Ladies and gentlemen, good day and welcome to HCLTech's Q1 FY2026 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference, please signal the operator by pressing star and then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Mohta, Head of Investor Relations. Thank you, and over to you, sir.
Thank you, Darwin. Good morning and good evening, everyone. A very warm welcome to HCLTech's Q1 FY26 earnings call. We have with us Mr. C. Vijayakumar, CEO and Managing Director, HCLTech; Mr. Shiv Walia, Chief Financial Officer, along with the broader leadership teams to discuss the performance of the company during the quarter, followed by a Q&A. In the course of this call, certain statements that will be made are forward-looking, which involve a number of risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from those in such forward-looking statements. All forward-looking statements made herein are based upon information presently available to the management, and the company does not undertake to update any forward-looking statements that may be made in the course of this call.
In this regard, please do review the safe harbor statements in the formal investor release documents and all the factors that can cause the difference. Over to you, CVK.
Thank you, Nitin. Hello, everyone. Hope all of you are doing well. Thank you for joining us today for our FY2026 Q1 earnings call. Let me start with the business performance for the quarter. Historically, Q1 has been a soft quarter for HCLTech, which is something all of you know. During this quarter, our revenue increased by 3.7% on a year-on-year basis, while declining 0.8% sequentially. Growth rates I mentioned and would be referring to today are all in constant currency. This year-on-year growth was driven by several verticals, including technology and services, telecom and media, retail and CPG, and financial services. The ramp-up in March within the tech vertical has significantly contributed to this robust growth in the technology and services vertical. Geographically, it was driven by the rest of the world as well as Europe.
During the quarter, the environment remained stable at an overall level, while there were some variations across verticals, and it did not deteriorate as feared at the start of the quarter. Our operating margin came in at 16.3%. It was lower than our plan. Q1 is seasonally the weakest quarter of the fiscal year, and the below-plan operating margins were driven by three factors. One, our utilization dropped during the quarter as we built capacity in March for specialized skills and a large deal that is taking time to ramp up. This utilization drop was also due to ramp-down in specific areas like automotive. In addition, the people that were released due to productivity benefits could not be redeployed due to skill and location mismatch. The second aspect was a one-off impact from a client bankruptcy.
Third and lastly, even though we have been hit by these unforeseen challenges, we remain committed to making investments in AI and go-to-market capabilities. In fact, given the growth momentum we are currently enjoying, we accelerated and pulled forward some of our generative AI investments and the platform efforts that we are working on. Coming to our segmental performance, our services business grew at 4.5% year-on-year, while declining 0.1% sequentially. Our IT and Business Services grew 3% year-on-year, and our Engineering and R&D Services grew 11.8% year-on-year. HCL Software had a weak quarter after several quarters of good performance. It declined 3% year-on-year. However, the Annual Recurring Revenue, ARR, stood at $1.06 billion, a 1.3% increase year-on-year. This augurs well for the future as we consciously are working to improve subscription or the SaaS revenues. In terms of geographies, during the quarter, U.S.A. grew 0.5%.
While Europe grew 9.6%, the rest of the world grew 15%, and India grew 1.3% all year-on-year. Our top-performing verticals were technology and services, which grew at 13.7%. Telecom and media at 13%, retail CPG at 8.2%, and financial services at 6.8% year-on-year. During the quarter, we made healthy additions to our client portfolio across verticals and geographies. We added six in the $50 million category, also added 11 in the $20 million category on a year-on-year basis. On a QoQ, we had a lot of clients across categories, including two in the $50 million category, six in the $20 million+ category, four in the $10 million+ category, and eight in the $1 million+ category. This is a very impressive execution, and it also sets us well for future growth. Coming to bookings, we had a decent quarter.
In terms of numbers, our net new booking for the quarter was $1.8 billion. We also won a large consolidation opportunity in the financial services vertical this quarter. This is not accounted for in the TCV value for Q1. You will recall we had a couple of large deals in the pipeline which we were expecting to close in Q1. These deals have moved into Q2, and this delay is unrelated to external factors. We are optimistic about their conversion, and if all goes as per plan, the TCV number should see a step-up next quarter. The booking was well-balanced across service lines, geographies, and verticals. As you would notice in the investor release. Happy to note our portfolio is incrementally getting more balanced than what it was even a few years ago.
