CI&T (NYSE: CINT), a global digital solutions provider, has announced a transition to an AI-first company, leveraging its proprietary AI platform, CI&T Flow, to drive internal efficiencies and client services. In the first quarter of 2024, CI&T reported a slight increase in net revenue to BRL523.5 million and a 7.9% sequential growth from its top 10 clients. The company signed a significant contract with a leading global automotive player and onboarded 22 new clients.
Despite a lower adjusted EBITDA and net income margins compared to the previous year's first quarter, CI&T maintains a positive outlook, expecting a 3.5% increase in net revenue for Q2 2024 and maintaining full-year guidance with net revenue growth between -2.5% to +2.5% at constant currency. The company also announced the adoption of the U.S. dollar as its reporting currency from 2024 onwards.
Key Takeaways
- CI&T is transforming into an AI-first company, with significant adoption of its AI platform, CI&T Flow.
- Q1 2024 net revenue was BRL523.5 million, with a 7.9% growth from top 10 clients and 22 new clients onboarded.
- The company signed a multi-million dollar contract with a global automotive player and expects to see further complex opportunities in its pipeline.
- Adjusted EBITDA margin for Q1 stood at 16.1%, with a net income margin lower than the previous year's comparable quarter.
- CI&T plans to transition to reporting in U.S. dollars to facilitate global financial comparison and expects a 3.5% increase in Q2 2024 net revenue.
- The company's full-year guidance remains unchanged, with expectations of margin expansion and a strong growth trajectory into 2025.
Company Outlook
- Anticipated net revenue of at least BRL542 million for Q2 2024.
- Full-year net revenue growth projected in the range of -2.5% to +2.5% at constant currency.
- Adjusted EBITDA margin forecasted to be between 17% to 19%.
- A reshaped recovery expected in the second half of the year, positioning for double-digit revenue growth in Q4 and strong growth in 2025.
Bearish Highlights
- Lower adjusted EBITDA and net income margins in Q1 2024 compared to the same period in the previous year.
- Current market conditions reflect less price elasticity.
Bullish Highlights
- Net revenue retention rate of 120% over the past five years.
- Margin expansion expected throughout the year, with revenue growth and cost management strategies.
- The company's guidance for the year is based solely on organic growth, excluding acquisitions.
Misses
- No specific misses mentioned in the provided context.
Q&A Highlights
- Expansion in Asia and Australia through acquisitions and scaling of services.
- Focus on efficiency and AI-driven offerings to gain client share.
- Major deal with an auto client and potential for more complex opportunities.
CI&T's commitment to becoming an AI-first organization is exemplified by its robust adoption of the CI&T Flow platform and the integration of AI into key processes.
The company's strategic initiatives and financial performance in Q1 2024, including the signing of a significant contract and the onboarding of new clients, demonstrate resilience and the ability to consistently deliver value to its clients.
With a positive outlook for the upcoming quarters and a strong focus on internal efficiencies and client relationships, CI&T is positioning itself for sustained growth in the digital solutions market.
InvestingPro Insights
CI&T (NYSE: CINT) has been making strategic moves that reflect its commitment to growth and efficiency. The company's management has been actively buying back shares, signaling confidence in the company's value and future prospects. This is complemented by a high shareholder yield, which is an attractive feature for investors seeking returns in the form of buybacks and potential dividends.
From a valuation standpoint, CI&T is trading at a low P/E ratio relative to near-term earnings growth, currently standing at 22.31. This indicates that investors may be undervaluing the company's earnings potential. Moreover, the PEG ratio, which measures the P/E ratio relative to the growth rate of earnings, is at 0.57 for the last twelve months as of Q1 2024, suggesting that the stock could be a bargain relative to its earnings growth.
Despite some recent price volatility, with a significant return over the last week of about 10.95%, the company has experienced a decline over the past six months, with a total price return of -29.25%. Analysts, however, predict that CI&T will be profitable this year, which could provide a solid foundation for recovery in the stock price.
InvestingPro users can find more insights and metrics, including an analysis of the company's profitability over the last twelve months and its future earnings potential. There are 11 additional InvestingPro Tips available for CI&T, which can be accessed at https://www.investing.com/pro/CINT. For those interested in a deeper dive into the company's financials and performance, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking a wealth of data and expert analysis to inform your investment decisions.
