Prepared remarks
Good morning. Welcome to CI&T Earnings Call for the Third Quarter of 2024. I am Eduardo Galvao, Investor Relations, Director at CI&T. Joining 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. 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. They 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 these forward-looking statements as they are valid only as of the date when made.
During this presentation, we'll comment on certain non-IFRS financial measures to evaluate our business. Please refer to the reconciliation tables of non-IFRS measures in the earnings release 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, please?
Thanks, Eduardo. Today I want to take a moment to talk about something that is at the very heart of our success and growth: our company culture. In this time of great change and excitement with the AI disruption, I'm intensifying my travels to connect with our teams around the world. CI&T now has people in 25 countries, and during each visit, I feel the key element that unites and sets us apart, our deeply rooted culture. Corporate culture does not happen by chance. It's the result of years of intentional choices, behaviors, and leadership. Our company culture is built on six tenets that guide everything we do. It starts with our clients, who are the reason we exist. They face complex challenges, and we bring our expertise as tech specialists to solve them with agility and innovation. To achieve this, we foster an environment of trust among smart, hardworking, and resilient people, enabling deep collaboration and teamwork.
This teamwork is driven by an obsession with excellence and continuous improvement, delivering superior results for everyone we serve. To remain relevant to our clients and sustain these results over the long run, we must continuously learn, adapt, and reinvent ourselves. Finally, we believe that the more diverse we are, the stronger we become as a collective and more fulfilled we are as individuals. As we embrace exciting transformations, including our AI reinvention, our culture remains the bedrock of our strategic vision and operational excellence and the key element to attracting and empowering top talent. Now moving to our financial highlights. CI&T continues to excel in an ever-evolving digital landscape. In the third quarter of 2024, we achieved a record net revenue of BRL622.2 million, marking a 17.6% increase compared to the third quarter of 2023, with constant currency net revenue growth of 9% year-over-year.
Growth was especially strong among our top 10 clients, with net revenue up 25.3% year-over-year. The tangible productivity gains from the CI&T Flow platform resonate well with our clients, giving us the opportunity to continue expanding our share with them. We continued to refine the process and methods of our AI growth machine, our expert sales team, boosting agility and effectiveness in meeting client needs. This enabled us to onboard large clients with substantial tech investments, reinforcing our long-term land and expand growth strategy. We concluded the quarter with a solid adjusted EBITDA margin of 19.5%. Additionally, our cash generation from operating activities reached R$295 million in the first nine months of 2024, underscoring our strong financial position. We continue to attract and develop talent in the regions where we operate. This quarter, we onboarded 520 new CI&Ters across the globe.
Notably, we have streamlined our talent acquisition process with AI, enhancing our ability to support our high-growth ambitions. In summary, we are excited about the prospects for 2025 as we embrace AI as a transformative force and optimize our sales machine. Now, let's explore some compelling stories of our clients leveraging AI in diverse contexts. I hope you enjoyed it. Now I would like to invite Bruno to talk about our global delivery model CI&T FLOW evolution and our talent strategy.
Thank you, Cesar, and good morning everyone. It's a pleasure to be here again. We ended the third quarter of 2024 with 6,700 CI&Ters, reflecting 10.5% year-over-year growth and 8.3% growth compared to the second quarter of 2024. We're glad to resume our headcount growth as we expand our services with our clients. This quarter specifically we are onboarding more than 500 CI&Ters globally. During the first half of this year we prepared ourselves for a higher growth pace and strengthened our talent attraction machine. In addition, we are accelerating the onboarding and training process using AI, which helped to maintain a healthy utilization rate during the quarter. Also, our voluntary attrition rate remains at a healthy 10.5%. As Cesar explained earlier, we firmly believe that our culture is our biggest differentiator that drives our long-term resilience, excellence, and sustainable growth.
Talking a bit more about our people, I'm delighted to share some exciting updates about our CI&T Next Gen, our trainee program that holds a special place in our hearts. We're passionately committed to developing the next generation of tech leaders by providing them a platform to learn, innovate, and excel. This program stands out for its unique approach. It goes beyond conventional learning, offering an immersive experience where theory integrates with hands-on practice. Also, our proprietary platform, CI&T FLOW, plays a central role in leveraging artificial intelligence to enrich and accelerate the learning journey. We have partnered with leading universities in Brazil and Colombia and we were invigorated by the overwhelming response to our program, receiving over 10,000 applications. We plan to onboard 500 of the most talented people in the first quarter of 2025. Attracting highly talented young professionals has been a cornerstone of our operating model.
