Ci&T Inc (CINT) 2022 Q2 法說會逐字稿

Hello, and good morning, everyone. Welcome to CI&T's Second Quarter of 2022 Earnings Call. I'm Eduardo Galvao, Head of Investor Relations at CI&T. And it's a pleasure to be here again to talk about our results.

With me on today's calls are Cesar Gon, Founder and CEO; and Bruno Guicardi, Co-Founder and President for North America and Europe; and Stanley Rodrigues, our CFO.

This event is being recorded. (Operator Instructions)

The Q2 presentation is available on the company's Investor Relations website at investors.ciandt.com. 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, including, but not limited to, those factors described in our earnings release and discussed in the Risk Factors section of our annual report on Form 20-F and other reports we may file from time to time with the SEC. These risks and uncertainties could cause actual results to differ materially from those expressed on this call. We caution you not to place undue reliance on those 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 reconciliation tables on non-IFRS measures in the appendix for more details.

Our agenda for today includes an update on recent events, followed by some of our successful business cases and a few highlights. We'll then talk about our people and discuss our quarterly financial results.

At this time, I'm pleased to invite Cesar Gon to begin our presentation. Cesar, please?

Thanks, Eduardo. Good day, everyone, and thank you for joining us today.

During those last months, I could finally physically attend investors conference and meetings, and it was good to meet many of you in person. We are excited to report a solid second quarter, demonstrating the resilience and consistency of our engagements with our long-tenured clients. We also continued to be disciplined in onboarding new clients every quarter to guarantee sustainable long-term growth. The demand for our services remain strong in all geographies and industry verticals we operate. And we continued to expand and diversify our inspiring network of tech talent worldwide.

And I'm glad to announce another move in our programmatic M&A strategy. This week, we announced the acquisition of Transpire in Australia, a founder-led award-winning technology consultancy company to accelerate our growth in the Asia Pacific region. We are excited about the arrival of Transpire to the CI&T family and with all future possibilities it will spark.

Since 2009, Transpire has been the trusted technology partner of some of Australia's most innovative organizations, including Vodafone, Virgin Australia, among several large companies. Headquartered in Melbourne, with team members across Australia, Transpire delivers digital experience across several verticals, with a solid design-led mobile-first cloud-native approach. As part of this strategic acquisition, Transpire will add around 100 digital specialists to CI&T, further expanding CI&T's operations in the region. Transpire recorded AUD 15.5 million in net revenue in its fiscal year, which ended in June 2022.

The purchase price for this acquisition is AUD 23.4 million.

Previously, in late May, we announced the acquisition of Box1824, a future focused strategic consulting firm headquartered in Sao Paulo, with around 40 specialized senior strategy professionals, helping Brazilian and global companies to design and implement their future. With their ability of detecting the coding and directing consumer behavior changes, the 3D methodology, they have been able to shape several industries for trading an impressive client lists, including names like Itau Bank, Vivo Telefonica, Nike, Google, Disney and Spotify. Box1824 will remain an independent business unit, part of the CI&T family, to foster their successful business model and enhance CI&T's end-to-end digital capabilities.

Now let me comment on the second quarter financial highlights. We are glad to present another set of high growth in revenue with solid profitability metrics. Our net revenue in the second quarter of 2022 grew 67% year-over-year or 73% in constant currency, eliminating FX fluctuation. The main factors contributing to our higher growth pace continued to be the expansion of our engagements with existing clients, the addition of 17 new clients this second quarter with annual revenue above BRL 1 million in the last 12 months, and our programmatic M&A strategy. Our adjusted EBITDA margin was 19.1%, 160 basis points higher than our previous quarter.

Finally, we continued to expand our global talent network. We ended the quarter with more than 6,700 CI&Ters, a net addition of 2,700 employees in the last 12 months. That's a 68% growth in our headcount, in line with our top line growth.

This is our 24th quarter of consecutive net revenue growth, embracing a business that allows the rare combination of long-term high-growth rates, solid profitability and cash generation.

