Ladies and gentlemen, good day and welcome to HCLTech's Q2 FY26 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 an operator by pressing Star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Mohta, Head 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 Quarter two FY26 earnings call. We have with us Mr. C Vijayakumar, CEO and Managing Director at HCLTech, Mr. Shiv Walia, Chief Financial Officer, along with the broader leadership team to discuss the performance of the company during the quarter followed by a Q and 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. Good morning, good afternoon, and good evening, everyone. Thank you for joining our second quarter earnings call.
I hope all of you are doing well.
This was a strong and energizing quarter for us, with broad-based growth and expansion.
In margins and exceptional bookings.
We are seeing the results of our strategy come to life, and I'm proud of how our teams are executing and winning in the market. Our revenue grew 2.4% sequentially and 4.6% on a year-on-year basis in constant currency.
Our services business grew 2.5% sequentially 5.5% year-on-year in Constant Currency w ith robust growth in IT and Business Services and Engineering and R&D Services.
Our software business, subscription support and professional services revenue grew 9% year-on-year, while the overall revenue was lower due t o lower Perpetual License revenue.
This reflects our objective to increase Subscription r evenue which is expected to provide more sustainable value compared to the Perpetual License revenue.
Our operating margins came at 17.5%, an increase of 116 basis points sequentially. This aligns with the recovery plan shared last quarter. While there is more to do, I am pleased with our progress so far.
This quarter saw strong, well-balanced bookings across service lines, geographies, and verticals, resulting in $2.6 billion of new booking. This is the first time we crossed the $2.5 billion mark without a contribution from any megadeal. We also signed two large deals this q uarter, which we mentioned as delayed last quarter.
We grew our employee base in l ine with the demand as we saw. Strong bookings and a good demand environment. More importantly, we continue to grow our revenue per employee as we leverage AI in everything we do. I'm proud and happy to share. TIME Magazine recognized us as the highest ranked India headquartered technology company for the second consecutive year in the World's Best Companies 2025. A little later, Shiv would unpack detailed financials a cross service lines, geographies, verticals, and the client segments. I will cover a little bit more on our AI propositions this quarter. We reached a major milestone by generating over $100 million in advanced AI revenue through our diverse service lines and IPs. This is about 3% of our total revenue.
The credit goes to our exceptional teams across the company and the leadership for a chieving this impressive milestone. Our people are embracing the transformation from a people-based business towards a model that seamlessly blends AI IP with human-in-the-loop capabilities. Over the past few years, we've made significant investments in building intellectual property, deepening partnerships, and strengthening our GTM and delivery teams. These efforts are now yielding results as we transition from the AI Pilot stage to the AI Monetization phase. As we called out in our investor release, Advanced AI includes rapidly evolving AI technologies like agentic AI, physical AI, AI engineering, AI Factory, etc. To clarify further, this excludes classical AI data and analytics services and the services delivered using GenAI and AgentIQ AI. This achievement is a clear outcome of our strategy. As we have shared before, our strategy is clear and focused on shaping the future of our business and the industries we serve. There are four key elements to this strategy.
First, we are proactively transforming our services with a long-term view and the confidence to evolve even if it means disrupting parts of our existing revenue base. This mindset keeps us agile, relevant, and future-ready. The second part of our strategy, we are investing in building differentiated IP that accelerates and scales AI adoption for our clients. While companies like OpenAI, OEMs, and Hyperscalers continue to advance the core intelligence layer and the computing needed for this, our opportunity lies in making that intelligence enterprise.
Ready and impactful at scale.
We are developing IPs that power transformation across IT SDLC services, engineering services, BPO services, as well as industry-specific use cases built on top of that intelligence layer. The third element of our strategy, we are expanding into new AI-led services including AI Engineering, which has a lot of silicon for inferencing chips, AI Factory, AI Advisory, and these services leverage our strong foundation in engineering infrastructure and the deep industry expertise. The fourth element, we are strengthening and expanding our AI partnerships across the entire technology stack from GPU providers to model a gentic platform providers.