We foster the development of our people and promote from within. This approach not only strengthens our culture but also ensures that we continue to grow and innovate. Now, moving on to our delivery model. Last year we launched CI&T FLOW, our end-to-end AI-powered platform with a bold vision to transform software development for CI&T and our clients. This decisive moment marked our commitment to a future powered by artificial intelligence. Today, I'm thrilled to share some tangible results we have achieved. I'm pleased to report that over 75% of our teams have integrated FLOW into their daily activities and over 3,000 of them are FLOW-certified. We are truly proud of this achievement given that GenAI is not just another technology; it requires a different way of working and a mindset shift which makes the adoption journey quite challenging. We're also very proud that more than 100 clients have embraced FLOW since the platform launch.
They are experiencing immediate value creation through significant improvements in velocity and productivity, doing more with less, which is a great way to create momentum and foster more extensive adoption and transformation. This is an exciting time for us in the world of digital and software engineering. We are front-runners in a massive transformation that is just starting and we are determined to continue ahead. Now I invite Stanley to present our financial performance for the quarter.
Thank you, Bruno, and good morning everyone. I'm pleased to share our financial performance for the third quarter of 2024. Our net revenue reached a record BRL622.2 million, marking a 17.6% increase compared to BRL529.1 million in the same period of last year. On a constant currency basis, this represents a solid 9% growth. In addition, we are glad to report a 10% revenue growth on a sequential basis, reflecting our sustained momentum throughout 2024 as we have been guiding the market. Our top 10 clients have shown particularly strong performance with net revenue growth rising by 25.3% year-over-year. This impressive figure underscores our unwavering commitment to delivering exceptional value and building long-term relationships with our key clients. Our financial results this quarter reflect not only our robust client relationships but also our strategic focus on expanding our market presence and delivering innovative solutions.
We have achieved net revenue growth across all regions on a year-over-year basis, demonstrating our balanced global presence. For the nine months of 2024, our geographic distribution of net revenue is as follows: 44% from North America, 41% from Latin America, 11% from Europe, and 4% from Asia-Pacific. In the third quarter, net revenue from Latin America grew by an impressive 11% on a sequential basis, driven by our strategic initiatives with top clients in the region. North America continues to be our fastest-growing market, showcasing our ability to drive value in diverse markets. Throughout 2024, we have consistently experienced growth across our primary verticals. In the third quarter of 2024, revenue from Financial Services, Consumer Goods and Retail, and Industrial Goods verticals grew by double-digits year-over-year. Notably, revenue from Retail and Industrial Goods sectors actually doubled compared to the third quarter of 2023, fueled by new clients we acquired in the last 18 months who are growing at a rapid pace.
This growth includes significant contributions from automotive players and food retail companies. Over the last 12 months ending in the third quarter of 2024, we had eight clients generating over $10 million in revenue and 17 clients within the $5 million to $10 million range. 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 broadening the range of services we provide. This aligns with our land and expand strategy, which focuses on retaining existing clients while expanding our presence within their organizations. Moreover, we are excited about the addition of new clients we have recently engaged, including large and well-known enterprises that present significant technology investment opportunities. As Cesar mentioned, our AI growth machine, a specialized sales team, has been refining our offerings, enhancing our effectiveness and speed to meet client needs.
Our adjusted EBITDA for the third quarter of 2024 reached BRL121 million, representing a 24.2% increase compared to BRL98 million in the same period of last year. The adjusted EBITDA margin improved to 19.5% in the third quarter of 2024, up by one percentage point from the third quarter of 2023. We have been dedicated to maintaining healthy margins through a diligent cost management approach. In addition, we have strategically invested in our sales team to drive sustainable revenue growth. Adjusted net profit was BRL56.5 million, an increase of 32.9% compared to the third quarter of 2023. The adjusted net profit margin increased from 8% in the third quarter of 2023 to 9.1% in the third quarter of 2024. This improvement was mainly due to the increase of the adjusted gross profit, partially compensated by higher income tax expenses in the quarter. In the nine months of 2024, we generated BRL295 million from our operating activities, a 15.9% increase compared to the previous year. This represents a cash conversion to adjusted EBITDA of 94%, demonstrating our healthy capacity to generate cash from our operation. Now, I invite Cesar back to comment on our business outlook.
Thank you, Stanley. For the fourth quarter of 2024, we expect our net revenue to be in the range of BRL620 million to BRL655 million, on a reported basis. At the midpoint of this range, our net revenue guidance represents a 22% year-over-year growth. For the full year of 2024, we are updating our guidance range and raising the midpoint. We now expect net revenue growth at constant currency to be between 0.5% and 2% year-over-year. On a reported basis, net revenue growth at the midpoint of the range for 2024 is expected to be approximately four percentage points higher than growth at constant currency, assuming an exchange rate of BRL5.55 to the US dollar in the fourth quarter. Additionally, we are raising the midpoint of our guidance for the adjusted EBITDA margin, which we now estimate to be in the range of 18% to 19%. In 2024's first quarter, we set the groundwork for a year of solid sequential growth, signaling a robust V-shaped rebound from 2023's atypical year, and aligning with our historical track record.