Once again, I want to express my gratitude to all CI&Ters across the globe who have been dedicated to making this happen.

stanley will deep dive into our financial results shortly.

Lastly, we are very proud of the business impact through digital initiatives we generate for an ever increasing number of large and fast-growing clients in several geographies and industries.

Regarding our revenue in the first half of 2022, 84% is from brick-and-mortar companies and 16% from digital natives. And to make this more concrete, let's take a look at some powerful stories with our clients, our data powerhouse and some additional highlights.

(presentation)

Now I invite Bruno to talk about our global talent strategy.

Thank you, Cesar. Good morning, everyone. It's nice to be here once again.

Our team keeps expanding globally. And we ended the second quarter of 2022 with more than 6,700 CI&Ters, which represents a net addition of 2,700 employees in the last 12 months or a 68% growth year-over-year. And we're proud to be recognized as one of the best companies to promote diversity, equality and inclusion within our teams by Mice Diversity Institute LGBTQI+ business and right forum in the human rights game pain foundation.

As we continue to grow and expand, we have a great opportunity to tap into the potential presented by the megatrends of remote work and work from anywhere. We're leveraging the processes and practices we have honed for decades, working in a distributed way to further integrate remote work into our operations and diversify even more our talent pool. We're gradually penetrating new labor markets and are really excited by these initial results. At the same time, we're pioneering innovative ways of team interaction in new forms of infrastructure to continue improving employee engagement in this new environment.

Also, acquisitions have been helping in that diversification as well. Throughout this year, the acquisition of SOMO has strengthened our footprint in Europe and got us a new delivery center in Colombia. Now with the addition of Transpire, we will enhance our position in Australia and the Asia Pacific region.

Now I invite Stanley to dive into our quarterly financial results.

Thank you, Bruno, and good morning, everyone. I'm glad to kick off our financial section with solid numbers in our top line.

Our net revenue in the second quarter 2022 was BRL 525 million, a 66% growth year-over-year. The acquisitions concluded in 2022 contributed to 13 percentage points of revenue growth in the quarter. Around 50% of our revenue comes from U.S. dollar and British pound denominated revenues. And as the Brazilian real appreciated against these currencies during the quarter, when eliminating the FX variation, our net revenue in constant currency would have been BRL 550 million, a 73% increase compared to the second quarter of last year.

We continued to diversify our client base with the addition of 17 new clients in the second quarter. This year, we already added 33 new clients to our portfolio that will foster our sustainable growth over the coming years. As Cesar mentioned, our strong revenue growth derives from our expansion within existing clients, the addition of new clients every quarter and our programmatic M&A strategy.

Analyzing our revenue breakdown, you can see in the left-hand chart that we are expanding our global presence. North America continues to be the largest growing market organically for CI&T. And we strengthened our presence in Europe with the acquisition of SOMO early this year.

Our net revenue by industry verticals remains diversified. It's worth noting that around 84% of our revenue comes from brick-and-mortar companies and only 16% from startups and digital native companies.

In terms of revenue by industry verticals, Financial Services grew 50% year-over-year; food and beverage increased 17%; and TMT grew 120% in the first half 2022 compared to the same period of last year.

Finally, we reduced our top 1 client share from 24% in first half '21 to 16% in first half '22. And our top 10 clients share diminished from 73% in first half '21 to 52% in first half '22. We expect this trend to continue as we onboard new logos and integrate the recent acquisitions.

Now talking about the number of multimillion accounts. We already mentioned the addition of 33 new clients in the first half 2022, pretty much the total amount of new clients added in the full year of 2021. It's worth mentioning that we also increased 5 accounts with more than BRL 20 million in annual revenues, totaling 21 accounts. The number of clients with revenue above BRL 5 million and BRL 10 million also grew significantly, as you can see in this chart.

This is a strongly recurrent business model based on a land and expand strategy, as shown in this cohort. Typically, most of the growth in the upcoming years happens by expanding within current clients generating an average net revenue retention rate of 120%. But we also ensure the entry of new logos every year, which will mature in 2 or 3 years and guarantee future growth. The result is a year-over-year increase in the client wallet share and an increasing number of multimillion accounts.

