HCL Technologies: Q2-25 Earnings Call Highlights
Solid Q2 with broad-based growth & margin expansion. Management cautiously optimistic due to macroeconomic uncertainties. Strong deal pipeline & focus on operational efficiency point towards growth
hcltech.com | NSE: HCLTECH
1. Key Takeaways
1.1 TLDR
HCL Technologies delivered a solid Q2 performance with broad-based growth and margin expansion.
The company is well-positioned to capitalize on emerging opportunities in GenAI and other digital transformation initiatives.
While management maintains a cautiously optimistic outlook due to macroeconomic uncertainties, the strong deal pipeline and focus on operational efficiency point towards continued growth momentum for HCL Technologies.
1.2 Key Themes
Strong Q2 Performance: HCL Tech reported a strong Q2 with broad-based growth across verticals (except Financial Services due to planned divestment). Revenue grew 1.6% sequentially and 6.2% YoY in constant currency. Operating margin stood at 18.6%, a significant improvement of 149 basis points QoQ.
At a high level, Q2 has been a strong quarter. As we had indicated in the last quarter, we've grown across the board as we see business momentum starting to pick up.
Services Business Growth: The services business grew 1.6% sequentially and 5.9% YoY in constant currency, driven by robust demand in IT and Business Services and Engineering and R&D Services.
Our services business grew at 1.6% sequentially and 5.9% year-on-year in constant currency
HCL Software Momentum: HCL Software continued its positive trajectory with 9.4% QoQ growth and 6.4% YoY growth in H1 FY25, demonstrating the increasing relevance of their products in the digital economy. The ARR reached $1.05 billion.
HCL software business grew 9.4% this quarter and 6.4% growth in H1 FY25 in constant currency year-on-year basis, demonstrating the increasing relevance of our products for the digital economy.
Robust Deal Wins: HCL Tech secured 20 deals in Q2, with a total TCV of $2.2 billion. This included several large wins in the areas of AI and GenAI, demonstrating the company's focus on these emerging technologies.
From a booking perspective, we won 20 deals, 12 deals from services and eight deals from Headsloft software in this quarter. And the total new booking TCV for Q2 stands at $2.2 billion with a good mix of small and large deals.
GenAI Driving Transformation: HCL Tech is witnessing strong traction for GenAI-related opportunities, led by its offerings like HCLTech AI Force and HCLTech Enterprise AI Foundry. AI Force has been integrated with Microsoft GitHub Copilot, providing a powerful platform for service transformation.
Overall, we continue to witness good traction in AI genai related opportunities led by our offerings HLTech AI Force, HLTech Enterprise AI foundry and AI labs.
Positive Outlook with Cautious Approach: While optimistic about the improving demand environment, management acknowledges the uncertain macroeconomic and geopolitical landscape. The revised revenue guidance for FY25 is 3.5% to 5% YoY in constant currency, with the ask rate for Q3 and Q4 estimated between 0% and 2%.
As I look ahead, our pipeline continues to grow and remain strong and is well distributed across business segments, verticals and geographies...We however remain cognizant of geopolitical factors and global economic conditions which can impact growth.
1.3 Operational Performance
Margins: Services margin improved by 110 basis points QoQ, driven by operating leverage and reduced marketing and travel expenses.
Cash Flow: Strong cash generation continues with LTM operating cash flow at $2.52 billion and free cash flow at $2.39 billion.
DSO: DSO improved by 3 days QoQ to 79 days, showcasing efficient working capital management.
Headcount: Headcount saw a slight decline, attributed to productivity initiatives and a focus on specialized skills. Wage bill increased in line with growth.
Wage Hike: Average wage hike in India expected to be around 7%, with double-digit increases for top performers.
Aerospace and Automotive: Pressure continues in the automotive sector, particularly in Europe. Aerospace expected to remain stable.
1.4 Analyst Concerns
Sustainability of software growth: Analysts questioned the sustainability of the high growth in the software business, with management reiterating their medium-term target of mid-single-digit growth.
