HCL Technologies Q3FY17 Concall Summary

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Financial Highlights

HCL Technologies Q3FY17 Financial Performance
  • Revenue for the quarter was $ 1745 million.Growth of 10% from a year on year
  • Quarter on Quarter growth of around 3% in constant currency terms & 13.8% on year on year basis. Dllar revenue growth was at 1.3%
  • Revenue growth of 11.4% year on year while Net income has grown over 11% over past 3 years
  • EBIT is at 13.4% & EBIT margin of 20.4% has shown growth both on quarter on quarter & on year on year basis
  • 12-14% on average exchange rate of FY 16
  • Total Hedge of around 1.4 billion & cash flow hedge of around 1.2 billion & balance being balance sheet hedge & an average book rate of 68.9%
  • Forex gain was around 6.4 million & from OCI perspective it was 34.7 million before tax benefit
  • Tax provision was around 21.5% & expect it to be in the range of 21%
  • Growth guidance of around 12-14%
  • Moving to the cloud based does not impact revenues.
  • Largely focused on the beach head of the digital revenues like beyond digital, design thinking, UI,UX kind of work
  • Able to arrest some decline in SAP business in coming quarters
  • SG&A spends have been in the range of 12%
HCL Technologies Hedge Details
HCL Technologies Forex Gain and LOss

Key Business highlights

HCL Technologies Q3FY17 Revenue Split
  • In terms of geographies Europe has a growth of 6.8% & Americas growth was at 1.7%
  • LTM YoY growth for Americas is fairly healthy at 15% followed by Europe at 10.5%
  • For this Quarter the growth of 2% growth in Application services, Infrastructure business growth is about 2.1%. Corresponding to the previous quarter i.e Q1 & Q2 the infrastructure growth was 17% & 4.4%.
  • Engineering service was soft on previous quarter but this quarter it has shown stellar performance of 7.1%
  • BPO Business grew at about 2.9% for the quarter
  • In terms of Verticals Financial Services growth was 4.5%, Manufacturing 8.3% & public services which is oil & gas, energy utilities & travel has grown by 5.6%
  • Telecom was soft but overall on an LTM basis it has grown by 9.7%
  • Worldwide IT spending growth for the calendar year 2017 is likely to be around 4.2%. This is definitely an optimistic scenario.
  • Acquisition & IP led partnership will contribute about 0.6% to 1% in revenue
  • IP acquisition of $ 555 million across 3 set of IP. Out of this 60% is paid out & the remaining 40% will be spread over this calendar year
  • Happy to build strong partnership with IBM, over the time it will create a healthy revenue stream which is relevant to business, strategic & also growing
  • Deals with IBM will have potential revenue of $ 160-165 million
  • Dependency on H1B visas is fairly lower & significantly built onshore presence like in US, the company has 6 delivery centers & 2 of them are significant scale & continuing to leverage them.
  • Completed the Acquisition of Butler. No revenues from the same. Expected to kick in around 1st January.
  • The company has signed couple of large deals, one of them is with large healthcare player in US
  • There company won a contract with a US based Insurance provider for Integrated services for Infrastructure & Application services
  • It also won an engagement for SAP Transformation program in Fortune 500 oil field services company
  • Industry Analysts ranked the company,  leaderin IoT works
  • Continue to pursue Hybrid cloud. Partnering with leading Public cloud providers like AWS, Azure & Bluemix
  • Launched SaaS platform that is called Service Engage allowing all the service cataloguing aggregation & creating a digital workspace for customers employees where they can not only experience ordering of services but also connect to all the attended ecosystem & make the whole process smooth.
  • Won couple of deals for migrating client landscape into hybrid cloud environment & another one where a healthcare provider are migrating their application to Azure
  • Cyber security is another important Mode 2 business. Focus is mainly on information security, IT resilience & governance risk & compliance solutions.
  • Mode 3 is product & platform business. Company continues to explore interesting, innovative IP based partnership. Announced partnership with IBM in September
  • New product called Appscan which is used for testing vulnerabilities in the software code & given it is a very robust & very mature product the company is acquiring rights of it
  • Another product is ITX which is very useful in transforming some of the legacy landscapes. It helps in getting ready data in different formats across different applications
  • Committed to invest $155 million in this partnership & expect to yield revenue of $45-50 million in first year.