Moving down the P&L. We ended the quarter with BRL 100.4 million in adjusted EBITDA, a 36% growth year-over-year, an EBITDA margin of 19.1%. The cost of services provided grew 66% compared to the second quarter '21, aligned with increasing revenue and headcount. Thus, the decline in EBITDA margin in the quarter was mainly due to FX headwinds. M&A, as recently acquired companies have lower margins, and higher SG&A expenses.

Sales, general and administrative expenses increased mainly as a result of 3 factors: the expansion of our hiring, attracting and training teams, aligned with our revenue and headcount growth; acquisition-related expenses, including the amortization of intangible assets from acquired companies; and the strengthening of our back office operation in connection with the IPO. The IPO-related expenses are mainly fixed and should be diluted over time as we expand our revenue base.

It's worth mentioning that adjusted EBITDA grew 17% compared to the first quarter '22 and margin improved 160 basis points sequentially due to the higher utilization rate and the price increases that happens throughout the year, as planned and as we mentioned in the previous quarter.

In the second quarter 2022, adjusted net profit was BRL 52.3 million 16% higher than the second quarter '21, equivalent to an adjusted net profit margin of 10%. The reduction in the adjusted net profit margin was mainly due to the higher SG&A and the financial expenses. Net financial expenses was BRL 17.5 million in the second quarter 2022 compared to BRL 2 million in the second quarter '21, mainly due to the debt raised in July '21 to finance the Dextra acquisition in the amount of BRL 650 million, combined with higher interest rates in the second quarter 2022.

In May, we paid down BRL 100 million in debt with cash proceeds, reducing our gross debt and replaced part of our Brazilian Real denominated debt that carries higher interest rates for dollar-denominated debt to reduce the overall cost of debt. Therefore, we expect to see a slight decline in our financial expenses for the coming quarters. We ended the quarter with BRL 358 million in cash, providing us a pretty good liquidity level.

I will now pass it back to Cesar to comment on our guidance for the remaining of the year. Cesar, please.

Thank you, Stanley.

We remain very confident about the opportunities that lie ahead. Based on current market conditions, we expect our net revenue in the third quarter of 2022 to be at least BRL 540 million, a 46% growth year-over-year in a constant currency basis. For the full year of 2022, we are updating our outlook, mainly to reflect FX variation in the period. So we expect a net revenue growth of at least 55% year-over-year on a constant currency basis and revenue growth on a reported basis of at least 49%, which includes a negative FX translation impact of approximately 6 [percent points]. In addition, we estimate our adjusted EBITDA margin to be at least 19% for the full year of 2022, assuming an average exchange rate of BRL 5.1 to the U.S. dollar for the full year.

That's what we have for now. Thank you all for your trust in CI&T and for attending our call today. We now conclude our presentation and may move to the Q&A session.

We'll now begin the question-and-answer session. I'll announce each participant's name. (Operator Instructions) The first question comes from Ashwin from Citi.

My question is with regards to FX, since we -- I don't think we had the FX impact disclosure for past periods. But could you walk through how FX volatility affects your EBITDA, is my first question?

And then the second part of it is, you're mentioning that the updated outlook is mainly to reflect FX. Are there also other factors with regards to cyclical concerns from clients or slower ramps, things like that, that we are beginning to hear perhaps from other companies?

Thank you. Stanley, let me start with the second part and then I hand to you to the first one. I think regarding the new outlook, I think, as you mentioned, the main factor is we adjust for mostly FX, 6% [or points] on this variation. But we also have we -- as you saw, we are still onboarding new clients in a very solid base, basically in 2 quarters. We did the same as the full last year. But the ramp-ups for the digital native cohort is slower. So we -- that's the -- represent probably the last -- the majority of the 4 [percentage] points. And regarding past FX impact, I will hand it to Stanley, please.