These partnerships are instrumental in helping us deliver impactful end-to-end AI solutions that drive real business outcomes for our clients. Transformation of our talent and onboarding new talent to enhance our capabilities is central to our strategy. We are fully committed to this strategy, the momentum is building, the results are encouraging, and our conviction is stronger than ever. We believe this approach positions us to lead in the AI era and define the next phase of growth for our c ompany and our clients.
I would like to share our AI progress last quarter across three key dimensions. One is offering, second is engagement, and the third is partnerships. On offerings, our AI Force platform, we launched v2.0 beta release with GA planned in January 2026. This version marks a significant leap forward, bringing agentic workflows, orchestration, and responsible AI together into one unified platform across IT Software and Business Operational services.
Our AI Force platform is now deployed across 47 accounts, up from 35 last quarter, and is the key solution enabler f or most of our wins.
I would also like to kind of bring the overall goal of 100 clients, hundred of our top clients to be leveraging the AI Force platform is the goal that we are working towards. We continue to invest and build repeatable AI solutions for industries. The Insight Gen in financial services and VisionX in manufacturing are two that are seeing good traction under advanced AI. We have added two new offering pillars of AI Factory and AI Advisory. The AI Factory proposition we are taking to market in very close partnership with partners like NVIDIA, Dell, and HPE. We are engaged with one of the global top 10 tech companies in implementing global AI factories. We see strong demand here, and we are scaling our teams to service this demand.
In AI Advisory, we will be helping our clients deploy AI at scale by advising at strategic points in their adoption journey from use case prioritization to business case formulation to POC and deployment blueprints, followed by organizational level change management and responsible AI. We also launched a new AI security and red teaming offering in physical AI. We signed a deal in robotics with AI, which is a proposition that is catching great interest in tech and heavy industries. In data and AI and AI foundry, we launched new capabilities and accelerators to enable business persona-driven agentic AI solutions for data modernization and analytics. On engagement maturity dimension, we are witnessing the size of our engagements becoming bigger every quarter. Most of our services deals are now embedded with advanced AI capabilities as they c ome up for renewal.
Five of our top 10 renewals came with increased ACV, while the specific SOWs in the remaining ones had a decline d ue to AI-linked productivity.
These are from large growing clients, and we do see opportunities to consolidate more work due to our proactive strategy in s caling AI with these clients. Some key examples from Q2 reflect the maturity in our AI engagement. We signed a major legacy modernization program with a leading European retailer to upgrade their order management system. Using AI Force w e are automating design, build, and test workflows resulting in 30- 40% increased developer productivity, shorter cycle times, and greater agility in software development. A Fortune 100 aerospace company chose HCLTech to create contour scanning software and a simulation testbed using physical AI and automation, and HCLTech will support precision manufacturing, faster validation, and improved production efficiency. A U.S. global manufacturer selected HCLTech AI Advisory Services to build an enterprise AI and governance framework to scale AI initiatives with measurable ROI, regulatory compliance, and responsible AI principles. A large U.S. telecom company selected HCLTech to launch an NVIDIA-powered Emerging Tech AI Lab.
Here we are setting up a high-performance AI cluster and deploying state-of-the-art models such as Llama 405B, Maverick, and Scout. Apart from this, we have several clients who are leveraging our advanced AI services. We think there is great potential to partner with these clients to grow our advanced AI business further. On the third axis is the maturity of our enabling ecosystems consisting of our people and partners. We see good demand for OpenAI enterprise adoption, and we are training more people to support this journey. We announced two more significant collaborations this quarter. We announced a multi-year strategic partnership with Pearson to co-develop AI-powered products and services designed to close skill gaps, empower individuals to advance their careers, and help organizations succeed amidst the rapid technological change. We joined MIT Media Lab in the U.S.
to collaborate in shaping the future of AI and emerging technology areas such as quantum computing. While we signed these new collaborations, we continue to excel in our existing AI ecosystem. We received the Dell AI Partner of the Year award for VisionX solution. HCLTech is the only SA partner t o receive this award.