We continue to win more in digital business and engineering services, an agenda we had set for ourselves as a part of a medium-term roadmap. Our pipeline continues to remain strong. Our digital business is seeing a number of large deals due to an engineering-led approach and a very strong client conviction of our AI propositions and data and AI capabilities. Our focus on application modernization, a long-standing strength, is a key contributor to our success and the strong growth in our pipeline. We are doubling down on this strength by incorporating AI at the core of this proposition. Additionally, we are investing in an AI-driven data lifecycle management platform. There is a healthy demand for efficiency-led deals across the board. Discretionary spending varies across verticals.
If I break it down to the vertical level, financial services and technology are showing promise, while we see public services and telecom to be stable, while we see some stress in manufacturing driven by auto, life sciences, retail, and CPG segments. Clients are continuing to look for AI-led transformational propositions, be it in software development or IT operation services. The share of AI and GenAI continues to grow as they become central to nearly every deal. GenAI is now central to IT services strategy. Agentic AI is gaining traction, especially in operational efficiency and accelerating application modernization programs. On people front, our count stood at 223,151, which is a slight reduction of 269. Our IT services voluntary attrition on an LTM basis stood at 12.8%, lower compared to the previous quarter.
On our AI GenAI-related progress, I wanted to update you on three strategic dimensions: one, ecosystem; two, offerings; and three, client engagement. On the first axis is the maturity of our enabling ecosystem, consisting of our people and partners. Our market momentum has ensured that we are perceived as a very attractive partner to leading tech OEMs, ISVs, hyperscalers, and pioneers like OpenAI. During the quarter, we announced a strategic partnership with OpenAI to drive large-scale enterprise AI transformation as one of the first strategic services partners. We are well-positioned to take advantage of the enterprise AI spend as we work on developing the most comprehensive AI ecosystem.
Similarly, this quarter, we announced a partnership with UiPath to accelerate Agentic automation, launched a suite of Agentic AI solutions in collaboration with Google Cloud, and integrated NVIDIA AI Enterprise with AI Force and NVIDIA Omniverse with a physical AI solution, Smart Twin. As a testimonial to this maturing momentum, we've received many leadership citations in AI and data this quarter, including we were named a market leader in HFS Horizon's Generative Enterprise Services 2025 report. ISG recognized us as a leader in advanced analytics and AI services. We were cited as a leader in IDC's MarketScape for Worldwide Data Modernization Services 2024 vendor assessment. We were also recognized as a Microsoft responsible AI partner, and we won top honors at AWS GenAI Premier League Awards 2025.
On the second dimension of offering maturity, HCLTech was first to launch a full-stack AI portfolio featuring AI Force, AI Foundry, AI Labs, and AI Engineering. These offerings are designed to drive end-to-end service transformation and value stream innovation for our clients. Some key aspects. Our AI Force platform is now deployed across 35 clients and 70+ deployments and is a key solution enabler for several of our new wins. AI Engineering is gaining good traction in physical and kinetic AI or robotics domains, while our data and cognitive infrastructure offerings have gathered momentum in the AI Foundry cluster. AI Labs are now moving to the next level, building COEs with partners and clients in niche and emerging tech areas. We are advancing our portfolio of industry-focused repeatable solutions across verticals. These offerings are developed with a strong governance framework to ensure enterprise readiness and compliance.
Building on FY2025 innovation momentum, our platforms such as Contact Center as a Service, Net Insight, Trade Compliance, Insight Gen, and Clinical Advisor are maturing, while NextWave solutions like Invoice to Payment and Lab as a Service are being launched. These initiatives are designed to accelerate time to value and deliver measurable ROI. HCL Software is making significant progress on Agentic AI, UnO Agentic Builder, and Orchestration Platform to build the agents, introduce the Max AI in HCL Unica+ for smarter decision-making, and hyper-personalized and real-time campaigns. Commerce AI in HCL Commerce to build agents that augment complex testing and reduce manual effort. On the third and last dimension of client engagements, we are witnessing the size of our engagements increasing steadily from exploratory POCs to strategic multi-million dollar partnerships.
Some key examples from Q1 reflect this momentum, like we signed a multi-million dollar engagement with one of the largest Australian logistics companies for AI-led service transformation using AI Force. A leading Europe-based telecommunication company selected HCLTech to modernize its technology and operations stack. The partnership will enable zero-touch operations through hyperautomation powered by GenAI. HCLTech will leverage its AI Force platform to modernize applications at scale and introduce Agentic AI for proactive issue resolution and integrated data intelligence. A Europe-based automotive major selected HCLTech to deploy workplace management and Agentic AI solutions to enhance operational efficiency and service quality, improve customer experience, and support new technologies. A global sports body partnered with HCLTech to create a GenAI-powered commentary platform to revolutionize live match broadcasting. This AI-driven solution analyzes live feeds, identifies key events, and provides real-time insights, enhancing storytelling with summaries during all game phases.