Full transcript - Ci&T Inc (CINT) Q1 2024:
Eduardo Galvao: Good morning. Welcome to CI&T Earnings Call for the First Quarter of 2024. I am Eduardo Galvao, Head of Investor Relations at CI&T. With me on today's call are Cesar Gon, Founder and CEO; Bruno Guicardi, Founder and President for North America and Europe; and Stanley Rodrigues, our CFO. This event is being recorded and all participants will be in a listen-only mode during the company's presentation. After that, there will be a Q&A session. If you'd like to submit a question, please send it via e-mail to investors@ciandt.com. The presentation is available on the company's Investor Relations website, and the replay will be available shortly after the event is concluded. Some of the matters we'll discuss on this call, including our expected business outlook, are forward-looking statements that are subject to known and unknown risks and uncertainties, which could cause actual results to differ from those expressed on this call. We caution you not to place undue reliance on those forward-looking statements as 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 of non-IFRS measures in the appendix for more details. Our agenda for today includes an overview of our quarterly highlights followed by some of our business cases. We'll then talk about our people and our financial results. At this time, I'll pass it on to Cesar Gon to begin our presentation. Cesar?
Cesar Gon: Thank you, Eduardo, and a warm welcome to everyone joining us today. Our first quarter of 2024 has been transformative. It marks one year since we started the CI&T powered by AI initiative to transform CI&T into an AI-first company and capitalize on the amazed opportunity of this next chapter of the digital revolution. Over this year, AI has become integral to our operations, enhancing our capabilities and allowing us to deliver more value to our clients. In this context, Bruno will soon share impressive numbers on how our teams are adopting CI&T flow, our AI platform for hybrid digital. As we reshape our market positioning and offerings around AI, we are also reinventing key internal processes, including sales, HR, branding and several other functions to fully leverage the potential of AI. Let's take sales as an example. With three decades of experiencing selling and delivering complex digital solutions, we are excited to share benefits in our go-to-market approach. To drive efficiency and growth, we establish the AI growth machine, a team of industry experts, solution strategies and AI specialists. This evolution of our global sales organization has two main goals: using AI to be faster and more precise in understanding our clients' needs; and being radically more effective in proposing unique solutions that maximize results for our clients. Among several positive outcomes, we are proud to announce a particularly significant one. We signed one of the largest contracts in our history with a leading global automotive player. We became its digital agents of record in the U.S., securing a multi-million dollar contract for at least three years. This major win was achieved after a very competitive RFP process involving all major players in our industry. I believe it highlights our exceptional capabilities and our innovative AI approach to meeting clients' needs in a unique way. Now let me present our quarter's financial highlights. In the first quarter of 2024, our net revenue totaled BRL523.5 million, a 20 basis point increase compared to the fourth quarter of 2023 and 70 basis points above our guidance. Although, it is slight increase, it represents an important milestone as it resumes our growth trajectory, which we foresee accelerating in the following quarters. Revenue from our top 10 clients grew 7.9% sequentially, signaling (ph) our ability to strengthen relationships with key engagements and expanding wallet share among them. Additionally, in the first quarter of 2024, leveraging our new AI growth machine, we successfully onboarded 22 new logos, including admired global brands, representing substantial opportunities for future expansion. We ended the quarter with an adjusted EBITDA margin of 16.1%, as planned. Our EBITDA margin is expected to improve throughout a year according to the seasonality of our business. Finally, in the first quarter, we generated BRL130 million in cash from operating activities, the strongest cash generation in the first quarter since our IPO. Now let's explore some concrete examples of how we are creating value for our clients and revolutionizing our offerings through the power of AI. [Video Presentation] It's exciting to see tangible AI advancements internally and with our clients. We are thrilled to be part of this remarkable technological revolution. Now I invite Bruno to talk about our people.
