CI&T Inc

Technology is more than a device, system or industry.

Technology is built by people for people. It's built for people with desires and needs and ambitions.

By our people who are.

intelligent, curious, creative, and the diverse.

Our people use innovative strategy, design, and engineering to offer end-to-end solutions that help companies to quickly transform and scale their operations globally.

While we create AI-powered solutions, all we really want and what motivate us is to make their tomorrow.

CINT, we breathe and build tech to make their tomorrow.

Good morning. Welcome to CINT earnings call for the first quarter of 2024. I am Eduardo Galvão, Head of Investor Relations at CINT.

Technology is more than a device, system or industry.

Technology is built by people for people. It's built for people with desires and needs and ambitions.

By our people who are.

Our people use innovative strategy, design, and engineering to offer end-to-end solutions that help companies to quickly transform and scale their operations globally.

While we create AI-powered solutions, all we really want and what motivate us is to make their tomorrow.

CINT, we breathe and build tech to make their tomorrow.

Good morning. Welcome to CIMT earnings call for the first quarter of 2024. I am Eduardo Galvão, Head of Investor Relations at CIMT. With me on today's call are Cesar Ghosn, Founder and CEO, Bruno Ghikadi, 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 email to investors at cint.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. 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 those 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. 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 Ghosn to begin our presentation. Cesar.

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 amazing 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 hyperdigital. 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 experience in selling and delivering complex digital solutions, we are excited to share advancements in our go-to-market approach. To drive efficiency and growth, we established the AI Growth Machine, a team of industry experts, solution strategists, 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 US, 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 R$ 523.5 million, a 20 basis points increase compared to the fourth quarter of 2023, and 70 basis points above our guidance. Although it's a 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 our ability to strengthen relationships with key engagements and expand 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 the year, according to the seasonality of our business. Finally, in the first quarter, we generated R$ 130 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.

The collaboration between IDUCS, one of the largest educational organizations in Brazil, and CINT marks a milestone in the education sector. Together, these entities are paving the way to a future where artificial intelligence is not just a learning tool but a fundamental pillar in creating enriching and personalized educational experiences. Modern education faces the challenge of integrating emerging technologies to enhance the learning experience. eDUX needed a robust reference architecture that could effectively and innovatively incorporate AI into its educational solutions while maintaining practicality and efficiency. CI&T responded strategically, developing a generative AI strategic roadmap combining evolutionary engineering and innovative product strategies. The partnership has generated innovative experiments in AI, providing new growth opportunities and generating significant savings. Through a well-crafted strategy and focused execution, education is becoming more accessible, personalized and effective, preparing students for the future and solidifying EDUX's role as a pioneer in the business world. in the Brazilian educational sector.

Sami Sawadee is an innovative healthcare provider in Brazil. The company was facing a crucial challenge optimizing its care coordination journey by eliminating administration work. The solution? Partnering with Google, Sami Sawadee implemented an advanced generative AI system with CINT, supported by the robust technologies of Google Cloud Run, Vertex, and BigQuery. This innovation brought a qualitative leap healthcare coordinators operate more efficiently and customer satisfaction has reached new heights. The solution has saved 900 hours monthly with administrative issues and the expectation is that each care coordinator will assist 50% more clients per day after the solution. We've turned a challenge into a glorious opportunity proving that technology and human care can go hand in hand.

In an increasingly digital world, Bola, a fintech specializing in flexible credit and benefits, has partnered with CINT to provide essential financial services. Their mission? To revolutionize digital financial inclusion using generative AI technology. By leveraging CINT's GenAI platform, Flow, BOLA aims to accelerate software development and deployment, doubling the velocity of code generation, and reducing testing time by one-third. Bola's journey toward digital financial inclusion has begun, powered by innovation and human and AI collaboration.

Welcome to our latest update. We have gathered the most recent information and insights from our leadership team to share with you.