The platform built on HCLTech's AI Foundry's scalable cloud infrastructure supports multiple data streams. A global aerospace major partnered with HCLTech to develop a vision AI solution that optimizes cargo container placement in aircraft. Leveraging HCLTech's AI engineering and intelligent automation capabilities, the solution aims to improve load distribution, space usage, and cargo operations. A Japan-based global imaging leader partnered with HCLTech to develop a GenAI-powered camera setting recommendations engine. Powered by HCLTech's AI engineering, the solution develops real-time personalized photo recommendations using live data, leveraging advanced LLMs and unique HCLTech frameworks. We continue to win a lot of recognitions and accolades from the market. Analysts, partners, and investor community. I think a couple of these that were announced this quarter are must-know, as it has a significant impact on our shareholder value creation.
We are the only service provider positioned as customer's choice in all six Gartner Voice of the Customer quadrant evaluations related to IT services. This is the first time any service provider has achieved this. Equally important is the fact that no other service provider is in this quadrant for more than one category. Just to mention the six to help appreciate how much of the IT landscape of an enterprise is covered when you add these: first, public cloud IT transformation services; two, custom software development services; three, data center and hybrid infrastructure managed services; outsourced digital workplace services; managed network services; and last, cloud ERP services. I would like to thank all our employees that make this and many more such recognitions possible. HCLTech figured among Asia's most honored in Extel's 2025 executive team rankings.
For the second year running, HCLTech was the most decorated India-headquartered IT services company in the survey. It achieved 17 top three rankings across overall buy-side and sell-side categories in technology, IT services, and software sectors, out of which nine were number one rankings. Humbled by all your strong belief and support, thank you. Looking ahead, we are improving our revenue guidance now for FY2026 to 3%-5% in constant currency based on better Q1 performance and the outlook for the remaining quarters. On margin guidance, we are adjusting our EBIT guidance to 17%-18% due to the factors I mentioned earlier, like one, the unanticipated impact in Q1 for regions I mentioned earlier, and which could continue partly into Q2. Second, investments in sales and marketing and AI capabilities to address the growth momentum.
Three, we plan to execute a restructuring program both on people and non-people side during the rest of this fiscal year. The one-time costs because of this are baked into the above guidance. We are doing this to provide us the structural agility to address the market demand in the AI era. We are optimistic about meeting our revised guidance, supported by superior revenue growth, and positive booking expectations for the coming quarters. This outlook is further reinforced by our consistent track record of strong operational execution demonstrated over the last several years. Now, I would request Shiv to walk you through more details on the numbers.
Thank you, CVK. Good morning, good afternoon, and good evening to all of you. Thank you for joining our Q1 Financial Year 2026 earnings call. Let me walk you through our financial performance for the quarter, starting with the revenue performance.
Total revenue for the quarter is $3,545 million, a 0.8% decline quarter- on- quarter, and a growth of 3.7% year-on-year in constant currency terms. With this, our revenue has crossed the milestone of LTM revenue of $14 billion. Services revenue for the quarter came in at $3,227 million, which is a decline of 0.1% quarter-on-quarter and a growth of 4.5% year-on-year in constant currency terms. The strength of our all-weather portfolio helped us offset the headwinds from the usual Q1 seasonality. Software revenue for the quarter is $330 million, a drop of 3% year-on-year in constant currency terms. Let me share the details on profitability now. Our EBIT is $578 million at 16.3% of revenue. The net income for the quarter is at $440 million at 12.7% of revenue.
This quarter, we traded short-term pain in profitability to secure our long-term growth leadership. Q1 margins usually have a negative impact due to seasonality for us. This time, it was amplified due to three factors that CVK just called out. It's important to note that we did not cut back on our investments in sales, GenAI, and people capacity to secure growth. Now, on the margin bridge, explaining the same is the company margins dropped by 161 basis points quarter-on-quarter. The higher sales and marketing investment had 30 basis points impact. Lower utilization due to specialized hiring and skill and location mismatch challenges cost us 80 basis points. One of the impacts during this quarter, which includes a client bankruptcy, had 30 basis points impact. Other major factors, such as lower share of software in revenue mix, had 20 basis points impact.
