CI&T Inc. (CINT) Earnings Call Transcript & Summary

All right. Good afternoon. My name is Puneet. I'm from JPMorgan's Payment Processing and IT Services team. Glad to have here with us Cesar from CI&T and Eduardo, who is sitting here in audience is also with us. So the format of this presentation is going to be fireside chat. I'll start with a few questions, and then we'll open the floor from -- questions from audience. And for people who are dialing in virtually, feel free to use the portal to send questions our way. So Cesar, welcome. Thanks for doing this. Appreciate it. You reported your first quarter results yesterday. So if we can quickly recap, like big picture, like what themes, what trends you are seeing in the market?

Sure, sure. Thank you, Puneet. Thank you for having me. We reported our first quarter last night. I think it was a very solid result. We beat our guidance. CI&T is growing consistently. 13.7% constant currency growth year-over-year. I think also we represent a very solid bottom line, an EBITDA margin that sticks with the guidance for the year. We are -- by the way, we are reaffirming our revenue guidance growth of 9% to 15% with midpoint of 12%. And I think we are very confident on that. And also the EBITDA -- adjusted EBITDA margin for the year between 18% and 20%, midpoint 19%, is, I think, a solid profitability. So I think it's we -- we also present some evidence, especially pipeline, commercial activity is doing good this year. We have 30% pipeline that is 30% higher than in the same period last year and the conversion rate are good. So basically, we credit that to our AI strategy and the way we organize our positioning and our offerings around the opportunities on efficiency, on customer experience and data decision-making around the AI. So a very, very solid start, and we are very confident.

So one thing that surprised us like -- so going into this earnings cycle, like after Liberation Day, we were worried like how like the -- just the macro shock and might have impact on certain clients, especially folks in like retail, CPG industries. And from your guidance, it didn't look like there was like a much impact even in those industries, it didn't look like there were many delays that you experienced. So can you help us understand like why like the macro news and all didn't have like the impact that people feared.

Sure, sure. I think the cohort of clients of the main clients of CI&T are very, very large companies, very solid companies. And we are working on very critical digital initiatives. So I think as what we are doing is very strategically, they will not stop investing because of short-term volatility. So I think I would grab the main reason why we are not feeling this downside is because of the cohort of clients and the kind of problems we are working with them.

Can you give us examples of like the digital projects or AI projects that are continuing or that clients are kick starting in this environment?

Sure. For example, in Brazil, all the large financial institutes and especially in large banks are in a very competitive moment regarding customer experience, customer engagement. And I think this is driving a lot of demand because it's resonates with our capabilities of looking this journey end-to-end and add a lot of value around -- innovate a lot around customer experience. If you look at different markets, also see a huge opportunity on finally address legacy systems. And with AI and our legacy modernization studio. We can really address this long-term challenge of large companies, if they migrate their legacy systems to the cloud, they will start moving faster, being more cost effective. And at the end of the day, create a better customer experience for their customers. So this is also very critical. And now it's even feasible with much less risk in a different equation of return on investment. So this is also driving a lot of demand. And we credit that to the way we organize our capabilities, our AI agent, CI&T FLOW towards a set of very important challenges our customers have, and we are fulfilling our growth with that.

Can you elaborate on CI&T FLOW from. What I'm hearing is, like there is demand for certain like AI core modernization, those projects, and you have to have capabilities to benefit from that. So what is it that you are doing and there like talk about CI&T FLOW that differentiates you from other companies?

Sure. I think since we realize, I think the milestone of our -- for our industry is the launch of GPT 3.5 in late November 2022. From that moment on, we realized that we would have a great opportunity if we embrace AI in -- I would say, in a very comprehensive way. And the first step would be how we create a safe environment for CI&Ters and our clients to really start learning how to reinvent software engineering based on the exponential growing of AI -- generative AI capabilities. And then we launched it. We worked in the first half of 2023. And by July, we were launching the first version of CI&T FLOW, a robust end-to-end platform, already connected with all the relevant foundational models are ready with cocreating with 5 of our 10 largest customers. So we were working in a very enterprise setting environment with security, we have privacy, with all the reliability that are nonnegotiable for our cohort of clients. So from that, we start retraining our teams. Now we have 7,000 people using AI and FLOW daily. And also, we have the opportunity to create a growing number of AI agents for different domains and problems. Now we have more than 3,000 AI agents in the platform. And now we are connecting these agents in the Agentic way, that is -- so it's an exponential curve of gain efficiency, productivity and really the ability to not only address the legacy problems, but also the new challenges that our customers are facing. So I think that was a very smart move, very early and bold move from CI&T and our customers. And now we have 100% of our customers take advantage of CI&T FLOW and our AI-boosted teams.