Bruno Guicardi: Thank you, Cesar. It's great to have the opportunity to talk about our people. At the end of the year, we had around 6,100 CI&Ters, relatively in line with the number we presented in the previous quarter. Going forward, we foresee an increase in our headcount as we are speeding up the hiring process to fulfill open positions and support the growing demand from our clients. As we resume our growth trajectory, we are creating new opportunities for career advancement and reinforcing our commitment to fostering an environment of innovation and entrepreneurship. The development of our people is a core value. We firmly believe in nurturing and empowering our people, giving them autonomy and meaningful challenges to stimulate their growth and potential. Furthermore, the current landscape marked by emergence of GenAI and the launch of CI&T/FLOW has created an environment full of exciting possibilities for our team. It has sparked a new wave of innovation and creativity, opening doors to many opportunities for our employees to thrive and excel. Our overall voluntary attrition rate remains at a healthy level of 9.6%. Meanwhile, for the leadership layer, it's even lower at 4.9%. As we continue to integrate AI into our operations and move towards a hyper digital state, we focus on nurturing a culture of continuous learning and developing the necessary skills to unlock AI's full potential within our organization. In line with that commitment, we are delighted to announce the launch of our inaugural CI&T/FLOW certification program. This initiative's main goal is to democratize our platform utilization, ensuring that every CI&Ter can access and benefit from it, regardless of their role or position. The response thus far has been truly remarkable. To this date, we have more than 2,300 active users, more than 700 of whom have successfully completed their certification process. The FLOW AI Certification path is an upskilling program for CI&Ters, enabling them to learn and apply FLOW progressively in their work. By supporting the adoption of CI&T/FLOW across teams, this program enhances the quality of our work and amplifies the value creation for our clients. Moving on to our delivery centers. We're excited to resume our organic global expansion following a period of strategic acquisitions. We are proud to announce the launch of our newest AI powered delivery center in the Philippines, situated just outside Manila. This expansion represents the significant milestone CI&T's dedication to integrating artificial intelligence and automation into our service offerings. We've established centers in Australia, Japan and China. The addition of the Philippines center further solidifies CI&T's presence in the Asia-Pacific region, enhancing our ability to serve clients in this dynamic market. This initiative will bring together a team of highly skilled professionals who will leverage cutting-edge technologies and advanced AI to drive client innovation and success. This strategic move aligned with CI&T's mission to cultivate a diverse and talent workforce, building upon our successful acquisition of transpiring Australia in 2022. Our rightshore approach ensures optimal outcomes for our clients, irrespective of their location. The creation of the Philippines center enhances our regional capabilities while enabling us to deliver cost-effective solutions for our clients. Now I invite Stanley to comment on our financial results.
Stanley Rodrigues: Thank you, Bruno, and good morning, everyone. I'm glad to be here once again to present our financial performance to all of you. In the first quarter of 2024, we achieved a net revenue of BRL523.5 million, representing a decline of 14.2% compared to the first quarter of 2023 or 12.1% in constant currency as a result of the challenges and market dynamics we faced during this period. Most importantly, I'm pleased to report an important growth indicator when compared to the previous quarter. Our net revenue showed a modest increase of 0.2%, signaling a resumption of our growth trajectory despite the seasonal nature of quarters. This demonstrates our ability to adapt and capitalize on opportunities in the market. The sequential growth in net revenue was primarily driven by our top 10 clients who exhibited a remarkable increase of 7.9% compared to the previous quarter. This underscores the strength of our relationships with key clients and our commitment to providing exceptional value and service. When examining our revenue distribution by geography, it is notable that North America and Europe have demonstrated sequential growth, collectively contributing to 53% of our total net revenue. Mature economies as a whole now represents 57% of our total revenue, signaling resilience and optimism for the future growth of our operations. In the first quarter of 2024, Latin America accounted for 43% of our revenue. Furthermore, in terms of our revenue mix across industry verticals, we observed a positive trend in retail and industrial goods, which experienced a remarkable 37.5% growth quarter-over-quarter. Additionally, there was a sequential growth of 4.9% in the consumer goods sector. These developments more than offset the decline experienced in the technology and telecommunications, life science and financial services verticals. Another significant milestone in our revenue distribution is the diversification of revenue share from our top clients. Currently, our top clients contribute to 6% of our revenue, down from 11% a year ago. Moreover, our top 10 clients now account for 41% of our revenue, a decrease from 44% in the first quarter of 2023. This diversification reflects a healthy and balanced client portfolio and enhancing our overall financial stability. Now let's take a look into our client base and explore some key metrics. Firstly, I'm