We did not get any benefit from Forex this quarter. Project Ascend is on track and was instrumental in helping negate the impact of increased average resource cost. Now, moving on to return on invested capital, which is ROIC. Our ROIC continues to improve thanks to our ongoing focus on profitability and efficient capital management. The last 12 months ROIC is at 38.1% for the company, up 353 basis points year-on-year, and services ROIC now is at 45.2%, up 236 basis points year-on-year. The software continued to improve with ROIC at 20.8%, up 473 basis points year-on-year. Let me share the details on our strong cash generation. Over the last 12 months, operating cash flow is at $2.57 billion. While free cash flow amounted to $2.42 billion.
Operating cash flow to net income conversion is 129%, and free cash flow to net income is at 121%. Our balance sheet continues to strengthen with gross cash at $3.46 billion and net cash at $3.19 billion. Our total DSO, including unbilled, is currently at 82 days, flat on year-on-year basis. Now, for the shareholder, the diluted EPS for the last 12 months came in at INR 62.57, which is up 3.4% year-on-year. The board has declared an interim dividend of INR 12 per share for the quarter. The record date is 18th of July 2025, and the payment of the same shall be on 28th of July 2025. That brings our last 12 months payout to INR 60 per share, effectively distributing 95.8% of our net income.
That's all from my side for now, and I would like to hand over the session to our moderator for a Q&A session. Thank you. Over to you.
Thank you very much. Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone telephone. If you wish to withdraw yourself from the question queue, you may press star and two. Participants are requested to please use handsets while asking a question. Ladies and gentlemen, we will now wait for a moment while the question queue assembles. Our first question comes from the line of Ravi Menon from Macquarie. Please go ahead.
Hi, thank you for the opportunity and congrats on good revenue performance. Shiv, the way you described your utilization.
Mismatch, it seemed like more of a timing issue for a deal, at least in part. Are you expecting those margins to probably exit this year closer to back to our original range?
Yes, I think. We are very clear we are not setting structurally the margin bar lower. I think it will continue to be 19-20% in the next three quarters, obviously for all the reasons that we explained. There is going to be certain headwinds. This year, we will be between 17%-18%. That is the max.
Right. It looks like high tech, you saw really good growth sequentially. Even one of your peers reported they have also seen decent growth there. This is a segment that I think the whole cost cutting started back in 2023, right?
Should we think of this as a good sign of a cyclical recovery in this sector, or is it still too early to call it that?
Yeah, I think we are, I mean, as I called out, we are looking at a strong demand in financial services and tech and services verticals. This quarter, of course, the growth is in tech vertical. Also, it is very broad-based, but definitely the 6% kind of sequential growth is driven by one large deal where we had onboarded the entire team in March, exactly on 6th of March. Of course, this is a very cutting-edge solution on contact center transformation using conversational AI. This will require this talent base to be deployed. We had some good success in the first quarter, but the ramp-up has been gradual. We think it will.
Ramp up fully in the second quarter, and in the third quarter, we should be fully, optimally performing on this team. Outside that, structurally, the tech vertical continues to give us a lot of confidence. So FS and tech definitely strong. We see some concerns in other verticals like auto and manufacturing, retail, CPG, and life sciences. There is pressure, but the rest of the verticals looks okay to me.
Thanks so much. Shiv, one follow-up. You were saying that there was no gain in the margins from Forex. I thought there was sharp depreciation of the rupee against both the euro and the pound. Why have we not seen any uplift from that?
This quarter, we did have some gain from in euro, but that was offset by some loss in the INR depreciating versus previous quarter.
Because the cost base we have in INR in India. That's why both kind of offset each other.
Usually, any appreciation in euro or pound translates to very little in terms of margin improvement for us because I think our costs are quite significantly there onshore as well.
Got it. Okay. Thank you so much.
Thank you.
Thank you. Our next question is from the line of Sudheer from Kotak Mahindra Asset Management Company. Please go ahead.
Yeah. Thanks, CVK, for the opportunity. First question on margin front, if we look at the full year guidance downgrade by around 100 basis points, how much of that downgrade can be attributable to one-off factors, be it a client bankruptcy impact plus restructuring impact? How much can be attributable to the utilization mismatch issue, and how much can be attributable to pulling forward of AI investments? Yeah.
