CINT - CI&T Begins AI Agent Platform Rollout To Major Clients

2023-09-18 13:20:43 ET

Summary

• CI&T Inc provides digital transformation and software consulting services globally.
• The company is rolling out its new AI agent platform to major clients and plans to expand it to its entire client base.
• The stock appears currently fully valued, so I remain Neutral [Hold] on CI&T Inc for the near term.

A Quick Take On CI&T

CI&T Inc ( CINT ) provides digital transformation and related software consulting services to clients worldwide.

I previously wrote about CINT with a Hold outlook.

Management is rolling out its new AI agent platform to major clients and, ultimately, to its entire client base.

However, this will take some time, and the stock appears to be fully valued at its present level, so I remain Neutral [Hold] on CINT for the near term.

CINT Overview And Market

Campinas, Brazil-based CI&T was created to provide a variety of software services to assist businesses in their digital transformation efforts.

The company is headed by co-founder and CEO Cesar Gon, who has been with the firm since its inception and previously earned a master's degree in computer science from UNICAMP.

The company’s primary service offerings include:

• Strategy

• Design

• Engineering.

The firm seeks clients across all industry verticals but focuses its main efforts on clients in the following industries:

• Retail and Commerce

• Financial Services

• Technology

• Automotive

• Consumer Packaged Goods.

The company has teams located in Brazil, the US, UK, Canada, Japan, China, Portugal, and Australia.

According to a 2021 market research report by 360 Market Updates, the worldwide market for digital transformation strategy consulting was an estimated $58.2 billion in 2019 and is forecasted to exceed $143 billion by 2025.

This represents a forecast CAGR of 16.2% from 2020 to 2025.

The main driver for this forecasted growth is a broad transition from on-premises, legacy systems to cloud-based environments with complex architectures.

The COVID-19 pandemic pulled forward substantial demand to improve enterprise systems, resulting in higher growth prospects for digital transformation consultancies.

Major competitive or other industry participants include:

• Endava (DAVA)

• Globant (GLOB)

• EPAM Systems (EPAM)

• Accenture (ACN)

• Capgemini (CAPMF)

• Cognizant Technology Solutions (CTSH)

• Tata Consultancy

• Ideo

• McKinsey & Company

• Omnicom Group (OMC)

• Sapient

• WPP (WPP)

• Others.

CINT’s Recent Financial Trends

• Total revenue by quarter has continued to rise, but operating income by quarter has remained flat despite the rise in revenue:

• Gross profit margin by quarter has remained stable, but Selling and G&A expenses as a percentage of total revenue by quarter have trended higher, likely contributing to flat operating income.

• Earnings per share (Diluted) have trended unevenly and slightly higher in recent quarters:

(All data in the above charts is GAAP.)

In the past 12 months, CINT’s stock price has dropped 31.74% vs. that of the SPDR S&P Software & Services ETF’s ( XSW ) rise of 14.48%, so the stock has underperformed the industry benchmark by a wide margin, as the chart shows here:

For balance sheet results, the firm ended the quarter with $38.6 million in cash, equivalents and short-term investments and $138.5 million in total debt, all of which was classified as long-term.

Over the trailing twelve months, free cash flow was an impressive $49.3 million, during which capital expenditures were only $2.5 million. The company paid $4.1 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For CINT

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $5.01 versus the current price of $6.30, indicating they are potentially currently overvalued.

Sentiment Analysis

The chart below shows the frequency of various key terms in the most recent management earnings conference call with analysts.

The frequency of negative terms is fairly significant, indicating the firm’s client base is experiencing significant change and stress in business conditions.

Analysts questioned management about when they expect to see growth return from client spending.

Leadership responded that clients are "very cautious" about new spending initiatives outside of AI-related projects.

Also, an analyst questioned management about employee utilization rates; while management didn’t respond with a specific rate, they characterized the rate as "still very high."

Commentary On CINT

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management highlighted the firm’s continued revenue growth despite substantial macro uncertainty and difficult operating conditions.

Management views the "AI revolution" as providing significant opportunities for the firm in the coming years as clients seek to incorporate new AI-enabled efficiencies and workflows into their operations.

To that end, the company recently launched its CI&T/FLOW AI platform and has engaged with several large clients from major industry verticals to create and test "over 100 new AI agents developed by both CI&T and partners."

On an internal basis, the firm’s employee attrition rate was 10.5%, and leadership attrition was 2.6% YoY.

Total revenue for Q2 2023 rose by 19% year-over-year, but gross profit margin fell by 0.4%.

Selling and G&A expenses as a percentage of revenue dropped by 1.8% YoY, while operating income increased 37.3% year-over-year.

The company's financial position is reasonably solid, with nearly $40 million in cash and equivalents, some long-term debt and impressive free cash flow over almost $50 million over the last twelve months.

Looking ahead, forward full-year 2023 top line revenue growth is expected to be approximately 10% over 2022.

If achieved, this would represent a significant reduction in revenue growth rate versus 2022’s very high growth rate of 58.49% over 2021.

In the past twelve months, the firm's EV/EBITDA valuation multiple has fallen a hefty 45%, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include increasing client uptake of its AI services as it expands its new AI platform offerings from its current marquee client focus to its broader client base.

Also, management has diversified the firm’s revenue streams geographically so that 60% of its revenue comes from U.S., Europe, Australia, and Asia.

However, given the time it may take for its AI platform full rollout to occur and additional time for it to show up in the financials, along with the apparent full valuation of the stock at its present price of around $6.30, my outlook on CINT is Neutral [Hold].

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