HCLTECH - HCL Technologies Ltd Share Price

HCL Technologies' management provided the following outlook and key points during their Q3 FY25 earnings call:

Outlook:

• Revenue Guidance: FY25 revenue growth expected at 4.5%"“5% YoY (constant currency), including ~50 bps contribution from the HPE CTG acquisition. Services revenue growth is also projected at 4.5%"“5%.
• Margin Guidance: EBIT margin maintained at 18%"“19%.
• Demand Environment: Improvement in discretionary spending, with clients prioritizing innovation, efficiency, and AI/GenAI-led solutions. Pipeline near all-time highs, driven by digital, cloud, and engineering deals.

Major Points:

1. Q3 Performance:

   • Revenue grew 3.8% QoQ (4.1% YoY CC). Services revenue up 2.2% QoQ (4.9% YoY), driven by IT/BPO (1.5% QoQ) and ER&D (5.4% QoQ). Software revenue rose 18.7% QoQ (ARR at $1.022B).
   • Margins improved to 19.5% (up 93 bps QoQ), supported by software margins (34.5%, all-time high) and Project Ascend efficiency gains.

2. Key Verticals:

   • Tech/Financial Services: Strong growth (QoQ: 2.5% and 1.9%, respectively) with AI adoption moving from PoCs to enterprise rollouts.
   • Retail/CPG: 13.7% QoQ growth due to a large project completion (temporary boost).
   • Telecom: 4% QoQ growth post-HPE CTG acquisition; focus on network modernization and AI.

3. Deal Trends:

   • TCV bookings at $2.1B (12 deals: 7 services, 5 software). ACV grew 23% YoY (9% QoQ) as clients favor shorter, smaller deals.
   • AI/GenAI embedded in large wins (e.g., contact center transformations, legacy modernization).

4. Strategic Initiatives:

   • GenAI: Cost reductions (85%+ since 2023) enabling scalable use cases (e.g., Agentic AI, regulatory platforms). Partnerships with SAP, ServiceNow, and hyperscalers strengthened.
   • Software Business: Focus on SaaS models; subdued YoY performance due to delayed renewals but robust margins.

5. Challenges:

   • Q4 organic services growth may dip (-1.3% to +0.6%) due to project completions and slower large-deal conversions.
   • Automotive/ER&D in Europe remains weak; manufacturing (ex-auto) and Americas show resilience.

6. Headcount/Attrition: Net addition of 2,134 employees (total 220,755); attrition rose to 13.2% (LTM) amid demand recovery.

Management remains confident in medium-term recovery, leveraging AI, cloud, and partnerships to drive growth despite near-term macro uncertainties.

Question 1:
"Just a quick question on the guidance and also your comment on the ACV up 9%, 20% YoY. Seems to be implying a negative at the midpoint for the 4th Quarter. Can you maybe elaborate a bit more in terms of where that comes from? And, since you mentioned smaller deals are converting faster, could you broadly talk about discretionary spending across the industries?"
Answer:
The Q4 guidance factors in the completion of a large transformation program, delayed ramp-ups in discretionary deals, and anniversary effects of a prior mega deal. Small deals are converting faster, but slower large-deal closures and timing of revenue recognition impact Q4. Discretionary spending is improving across most verticals (e.g., Financial Services, Tech), though automotive and public services remain weak.

Question 2:
"How does calendar 25 looks to you right now, given how you're seeing conversations around budgets and spend perspective? One of your peers highlighted that they are seeing improved deal signings and revenue conversion. Now you of course have some one-offs in 4th quarter, but historically we've also seen a softness in your 1st quarter. How should we think about the next four quarters on a momentum perspective?"
Answer:
Calendar 2025 is expected to see gradual IT spending recovery, driven by AI/GenAI adoption and legacy modernization. Q1 FY26 is unlikely to face the prior year's headwinds (e.g., mega-deal anniversaries), but seasonal softness may persist. Momentum is supported by strong pipeline growth, accelerated small-deal conversions, and rising demand in digital/cloud initiatives.

Question 3:
"Can you share the ACV trends on a LTM basis now that HCLTech has started disclosing that data point again?"
Answer:
ACV (Annual Contract Value) grew 23% YoY and 9% sequentially, reflecting faster conversion of smaller deals and shorter deal tenures. This metric underscores improved revenue visibility despite moderated TCV (Total Contract Value) due to reduced deal durations.

Question 4:
"CVK, just wanted to get some color on the manufacturing vertical. I think a couple of quarters ago we had called out that we had seen some weakness in the German automakers and overall vertical. What is it that you are picking up at this point of time and if there is still weakness, do you believe that will persist for some time and your overall outlook on how we should look at the sector from the next three months perspective?"
Answer:
Manufacturing (excluding automotive) shows stable demand, driven by SAP-led projects. Automotive remains challenged, particularly in Europe, with recovery likely in 2"“3 quarters. Pipeline improvements and transformative deal discussions signal potential growth, but near-term weakness persists in auto due to legacy cost pressures.

Question 5:
"CVK, if I understood correctly, last year in the 1st quarter, we called out close to a 2% QoQ dip because of the normal seasonal softness in services business, offshoring in one of the large BFSI deal and some revenue run downs in the discretionary sales. While entering in the 1st Quarter of this coming financial year, FY26, seasonal softness may continue but the other two parts may not continue. In that scenario, one can directionally believe that the 1Q FY26 as a start could be better than 1Q FY25?"
Answer:
Q1 FY26 is expected to avoid prior year's headwinds (e.g., mega-deal anniversaries), but seasonal softness and productivity impacts may persist. Growth will depend on deal conversions and pipeline execution. While some improvement is likely, specific guidance will be shared post-FY25 results.

Question 6:
"On your software business, we have seen despite revenue coming down on a YoY basis, the margin was pretty strong, actually among the highest which we have seen in this quarter. Similarly, last quarter also, the margin was pretty strong. So, is there any change in the mix of products which you are selling? Is it just a quarterly phenomenon?"
Answer:
Software margins improved due to product rationalization (discontinued low-margin offerings), reduced amortization costs, and operational efficiency. The Q3 margin (34.5%) reflects seasonality but aligns with long-term optimization efforts.

Question 7:
"My second question is on just the broad-based nature of growth. If you look at it from a client concentration perspective, our top five clients are pretty much growing at 30% plus for the last four quarters. So, a large part of our growth this year has been primarily attributable to the top five. Just wanted to understand, are you seeing clear signs of growth spreading to your non-top five and even beyond top 20?"
Answer:
Growth is broadening beyond top clients, with mid-sized deals and non-top 20 accounts contributing. Adjusted for divestitures and prior mega-deal impacts, growth is more evenly distributed across verticals like Tech, Retail, and Telecom. Client additions in $20M"“$100M categories indicate diversification.

Question 8:
"Over the last 18 months, we really have not seen any meaningful spending from clients. So, considering there has been a lull, there are two scenarios [...] how are you thinking about it broadly?"
Answer:
Post-COVID spending normalization and macroeconomic caution drove the lull. Current recovery is fueled by pent-up demand for cloud, AI, and legacy modernization. Clients prioritize ROI-focused projects (e.g., GenAI use cases), with discretionary spending gradually improving across verticals except Life Sciences/Healthcare.