I'll just give you the walk. Q1, the margin are 80 basis points lower versus last year. The full year impact of that, this dip is 20 basis points. Higher sales and S&M investment, we expect that it's going to have an impact of 30 basis points. The utilization, which is one of the factors we had impact in Q1, is going to have some follow-on impact in the subsequent quarters. We expect that to have an impact of 10 basis points-20 basis points. The restructuring cost, which also CVK talked about, would have an impact of 30 basis points-40 basis points in the subsequent quarter. Put together, all is around 100 basis points impact year-on-year.
Understood, Shiv.
To Ravi's question earlier, I think CVK mentioned that probably the exit margin would be closer to our aspirational range of 19%-20%. That looks like a steep arc over the next three quarters. Any thoughts on how we would be reaching there?
Yeah, I think just look at it like a full year margin because quarter-on-quarter margin has a lot of cyclicality for us, right? Q3 will peak and Q4 will dip. I think the comment I made was on a normalized basis, we would be closer to our desired range. There are multiple levers, like even the utilization, as Shiv mentioned. We obviously had a big gap in this quarter. It will significantly moderate in Q2. In Q3, we should be in line with the expected margins. A lot of the restructuring costs would be mostly in.
Q2 and a little bit in Q3. I think that's the color that we can provide. The rest of it is a normal cyclical seasonality in our business.
Very much, sir. Just one last question. As AI adoption evolves more into an Agentic AI level, there is a talk about a potentially big data center refresh as the current data centers are not equipped with the capacity to handle AI workloads. What's your view on this? Given our strong presence in IMS, what are we doing to potentially leverage on this thing?
Yeah, we have launched the cognitive infrastructure proposition, and we are already seeing some early wins in this. We had one marquee win in the last quarter, which we will probably announce during this quarter more formally. We think it's a big opportunity, but obviously, we don't want to play in the.
Assets kind of game. We are totally focused on services. We work with a lot of partners to kind of deliver the GPU as a service and things like that. We also see a lot of traction at the edge. Edge infrastructure, Edge AI, we see good traction. We see that as well as a big tailwind. I think the pickup is going to be gradual. Even a lot of customers who are deploying Edge AI, they're starting with one factory, one big location, and then based on the success and all the proof points, they will expand to other locations. It will be a gradual ramp-up. I definitely see that as a big strength and capability of ours, which will really come to our big help in this particular space.
Thank you, sir. All the very best.
Thank you.
Our next question is from the line of Abhishek Pathak from Motilal Oswal. Please go ahead.
Yeah, hi. Am I audible?
Yes. Please go ahead, Abhishek.
Hi, team. Congrats on a good quarter. Just to double-click on the margins. Do we expect the AI investments to continue into FY2027 as well? I mean, I ask that because, I mean, should I be expecting FY2027 margins to again operate in the 18%-19% ballpark, or are we revising those expectations a little bit? Because the investments, I'm sure, will be slightly higher than what we are building in right now. That's the first question. The second question, CVK, was around revenue conversion from deals. Did you expect that, or rather, did you see that getting slightly better in Q1, and do you expect that to improve in the next couple of quarters?
Considering a couple of deals that we were supposed to have spilled over? I mean, should we expect those deals to pick up and ramp up quicker than earlier, which means the revenue impact will be much, much better as compared to earlier? Those are two questions. Thank you.
Yeah. Abhishek, the investments in GenAI and a little more expansion in our go-to-market teams. We think, I mean, obviously, with every investment, these are people, capability, platform build. Of course, a lot of token costs, all of that is baked into this. We think it will normalize because growth will also catch up, and these investments will catch up. I mean, our expectation is in the next financial year, which is FY2027, it should normalize, and we will be back to our SG&A percentage. That is what we expect on the investment front. Revenue conversion.
Obviously, it all depends on the timing of closure. Since the closure of these two deals moved from Q1 to Q2, the impact of this through this year would reduce. What is encouraging is the discretionary spend in a couple of verticals, especially FS and technology. We feel good because our earlier assumption was environment will deteriorate because we were really talking about the impact of tariffs in the beginning of last quarter. We did not see that kind of deterioration. That is a positive. These two deals moving to Q2 is a little bit of headwind on the overall revenue. We feel very comfortable with a 3%-5% guidance.
Got it. Thanks and all the best.
Thank you.
Thank you. Thank you. Our next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.
Hi.
Thanks for taking my question. My first question is pertaining to this restructuring charge. CVK, what is driving this restructuring? Is it to do with the fact that the evolution of services is changing in terms of how contracts are restructured, location-agnostic services are happening, and hence some restructuring on the on-site position? Just trying to understand, is it pertaining to the way services businesses evolve?