pleased to report that we have seen growth in the number of clients with revenue exceeding BRL20 million from 29 in the fourth quarter '23 to 30 in the first quarter '24. Notably, three of these clients have revenues exceeding BRL100 million. It's important to note that this client cohort takes into account their revenue contributions over the past 12 months. And in the first quarter of 2024, we successfully onboarded 22 new clients, demonstrating our ability to attract and nurture new business relationships. This upward trajectory in client engagement tests this stage for the expansion of our multimillion accounts throughout the year. Additionally, one of our top priorities is to increase our wallet share among our largest clients. We are committed to fostering strong long-lasting relationships with them and expanding the range of services we offer. This aligns with our land and expand strategy, which aims to both retain existing clients and grow our business within their organization. I am proud to highlight our net revenue retention rate, which has consistently averaged 120% over the past five years. This impressive figure serves as a testament to our unwavering resilience, strength and ability to consistently deliver value to our clients. It also underscores the sustainability of our business model. Now let's turn our attention to the key metrics that reflect our profitability. In the first quarter of 2024, our adjusted EBITDA stood at BRL84.3 million compared to BRL116.5 million in the same period of the previous year. This resulted in an adjusted EBITDA margin of 16.1%, a decrease of 3 percentage points compared to the first quarter '23. The decline can be attributed to a lower gross margin and an increase in SG&A expenses as a percentage of revenue. Throughout 2023, our proactive cost management strategies played a pivotal role in maintaining attractive profitability margins. As we anticipate revenue growth throughout the year, we expect to achieve margin expansion by diluting fixed expenses. It's worth noting that the first quarter of the year typically encompasses the salary increases for most of our employees in Brazil, while our contract price adjustments occur throughout the year. Moving on to adjusted net income. We recorded BRL41.7 million in first quarter '24 compared to BRL62.4 million in the first quarter '23. This led to an adjusted net income margin of 8%, a decrease of 2.3 percentage points compared to the same quarter last year. The reduction is primarily attributed to the lower adjusted EBITDA, which was partially offset by lower net financial costs and tax expenses. Starting from first quarter '24, we have decided to add back stock-based compensation expenses in our calculation of adjusted net profit, which is a non-IFRS financial measure, to achieve better comparability with our main peers, and it's a common practice within our sector. And to finalize our financial performance presentation, in the first quarter '24, we had another quarter of strong cash generation from operating activities amounting to BRL130.3 million, 11.8% higher than the same period last year. Free cash flow calculated as net cash generated from operating activities less CapEx, was BRL108 million. This is a solid mark that allow us to reinvest in our business and reduce our net debt position. Finally, I'm pleased to announce an important decision regarding our reporting currency. Starting with the full year 2024 results, which will be reported in March next year, we will be transitioning from Brazilian real to the United States dollar as our reporting currency. This strategic move will facilitate a more accurate global evaluation of our financial performance and allow easy comparison of our results with those of other companies in our industry. Now I invite Cesar back to provide you with our business outlook.
Cesar Gon: Thank you, Stanley. We expect our net revenue in the second quarter of 2024 to be at least BRL542 million on a reported basis, equivalent to a 3.5% increase in our revenue compared to the first quarter of 2024. For the full year of 2024, we are maintaining our guidance. We expect our net revenue growth at constant currency to be in the range of minus 2.5% to plus 2.5% year-over-year. In addition, we estimate our adjusted EBITDA margin to be in the range of 17% to 19%. Now let me add some color to our business outlook for the year. As we project a flattish revenue growth in 2024, the midpoint of our guidance implies a significant sequential increase of low to mid-single digits over the next three quarters. This entails a reshaped recovery from the atypical 2023, resulting in double-digit revenue growth year-over-year in the fourth quarter of 2024. This solid exit rate will position us favorably for a strong growth trajectory in 2025 and beyond. To conclude, I want to express my deep appreciation for the dedication and resilience of our team. As we embark on this new phase of growth and development, we are committed to providing every CI&Ter with the support and resources they need to succeed. Together, we will continue to drive our company towards a future defined by innovation, collaboration and impact. Thank you all for your trust and support. We now conclude our presentation, and we'll begin the Q&A session.
A - Eduardo Galvao: Okay. We'll now begin our 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 Edoardo Rulli from UBS. Edoardo, please go ahead.
Edoardo Rulli: Hi, everyone. Thank you very much for opportunity to make the question. Two from my side. First, if you could comment, please, on the main drivers for the revenue expansion quarter-over-quarter? And second, if you could give more details and opportunities you're seeing in Asia and Australia? And when would we expect to see the higher revenue expansion there? Thank you very much.