No, I remember you've been talking about FLOW -- CI&T FLOW for a while and it's beginning to see like the results of all those investments. So like you mentioned Agentic AI, like obviously, like it has like the latest buzz word in Gen AI era. So we hear like the concept like services as a software, right? So increasingly more services work will be delivered as software or a platform. So like why are like IT services companies broadly, the right type of firms who will address that opportunity? Why couldn't it be like the software companies or like a pure-play companies, private companies, which lead with the platform, less people, more platform-based solutions.

Puneet, what I see now is because of the equation of return on investment is changing dramatically because of hyper productivity. I see the build versus buy equation changing in favor of custom development. And we are just in the beginning of this radical curve of hyper productivity. So what I see is as we evolve this -- the capabilities of the model, the latents all -- even the -- with more diversification of foundational models and including the advent of the open source models as a relevant part of this puzzle. I see tremendous opportunity on innovation around AI solutions. And I believe this will replace a lot of things that now are considered part of the buy side of this equation. So what I foresee is a much larger market for solutions, customer solutions and -- but in a very different fashion. I think companies will have to verticalize their capabilities to be really grasp on design the best solutions for specific problem, you need to know the business, the industry, not only the technical part of it. So I see more potential of differentiation on verticalization that is CI&T strategy going from vertical to vertical and create a specific custom AI-driven solutions, compared to the game of very horizontal play of the large IT consulting business where they go to A to Z, but with very standardized solutions. So I see a tailwind in favor of what we are doing.

Got it. And that's very interesting. So it's like that got me thinking like, so it will be back in the days, how there was software companies would provide ERP and IT services company will do customization, bring that industry knowledge and expertise. Now that IT services companies will add a platform or a solution that is more industry-focused that sits on underlying software.

Yes. I think it's a trend, and it will be a big opportunity for companies that move fast in this direction.

Yes. No, very good. That's great. Other question, other concern that we hear from investors around AI is about all those spend new projects, whether it's cloud migration, core modernization, Agentic platforms. What's the source of funds for all those projects like our clients cutting back on their operations, the business process because they don't need as many employees, paralegals, admins and AI is doing those jobs. Or are they just moving funds from other discretionary projects into this?

I think the equation for legacy modernization is more regarding return on investment. So the kind of speed and flexibility you're going to have as soon as you modernize your legacy system for getting more customers increase your client acquisition strategy, improve your customer experience, so you get more customers and more business. I think it's more about competing with other companies that are also challenging the status quo regarding customer experience than moving from one IT bucket to another. Of course, there is a lot of opportunities of automation that will free some investment capacity. But specifically for when you are talking about mission-critical platforms is kind of urgent that you migrate these platforms to the cloud where you have another level of scalability, flexibility and so on. So this is just a foundation of the digital transformation really is, when we say that we are in the second chapter of the digital revolution with AI. This is a backlog from the first chapter, right? It is still there. The majority of large companies are still dealing with very old -- 30 years old legacy system, and it's almost impossible to compete in the dynamics of the current market because of the new technology possibilities and new consumer behaviors, if you not seriously address this legacy.

And AI will make it easier to take care of this technical debt.

Yes. And finally this is the good news. Something you would spend, I don't know, 7, 8 years and hundreds of millions. Now you can do in 2 or 3 years in a completely different cost equation. So I think this is the opportunity.

And that's also like when we talk to some investors who worry about feature of IT services or outlook for companies like even yourself, they asked us about this developer productivity that AI will -- the lot of work that's being done manually can be done using AI, right? And what does that mean for IT services, companies, because naturally the project size on like-to-like basis goes down. So is that the response like or like how would you make us feel confident that the incremental work that will come from AI will more than offset or at least offset incremental productivity.

I think if we look at the history of computing on Earth, starting 1946 with the ENIAC. The first general purpose digital computer. In the last 80 years, the productivity has been increased a lot. And this equation, every time we have a leap in productivity, we have an increase in demand because there is a lot of problems for 2 reasons. First, the return on investments increased. So a lot of things you were not considered to automate or to add technology, now makes sense because of this equation. Another thing that's happened especially now with AI, there is a class of problems that we -- before AI, we were not considering to use technology to address now are addressable using technologies. So the number of challenges and problems that we will be able to solve is much, much higher than to consume this new jump in productivity. So this equation is always -- you need to look at as a 2-part equation productivity means demand.