Impact of wage hikes on margins: Analysts enquired about the impact of upcoming wage hikes on margins, with CFO outlining an expected 65-80 bps impact in Q3 and further 50-60 bps impact in Q4.
Drivers of discretionary spending improvement: Analysts sought clarity on the specific sectors driving the improvement in discretionary spending, with management highlighting Financial Services and Technology & Services as key contributors.
Reconciling headcount decline with growth: Analysts questioned the headcount decline despite strong growth, with management explaining the focus on productivity initiatives and specialized skills leading to a shift in the workforce pyramid.
AI adoption and platform progress: Analysts were keen on understanding the adoption rate of HCL's AI platform, AI Force. Management indicated strong early adoption and commitment from clients.
HCL Tech Q2 FY25 Earnings Call FAQ
1. What were the key highlights of HCL Tech's Q2 FY25 performance?
HCL Tech reported a strong Q2 FY25, with revenue growth of 1.6% sequentially and 6.2% year-on-year in constant currency. Operating margin stood at 18.6%, a significant improvement of 149 basis points from the previous quarter. Key highlights include:
Broad-based growth: Growth was witnessed across service lines and verticals, except for a planned divestment impact in financial services.
Strong services business: Services revenue grew by 1.6% QoQ and 5.9% YoY in constant currency.
Robust software performance: HCL Software recorded its highest-ever year-on-year growth at 9.4% YoY in constant currency, with ARR reaching $1.05 billion.
Significant deal wins: HCL Tech secured 20 deals (12 services and 8 software) with a total TCV of $2.2 billion, including several large deals with AI and GenAI components.
2. What is HCL Tech's revised revenue guidance for FY25?
HCL Tech has revised the lower end of its FY25 revenue guidance upwards. The company now expects revenue growth between 3.5% to 5% year-on-year in constant currency, up from the earlier range of 3% to 5%. The services revenue growth is also expected to be within the same range.
3. What factors contributed to the strong margin performance in Q2?
HCL Tech's operating margin expansion in Q2 was driven by a combination of factors:
Software business contribution: The software business contributed 54 bps improvement at the company level.
Services margin increase: Services margin improved by 110 bps QoQ due to operating leverage and reduced marketing spend.
Positive exchange movement: There was a favorable 22 bps impact from exchange rate movements.
4. What is HCL Tech's outlook on discretionary spending?
HCL Tech has observed some improvement in discretionary spending, particularly in the financial services and technology sectors. However, the company remains cautious in extrapolating this trend due to ongoing geopolitical and economic uncertainties.
5. What is the impact of wage hikes on margins for the remaining FY25?
Wage hikes are expected to impact margins in the upcoming quarters. The impact is estimated to be between 65 to 80 bps in Q3 and an additional 50 to 60 bps in Q4.
6. How is HCL Tech leveraging AI and GenAI to enhance its offerings?
HCL Tech is actively integrating AI and GenAI capabilities into its solutions and services. The company's platforms like HCLTech AI Force and HCLTech Enterprise AI Foundry are witnessing strong adoption for service transformation and automation. HCL Tech is also partnering with leading technology providers like Microsoft, AWS, and Google Cloud to accelerate GenAI adoption.
7. What is driving the growth in HCL Tech's software business?
The HCL Software business is experiencing robust growth due to a multi-pronged strategy:
Focus on targeted growth: The company is capitalizing on opportunities from renewals, customer success motions, and value delivery.
Strengthening partner ecosystem: HCL Tech is actively collaborating with managed service providers, global system integrators, consulting partners, ISVs, and hyperscalers.
Organic development and acquisitions: The company is pursuing organic product development and strategic acquisitions, like the recent acquisition of ZenAI, to enhance its capabilities and drive growth.
8. How is HCL Tech addressing the decline in headcount despite a strong growth environment?
While HCL Tech's headcount has declined slightly, the company highlights that this is due to a shift towards specialized skills and improved productivity through automation and upskilling initiatives. The focus is on optimizing the workforce structure and hiring for specific high-demand skills, resulting in an overall increase in the wage bill despite a lower headcount.
Source: Link to Earning Call Recording
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