The solid exit rate in the fourth quarter of 2024 positions us favorably for a sustainable growth trajectory heading into 2025 and beyond. As we conclude, I extend heartfelt gratitude to our clients, stakeholders, and my exceptional team for the trust, support, and dedication that drive us forward. Let's continue to collaborate, innovate, and transform. We now conclude our presentation and open the floor to your questions.
All right. We’ll now begin the question-and-answer session. The first question comes from Leonardo Olmos from UBS. Leo, go ahead.
Questions and answers
Hi, everyone. Good morning. Congratulations on the great results and the perspectives going forward. Very happy to see it. Two questions on my side. First on employee growth. If you could talk a little bit about the good problem you have to face. So you got a lot of demand and you may need to hire a lot of people. Can you talk a little bit about that and how the utilization rates are doing? And the second question was we noticed that income tax was a little higher than we expected. Can you talk a little bit about the expectation of the tax rate going forward? Thank you.
I can take the first one on the headcount. The headcount has been growing in line with revenue growth. So we don't think it's a big problem right now. The market is still stable, so it's not as hard as it was in the pandemic years. And we were able to grow even during pandemic years. So at this point, it's been an easy problem to solve. Not too hard, and we've been competing in this market for 29 years and it's never been easy. It's never easy, but it's easier than it was in 2021-2022. Stanley, do you want to…
Yeah. Let me get this about the tax rate. Hi, Leo, thanks for the question. Well, about the effective tax rate, the better way to see that is to see in the nine months of 2024. As you can see we have a 38.7% effective tax rate compared to the nine months in 2023, which was 36.5%. This increase is mainly due to some business restructuring that are one-off expenses this year affecting the tax rate and also some loss-making from emerging regions that we have within the year. Another way to see that is to see the cash tax rate. The cash tax rate for the nine months is 10% this year compared to 14.8% from the nine months of 2023, which are both exceptional effective cash tax rates, let's say. With regard to going forward, we expect to behave in that way. So, in the cumulative way, it's the best way to see to translate our effective tax rate.
Leo, about the utilization rate I forgot you mentioned, it's still very healthy around between 85% and 90%. So even with the growth we've been able to kind of onboard people faster than in the past just with the use of AI-based learning tools and onboarding processes. So that's still very high.
Very good, good news. Have a good day all. Thank you.
Thank you, Leo. Our next question comes from Vitor Tomita from Goldman Sachs. Vitor, go ahead.
Good morning, everyone and thanks for taking our questions. So we have two questions from our side. The first one is, if you could give us a bit more color on which factors were most important for the margin improvement in the quarter and for the guidance raise, you cited cost management approaches but also if factors such as capacity utilization improving, FX, AI, and other drivers might have surprised you in how effective they were in supporting your margins? And our second question would be on the North America and US business, how have you seen the commercial environment and moods among clients in the US leading up to elections? And now after elections, do you believe there might have been some repressed demand for new initiatives there that might be unlocked now or anything like that? Thank you.
I can start by discussing margins. Thank you for the question, Tomita. We continue to focus on productivity gains through our diligent cost management approach. In the near future, most of the selling, general, and administrative expenses are fixed. We expect to provide operating leverage as we resume growth. Additionally, we plan to invest in hiring, training, and fostering our growth trajectory, along with AI initiatives. In summary, we are on track to achieve the EBITDA we are guiding, which is between 18% and 19%. In fact, we raised the midpoint due to the reasons I mentioned.
Great to see you, Vitor. What we see in the US is I think the demand environment is slightly better. Of course, we still see ongoing macro uncertainty. But it's clear that the budgets are more stable, especially for large companies. So this translates to less volatility and more visibility that is good for our strategy of replacing underperforming competitors. What we also see by now is it's still early. I think we are still seeing what's happening after the election results. But Q3 was a quarter with our highest booking of the year, and we ended Q3 with a very strong pipeline. We reached our record pipeline, especially due to the US. So it's a good indication, but we need to continue looking to see if we will have any real good or bad impact. But things are moving, I think, in a good way.
Very clear. Thank you both very much.
Thank you.
Thank you, Vitor. Our next question comes from Thiago Kapulskis from Itau BBA. Thiago, your line is open.