CINT showcased its innovative solutions to advance the future of healthcare and life sciences at the HIMSS24 Global Health Conference in Orlando, Florida. In collaboration with Mercy Personal Physicians and Bayer, CINT hosted a main stage session exploring how AI could help orchestrate a seamless health ecosystem. CINT also showcased industry-leading solutions for doctors and patients that enhance and streamline user experience. Solutions included immersive solutions for HCP training, augmented patient triage, and HCP accelerators. In 2024, the Web Summit Rio took center stage, uniting over 35,000 people at the Rio de Janeiro. Among the thought leaders and innovators, CINT drove the conversation on the transformative power of AI in the corporate world. From thought-provoking discussions to groundbreaking insights, CINT's impact was felt across the event. From exploring AI's role in driving efficiency to navigating the generative AI revolution, CINT top leaders and the CEO shed light on the vast opportunities and challenges in the new AI world. At the Gartner Data and Analytics Summit in Sao Paulo, Brazil, CINT unveiled groundbreaking solutions that seamlessly blend advanced knowledge, artificial intelligence, and data to address evolving landscapes. As a strategic partner for growth, CINT illustrated how to translate vast data into actionable business strategies. CINT proved to be a transformative force at the Gartner Data and Analytics Summit, emphasizing that collaboration between humans and AI is the key to unlocking the potential of data.

In 2024, CINT was recognised by the Everest Group for its excellence in digital transformation and was named in the Peak Matrix for 2024 in CPG and retail. In April, in a moment of great pride for all of us, CINT was distinguished by the Everest Group as a major contender in not just one, but two of their reports the Application Transformation Service's Peak Matrix assessment for both North America and Europe. The Peak Matrix is a proprietary framework that assesses the market success and overall capabilities of service providers based on key parameters such as performance, experiences, ability and knowledge. This recognition shows how CINT continues to raise the bar in hyper-efficiency and reaffirms its commitment to innovation and excellence.

At the Visionary Awards 2024, CINT is a finalist in the Learning Innovator of the Year category. The company's commitment to continuous education through CINT University reflects its culture of promoting team growth and aligning skills with market demands. CINT has implemented a robust strategy for skill mapping and professional development, including the creation of powerhouses, communities of experts, and the integration of advanced technology and artificial intelligence at CINT University. CINT's learning strategy ensures the maintenance of its leadership in innovation and professional development.

Since the rise of cloud computing, CINT in strategic collaboration with Salesforce has been reinventing the technological landscape for a decade through innovative and efficient solutions. This strategic partnership, which spans sales support to delivering solutions across multiple clouds, has been a milestone in development and innovation in various areas, optimizing processes and creating valuable customer experiences. CINT has accumulated numerous certifications and qualified professionals, reflecting the partnership's success with Salesforce and the ability to deliver impactful results. The benefits of the union of these two brands are tangible. Clients and companies have seen their businesses transformed, customer satisfaction elevated, and operational efficiency enhanced by automation and advanced data technologies.

At CINT, we recognize legacy systems challenges to modern businesses. They slow market responsiveness, lack resilience against unexpected events, and hinder digital innovation. Our AI legacy modernization service is designed to address these issues head on. By leveraging specialized teams and artificial intelligence, we reduce risks and accelerate the modernization process, boosting organizational efficiency. We delve deep into existing code to extract and transform rules, enabling modernizations that were once deemed too risky or impractical. Our approach has significantly sped up the modernization process, ensuring it's safe and agile. Together with our clients, we are ready to propel companies into new digital horizons.

iTalent is an artificial intelligence tool integrated with Google Chat developed to optimize the search for internal talents at CINT. It plays a crucial role in the transition of employees between projects, speeding up the process and providing recruitment and selection tips. iTalent assists hiring managers and talent-attracting specialists in the search for available talents, suggesting candidates with potential for open opportunities. It is a faster process than the previous one, requiring them to navigate through complex filtering and search commands. Developed internally at CINT, the iTalent is a more user-friendly and agile solution for internal reallocation. Just the right interactions, resulting in greater agility in recruitment processes.

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.