Got it. Got it. And then you talked about like your 7,000 people like who are trained, who use AI tool solutions every day. Last night, on your earnings call, you talked about 85% of employees that use AI daily. So talk to us like the effort required in getting people and the training effort and why your peers cannot catch up or replicate what you have been doing in training your employees?

I think our strategy was a very comprehensive one. First was creating a vision, a purpose, why CI&T is doing this? Why we are creating flow? Why this is important for our clients and for the future of our clients and for the future of CI&T. So we have a purpose. We want to be a serious protagonist in this AI revolution. We want to be the first IT service company that will really handle this in a very aggressive way. And then we create a lot of opportunities for the CI&Ters to learn, to deep dive on AI, on FLOW training, formal training certifications, a lot of incentives in career, bonus for executives. We measure every single day who is using who is not using, why? So was a full period of radical PDCA around we need to put our teams inside this trend. And 6 months later, it was clear that we were winning. Everyone was excited, and we start to see a lot of innovation coming from this reinvention of process or workflows that we could do in a different way. Another thing I think we got right was we did it for our clients and for our production teams, but we also create a program, we call U prompt for all the supporting areas of CI&T. So if you are a CI&T in our market, in our financial, in our HR area. You also need to embrace FLOW. If you're a coder or if you are a non-coder, there's a lot of things to learn and to do. The idea of design the future of CI&T is a reinvention of our business, combined with the reinvention of what is to be a professional in this future powered by AI. I think that connection was the main flywheel that allows us to move so fast during these last 2 years.

And do you have to like hire different type of people now? Are you hiring the different skills?

Basically, the first step were basically reskilling. Now we are doing a very, very strong bet around fresh grads. Probably you heard, we just onboard more than 400 trainees. And we prepare a training, a very specific training. We want to create the first AI native generation, because in the last 2 years, we learned that more senior you are, more hard is to change. More young, more in the beginning of your career, you are more open for -- to really reinvent your capability or skills the way you see these opportunities. So Next Gen, that is the name of the program is our huge experience on creating the first generation of AI native coders. It's just for coders now, but we are very happy with the early results we are getting.

No, that's great. At this time, like are there any questions from people in the room?

Yes. Could I just -- first of all, thank you so much for being here, Cesar. I appreciate you. Could you elaborate on the kind of folks you're hiring and what it takes to sort of train an AI-native developer. Maybe if I could ask a follow-up built into there. How do you expect that to keep changing over the next couple of years?

Sure. These are basically the people that are graduating on computer science or things like software engineering or some math especially for data, some tests, math background. And basically, our training program is 6 months, to, let's say, in-room deep dive on AI and FLOW and then 4 months on the job in real challenges, real engagements we have been coached intensively. That's -- so basically, we believe that there's very young, fresh profession who can add value after 6 months of very intensive and focused training. For the future, what I think is -- what I see is we are still decoding the new capabilities or behaviors of this new generation of tech talents or professionals. But basically less emphasis on hard skills and more emphasis on soft skills related to curiosity to being innovative, being less attached to one way to solve a problem and so on. We are decoding that. But I figure this is the future of our -- a good chunk of our cohort of employees.

Let me ask about margins. So your guidance for this year is 18% to 20% on adjusted EBITDA margin basis, which is quite wide range. Like maybe talk to us like what are the levers in the model like that can push margins higher above this range or even like towards the high end of this range. Like how should we think about margins? You had some margin headwinds in Q1, like why some of those headwinds will not continue beyond Q1?

Sure. I think in the short term, as we are growing fast, just the dilution of our G&A is it's something we can leverage. But -- and -- but we are using that leverage also to increase our sales investment because we see a lot of opportunities. We have an edge in terms offering and differentiation. So it's a good moment to increase our investment on sales and go-to-market strategies. So it's natural. I think another leverage is we are seeing less effort to onboard new employees because of AI. We can speed up this process to billability, and also reduce the overhead of our senior people having to stop to really help someone that is arriving in a new business or project context. We can use AI for that. You can really solve 90% of your questions with a model, not with a person. That helps a lot in the business in the onboarding process. In a more strategic way, I think the commercial model will evolve. We are doing a lot of experiment, not only migrating time material for fixed price, but also creatively testing new commercial models where potentially we can capture more margin. This is early stage, but I think in 12, 24 months, we probably will have a portfolio of commercial models that can help in the long term to increase margins, too.