Hi, everyone. Thank you for the chance to ask questions and congratulations on the results. I have two questions as well. First, as you know, I cover US tech and have been hearing a lot about Agentic AI. You are early adopters of this trend with CI&T FLOW, and you showcased a lot in the videos before the Q&A session. I would like to know how AI is actually driving results and this acceleration. Can you quantify whether it's helping or not? Additionally, could you share some examples of the cases you're seeing with these agents? Is the concept of Agentic AI gaining more traction, especially with companies like Salesforce and Service...?
Okay. Great to see you, Thiago. For your first question, I think we attribute our solid revenue growth not to a better macro environment but two key factors. One is the way we enhanced our offerings and competitiveness because of CI&T FLOW and AI. I think we moved fast and positioned CI&T in a very strong way, and our ability to demonstrate the kind of tangible results we can achieve. I think now a team with FLOW can easily show at least 50% improved speed compared to a non-FLOW team. Depending on the content, it can go for 200%, 300% faster. So it resonates very well with our top clients. You probably saw our top 10 clients grew 25% year-over-year. Basically, we are expanding our share with them. I think we planned for 2024 at the end of 2023 and that will probably be the main initiative for 2025 focused on CI&T FLOW and efficiency as our main drive for acquiring new clients and expanding our portfolio.
What we see now is the beginning of demand. I think we have a good number of exploratory business use cases around Generative AI as the maturity of the models evolves. I think you saw we showcased BASF a few minutes ago. A lot of things focused on hyper-personalization using AI, but it's still exploratory. It's across all verticals. I believe we could foresee reasonable demand around business use cases based on customer experience and personalization using AI next year, but there will probably be huge demand only from 2026 on. Then the maturity of the infrastructure environment, I think there are still lessons learned and homework from the first chapter of the digital revolution before companies can explore the potential of AI. Also, there is this amazing curve of the capabilities of the models that are evolving and will converge to huge reinvention of customer experience and decision-making in every single corporation.
So this is my brief scenario. On the second question regarding Brazil, Thiago, I see stability and visibility among budgets. It's still early. I think we are already discussing with our clients, working to understand their plans for next year, of course adjusting our forecast accordingly. But I think in the next three to four weeks we will have good visibility of the way our customers are planning the investments for 2025. What I see are good signs of stability around tech and digital budgets.
Great. Super helpful, Cesar. Thanks a lot for insights.
My pleasure.
Thank you, Thiago. I want to emphasize that revenue from Latin America grew 11% on a sequential basis, showing significant improvement this quarter in the latter half of the year. The next question is from Bryan Bergin at TD Cowen. Bryan, please proceed.
Hi. Thank you. So I wanted to ask about some top clients since your top 10 looks to have shown very strong performance. Can you speak about the sustainability of that performance that you forecasted here, particularly for Q4? Any early 2025 considerations in those top 10?
Sure. Hey Bryan, thank you for your question. We are seeing a lot of space to continue our value proposition of efficiency in replacing underperforming vendors. I think we can take advantage of a very fragmented market, allowing us to continue to grow by replacing or capturing more share even without macro tailwinds. However, if we have some macro tailwinds and there's a chance to have that in the quarters to follow, I think we could see this trend of growth in our major clients continue. We also onboarded a very good set of new large clients, especially in the automotive industry and food retail. We expect this cohort will complement our growth and become really big clients for CI&T. So, it's going to be a combination of expanding in our long-term clients and fostering continued growth among the new set of clients we acquired in the last quarter of 2023 and the first quarter of this year, basically.
Okay. That's good to hear. And then on FLOW, it's good to see the traction with the solution now impacting, I believe, it was 80% or so of revenue. As you analyze the client engagements where the use of FLOW is more mature, is there any variability in the profit profile of those relationships versus accounts that are not leveraging FLOW? Just anything to call out as it relates to the financial impact and the profitability that might be different?
Sure. It's really early to say, but we see some space for margin improvement because we can really reduce some non-quality costs within the contracts using AI. Bruno mentioned that one of the costs is onboarding. When we streamline onboarding, we're using AI with the context of the engagement for fast training of new team members, we gain margins. There's a lot of other opportunities around that. We see an initial correlation with less price pressure and more price elasticity where we are using AI more heavily. But I think it's early to project some real impact. However, we are really paying attention to that and fostering ways to not only get growth through our CI&T FLOW initiative but also to gain some efficiency.
If I can chime in, Cesar. For 2024, Bryan, we were deliberately passing on all those productivity benefits to clients so we can kind of grow. The strategy was intentional to prioritize growth. If we can be 30%, 50% more productive than our underperformers, then we will capture that wallet share within those accounts, right? This strategy was by design. Of course, we're doing some experiments to actually try to capture a little of that value creation to ourselves. That will certainly intensify in 2025, but in 2024, this was by design.