We announced new partnerships with SailPoint on AI-driven Identity Transformation and with Thought Machine to accelerate AI and cloud-led transformation of banks. On the people side, we continue to train our people at scale. We are building black belt cohorts on every technology stream. We trained 820 black belts in H1 alone, while our data and AI principal cohorts are now strongly embedded in more than 50% of our priority accounts. We've also undertaken an AI skill standardization framework and have identified 14 top AI s kills for scaling our AI talent base.
As a testimonial to this maturing momentum, we received multiple leadership citations for our AI business this quarter that are mentioned i n our investor release.
The progress we've made on advanced AI over the last few quarters gives us great confidence in our AI propositions as it resonates with our clients. Every investment we have made till date builds the conviction that it was very well invested. As we further accelerate our journey to address the expanding market to help enterprise clients realize value out of their AI investment, we expect to further invest in advanced AI propositions, IPs go to market.
Capabilities and partnerships, I will dwell a l ittle more regarding our bookings. We crossed $2.5 billion of new bookings without mega deals. We continue to invest in a strong global sales engine that meets diverse client needs. For instance, our Public Sector GTM Group secured a large aerospace and defense contract w ith a new client last quarter.
As you would all know, new bookings we disclose do not include rate card deals or renewals. We emphasize more on the new booking metric, which generally has a strong correlation with revenue growth, typically observed with a one to two quarter lag. Nearly all deals include AI, and a comprehensive suite of AI offerings was instrumental in securing multiple large strategic wins. You would find the details about our k ey wins in our investor release.
As you would have noticed, we have been growing strong in three large verticals, which are BFSI, Technology, and Telecom and Media. We see a similar trend emerging in Retail CPG that should help us grow in the future as well as diversify our portfolio. We continue to win and grow in our Retail and CPG business as clients show intense interest in our prudent approach to adopting and scaling AI. A couple of areas where we see this include integration work in M&A or carve-out related separation work and in large-scale SDLC transformation work supported by generative AI, especially our AI Force platform. We are seeing similar trends in Life Sciences and Healthcare as well as in our Public Services. While the broader Manufacturing segment is doing fine, there is continued impact due to t he auto sector slowdown within the overall manufacturing vertical.
Next I want to share some thoughts on our software business as a business. This is growing from strength to strength. For example, HCL Software has been named a leader in the 2025 Gartner Magic Quadrant for application security testing. This is significant as we advance from Challenger position in 2023 to Leader position in 2025. We received the second highest score on Completeness of Vision among 16 evaluated vendors, a strong validation of our forward-thinking approach to application security and our alignment with the market needs and buyer expectations. HCL Software has been named a leader in the 2025 Gartner Magic Quadrant for Service Orchestration and Application Platform, which makes it twice in a row for us. This consistent recognition from Gartner is all thanks to HCL Uno, especially the recent HCL Uno agentic delivery platform, which was called out for its end-to-end orchestration capability.
This is a missing piece in the entire agent. Take AI and software services as a software proposition, so you know is a very strategic component in that. This feature enabled us to be the second highest rated in Completeness of Vision a mong the 12 vendors evaluated this year.
Coming to the pipeline and market trends, our pipeline remains robust and has grown to a record high, well supported by our advanced, nearly every deal serving as a productivity enhancer as well as an innovation toolkit. While the external environment continues to be unpredictable, our key business indicators like revenue growth, booking, pipeline, AI demand, etc., all look promising. While there are some concerns about the long term trajectory of the industry, we feel there is and will be a huge tech services market. This AI wave would create big winners and those winners would benefit big over the long term as clients always need a partner who can bring various technology capabilities together to build and operate solutions t hat solve business problems.
To be a winner, one needs to have the scale and reach to develop AI IP led propositions, have a great ecosystem of partners, and most importantly have a strong engineering and a software culture which we pride ourselves. We strongly believe this core competence of technology services partners is what global enterprises will always seek to realize value beyond buying technology tools and platform. At HCLTech we are focused, are rather obsessed, to be such a partner to enterprise clients. Coming to the last topic which is on immigration, I know a lot of you may have questions regarding H1B visa fee revision and its potential impact on us. Over the years we've made conscious effort to reduce our reliance on visas by s trategically strengthening our global delivery model.