Ashwin, thank you. Thank you for the question. In a programmatic way to see how FX affects our EBITDA, you can consider that for each 0.40 in the FX rate, you can foresee a 1% impact or above or down. That's the most programmatic. And this comes from the mix of currencies that we have in top line, any cost. As you may know, 70% of our costs, they are based in Brazilian reals, while around 50% of our revenues comes from hard currencies. So we have a FX leverage that are -- they are -- this leverage is affected by this 0.40 per 1 percentage point ratio, let's say.

Okay, okay. Understood. And then the other question was, I noticed that you're now adjusting out amortization of acquired intangibles. Is that indicative of a very strong M&A pipeline that you feel the need to do that? You've obviously done many tuck-in type acquisitions since the IPO itself, if you could.

About the adjustment itself, we felt that we were -- we would have to be in line with what the industry is doing. Since the amortization, they have a quite significant impact in our SG&A. So it would be better for everybody to understand -- better understand and faster to understand our operation. And that's the main reason for the adjust. With regard to the pipeline, we remain active. As we've been mentioning, we have a programmatic approach to M&A. And we have this as an important tool to speed up our organic growth as we incorporate very focused and programmatic acquisitions.

Thank you, Ashwin. Our next question comes from Diego from Goldman Sachs.

Yes. So my first question is regarding M&A. You made 3 acquisitions since the IPO, 2 of them seems highly complementary in a geographic standpoint, while Box1824 looks to bring more, let's say, intelligence, specifically for clients in Brazil and LatAm. That's my understanding. So I have a couple of questions in here.

The first is how is your current pipeline of M&A at this point? And what should we expect in the next, let's say, 12 months? And also, how do you expect to fund these transactions and future transactions, right, specifically given the market uncertainties, either like on the equity side, on the debt side? So I just want to understand a little bit of fewer deals in there. And lastly, if you can just help us to understand the cross-sell opportunity, specifically for SOMO and Transpire. That's the first question.

Sure. Thank you, Diego. Great to see you again. I think we have been following this in a very consistent way our programmatic approach for M&A, looking for expanding our geography reach and also vertical expertise. And this last move with Transpire is in the same pack, right? We now have a good platform for expanding Australia, one of the largest and good market for digital services, the same size of Brazil, so is an amazing opportunity for speed up our growth, not only in Australia, but in the Asia Pacific region.

Regarding -- yes, I think you are right. We continue to foresee and seeing a very strong pipeline for M&A. Now the M&A, of course, as Stanley mentioned, M&A for us is a way to speed up our organic growth. So now we are focused on -- especially on -- in our pipeline, you can see a lot of opportunities in the U.S.A. and in, I would say, Continental Europe, no U.K., Europe, where we still have a lot of, I would say, markets that we are not addressing in Europe. So you should expect to see more moves especially in these 2 geographies . And we are always open for opportunity to strengthen our competence, our skill set as we did with Box, that I think is an amazing complementary expansion of our [strategy], set of competence and offering.

Regarding funding, I think Stanley could handle that. Please, Stanley.

Okay. Well, thanks, Diego, for the question. With -- we may take some debt because we have plenty of space to use that if we cross with any good opportunity that we couldn't miss, but in a very conservative way. Of course, we have -- we are looking closer to the market, waiting for the market conditions for any, let's say, any movement in the market, additionally, to offset any debt that we acquire now. So we're in a very conservative. As always, we're observing market and observing the opportunities and considering those tools, let's say.

Understood. I guess my second question is more related to the overall business dynamic for your services. Now that we are facing, let's say, a more challenging macroeconomic environment for 2 months, are you seeing any indication that demand is slowing or that clients are somewhat postponing their projects?

Thank you for your question, Diego. I think as I mentioned, I think for brick-and-mortar, large global companies, they are continue to invest consistently on digital and technology. What we see, especially in this, I would say, short term, the 1 or 2 quarters ahead, is a slowdown in the digital natives cohort. I think it's relate to the scarcity of funding, and of course, this macro environment. But -- so it's -- that's why we emphasize that 84% of our business is based on this brick-and-mortar set of clients. And this cohort is continue to expand in a very consistent way. And yes, I think that's it for your question.