Cesar Gon: Sure. I can start with the first one. So basically, as you saw, our Q2 expansion is guided at 3.5% incremental increase. It's basically based on bookings we already have. So deals we already won. And it's a matter of ramp up the teams that we are doing, so we have a very high confidence level around that. I will detail more what is the kind of demand we are seeing. And then for the implied Q3 and Q4, we are -- of course, we are counting the current bookings we already have, combined with our -- deals from our pipeline, keeping the current rate of closing new deals. So we are -- as you saw, we are maintaining our full year guide. By the way, in our category, so among our peers, we are probably the player with a higher sequential growth forecasted. And in terms of basically what we see in our portfolio is, and I think this relate to the demand environment, is of course, there is a still uncertain in the macro, but we see our larger clients much more stable in their spending patterns this year. And I think we decided not to wait for ideal macroeconomic conditions. So instead, I think we are creating very concrete differentiations and offerings that allow us to gain client share and new clients even in, let's say, unfavorable environment. So we create -- I think part of this expansion is based on new offerings relate to, I think, a very compelling value prop around using AI for boost cloud migration, legacy modernization. A lot of things relate to data strategy as a foundation for future AI leverage. And also, we are seeing a lot of traction on our Generative AI strategy road map. So commercial activity and pipeline this year compared to the previous year is considerably higher and we see our deal closing ratio continue to improve. So basically, if we look the kind of projects, there's a lot of things relate to digital efficiency, doing more with less. That is the main value prop of CI&T/FLOW and also a lot of investments that are really preparing the foundations for future AI leverage, I mentioned cloud migration, legacy or app modernization, data and so on. So I think this is basically what's driving our growth in Q2. And -- sorry, the second question...?
Bruno Guicardi: The second question was about expansion in APAC. Cesar, I can take this one. What's driving the offering there, you may remind that we acquired the company in 2022 in Australia that had a very good client portfolio. And the growth there is based on kind of providing a different scale to the services. It was a small company. And now they have the power of nearshore and other capabilities from CI&T. So that's what's driving the growth plans there, right? So that's what's driving actually even the Philippines center that we are opening out this year. So that's the rationale behind it.
Edoardo Rulli: Okay. Very clear. Thank you very much.
Bruno Guicardi: Thank you. My pleasure.
Cesar Gon: Thank you.
Eduardo Galvao: Thank you, Rulli. Our next question comes from Ryan Potter from Citi. Ryan, your line is open.
Ryan Potter: Hi. Thanks for taking my question. So you guys had some variability in your top lines recently with your top client changing over in 4Q. So could you give us some color on the demand trends you're seeing in large clients? Do you believe you're taking share of those clients? And then on that top client, is it consistent with the client that it was in 4Q? Or did it change back to the client that was before them?
Cesar Nivaldo: Thank you, Ryan. Great to see you again. Well, as I mentioned, I think we mentioned that in the first quarter, our top 10 clients expanded 7.9%. So we see a much better pattern of expanding our larger clients this year. But this is combined with our strategy of gaining client share based on efficiency. I think this is the main focus on our strategy for 2024, leveraging our CI&T/FLOW platform in terms of efficiency and really replace no AI vendors within our clients and also being very competitive on adding new logos to our portfolio. So basically, this is the main agenda. There is a lot of preparation for leveraging AI, nation data. Data is hot now. Of course, there is no AI without data and companies are kind of trying to speed up their data strategy, so they are prepared for the benefits and opportunities around leveraging AI inefficiency or experience corners. So this is basically what is driving -- And we have -- I think last year was a tough year, but we onboarded very large global companies in retail and consumer goods. And this global master service agreements are expanding in a very good way this year. So this is also driving growth for us.
Ryan Potter: Got it. On the large client comment, is it consistent with large client 4Q, same client?
Cesar Gon: Yeah, I think so.
Ryan Potter: Okay.
Cesar Gon: It's the same pattern. We mentioned, for the first time in history we had three clients with last 12 months revenue above BRL100 million. So we see a lot of consistency on the expansion in the largest clients of our portfolio. And of course, more challenges in the -- for the smaller more tech savvy companies is still, I think, a very turbulent environment. And you see across the board even in other -- for other providers that deck is still a challenge. For luck or strategy we are not very exposed to the tech sector. We are more grounded in traditional verticals like financial services, consumer goods, retail and so on. So it plays in our favors.