Okay. Make sense. Thank you.
Thanks Bryan. Our next question comes from Joseph Vafi from Canaccord. Joe, your line is open.
Good morning, everyone, and congratulations on the strong results. I want to focus more on Financial Services, which is a significant sector for IT services. What are you expecting to see in that area towards the end of 2024 and into 2025? You mentioned having large Financial Services clients in Latin America and Brazil. Can you provide any insights on the outlook for North America in Financial Services? I also have a quick follow-up question.
I can take this one. I think for North America, we do have already a footprint not exactly in banking but a lot of fintech and asset management, with some medium-sized and small banks, so working our way up to the large banks. We see a large opportunity going forward, which is with the Legacy modernization. With the use of GenAI there, I think we can make significant progress on the Legacy modernization that's been sitting there for decades to modernize very old infrastructure. I believe that can be a really promising play for the upcoming years for us within that industry. So we're investing a lot in the go-to-market with that offering to that specific industry vertical. Thanks for the question, Joe.
Let me complement with the Brazil or Latin America scenario. What we see is a very competitive environment; really the competition among the digital-native financial service companies and the incumbents is increasing. That means everyone needs to accelerate their digital initiatives. So we see a lot of room for continuing to grow in this space in Brazil and other parts of the region due to the competition, especially among digital-native and incumbents. I anticipate that the next three or four years will be particularly intense, especially as Financial Services will be the first real reinvention of hyper-personalization and customer experience based on AI. I'm betting on that. It will drive a lot of demand from both sides: from the incumbents and from the fintech world.
Great. Thanks for that. Thanks for that color, Bruno and Cesar. And then maybe it seems like you're outperforming peers in growth right now a little bit and there may be a few factors for that; maybe smaller size, maybe it's FLOW and how quickly you've implemented it across the employee base and the customer base. It could just be a few large customers growing more quickly. I was wondering if you could maybe rank what you think are the kind of the most important drivers of outperformance at a broad level? Thanks.
Sure, Joe. We credit our fast growth to basically two factors: the way we moved with FLOW and the way we enhanced our offerings based on AI and CI&T FLOW. I think having 75% of the teams already using AI in a little more than one year is a big win for us and positions us really at the edge of this disruption. The second factor I think is our new enhanced sales structure. We call this initiative the AI growth machine. This is also part of our ability to address the opportunities in the market more aggressively as we have a compelling offering better than our competitors.
Thanks, Cesar.
My pleasure.
Thank you, Joe. Our next question comes from Ernesto González from Morgan Stanley. Ernesto, please go ahead.
Hi. Thank you for taking our question. It's two. The first one is, can you comment a bit on the sustainability of demand trends? And also what drove the increase to your revenue guide? Q3 was stronger than expected. I was wondering if it was a stronger ramp-up of projects or maybe if there's some conservatism baked into your full year guide? And also if you could briefly comment, what kind of players are you replacing within your clients? Is it higher-end digital transformation players or maybe more traditional IT services? Thank you.
Thanks, Ernesto. I will start with the second question. I think 70% of our real daily competitors are not our peers or traditional IT services or consulting companies. Around 30% is really our other digital specialists or native players. As attendance with the protagonism of the digital specialists evolves, we may see more competition, but the majority of our competitors are traditional horizontal IT service players. As for our guidance, we are guiding based on the current condition we observe. Of course, every guidance has a conservative nature. I mentioned we had our highest booking quarter in Q3 and ended with our record pipeline for future opportunities. It depends on whether we will continue with the current success rate. We believe yes, and we believe the environment will continue at least stable. So we see a good outlook. But it's too early to provide guidance for 2025. I think this is our main work in the next three to four weeks. Afterward, we will have a clearer vision of what's ahead, and of course, we will present our complete guidance for 2025 in detail in our next call.
Really clear. Thank you.
Thank you.
Thank you, Ernesto. That concludes our Q&A session. Thank you all for attending our event today. I'll now invite Cesar Gon to proceed with his closing remarks. Cesar?
Thanks, Eduardo, Bruno, Stanley. I think with this we have now completed a dozen earnings calls. So just enough to call it a collection of earnings calls. Thank you all for joining our call. I'd like to extend my gratitude once again for all CI&Ters across the globe for your hard work and the huge achievement this quarter. A special thank you to you as well to our clients for choosing CI&T as their partner for co-creating this exciting new chapter of AI-driven innovation. Stay well. See you soon.