expecting this productivity versus how much is CI&T pushing into the client base to obviously differentiate competitively? Talk about that dynamic. I'm more so interested about more of the mature clients that are adopting and generating GenAI solutions.

Cesar Gon (CEO)

I think it's 100% CI&T pushing for that. I think we anticipate that. I think we were very pioneers on creating CI&T Flow and launching our initiative. I think we are ahead of our peers and the average market in general for what we can see and what our clients are telling us. I think by now we have very concrete ways to showcase the numbers we are getting and the evolution of these productive gains as we add more agents to our platform, as we reinvent the methodology of building digital solutions end-to-end, as we reskill or we improve the skill of our teams to be AI-boosted teams. It's 100%, let's say, pushed by CI&T. The response from our clients is amazing. I think that's why we are now starting what I mentioned, this AI-first transformation.

It's kind of we learn a lot in terms of how to convert a team in an AI-based team, how to approach adoption of AI that is a non-trivial challenge. By now, we are helping our clients to start their journey with the learnings of our own two and a half years journeying around AI. I think it's an amazing moment where we can really support our clients in not only capturing productivity. Remember, productivity or hyper-efficiency is just chapter one. We still have customer experience in hyper-personalization and also the powerful act of revolutionizing decision-making and business models. I think we are really moving in a very good pace. I think our clients recognize that.

Brian Bergin (Managing Director)

Okay. Okay. If I could just fit one more in here on margin. So understanding you have seasonality in the first quarter, can you comment on gross margin expectations as you move through 2025?

Stanley Rodrigues (CFO)

Yes, I can. Brian, I can take that one. As you already mentioned, we have that seasonality, which is mainly with regard to the salary increase that we have in the first quarter every year. Throughout the year, as we pass prices forward and etc., those margins will grow. You should expect the same type of pattern that you saw in previous years.

Brian Bergin (Managing Director)

Thank you all.

Eduardo Galvão (Head of Investor Relations)

Thank you, Brian. Our next question comes from Puneet Jain from JPMorgan. Pune, go ahead.

Puneet Jain (Equity Research Analyst)

Hey, thanks for taking my question. I also wanted to ask about this year, especially around the second half of this fiscal year. What's your visibility right now on second half? Are you seeing any differences across US-based clients or Latin America-based clients, especially the clients you have in Brazil? Is there any difference in behavior, spend patterns across those clients?

Cesar Gon (CEO)

Thank you, Puneet. I can start and maybe we're looking at more colors regarding the US market. Our guidance is basically supported by what I mentioned, a very solid pipeline. We have a strong visibility, and we are considering our current very strong sales conversion. As I mentioned, pipeline now is 30% higher than the same year last year. We also consider the secure expansion in our top 10 clients as it's happening now in both our largest markets, US and Brazil. We are still leveraging ramp-ups in very high-potential customers we acquired last year where we are still increasing the demand, the teams there. I don't see any significant difference now between Brazil and the US, but maybe Bruno can add more comments regarding specifically US.

Bruno Guicardi (Co-founder and President of North American and Europe Operations)

Thanks for your question, Puneet. Yeah, we don't want to see a lot of differences in purchase patterns between US and Brazil at this point. We see, as Cesar kind of put in the previous question, we see the beginning of this new era of GenAI. I think we're past the pilots and the exploration that was 2024. I think we see clients more confident moving forward and taking GenAI to scale opportunities. I think we're going to see this accelerating in the following years. It's just the beginning of a major revolution. Again, to Cesar's point, I think we're very well positioned. We're uniquely positioned to capture that demand. We're ahead of the curve. We're ahead of the pack in terms of what we're creating in terms of impact for clients and can prove that with stories, with real data, with real impact.

That kind of reflects in pipeline and a higher pipeline than 2024. That is what gives us the confidence that we're going to get that growth.

Puneet Jain (Equity Research Analyst)

That's great color. Then on GenAI, I totally understand there is so much opportunity that's ahead. My question is more on the structural level. Why is it that IT services companies will necessarily be beneficiaries of this opportunity compared to the software companies or pure-play private companies that are leading with an AI platform? What is it that companies like yourself, your peers bring to the table that others can't in this evolving ecosystem?

Cesar Gon (CEO)

That's a great question, Puneet. That actually, we think that would be a great tailwind for us. Because if you look at the way the buy versus build comparison today, it's cheaper to just go with one standardized solution that fits many clients. But when productivity goals continue to improve exponentially, building will be much cheaper. What we predict, and some analysts in the industry also agree with us, is that there will be a shift towards more custom software. There is no reason why a client would be dependent on a package solution, a software provider, and base their future into the hands of their provider, that ability to adapt and adjust to their needs when you can do it yourself. We see that that would be a big tailwind for services companies because more and more software will be just custom software.

That's what we're seeing, some real case scenarios with our clients right now. They're analyzing build versus buy. When you factor in the productivity increases that we're going to have on the customer software build side, you kind of conclude that that's the way to go for the future. We think that will be a great source of demand for us going forward.

Puneet Jain (Equity Research Analyst)

Thank you.

Cesar Gon (CEO)

Thank you.

Eduardo Galvão (Head of Investor Relations)

Thanks, Puneet. Our next question comes from Maria Clara from Itaú. Maria Clara, please go ahead.

Maria Clara Infantozzi (Head of Brazil TMT - Equity Research)

Hi everyone. Thanks for taking my question. I would like to ask you guys to better explore about the SG&A trends. This was the main positive surprise when we compared to our numbers. Should we expect this space of operating leverage to be a reality throughout the year? If you could please comment about if the structural profitability of this business could be positively revised given this operating leverage tailwind, it would be very interesting to hear your opinion. Thank you so much.

Stanley Rodrigues (CFO)

Maria Clara, thank you for your question. SG&A, we've been operating in a very stable platform, of course, let's say, or we don't expect growth except by the S of SG&A, meaning we are investing on sales. For that portion, you would expect a growth throughout the year. Everything said, we are very in line to deliver what we are guiding in terms of EBITDA, 18%-20%. You shouldn't expect any tailwind, as you mentioned, to go above whatever we already guided the market. Everything is already compounded into that number. From the operational side, we have been experiencing margin gains, small margin gains from AI, I would say, in terms of coming from this efficiency that we are also taking advantage in the operation.

Some gross margin gains combined with that SG&A, as I mentioned, but at the same time, taking into consideration that we are investing in the growth side, meaning the sales, as I mentioned, and also in people. All balanced, we are aiming for the EBITDA that you saw. You have some ups and downs in the whole equation, but the EBITDA will translate everything.

Maria Clara Infantozzi (Head of Brazil TMT - Equity Research)

Great. Very clear. Thank you.

Eduardo Galvão (Head of Investor Relations)

Thank you, Clara. That concludes our Q&A session. I now invite Cesar to proceed with his closing remarks. Cesar.

Cesar Gon (CEO)

Thanks, Galvão. Thank you, Bruno and Stanley. Thank you all for joining us today. I'd like to extend my sincere appreciation for all CI&Ters around the world for the dedication and accomplishments this quarter. A special thank you as well for our clients for choosing CI&T as a partner in co-creating this exciting new area of AI-driven innovation. Stay well. See you soon.