Yes. But I think I would add, that we still see that digital is really consider not only important, but urgent. Even in these uncertain times, companies are really improved their bets on the agility of digital initiatives, a way to not only increase opportunities, revenue and client engagements, but also a way to gain efficiencies in their operations. So it's -- that's the amazing leg of -- a big part of this industry, that is really very resilient to different market in macro conditions.

Thanks, Diego. Our next question comes from Tyler DuPont from Bank of America.

I want to start specifically on margin and how we should think about that moving forward. Can you maybe just speak a bit to the strength of your pricing model and perhaps the leverage you have at your disposal to either increase pricing or just to manage costs more generally?

Tyler, thank you for the question. Pricing is always depending on the mix of teams, on the technology that we deploy. And we have plenty of space there. The -- as you may know, we are always working with the top line of our clients. And in -- even the market conditions also help us. We are very well positioned in the top tier of value -- in the value chain for our clients. So we always have opportunities to use new technologies and blend those technology into our mix and always preserve margins. We also have the freshly new clients entering the portfolio. That, again, they play a major role in that mix. So it's always a portfolio management in terms of the pricing with all the existing clients, the growth levers that we have within the clients and also the new clients coming in.

Perfect. Great. Appreciate that. And then also, I know you don't tend to provide specific numbers surrounding attrition and utilization. But maybe if you could just speak more generally to how it's trending versus previous quarters and your like internal expectations and if there's anything specific to call out there.

I think Bruno could you handle that. Could you come again, Tyler?

The question was with regard to attrition.

Attrition utilization rate.

Attrition continue at very low levels. Compare to the industry, our overall attrition is around 16%. And our -- the -- another attrition number that we follow even more closely is actually the leadership attrition, which is actually the big bottleneck for growth for us. And actually that's most important in terms of quality of our services and consistency of our services. And that's even lower. It's around 6%. So it's very comfortable levels. And what we've seen in the industry is that I think it continues to be a very hot market, but it's probably the less hot that's been in the last 12 to 18 months. So it's a good news for us.

We have a question here. Thank you, Tyler. And we now have a question here via e-mail Pune from JPMorgan. Can you break down components of EBITDA margin deterioration from 20% to 19% guided into FX, SG&A investments and new M&A impact? Are you seeing any adverse impact from macro uncertainty on client spending? Or have their spending priorities changed at all over the last 3 months?

Okay. Well, I'll start with the first part, and Cesar, you handle the second, please. With regard to the EBITDA breakdown, FX plays a major role. As I mentioned, we have this leverage reais, dollar. And as you saw, we had an affectation in gross margin with regard this leverage. So -- but M&A also is relevant as we have increased our expenditures with the activity, and of course, SG&A investments. As we became public, we had to invest in our back office structure. So we have a consultancy. We have stronger teams. We have a higher D&O insurance. So the whole package. I would say, starting with FX, that plays a major impact, but in that order. Yes.

Just to add here. In term of those impacts, we have those investments in SG&A, that -- we expect them to be diluted over time. So they are mainly fixed expense when I think about back office operations. So that should contribute to our operating leverage for next years. And M&A impact, I mean, as usually, the companies we acquire have lower margins. It's natural to have an impact on that side. But that's something that we also expect, to improve those margins going forward, to bring that to CI&T level so that overall, we can also increase EBITDA margin for the consolidated company.

Thank you. Let me add regarding the client behavior or spending pattern. We see our clients looking for really initiatives that will generate results in, I would say, more short cycles. And that resonate a lot with CI&T value proposition of combining strategy, design engineer in a way that we can really foster results in very short times, typically 9 days. I think that's why we see this environment as an amazing opportunity to continue to grow higher than the industry, much higher than the industry, and it's -- particularly to increase our market share. And I think we are very well positioned to continue to do so. .

Thank you, Cesar. We have a follow-up question from Diego from Goldman. Goldman Sachs. Diego, please. Let me move on here for some questions we've got via e-mail. The first one is regarding the integration of the acquired companies. Can you please provide color on the status of the integration process of your recent acquisitions?