Our dependence on visa is now down t o a few hundred visas a year in Q1.
This year Forbes recognized us as one of America's Best Employers for New Grads 2025, underscoring the success of our approach towards fostering innovation, career growth for early p rofessionals and talent readiness.
Overall, we intend to increase our local h iring and training to enhance our localization.
With that, I would request Shiv to w alk you through more details on the numbers. Over to you, Shiv.
Thank you, CVK . Good morning, good afternoon, and good evening to all of you. Thank you for joining our Q2 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 $3.644 million, a growth of 2.4% quarter- on- quarter and 4.6% year- on- year in constant currency terms. Services revenue for the quarter came in at $3.322 million, a growth of 2.5% quarter-on-quarter and 5.5% year-on-year in constant currency terms. For IT and Business Services, services grew 2.6% quarter-on-quarter and year-on-year. the engineering and R&D Services segment grew 2.2% quarter-on-quarter and 13.4% year-on-year in constant currency terms. Our recent CTG assets acquisition from HPE has been delivering financial results in line with our business plans.
It has also given us the opportunity to address the needs of a much larger global telecom client base with a richer value proposition. Software revenue for the quarter is $333 million, a growth of 0.5% quarter-on-quarter and a decline of 3.7% year-on-year in constant currency terms. Within the software segment, subscription and support and professional services revenue grew at 8% year-on-year in constant currency terms. This performance reflects our priority to grow subscription and support and professional services revenue lines. In terms of geographies during the quarter, USA, the largest IT services market, grew at 2.4% year-on-year, Europe grew at 7.6% year-on-year, while India grew at 0.6% year-on-year, and rest of the world reported an increase of 17.9% year-on-year.
Regarding verticals, we saw broad-based quarter-on-quarter growth across key verticals, with some achieving double-digit year-on-year growth despite the macro environment. Our top performing verticals on a sequential basis were life sciences and healthcare and public services, whereas on a year-on-year basis, financial services and technology fared well. They grew at 11.4% and 13.9%, respectively. In terms of clients, we remain focused on adding and expanding G2000 equivalent and emerging enterprises. This quarter, we made good addition to our client portfolio across verticals and geographies. On a year-on-year basis, we added two clients in the $50 million category, 14 in the $20 million category, and seven in the $10 million category. HCL Software is steadily broadening its client base across multiple industries and geographic regions, with this portfolio exhibiting strong performance and facilitating the acquisition of new clients.
This impressive execution positions us well for the future growth. Now let me share the details on profitability. Our EBIT is $637 million at 17.5% of revenue. Net income for the quarter is $486 million at 13.3% of revenue. The margin bridge explaining the same is as follows. The company margins have increased 116 basis points quarter-on-quarter. The improved profitability for the software segment gave us 35 basis points benefit for services. The 81 basis quarter-on-quarter increase was driven by falling factor absence of one of that hurt margins in Q1 gave us positive 30 basis points in this quarter. Project Ascend helped us to obtain 50 basis points gain from higher utilization during the quarter. Forex gain from INR depreciation gave us positive 56 basis points and restructuring expenses had an impact of negative 55 basis points.
As we had indicated in July, our annual guidance, quarterly numbers and commentary, all of them include the impact of one-time restructuring hit in financial accounting sales for three year comparisons. We would encourage you to keep this in mind. Now moving on to return on invested capital, ROIC. Our ROIC continues to improve thanks to our ongoing focus on profitability and efficient capital management. The last 12 months ROIC is at 38.6% for the company, which is up 290 basis points year-on-year. For services, ROIC now is at 45.3%, up 180 basis points year-on-year. Software continues to improve with ROIC at 21.8%, up 396 basis points year-on-year. Let me share the details on our strong cash generation now. Over the last 12 months, operating cash flow is at $2.62 billion while free cash flow amounted to $2.48 billion.