Ryan Potter: And it was good to see that it's a large deal they announced in your prepared remarks, that with the auto client. Could you give some additional color on what exactly you're doing for this client? What let them to choose you? And then do you believe you have other kind of larger, more complex opportunities in the pipeline similar to this?
Cesar Gon: Yeah. This was the major victory in the first quarter. We were working. This was a very broad and competitive RFP process, global RFP process which all the players industry involved. I think we use our new AI growth machine approach. I think that gave us a speed and the kind of differentiation that allow us to win. I think it will be probably in a few months. But right now we cannot disclose more than what we did, but we are very happy and this is part of what is, for us considered a very good start for the year.
Ryan Potter: Great. Thanks, again.
Cesar Gon: Thank you, Ryan.
Eduardo Galvao: Thank you, Ryan. The next question comes from Puneet Jain from JPMorgan. Puneet, go ahead.
Puneet Jain: Hey. Thanks for taking my question. I have a quick question on like the growth improvement. Is this growth improvement in any way related to clients willing to do more GenAI projects? Like some of those GenAI projects, is that driving this growth -- sequential growth that you expect for rest of the year? And second part to that question is, we often hear, like many of those projects are still stuck in POC stage, like they're still in pilot stage. So what are some of the top constraints to adoption from clients perspective?
Cesar Gon: Sure. Thank you, Puneet. Well, basically, there is -- I think the main driving force for our growth is AI as a tool for efficiency in our services. And we -- of course, companies continue to invest and need a lot to improve their digital experience. And now we have the possibility to really streamline a lot of initiatives based on the efficiency we can get -- apply AI in end-to-end, producing flow of digital solutions. So this is the main driver. This is basically what we were foreseeing with CI&T/FLOW, and now we are seeing the kind of results and differentiation for us. And in parallel, we create specific offerings. I mentioned, for example, legacy modernization, we create a framework based on AI to streamline. So, we call AI boosted at modernization. So we can do things that without AI would take years and now we can do in a matter of months because of applying some AI agents that we incorporate with development, incorporate in our CI&T/FLOW platform. Cloud migration is another thing. Everyone knows that to be fully in the cloud is mandatory if you want to leverage future AI benefits, but companies are still working on it, and we have a very compelling new offering based on AI to speed up AWS, Google (NASDAQ:GOOGL) or Microsoft (NASDAQ:MSFT) cloud migration, and that's helping a lot to also driving demand for us. So basically, it's more about efficiency and speed up, creating this foundational digital infrastructure than new use case based on Generative AI. There is a lot of experimentation, POCs around improving customer service experiences, improving a lot of customer-facing use case, but this is still early stage. I think the whole foundation of technology is not mature enough for big bets around experience, but it will evolve. It clearly will be there that we are foreseeing that probably use case around AI experience. So when we move away from screens and bottom and you start doing interactions with the machine through natural language interface and so on, will happen from next year on in a more aggressive way. But now there's a moment of experience, creating the capabilities and really streamline governance and everything, infrastructure, having data infrastructure, mainly having companies need to be able to play the, I would say the experience war that is ahead. And there is -- there will be a lot of invention around new ways to interact with consumers, and we will prepare our clients for this moment.
Puneet Jain: Thanks for that answer.
Cesar Gon: Thank you, Puneet.
Eduardo Galvao: Thank you, Puneet. Our next question comes from Joey Vafi from Canaccord. Joey, your line is open.
Joey Vafi: Thanks, Eduardo. Good morning, everyone. I was just wondering if we could drill down in verticals a little bit in the outlook? Clearly, some verticals are still weak and maybe we just focused on those. What is your outlook this year for TMT and Telco relative to how that may be in your guidance at this point? Do you think that those weak verticals can stabilize and that at least get to maybe flat sequential results or do you think there's still a deterioration in those verticals this year? And then I'll have a follow-up.
Cesar Gon: Thank you, Joey. Well, I think we grew tech and telecom in the same vertical, but I think there are two different perspectives. I think telecommunications is stable. We've been increasing, especially among some of our largest clients in this vertical in U.K. and Brazil. As you know, we have BT expanding U.K. We have Telefonica (NYSE:TEF), Vivo expanding in Brazil. So telecom is in a good fashion and we see this vertical expanding along the year as we expand our revenues. Tech is different. I think it's still under challenges. There is a lot of volatility in the demand from Tech. And we don't see along the year that this will be stable anyway. For lucky, we have very low exposure to tech. We are more exposed to telco. But even though we are prepared for a lot of volatility in the tax base as digital natives and this kind of companies that are still facing challenges on the funding part of their business. But for us it's small, but even though we are paying attention and reacting according. So we do not expect that tech is going to be -- you have a great year in 2024, maybe improving only from next year or...