I think it's a combination of both. I think the first aspect is some of the acquisitions that we did in the past. Of course, we have done the integration, but we were not really clinical about facilities and other cost rationalization. That is one. Automotive has seen a ramp-down, and it will obviously not see a very quick recovery here. Even if the recovery is happening, the skills required are really more offshore-based capabilities.
We see some restructuring that is required there. These two are things which we were waiting to see if things will pick up, and we do not believe it is picking up. Even if it is picking up, it is not going to be in the right location. We are going to take some firm decisions on this. The second aspect is what you talked about. Of course, we have had a good amount of people released due to the productivity improvements. Not all of them are readily redeployable because the requirement for some of the entry-level or lower-end skills are being addressed through automation and other elements. The training time is longer. The redeployment, some of them will get redeployed, but some of them may not be, it may not be possible. Some amount of change in the industry is also kind of causing this.
As we adjust to this, a lot of proactive trainings are happening. As we adjust to this, we see this moderate because we are also looking at people who could get potentially released, who should be upskilled and things like that much more proactively now, given that we've seen a good cycle of optimization-led releases. I think in the future, this should get adjusted in the normal course of business.
Got it. Second question on the talent strategy. We did talk about accelerating the intake of freshers last quarter, and we kind of saw that happening this quarter. What we kind of hear is that because of the productivity gain, a lot of the junior-level jobs are getting automated, but at the same time, we are seeing increased intake of the freshers. How do we reconcile what's really happening?
Eventually, how do you think the overall pyramid will shape up over the next three to five years, keeping in mind the reputable solutions that you're building and the platforms that you're building?
Yeah, I'll request Rama, our Chief People Officer, to respond.
Yeah, sure. CVK. We are calibrating our approach. This is something that we have been talking about for a couple of quarters now. One calibration that we are doing is we are focusing more on specialization. Our fresher intake is no longer just based on numbers. It's based on skills and specialization. That is one level of calibration that we've done in terms of how we are approaching the fresher hiring program itself. We have also reindexed our compensation plans as well for our freshers. While the regular cadre in the India context, the base compensation is INR 4.25 lakh, the
Specialist or the elite category that we do now is in the range of 3x higher than the base compensation that we do on the services side. On the software side, it is upwards of 4x of the base compensation that we do. There is an extreme level of specialization that we are focused on. We are attracting the talent by also revising our compensation plan. There is a significant amount of work that has happened over the last six to eight months to overhaul and recalibrate our entry-level talent plans. That is showing some early signs of the program working well, and that is what we look to accelerate.
Thank you for the detailed answer. Last question, if I may squeeze in. What are the factors that take you to the upper end of the guide? Is it more dependent on macro?
Is it dependent on your deal wins getting back to the aspiration level of $2.5 million+ per quarter? Thank you.
I mean, obviously, we have seen some macros play out differently in different verticals. We are just assuming that the same will continue. I mean, we're not expecting some recovery in manufacturing and life sciences and retail CPG, but at the same time, we expect FS and tech and services to continue the discretionary spend. We are looking at whatever we are seeing now will continue during the rest of the year. Bookings. I think we are, I mean, some of the vendor consolidation deals that we have signed, though they are not in PCB, we really expect a very, very quick ramp-up, especially in financial services, to support some of the growth which we have lost due to the deals moving from Q1 to Q2.
I think these are the assumptions. At this point, we feel very comfortable with our revenue guidance.
Thank you.
Thank you. Ladies and gentlemen, we request you to please limit yourselves to one question per participant. We have the next question from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Hi. Good evening, and thank you for taking my question. My first question was more of a clarification. You called out lower utilization as one of the drivers for the lower margin in the quarter by about 80 bps . If I look at your headcount sequentially, it has come down in line with your services revenue. On a year-on-year basis, the decline is actually lower than revenue growth being actually higher. Where is this lower utilization coming from?
Is it the subcontracting which has inched up, and that's where you were building capacity?
Yeah. A large part of it was the ramp-up that we did in March. I think I called it out a couple of times. That was one element which is causing this. The second element is really the people who are getting released from productivity benefits and inability to redeploy them. The third element was the decline that we've had in automotive for maybe now three quarters. That has also released some capacity. We are continuing to see non-linearity in our business, like revenue growth and people count growth. I mean, we saw that significantly play out in FY2025, and even in Q1. The year-on-year revenue growth versus year-on-year people count, there is a decoupling. You will see that. You can still have underutilized people within the existing.
