HCL Technologies Limited Q1 FY24 Earnings Conference Call Insights

Key highlights from HCL Technologies Limited (HCLTECH) Q1 FY24 Earnings Concall

Management Update:

• [00:03:49] The three largest verticals for HCLTECH in 1Q24 were financial services, manufacturing, and life sciences, delivering double-digit growth YoY.

• [00:10:32] HCLTECH’s 1Q bookings were $1.6 billion, which was lower than expected. However, the company expects spikes in bookings in the coming quarters to make up for the drop.

• [00:14:07] The company’s LTM attrition declined 7.5% YoY to 16.3%.

Q&A Highlights:

• [00:22:43] Ankur Rudra of J.P. Morgan asked how did 1Q demand and revenue performance compare to expectations, and was it anticipated given the maintained guidance and the enterprise tech spend environment. C. Vijayakumar, CEO stated that 1Q was lower than expected despite growth in life sciences and manufacturing. Tech and telecom saw unexpected drops, impacting revenue and margins. However, discretionary spend is stabilizing, efficiency-led programs are filling the gap, and strong bookings are expected in 2Q.

• [00:25:47] Ankur Rudra at J.P. Morgan enquired that if HCLTECH thinks that by maintaining its revenue guidance it risks reducing the upper end of the guide if uncertainty persists. C. Vijayakumar CEO said HCLTECH has a good track record of meeting the guidance given by looking at its pipeline and conversion. Despite challenges in the macro environment, the company remains confident of delivering to the guidance this year.

• [00:26:55] Ankur Rudra with J.P. Morgan asked how GenAI is playing out in contracts and if it is showing up as a source of price deflation that might impact contract profitability going forward. C. Vijayakumar CEO answered that GenAI is innovation-led, with efficiency as a key benefit. Deflation may occur in 2-3 years, but will be offset by many projects. HCLTECH has 140 projects in a few weeks, including pilots and implementations.

• [00:29:09] Kawaljeet Saluja of Kotak enquired why the company is continuing to provide guidance that is not realistic, given the recent performance of the company. Prateek Aggarwal CFO replied that the company is confident in meeting its guidance, despite the increase in the ask rate. The company’s forecasting process is robust, but it is still subject to error, particularly in a volatile environment.

• [00:35:02] Kawaljeet Saluja of Kotak queried if the company is confident that the second quarter will see a significant increase in bookings, and will this be enough to meet the guidance. Prateek Aggarwal CFO replied that the nature of deals varies, and some convert to revenue faster than others. And that is what’s driving the company’s guidance.

• [00:36:02] Kawaljeet Saluja of Kotak asked if the change in compensation revision cycle this year provide a tailwind for profitability. Prateek Aggarwal CFO clarified that the company has a plan to reduce costs, including cutting back on E4 and above salaries, which is a significant portion of the total wage bill. The leadership team is committed to taking the necessary actions to meet the numbers.

• [00:38:10] Mukul Garg from Motilal Oswal queried if HCLTECH is confident that the large deal wins will scale up quickly enough to meet guidance, even in a muted environment. C. Vijayakumar CEO replied that the company expects that the significant part of its advanced pipeline will convert to revenue relatively quickly, compared to the last two or three large deals.

• [00:39:13] Gaurav at Morgan Stanley asked if the deferrals and cancellations in tech and telecom are behind HCLTECH, or will they continue to be an issue in the near term. C. Vijayakumar CEO answered that it looks like things have stabilized, but it has been volatile.

• [00:40:10] Sandeep Shah with Equirus enquired if the 2Q conversion of deal pipeline into deal wins result in better growth from 2Q onwards, or will the growth pick up from 3Q. C. Vijayakumar CEO replied HCLTECH don’t give quarterly guidance, but it expects the quarters to get incrementally better throughout the year. There will likely be a spike in one of the quarters.

• [00:41:07] Sandeep Shah with Equirus asked what was the one-time benefit in the intangible amortization, and will it reverse in the second quarter. Prateek Aggarwal CFO replied that the one-time benefit in the intangible amortization will not reverse in 2Q and is due to an increase in royalty from a product that was impaired a few years ago. There are no repercussions on any subsequent quarters.

• [00:46:39] Manik Taneja from Axis Capital asked about HCLTECH’s hiring plans in the backdrop of some of the near-term challenges. C. Vijayakumar CEO said HCLTECH’s hiring plans are moderated Q-on-Q to align with the revenue forecast. The next quarter will see a higher intake of freshers, reducing the need for lateral hires, and productivity-based releases will contribute to growth in Q2.