Joey Vafi: Thank you for that color, Cesar. And then secondly, on your operating margin trajectory for this year and the guidance. Clearly, we have operating leverage in the business to a certain degree with sequential increases in revenue, but wondering how AI internally could be helping operating margins this year? And does AI have the potential internally to take you to maybe higher watermarks or higher levels of operating margin over time? Thank you.
Cesar Gon: Sure. Stanley, you want to get this one and I can add some comments.
Stanley Rodrigues: Yeah. Well, talking about margin. Seasonally, we have salaries increased for the most of our people in Brazil in general. So typically, by design, we have the first quarter with lower margins. And then throughout the year, we will pass on that cost to our clients throughout the year, throughout the contract anniversaries. And of course, for the near future, most of the SG&A, they are fixed expenses, for example. And with the growth, we should provide operating leverage and as we resume growth. Additionally, we continue to focus on productivity gains. We have this cost management -- very diligent to the cost management approach. And yes, we're forecasting this typical seasonality to happen with -- in the margins throughout the year. Cesar, do you want to…
Cesar Gon: Yeah. I would just add…
Stanley Rodrigues: Component of this?
Cesar Gon: Yeah. As you know, we have a huge bet on reshape all key internal process around AI. I mentioned our sales reinvention in the call, and it's amazing the kind of effects and benefits we can get from that. We are applying AI across the board in our HR practice, hiring and the way we do and develop our teams. And in every single area of CI&T, you're going to see both investment and expectations about turning CI&T end-to-end AI-first company. And another thing -- and this we will leverage to, I think, more space to leverage efficiency in the future. Another thing in some context, our differentiation in terms of offering give us some price elasticity. We are now totally focused on capturing our differentiation as growth, not margins, but there is some space where the kind of differentiation we can get, and I mentioned some offerings that are being completely not staying around AI efficiency. And so there is some space for some price elasticity and we expect to see this gradually happening along the quarters and especially from next year on. So internal efficiency and also some price competitors for some elasticity based on our differentiation.
Joey Vafi: Great. Thank you very much.
Cesar Gon: Thank you.
Eduardo Galvao: Thank you, Joey. Our next question comes from Moshe Katri with Wedbush. Moshe, your line is open.
Moshe Katri: Thanks and congrats for, actually, pretty impressive results. So going back to the non-GAAP EBITDA margin discussion, so you had some pressure this quarter, I think it was 300 bps. You alluded to compensation increases that typically happen in Q1. Can we get some color on how high were these increases this quarter? And then also in the context of margins, can you comment on pricing or repricing of contracts in this environment? Are you still going through this exercise of clients? And what is the magnitude of any sort of pricing pressure we're seeing right now?
Cesar Gon: Well, let's start with the first question. In a comparison, if we go back to 2023, we saw in a typical quarter at that time, we recorded more than 19% in EBITDA. And as a comparison, we should consider that in that quarter we had a higher-than-expected growth that really positively impacted our margin at that time. But throughout our history, we always have first quarter with low margins. And this year it happens as expected. So -- and your question about how high was it, so it was around 5% cost increase and in the whole majority of our payroll. With regard to passing on to those clients, typically, we have -- especially for contracts based for our Brazilian clients we have in the contract, contract anniversaries. We have automatic clauses to pass on inflation, for example. But more than that, we also -- we have organic, let's say, relationship with our clients and when we talk about price. We are always adding new features, new technologies, new skills. And we always have opportunities to sit with our clients and redesign the whole relationship in terms of adjusting things, considering those additional features, let's say. So that happens, and that's what we expect throughout the years. So it's spread it. So we don't have that. As we have a certain date for the cost increase in January, we have certain dates but spread it throughout year for those conversations with the clients. So that's the -- what -- that's the cause of this seasonality. As you see quarter-by-quarter, our margins would be increasing as a result of that dynamic.
Moshe Katri: And just a follow-up about guidance in terms of organic growth, is this all organic or are there some acquisitions embedded in guidance?