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 selling tiers, 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 CNT 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 hyperdigital 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 light of 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's 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 FlowAI certification path is an upskilling program for CITers, enabling them to learn and apply Flow progressively in their work. By supporting the adoption of CIT 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're proud to announce the launch of our newest API-powered delivery center in the Philippines, situated just outside Manila. This expansion represents a significant milestone in CIT'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 CIT'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 aligns with CNT's mission to cultivate a diverse and talented workforce, building upon our successful acquisition of Transpire in Australia in 2022. Our right-shore approach ensures optimal outcomes for our clients, irrespective of their location. The creation of the Philippine 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.

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 R$ 523.5 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. Material economies as a whole now represent 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 client contributes 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 20 million reais, from 29 in the fourth quarter 23 to 30 in the first quarter 24. Notably, three of these clients have revenues exceeding 100 million reais. 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 sets the 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 organizations. 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 2024, our adjusted EBITDA stood at R$ 84.3 million, compared to R$ 116.5 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 2023. 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 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 41.7 million reais in the first quarter 24 compared to 62.4 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 Q1 2024, we 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 130.3 million, 11.8% higher than the same period last year. Free cash flow calculated as net cash generated from operating activities, less capex, was 108 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 Year 2024 results, which will be reported in March next year, 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 will invite Cesar back to provide you with our business outlook.

Thank you, Stanley. We expect our net revenue in the second quarter of 2024 to be at least R$ 542 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 natural revenue growth at constant currents 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 V-shaped 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 CIN tier with the support and resources they need to succeed. Together, we will continue to drive our company toward 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.

Okay, we'll now begin our Q&A session. I'll announce each participant's name. Once you hear our name, please unmute your line and ask your question. Then when you're done, please mute your line. The first question comes from Eduardo Rubi from UBS. Eduardo, please go ahead.

Hi, everyone. Thank you very much for the 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 see in Asia and Australia, and when would we expect to see the higher revenue expansion there? Thank you very much.

Sure, I can start with the first one. So basically, as you saw, our Q2 expansion is guided as 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 on the current bookings we already have, combining with our deals from our pipeline. keeping the current rate of closing new deals. So we are, as you saw, we are maintaining our three-year guide. By the way, in our category, so among our peers, we are probably the player with the higher sequential growth forecasted. And in terms of basically what we see in our portfolio is And I think this relates to the demand environment. Of course, there is still uncertainty 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 related 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 roadmap. So commercial activity And pipeline this year compared to previous year is considerably higher. And we see our dual closing rate ratio continue to improve. So basically, if we look, the kind of projects is a lot of things relate to digital efficiency. doing more with less that is the main value prop of CIG flow. And also a lot of investment that are really preparing the foundations for future AI leverage animation, cloud migration, legacy or app modernization data and so on. So I think this is basically what's driving our growth in Q2 and ahead. Sorry, the second question.

The second question is about expansion and APEC. Cesar, I can take this one. What's driving the offering there? You may remind that we acquired a 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, which was a small company. And now they have, you know, the power of near shore and other capabilities from CINT. So that's what's driving, you know, the growth plans there. So that's what's driving actually even the Philippine center that we are opening now this year. So that's the rationale behind it.

Okay, very clear. Thank you very much.

Thank you for your question.

Thank you, Hobi. Our next question comes from Ryan Potter from Citi. Ryan, your line is open.

Hey, thanks for taking my question. So you guys had some variability in your top clients recently with your top client changing over in 4Q. So could you give some color on the demand trends you're seeing in your largest clients? Do you believe you're taking share of those clients? And then on that top client, is it consistent with the client that wasn't working or did it change back to the client that was before them?

Thank you, Ryan. Great to see you. 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 spending in our larger clients this year. But this is combined with our strategy of gain client share based on efficiency. I think this is the main focus on our strategy for 2024. leveraging our Cintiq 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. I mentioned data. Data is hot now. Of course, there is no AI without data, and companies are kind of trying to speed up their data strategies 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 agreement are expanding in a very good way this year. So this is also driving growth for us.

Got it. And the large client comma, is it consistent with large client 4Q? Same client?