Sure. I can take this one. Dextra has been -- the integration of Dextra has been completed by December last year. So we're considering business as usual, completely integrated. The business has been reorganized around 4 growth units, and it's completely similarly integrated at this point. SOMO, we started integration in this first half of 2022. We expect to be fully integrated in 2023. But its integration is going really well, like we're collaborating already around some global accounts. And that's part of actually the question Diego asked, right? So what we expect from those in terms of cross-sale from those acquisitions is actually those global accounts that Transpire or SOMO have in CI&T. So we use those new geographies to try to support our global clients, those geographies and their global accounts, to be supported in the geographies that we already have presence. So that's a kind of clear opportunity there for cross-sale. That's what we're doing with now SOMO and we'll do with Transpire going forward.

Bruno, let me take these questions to mention that we see really our platform, our entrepreneurial platform, the way CI&T is organized around 26 growth units. It's helping a lot, not only in our aggressive organic growth, but also in -- allow us to provide a very strong value proposition for founder-led companies, our target companies. And also, it's been an amazing way to integrate those new companies to CI&T, global platform, and leverage the synergies and the market capabilities. It's -- we are counting on this entrepreneurial organization model to continue to combine an aggressive organic strategy with our programmatic M&A strategy.

We have a follow-up question from Ashwin from Citi.

Yes. Follow-up is on M&A. And you've mentioned, of course, a few times the programmatic approach. Are you back testing the results of past M&A? I mean, for example, relative to your initial expectation, how is Dextra doing? How is SOMO doing? If you could comment a little bit on that, what -- is that what gives you confidence to keep doing the programmatic M&A.

Great. Thank you, Ashwin. I think the main initial purposes, priorities, keep the growing. We are acquiring high-growth companies. And the first indicator, as this company onboard CI&T platform, they continue to grow in the way they were doing before. And then over time, we have 2 priorities. One is cross-sales opportunities, that both in way, adding CI&T global capabilities, nearshore capabilities to their operations, that also drives margin improvements, and also leverage their global clients in different geographies or business units.

So I would say that Dextra was an amazing, as Bruno mentioned, amazing story line. As Bruno mentioned, in -- from August last year to November, it was fully integrated. And the 4 new growth units continue to grow at the same pace as CI&T. I think SOMO follow the same pattern. Box is a different animal, is a strategy boutique that we are now integrating with the whole CI&T end-to-end portfolio. Initial, good signs, but it's too early to have a concrete learning from this. And Transpire will be our next move. By the way, Transpire is not included in our guidance. We will do that as soon as we close the operation, we have the closing date of the operation.

Just to clarify, when is the closing date?

We expect in this third quarter. That's our expectation right now.

All right. Thank you, Ashwin. We have also a follow-up from Tyler DuPont from Bank of America. Tyler?

Just to follow on that M&A front, and in particular, the growth rate in Europe. It looks like a significant portion of that comes from the SOMO acquisition, if I'm not mistaken. Can you just clarify how much of the European growth is attributable to recent acquisitions versus just traditional organic?

Well, the -- if I got it right, the question is, how much of the growth is attributed to the acquisition itself? Is that correct, Tyler?

Correct, yes.

The growth in Europe specifically in Europe. But really, the -- our operation in Europe was very small. And now the platform is basically SOMO. Clients expanding in new clients we acquire. And we combine with CI&T a new growth Unit. You want to add more color, Bruno?

I would say 80% right would come from the acquisition side, most.

Another way to look at that, Tyler, our revenue in Europe pre acquisition was about 3% of total sales. So now this 9% is mainly due to the acquisition.

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

Thank you, Eduardo, Stanley and Bruno for joining me today. Thank you all for participating in our call. Again, I want to thank you all CI&T for the amazing pact we are delivering as a team and client investors and partners for their continued support. Stay well. I'm looking forward to seeing you in a couple of months. Bye.

Thank you.

Thank you, all.