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.