Yeah, I think so. It's the same pattern. We mentioned for the first time in history, we have three clients with last 12 months revenue above 100 million reais. So we see a lot of consistency on the expansion in the largest clients of our portfolio. And of course, more challenges for the smaller, more tech-savvy companies is still, I think, a very turbulent environment. And you see across the board, even for other providers, that tech 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's placed in our favors.

Got it. Got it. And it was good to see the large deal that you announced and your prepared remarks with the auto client. Could you give some additional color on what exactly you're doing for this client and what led them to choose you? And then do you believe you have other kind of larger, more complex opportunities in the pipeline similar to this?

Yeah, this was a major victory in the first quarter. We were working This was a very broad and competitive RFP process, global RFP process with all the players in the industry involved. I think we use our new AI growth machine approach. I think that gave us a set of speed and the kind of differentiation that allow us to win. I think it will be public probably in a few months. And 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.

Great. Thanks again.

Thank you, Ryan.

Thank you, Ryan. The next question comes from Funet Cheng from JP Morgan. Funet, go ahead.

Hey, thanks for taking my question. I have a quick question on this growth improvement. Is this growth improvement in any way related to clients willing to do more Gen AI projects like some of those Gen AI projects? Is that driving this growth, sequential growth that you expect for the 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 client's perspective?

Sure. Thank you, Puneet. Great to see you. Well, basically, there's 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 applying AI in the end-to-end producing flow of digital solutions. So this is the main drive. 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 app 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, we develop and 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, or Microsoft 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 experimentations, POCs around improving customer service experiences, improving a lot of customer facing use case, but this is still early stage. I think the whole foundational technology is not mature enough Or big bets around experience, but it will evolve. It's clearly will be there that we are foreseeing that probably use case around the AI experience. So when we move away from screens and buttons and start doing interactions with the machine to natural language interface and so on will happen from next year on in a more aggressive way. But now is a moment of experience, creating the capabilities and really streamline governance and everything infrastructure, having data infrastructure, mainly everything companies need to to be able to play the, say, the experience war that is ahead. There will be a lot of invention around new ways to interact with consumers, and we will prepare our clients for this moment.

Thanks for that answer. Thank you, Pradeep.

Thank you, Pune. Our next question comes from Joey Vafi from Canaccord. Joey, your line is open.

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 focus 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 at least, you know, get to maybe flat sequential results? Or do you think there's still deterioration in those verticals this year? And then I'll have a follow-up.

Thank you, Joey. Well, I think we grouped tech and telecom in the same vertical, but I think there are two different perspectives. I think telecommunications is stable, even increasing. especially among some of our largest clients in this vertical in UK and Brazil. As you know, we have BT expanding in UK, we have Telefónica Vivo expanding in Brazil. So Telecom is in a good fashion and we see this vertical expanding along the year as we expand our our revenues. TAC is different. I think it's still under-challenged. There is a lot of volatility in the demand from TAC and we don't see along the year that this will be stable anyway. For lucky, we have very low exposure to techie, we are more exposed to telecom. But even though we are prepared for a lot of volatility in the tech space, as digital natives and And this kind of companies are still facing challenges on their funding part of their business. But for us is small, but even though we are paying attention and reacting accordingly. So we do not expect that tech is gonna be, we'll have a great year in 2024, maybe improving only from next year on.

Very good. Thank you for that, Cesar. And then secondly, on your operating margin trajectory for this year and in the guidance, you know, clearly we have operating leverage in the business to a certain degree with, you know, 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 sure still anyone I get this one and I can add some comments

Yeah, well, talking about margin, seasonally, we have salaries increase for the most of our people in Brazil in January. 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. Um, and, um, of course, for for the near future, most of the, they are fixed expenses, for example, and with the growth, we should provide, uh, operating leverage and. As we resume growth. Additionally, we continue to focus on productivity gains. We have this cost management, very diligent cost management approach. And yeah, we're forecasting this typical seasonality to happen within the margins throughout the year. Cesar, do you want to?

yeah i would just add a component of this yeah we we as you know we we have a huge uh bat on reshape all key internal process around ai i mentioned our sales reinvention in the call. And it's amazing the kind of effectiveness and benefit we can get from that. We are applying AI across the board in our HR practices, hiring, and the way we do and develop our teams. And in every single area of CIMT, you're gonna see both investment expectations about turning CIG into an end-to-end AI force company. And another thing, and this will leverage to, I think, more space to leverage efficiency in the future. Another thing is, in some contexts, 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 outstanding around AI efficiency. And so there's 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 competitiveness or some elasticity based on our differentiations.