People universe that we have.
Thanks, CVK, for that. My second question was, a couple of weeks back, you announced your collaboration with OpenAI. How do you plan to use that to create a differentiation in your offerings?
Yes. I have our CTO, Vijay Guntur. I will request him to talk about it. Vijay, over to you.
Yeah. Thanks, CVK. Yeah. The OpenAI partnership is expected to give three benefits. One, we went through a qualification process that OpenAI had to qualify. It will help us work closely with OpenAI to serve OpenAI's customers and do their forward engineering and get OpenAI adoption into customers. That is the first benefit. The second benefit is our own internal adoption of OpenAI as an enterprise. It will unlock productivity benefits within the organization. The third, we expect to take some of our solutions, IFRS, which we talked about.
Enable them with OpenAI's models and their technology so that we can co-sell in the market. Those are the three benefits that we have from the partnership. It is early days, but that is our expectation.
Just to add, we also have a team of 50 highly specialized people who are being embedded into these training programs, which will really kind of give us the cutting-edge capabilities. While a lot of customers are adopting the LLMs, their ability to holistically get benefits within an enterprise is being challenged. I think these trained people will really be a force multiplier for us across our existing clients and the new opportunities that we are working on. Actually, I am even happy to report that some of the large deals that we are pursuing in application modernization and the entire software development lifecycle are also getting positively impacted by the.
AI Force and the data lifecycle platform that we are now very actively talking to a number of customers. OpenAI is very integral to all these platforms that we have built.
Got it. Thanks a lot, CVK and Vijay, for that.
Thank you. Our next question comes from the line of Ankur Rudra from JPMorgan. Please go ahead.
Hey, thank you. Just wanted to quickly check, starting with demand. Could you elaborate a bit of the reason for the slightly softer-than-expected signings? I know you said it is time complete by July, but any particular reason for that? Also, the delay in the large deal ramp-up you're seeing, is that client-specific, or is that something in the demand environment you're seeing? That's question number one.
Secondly, on the margin side, if you could also elaborate, is there anything you're seeing from clients in terms of asking for lower pricing or AI-led productivity pass-throughs, which is out of turn, which is also making you a bit more cautious about where margin is going?
Yeah. Demand from a signing perspective. Of course, two signings which we really expected towards the end of June that got delayed to sometime this month. It's purely procedural delays. Technically, we just could not kind of get it done before the year-end. I don't see anything else. They are very much intact, and we've already ramped up quite a bit for some of these opportunities. That's on the signings. What is not included is one large vendor consolidation win in FS, which will give us very strong revenue growth through this year and even next year.
We could not consider it because, as per our definition of booking, time and material-based constructs do not go into our booking. They only go into booking after we ramp- up and we are able to build. That is on the signings. The large deal ramp-up, we had onboarded a lot of talent on conversational AI and contact center transformation based on a partnership with a big technology firm. We did that in March. Of course, all of them were working on various clients. Now, as a part of the transition, some of the work got a little bit delayed. We did get good growth from this ramp-up, and that is what is showing up in the tech services vertical growth this quarter. Still, about a third of the team is not fully utilized, so they will get into utilization during this year.
These are really high-cost and highly specialized talent. I think that's the reason for them. It's not really a demand environment or client-specific. It's just the timing, based on onboarding of people and changing the client contracts and things like that into our books. This cuts across multiple verticals because it's a horizontal capability that we ramped up based on an exclusive partnership. Now we need to make sure they're being fully utilized. We are continuing to see a strong pipeline for contact center transformation led by AI. This really plays very well into that, Ankur. Did you have anything else?
Thank you. On the margin side, no, the demand was good. I think on the margin side, my question was, were you getting any demands for pricing or cost takeouts out of turn?
Not out of turn.
Definitely, I mean, when renewals are there, definitely customers have expectations and competitive pressures as well. We obviously have to react appropriately for that. We haven't seen anything out of turn, but obviously, a lot of customers are asking us, and we are also proactively talking to a lot of clients about what can be done. The reason we are doing that is, I mean, when the renewal comes, we should be much more prepared, and we should have enough proof points and conviction about what we can really drive. I don't see anything out of turn, but we are definitely proactively working with clients to see what is the art of the possible.
If I can ask a quick follow-up, when you go proactively to a client, I think you said 35 clients have AI Force already.
Would that be unexpected, for example, pricing, productivity pass-up if you can do it then?
