HCL Technologies Limited Q3 FY24 Earnings Conference Call Insights

Key highlights from HCL Technologies Limited (HCLTECH) Q3 FY24 Earnings Concall

• Revenue Growth and Margins
  • Revenue grew 6% sequentially and 4.3% YonY in constant currency, the highest growth since Q3 2021.
  • Services revenue grew 3.1% sequentially despite being a seasonally weak quarter.
  • Software revenue grew 5% YonY in constant currency due to growth in subscription and support revenue.
  • Operating margins were 19.8%, up 126 bps sequentially and 16 bps YonY, after accounting for the impacts of wage hikes and furloughs.
• Business Highlights
  • 5 of 7 verticals grew this quarter, with telecom and media up 25.9% and manufacturing up 7.6% sequentially.
  • Europe delivered 5% sequential growth including the ASAP acquisition.
  • Added 3 $100 million plus clients and 4 $50 million plus clients on a YonY basis.
  • Bookings were lower than last quarter but YTD bookings are up 10% versus last year.
  • LTM attrition currently at 12.8%, a QonQ decline of 1.4%; lowest since 1Q21.
• GenAI Momentum and Outlook
  • 30 GenAI deal wins, including with a US healthcare provider and financial services firm.
  • Use cases include clinical search, risk management, anomaly detection, and sustainability analytics.
  • Huge potential but near-term deployments will be small.
  • Focus on laying foundations like cloud, data, security to scale GenAI.
• Macroeconomic outlook
  • 2024 presents opportunities and challenges for enterprises.
  • Cost improvements and low code capabilities will be prioritized.
  • While overall discretionary spending flat, some areas like cloud, data, and security remain resilient.
• Guidance
  • Total revenue growth expected 5-5.5% in FY24, services towards higher end.
  • Operating margins expected 18-19%.
  • Healthy medium-term outlook based on business mix, people and innovation focus.
  • Services expected to see good growth in Q4, typical seasonality in Software.
  • Expect services to grow towards higher end of 5-5.5% FY24 guidance range.
• Financial highlights
  • Revenue $3.4 billion, up 4.3% YoY in constant currency, including 100 bps from acquisition.
  • Net income grew 5.2% YoY to $522.7 million.
  • Operating margins at 19.8%, up 126 bps QoQ and 16 bps YoY.
  • Annual recurring revenue $1.06 billion, up 2.9% YoY in constant currency.
  • EBIT margin improved 126 bps QoQ to 19.8%.
  • LTM ROIC improved to 32.8% at company level, 40.1% for Services.
• Software R&D Spend
  • Remained steady as revenue grows.
  • R&D capacity has expanded by leveraging right locations.
  • Allows more investment in product modernization and embedding GenAI.
  • Strategy to convert perpetual to subscription licenses is working.
  • Seeing good traction for Unica and Commerce with cloud and GenAI.
• Demand Environment
  • No change in discretionary IT services spending, still soft.
  • Seeing green shoots of growth in Engineering Services.
  • Confident of strong exit momentum in FY24 with bookings and pipeline.
  • Partnering on Gen AI centers of excellence and advisory services.
• Hiring Strategy
  • Had hiring this quarter in line with growth experienced.
  • Headcount leading indicator aligned to guidance.
  • Had some declines in prior quarters but positive YoY increase.
  • Maintaining transparency on ask rates for next quarter.