HCL Technologies Ltd Q1 FY25 Earnings Conference Call Insights

Key highlights from HCL Technologies Ltd (HCLTECH) Q1 FY25 Earnings Concall

• Financial Performance
  • HCL Tech’s Q1 revenue grew 5.6% year-on-year in constant currency.
  • Revenue declined 1.6% sequentially, which was better than expected.
  • Operating margins were 17.1%, down 50 basis points from last quarter but up 13 basis points year-on-year.
  • Services business grew 5.8% year-on-year but declined 1.9% sequentially in constant currency.
  • Engineering and R&D services grew 8.4% year-on-year but declined 3.5% sequentially.
  • Total contract bookings were $1.96 billion, with a mix of small and large deals.
• AI Initiatives
  • Launched HCLTech AI Force, a generative AI and automation platform.
  • Also introduced HCLTech Enterprise AI Foundry to simplify enterprise AI journeys.
  • The company won several AI-related contracts with major clients across various industries.
  • HCL Tech aims to train 50,000 people on AI and GenAI skills in FY25, with 33% of the target already achieved.
  • New AI labs were opened in New Jersey and Texas to help clients innovate and deploy AI solutions.
  • AI Force platform addressing end-to-end lifecycle of software development and application operations.
• Software Business Growth
  • HCL software grew 3.5% year-on-year and 0.4% sequentially in constant currency.
  • Annual recurring revenue for the software business reached $1.01 billion.
  • GenAI capabilities have been embedded into every major product in HCL Tech’s software portfolio.
  • The software offerings now cover business applications, total experience, intelligent operations, cybersecurity, and data analytics.
• Future Outlook
  • HCL Tech expects growth in Q2 across all verticals and geographies, except for financial services.
  • The company anticipates an impact from the State Street divestiture on Q2 revenues.
  • Despite this, HCL Tech remains comfortable with its full-year revenue and margin guidance.
  • The company expects to meet its guidance through strong operational execution.
  • Growth is anticipated to be driven by client spending on GenAI and other emerging technologies.
  • The company maintains its revenue growth guidance of 3-5% for the full year.
  • EBIT margin guidance remains at 18-19%.
  • The company expresses confidence in achieving growth despite challenges.
  • Q3 expected to be the peak quarter for margins, with Q2 and Q4 at similar levels.
  • R&D margins declined sharply but expected to recover quickly in coming quarters.
• Margin Analysis
  • EBIT margin was 17.1%, down 50 basis points sequentially but up 13 basis points year-on-year.
  • Services margin declined 51 basis points sequentially but increased 43 basis points year-on-year.
  • The margin decrease was primarily due to the drop in Engineering and R&D segment revenue.
  • Annual productivity impact on revenue decline was offset by business efficiencies.
• Cash Flow Performance
  • Last 12 months operating cash flow was $2.7 billion, a 9% increase year-on-year.
  • Free cash flow reached $2.6 billion, growing 12% year-on-year.
  • Operating cash flow conversion rate was 139% of net income.
  • Free cash flow conversion rate was 133% of net income.
  • The company’s gross cash position stood at $3.26 billion, with net cash at $2.985 billion.
  • DSO improved by one day to 82 days, down from 88 days in the same quarter last year.
• Vertical Performance
  • BFSI segment expected to show growth after Q2, following State Street divestiture impact.
  • Large wins in financial services to contribute to incremental revenues in Q3 and Q4.
  • Manufacturing vertical faced challenges in Q1 due to offshoring, productivity measures, and weakness in the automotive segment.
  • Manufacturing expected to show good growth in Q2 despite challenges.
  • HF acquisition in manufacturing underperformed in Q1 but overall outlook remains positive.
  • Technology and services vertical has shown growth after several soft quarters.
  • Green shoots observed in engineering services, expected to contribute more in the next quarter.
• Market Conditions
  • Discretionary spending remains constrained due to economic pressures like interest rates and inflation.
  • Macro factors need to improve for clients to become more liberal with new project spending.
  • Company plans to hire 10,000 freshers for the full year, with 1,100 added in Q1.
  • Fresher addition strategy allows flexibility to adjust to demand quarter by quarter.
• European Market Challenges
  • Weakness in Europe primarily led by the manufacturing sector.
  • Automotive segment, especially large firms with in-house software capabilities, has reduced project spending.
  • EV-related investments are being deprioritized due to economic pressures.
  • Company plans to broaden asset capabilities to global clients to offset this weakness.
• GenAI Impact
  • GenAI expected to provide 50% savings in BPO and testing areas.
  • ADM productivity improvement estimated at 10-30% through GitHub co-pilot adoption.
  • Infrastructure and application operations may see a 10% incremental benefit from GenAI.
  • Business innovation and data-led AI journeys seen as significant growth drivers.
  • Some clients are allocating significant budgets for GenAI programs, such as one bank considering a half-billion-dollar outlay.
• State Street Divestiture
  • Expected to have an 80 basis point impact at the company level in Q2.
  • 90 basis point impact anticipated at the services level.
  • $70 million recognized in other income this quarter due to the divestiture.
  • Remaining portion of the total $170 million consideration expected in the next quarter.