Great. Thank you very much. Thank you.

Thank you, Joe. Our next question comes from Moshi Katri with Ed Wedbush. Moshi, your line is open.

Hey, thanks, and congrats for actually a pretty impressive result. 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 with clients? And what is the magnitude of any sort of pricing pressure we're seeing right now? Thanks a lot.

Thank you. Well, um, let's start with the, um, the, um. The 1st question, um, in a comparison, if we go back to 2023, we saw in a typical, a typical quarter at that time. We recorded more than 19% in 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. And you... your question about how high was it. So it was around 5% cost increase 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 anniversaries, we have... automatic clauses to pass on inflation, for example. But more than that, we also have an organic, let's say, relationship with our clients 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 for all the years. So it's spreaded. So we don't have... As we have a certain date for the cost increase in January, we have certain dates, but spread it probably here for those conversations with the clients. So that's the cause of this seasonality. And as you see, quarter by quarter, our margins would be increasing as a result of that dynamic.

And just to follow up about guidance for the year in terms of revenue, is this all organic? Or there's some acquisitions embedded in guidance?

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, part of this is automatic. As a Brazilian standard, 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 on, 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 a market where we need to pay attention on pricing all the time. And as Sterling mentioned, our motto is having once a year with our clients a discussion about price. It's a moment where we also discuss new capabilities, new geographical locations. We are adding to the deal. And so this, we normally update our Global Master Service 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 it's it's I think it's we have been doing this for three decades now. So I think it's part is an interesting part of our business to to maintain a good level of contribution and gross margin.

Thanks for the color.

My pleasure.

Thank you, Moshe. We have two questions here from Brian Virgin from TD Cowen via email. 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 and the balance of the year? Talk about the balance of utilization versus the need to add incremental engineers to support the growth.

Take that one. So we're expecting headcount to go up in Q2 in line with revenue, right? Because our utilization rate in Q1 is already very high. So there's very little space there in front of a bench to tap into. So we expect that headcount to go proportionally with revenues increase. And throughout the year, actually. Q3 and Q4 as well.

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?

Yeah, basically, thank you for the question. Basically, we are doing every single engagement of CIT in a CIT flow engagement. Sometimes it's even transparent to our clients. They are just seeing the kind of efficiency and velocity we can provide. And sometimes it's more structured to do based on building new agents for specifics of each client context. But in general, Bruno mentioned we have more than 2,000 CIDs already onboarded at our platform. And it will continue to increase along the year. I think we have 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, strategists, 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 2000, we will continue to evolve monthly or quarterly, and we're gonna 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.

Also related to that, Cesar, we have a question from Tiago Kapuskis from Itaú, PBA, regarding CIT flow agents. So specifically to give some examples of what we're doing in terms of POCs for our clients.

Yeah, we have the majority of the agents, it's more than 50 now, are related to getting pieces of or tasks in the end-to-end production flow of digital solutions and streamline or radically 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, it is still a field of opportunity. We, as I mentioned before, we have some very interesting use case already in production. And by the way, we just published a new report we call AI Pulse. The first edition of this report is basically in a quarterly basis, we are going to feature all the powerful stores and use case, concrete 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 readily improve customer experience. You can see the kind of results we already have in this report. AI pools in our website.

Thank you, Cesar. With no further question, that concludes our Q&A. And I'll pass it on to Cesar to proceed with his closing remarks. Cesar, please.

Thank you, Eduardo, Stanley, Bruno, for joining me. Today, once again, thank you all CINTs 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 thank you for our clients for selecting CINT in this journey of reinvention around AI. So stay well and see you soon.