Worldwide Trends

  • Enterprises are becoming very focused on becoming lean & agile.
  • Technology has become biggest disruptive element in transforming business & businesses model
  • Enterprises are increasing their investments in 3 key themes, the first one is connected experience – which is connected consumer & the experience we get from because of connected end to end value chain
  • Second is connected assets – the opportunity offered by sensors embedded in everything that one can imagine.
  • Third is Connected ecosystem – the ability to connect the supply chain across at least 10-11 layers or chains of ecosystem.
  • Customers are reallocating IT spends towards the discretionary spending, leveraging disruptive technologies.
  • Many fortune 500 companies & Global companies are looking for alternative IT vendors

Growth Strategy

HCL Technologies 1-2-3 Growth Strategy
  • Looking at the world wide trends, the copany has formulated a Mode-1,2,3 growth strategy.
  • Mode1 is making an enterprise agile & lean. The company’s Application services, infrastructure, BPO, & engineering & R&D services are part of Mode 1 services. An example is DRYiCE Automation platform
  • Mode 2 is about business outcome oriented conversations & experience centric services. There are 4 services here.  Digital, Analytics, IoT works, Cloud & security. All these are helping customers to reimagine their businesses & enabled by cloud & Cyber security
  • Mode 3 is truly mechanism to future growth where it involves creatively building products & platform business. Here the strategy is to create over a period of time a good product business with margins & create good growth in these product lines. 

Digital transformation

  • Companies are transforming themselves digitally. They are driving their digital transformation agenda. Gartner estimates that 19.5% of all technology services that enterprises are buying have something to do with their own digital transformation.
  • Companies are spending significant amount of time in reimagining their businesses. HCL has a practice called “Beyond Digital” which is the company inhouse agency that helped with user experience, customer experience & design thinking based business process, which allowed it to participate in a lot of unique enterprise transformation. It has able to use DevOps & Autonomics successfully to transition.
  • Many large global 100 financial services institution in Europe has brought us in as their global partner for digital transformation. Also a very large global marketing services company has asked the company for platform modernization & digitalization of their own business.
  • Consistently rated as leader in Digital services quadrants by Everest

Financial Services

  • Financial Services had a good quarter on quarter growth of 4.5%
  • Momentum coming back to financial services
  • 2 new trends in Financial services – First one is the retail financial institutions typically banks, retails etc impacted by buying behavior of customer want to provide services the digital way.
  • Second is the Capital Markets firms, which tend to a tremendous impact of low interest rates over the last couple of years. This has resulted in very high cost focus,& therefore want services to keep costs under control.
  • Lot of focus on “Micro Social Networks” where banks would be connecting to insurance customers
  • In the long term perspective of 3-5 year vision there is a discussion around block chain & other technologies, as a result of which there is change in buying behavior
  • Vendor consolidation driven by simplification, at the same time seeing localization, influence of internalization, captives taking place
  • The company has won a contract from large retail bank in Europe & identified almost a quarter of billion dollars of spend over 3-5 years for digital transformation
  • Also there was empanelment in US last quarter were the client was insurance firm

Manufacturing Vertical

  • Performance on LTM basis has been robust in between 10-24% on 12 month LTM basis
  • HCL has been time investing in what is called “Micro Verticals”, essentially putting a fair amount of investment in domain & in solutions that tend to align and resonate with business stakeholders, more so than the IT stakeholders.
  • Oil & gas utilities sectors typically have been lagging in past we have seen a lot more change happening on their side, where the focus has been more on connected assets and connected ecosystems, fundamentally where the confluence of assets and what will be considered as an extended enterprise is where a lot of changed products have come through. The understanding of domain is now beginning to pay off. It is also going to pay off more so on the projects that are coming in the Mode-2 side of the house.

Future Guidance

  • The company had guided for FY'17 Revenues to grow between 12.0% to 14.0% using the average exchange rates for FY’16. This translates to 10% to 12% in USD terms based on December 31st, 2016 exchange rates.The company expects FY’17 revenues to be in the middle of this range.
  • The acquisitions and IP led partnerships announced after 30th September, 2016 are likely to additionally contribute 0.6% to 1.0% in revenues depending upon the date of consummation of Geometric deal.
  • FY’17 expected Operating Margin (EBIT) range continues to be in the range of 19.5% to 20.5% post consummation of acquisitions .
  • The company expects JFM’17 quarterly margin to be in the same range.