Yeah. I mean, I think we are being very transparent. We are telling the clients, if you allow us to use AI Force and use all the recipes that we've created, we will showcase to you the optimization that is possible. To scale it up within your environment, it needs a lot of sponsorship within your organization. We are very happy to proactively do this, and it will mean some reduction in revenue for us. We are okay with that. The whole hypothesis is, when we are doing that, there is going to be an increase in wallet share in the existing client. And Ankur, if you look at the number of.
Renewals that we have done in this quarter, nine renewals, in eight of them, the total revenue from the client is higher than the existing run rate that we will have. We have been able to get a little more wallet share, which more than offsets some of the productivity benefits that we have given. That is a trend that we are seeing.
Okay. That's great. Appreciate it. Thank you so much, and best of luck .
Thank you.
Thank you. Our next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Yeah. Hi. Thanks for taking my question. CVK, just one question from my side. You mentioned about these productivity benefits, and you go into clients proactively, telling them that basically these are the productivity benefits that we can pass on, even if that means, let's say, slightly lower revenue.
How similar is this entire productivity benefit thing? How similar is this to the earlier cycle of the IMS business being cannibalized by the cloud business that we saw some six, seven years ago? How prolonged do you think this is going to continue? Do you think this is going to eventually lead us to some period of maybe a lower kind of a growth, and then only the incremental growth from new opportunities picks up? Some color on that would be really helpful.
Yeah. See, it's slightly difficult to quantify how similar it is because a lot depends on the level of automation maturity in each of the clients. Even though we have been having machine learning-based, AI-based automation, IntelliOps, and all those products prior to generative AI, there has been a big variation in how much clients have adopted.
Depending on where they are, the benefits could be higher or lower.
Right. But do you see, I mean, the kind of cannibalization that we saw initially when the cloud business started and the IMS business was impacted, a similar thing might well be possible in the other businesses that we do this time because of productivity benefits by GenAI?
Yeah. See, I think in IT operations, whether it is infrastructure or application operations, if you have leveraged machine learning and classic AI quite well in bringing automation, the incremental benefit from generative AI is only marginal. It is only in a software development lifecycle. 25%-30% benefit is realistic. And in a lot of business process operations, we think it can be 40%-50%. This can happen fast because we are seeing contact centers where a very large number of people get reduced by 75% even.
By implementing Agentic conversational AI and things like that. I think in these two areas, it will definitely create deflation. The only positive aspect is there is so much of legacy applications and legacy landscape. Modernization gets accelerated in a lot of these cases. That is also causing some kind of demand uplift to offset this deflation.
Got it. Got it. One last question, if I may.
Sorry to interrupt. We request you to please rejoin the queue if you have follow-ups.
Sure. Thank you.
Thank you. Our next question is from the line of Prashant Kothari from Pictet. Please go ahead.
Hi, sir. I'm here in person. I just wanted to understand how are the management incentives aligned to this margin of utility that you're seeing in the business kind of going down this year and hopefully coming back up next year?
How are our incentives and management incentives kind of aligned to this? Thank you.
Sorry, we did not understand the question. You were a little bit, there was some noise on the line.
Prashant, can you hear us? Prashant, would you please repeat your question?
Sorry. Am I audible now?
Yes, yes. Go ahead, please.
Yeah. Yeah. My question was, how are the incentives for the management aligned with this margin volatility that we are now seeing in the business? The margins are supposed to go down this year and then again kind of maybe roll out next year. How are our interests aligned with the management? Thank you.
I think we have, obviously, we know the reasons for margin drop. I think if you look at, I mean, obviously at the top leadership level, we are aligned.
To do what is right in the long term, not necessarily looking at individual years as a big metric. Of course, it is a metric, but not necessarily a big metric. If you look at the larger organization, some normalization due to these one-off factors are definitely considered when we evaluate the performance.
Thank you. Ladies and gentlemen, we will take that as our last question for today. I would now like to hand the conference over to Mr. C. Vijayakumar, CEO and MD, for closing comments. Over to you, sir.
Yeah. Thank you. I really appreciate all of you joining. I know it's late in the evening in India. Thank you for everyone who's joining from across the globe. We've started the year on a strong revenue momentum.
We absolutely have some work to do on the margin front, and we are very committed to do all the right things to ensure that we deliver to our guided range and also improving it as we exit the year and come back to our normal guidance range as we look at the next financial year. Thank you for your support, and I look forward to talking to you or seeing you in the subsequent interactions. Thank you, and have a good evening.
Thank you. On behalf of HCLTech, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.