Cesar Gon: No, it's 100% organic. There's no acquisition in this guidance. Moshe, let me address the pricing part of your question. I think as Stanley mentioned, there is -- part of this is automatic as Brazil has done -- we readjust salaries by inflation by law in January, and we have an annual automatic readjustment of contracts along the year. For the global contracts based on where we use Brazilian teams, we count -- or normally we count on the FX that normally more than compensate any difference in terms of cost structure. But in general, of course, with the current environment, there is much less price elasticity than in the past. Except in some areas where AI is really giving us, I would say, a matched level of efficiency. But in general, it's not a -- it's a mark to where we need to pay attention on pricing all the time. And as Stanley mentioned, our model is having once a year with our clients discussion about price. There's a moment where we also discussed new capabilities, new geographical locations we are adding to the deal. And so we normally update our global master sales agreement once a year to really reflect our capabilities and geographic locations expansion. So this is also an opportunity to manage pricing in a portfolio way. So that's -- I think it's -- we have been doing this for three decades now. So I think it's part -- it's an intrinsical part of our business to maintain a good level of contribution and gross margin.
Moshe Katri: Thanks for the color.
Cesar Gon: My pleasure.
Eduardo Galvao: Thank you, Moshe. We have two questions here from Bryan Bergin from TD Cowen via e-mail. Let me start with the first one regarding the workforce planning. So headcount was down modestly in the first quarter. What is your expectation as you move through the second quarter in the balance of the year? Talk about the balance of utilization versus the need to add incremental engineering to support the growth field?
Bruno Guicardi: I'll take that one. So we're expecting headcount go up in Q2, in line with revenue, right? Because our utility rate in Q1 is already very high. So there's very little space there in front of the bench to tap into. So we expect that headcount will go proportionally with revenues increase, so -- and throughout the year actually, for Q3 and Q4 as well.
Eduardo Galvao: Thank you, Bruno. And the other question is regarding GenAI. So what's the penetration of FLOW within your client base? And have you noted an uptick in engagement size?
Cesar Gon: Yes. Basically -- thank you for the question. Basically, we are turning every single engagement of CI&T in a CI&T/FLOW engagement. It -- sometimes it's even transparent for our clients. They are just seeing the kind of efficiency and velocity we can provide. And sometimes it’s a more structured view-based on building new agents for specifics of each client context. So -- but in general, Bruno mentioned, we have more than 2,000 CI&Ters already onboarded at our platform, and it will continue to increase along the year. I think we have a very aggressive goals for adoption. And I think by now we knew how to do that. It's not easy to turn software engineers, designers, strategist, testers, architects, everyone to improve the way they work to incorporate AI, but I think we have the equation, the formula now, and you should expect this -- we will continue to evolve monthly or quarterly and we're going to end the year probably fully onboarded in our platform in these new ways of work. So I think it's happening even in the higher speed than we expected.
Eduardo Galvao: Also related to that, Cesar, we have a question from Thiago Kapulskis from Itau BBA regarding CI&T/FLOW agents, so specifically to give some examples of what we're doing in terms of POCs for our clients?
Cesar Gon: Yeah. We have -- the majority of the agents, it's more than 50 now, relates to getting pieces of our tasks in the end-to-end production flow of digital solutions and streamline or radially reduce the effort using Generative AI. So the majority, I would say 95% of the agents are related to efficiency and not specifically use case that will touch the end user. But of course, this is still a field of opportunity. As I mentioned before, we have some very interesting use case in production. And by the way, we are -- we just published a new report we call AI info. The first edition of this report is basically in a quarterly basis. We are going to feature all the [indiscernible] stores and use case, concreting results. We are generating with our clients with AI and FLOW, and you can download this report in our website. We are committed to quarterly update with new use cases, new results around what we are achieving with our clients. And basically, it's a combination of efficiency. The majority of the results now are around efficiency, but opening space for future use case that will radically improve customer experience. You can see the kind of results we already having in this report, AI post in our website.
Eduardo Galvao: Thank you, Cesar. With no further questions, that concludes our Q&A. I'll now pass it on to Cesar to proceed with his closing remarks. Cesar, please.
Cesar Gon: Thank you, Eduardo, Stanley, Bruno, for joining me today. Once again, thank you all CI&Ters around the world for the hard work and the achievement of this first quarter. I think it's a very good start for the year, and a special thanks for our clients for selecting CI&T in this journey of reinvention around AI. So stay well, and see you soon.
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