And like you've talked about, like, say, how much like productivity you can extract using AI like in typical like the coding effort, right? Your peers like we hear numbers 20%, 30%, 40%, like numbers like that x percentage of productivity using AI. My question is when you bid for contracts, when you go to a client, do they care about that number at all? Like one vendor saying we can do it using 20% AI, other 30%. Like how are they taking those decisions when everything is so new and so uncertain?

We are doing something much more concrete we get. Let me get what your other vendor did in the last 6 months and we measure. And we say, well, this is -- with the standard AI boosted team of CI&T, we can do it in half of the time or half of the hours in a very concrete way, especially if they are already using CI&T teams, they have these numbers. I think play in our favor in the last 3 decades, one thing that put CI&T apart is, our discipline on measuring everything we are doing. And in particular, productivity is something we handle in a very concrete way. So with AI, it's very easy to assess the current productivity of one team and compare with what would be if this team was using a different methodology, a different set of platforms in like AI agents like CI&T FLOW. So it's a very concrete. It's not an abstract discussion about I'm 30% better. It's about what is your current baseline of productivity and when you can get in 3 or 4 months if you go in a different direction.

Talk to us about your use of cash, like you have used M&A. It's been a while since you've done completed deal. So talk to us like how do you look at -- think about M&A as one of the levers. Many of your peers have gotten very acquisitive in last 1 year compared to like you haven't done much. So how do you think about M&A as a driver for future organic growth?

Sure. I think we see M&A as a long-term strategy to accelerate our organic growth. But I think in the current moment of AI disruption, I think we are -- we continue to scan the market. But we -- I think we are looking at the market with a very high bar, because what I see is smaller companies are facing a very hard time on handling the AI revolution. And if we acquire a company and basically, the main reason why we are acquiring a company is the portfolio of clients. But if these small companies do not have the kind of relationship that we can scale for an AI discussion, AI transformation discussion, we're going to destroy value. So we are -- but having said that, we continue to -- our main geographies is the U.S., and we continue to look for good companies with a good portfolio of large clients but also checking if the level of relationship, the intimacy is enough for CI&T to scale this relationship to be able to apply the AI concept and solutions we are talking about. So I think this is a very high bar. Having said that, we continue to look at the market. If we find a good target, we will execute another M&A and probably here in the U.S.A.

Very good. Like we have about 3 minutes left. Any last questions from...

So you mentioned some success in financial services, particularly customer experience with banks. And would you say that's like by far and away your kind of most successful near-term applications on those AI stuff? Or would there be other -- any other interesting vertical implementations or call-outs you want to share with folks?

I think every customer facing industry will have to reshape the customer experience strategy. More competitive environment will move fast, where we have more digital native participating in the competitive game. The increments will have to move fast. So I think it's more an equation of competitiveness than the intrinsic characteristics of the specific vertical. So -- and this is different from geography to geography. As I mentioned, Brazil is a very interesting moment for financial services but I see a lot of opportunities in consumer goods, especially when you -- when big large companies want to really understand better their customer, their end customer, the direct-to-customer strategies and/or leverage hyper personalization through a more intense use of data and AI, so another vertical. Retail is always a battle among the traditional retailers and the marketplace is very well designed for producing better customer experiences. So the traditional retailers will have to move fast if they want to compete in this space. So I think it's -- you're going to see this battle in every single industry where customer-facing is important.

Let me quickly ask one more like the -- you recently started reporting results in USD. It's more Stanley question, so sorry about that. But like the feedback you have gotten from investors on that and what else you can do to drive investor interest here in the U.S.?

I think it was an important move. Now we report in standard U.S. dollars, easy to compare CI&T with our peers with the vertical. Another thing is, I think we are a company with 3 decades. So 30 years of consecutive growth. But for the market, we have only 4 years like we -- so we are new. And -- but consistence and our ability to continue to expand, to grow, to adapt, to take advantage of moments like this one where there is a technology disruption and also the big shift in consumer behaviors. I think this resonates with our track record. One thing that I think is very important to understand is the fact that we are 7,000 or 7,400 now, it's a big number for the kind of demand our clients have it, but it's small in terms of the whole IT services. So we can continue to grow aggressively without any bottleneck on the supply side, especially because we have a very comfortable position in Brazil. That is the largest tech talent pool in Latin America by far, and we are a dominant force there. We are diversifying. Now we are ramping up Colombia and other places. But I think projecting CI&T in a 10-year high growth is more about how we're going to leverage demand than how we're going to manage the supply side of the equation.

Absolutely. Thank you. Thank you so much for joining us.

My pleasure. Thank you for having me.