Key highlights from HCL Technologies Limited (HCLTECH) Q2 FY24 Earnings Concall
- Financial Performance
- HCL Technologies had strong revenue growth this quarter across all dimensions.
- Revenue was $3.225 billion, up 1% sequentially and 3.4% in constant currency. This includes a 60 bps contribution from the ASAP acquisition.
- EBIT margin improved 154 basis points sequentially to 18.5%, driven by productivity, utilization, and cost optimization.
- Net income grew 6.4% year-over-year to $463.5 million. In rupee terms, it grew 9.8% to 14.4% of revenue.
- Services revenue grew 1.6% QoQ in constant currency.
- Engineering and R&D Services segment grew 5% and IT and Business Services grew 0.9% QoQ in constant currency.
- Improved Margins
- Operating margins improved by 154 bps sequentially through several initiatives.
- Efficiency improved in managed services operations through automation and AIOps capabilities.
- Freshers who were hired and trained over last 18 months got deployed economically.
- Subcontracting costs were optimized.
- As a result, EBIT percentage reached 18.5%.
- Attrition
- LTM attrition stood at 14.2%, down almost 10% on a YoY basis.
- Record High Bookings
- Q2 bookings hit a record high of $4 billion vs. $2 billion range in previous quarters.
- HCL signed a major deal with Verizon to become the main provider for deploying Verizon’s managed services worldwide for enterprise customers.
- The high value of bookings sets up HCL for healthy growth in 2H24.
- Guidance
- HCL revised full year revenue guidance down by 300 bps at upper end due to weak Q1 and Q2 performance being below expectations.
- Q1 was weak and Q2 had some strain on discretionary spending, leading to lowering of full year guidance.
- But Q3 and Q4 expected to be strong with services organic growth of 2.6-3.8% to achieve new guidance range.
- Large deal ramping up in Q3 and Q4 will significantly contribute to growth.
- Software margins expected to remain in similar range as last year for now.
- Verizon cost deal ramp-up related to sales may affect margins, but upward bias is still expected.
- Demand Environment
- Discretionary spending by clients continues but is lower than normal levels.
- Deal pipeline continues to remain very strong, though maybe 10% below peak levels.
- HCL continues to see good deal flow and is in final stages on many large deals.
- Direction of discretionary spending still uncertain, with volatility in market outlook every 2-3 months.
- Cost Reduction Measures
- Deliberate action has been taken on a number of fronts to reduce costs, including third-party subcontractors and travel.
- Training costs have not been cut, but recruitment has been reduced due to hiring of freshers.
- Cost of hardware and software has also reduced.
- Timing And Impact Of Wage Hikes
- Salary increases usually happen in July, but will now happen in October due to one quarter deferral.
- Wage hikes will have an impact of around 60-65 basis points in October and a small impact of 25-30 basis points in March.
- Outlook for 2H24
- In 2H24, recovery is expected due to large deal going live in November, software seasonality, and continuing revenue.
- Strong growth is expected in the rest of the year with a commitment to deliver 5-6% growth for the full financial year.