Operating cash flow to net income conversion is at 133% and free cash flow to net income is at 125%. The balance sheet continues to strengthen with gross cash at $3.56 billion and net cash at $3.29 billion. This cash generation is on the back of our continued improved DSO performance. Our total DSO including unbilled is currently at 78 days, an improvement of 4 days quarter-on-quarter and 1 day year-on-year basis. For our shareholders, the diluted EPS for the last 12 months came in at INR 62.57, which is up 0.9% year-on-year. The board has declared an interim dividend of INR 12 per share for the quarter. The record date is 17th of October 2025. Payment date of the same shall be 28th of October 2025.
That brings our 12 month payout to INR 60 per share, effectively distributing 95.7% of our net income. Now on the guidance, on the back of standout quarter and sustained growth momentum, we are raising our full year services revenue growth guidance to 4% - 5% in constant currency terms. Given the softness in software segment due to decline in perpetual licenses revenue, we are keeping the company level guidance unchanged at 3% - 5% in constant currency terms. We remain on track to deliver our full year EBIT margin guidance of 17% - 18%. The wage revision cycle will kick in in Q3. The revision is expected to be similar as last year. Q3 is expected to have 70 - 80 basis points impact and Q4 to have an incremental impact of 40 - 50 basis points. The impact is baked into our margin guidance.
That's all from my side for now and I would like to hand over the session to our moderator for Q and A session. Thank you. Over to you, Darwin.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question, please press star and one on their touch tone 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 Abhishek Pathak from Motilal Oswal. Please go ahead.
Hi, I'm audible.
You are audible, sir. You may proceed.
Yeah.
Hi team. Thank you for the opportunity, and congrats on a solid quarter. CVK, very encouraging to see advanced AI revenue broken out q uite curious to know how are these r evenues being offered to clients? Are they mostly through standalone PoCs or standalone projects, or are they kind of embedded into our bread and butter business? That's one.
Secondly, how do you see HCLTech's r evenue mix evolve over the next three to four years? I mean, do we expect IPs to contribute more and more % of our revenues? If that's the case, how do you see our R&D expenses go up considering we'll be competing head on with a lot of the rich world OEMs in their own backyard.
Lastly, a question on margins for Shiv on the restructuring charges. Would we expect a similar sort of quantum of hit over the next couple of quarters as well? That's all from my side.
Thank you.
Yeah, thank you, Abhishek, for a lot of interesting questions.
First is advanced AI.
It's got a number of different ways of billing. For example, a lot of inference silicon build work are more fixed price projects which we take with clients and delivery. That has got a lot of scaling, and there are a lot of reusable components in that. That's number one. For example, for the AI Factory.
The implementation could be even time m aterial, but there is a run piece which is based on per rack and things like that.
There are a lot of custom AI solutions that we are building for our clients, which is continuing to be contracted in the traditional ways. Some of them, most of them, in some kind of a fixed price model because we also leverage some solution accelerators there. There could be a number of time and material also.
There is an IP element like, for example, AI Factory.
Force platform is being used in the SDLC transformation. The AI Force platform has got a licensing price list and that's what we are considering as an advanced AI revenue. All the services that are being delivered, that is not considered in this category.
There are a couple of small p roducts in HCL Software, they also are being sold as IPs. Right now, the IP component is small.
Now going into your next question on what do we expect our IP trajectory to evolve, we believe this industry will h ave to evolve from being a pure labor-based service provider to people plus IP and platform-based service provider.
When you have the platform as a third party platform, I think there is very little leverage, very little stickiness that we can build.
We believe we can really deliver v ery good quality vertical IP solutions, which can be replicated across customers.
That is why we are investing. However, the investments that is required to create that intelligence layer, that's not something w e are taking on ourselves. We are really leveraging the intelligence layer created by OpenAI and all the tech companies.
We are really creating IPs, which make t his intelligent layer is a lot more usable, scalable, and relevant for the enterprise.
I think this is the sweet spot w here we are focused on, everything goes through a rigorous kind of exercise. We are open to invest. We really don't have a full picture on how much investments this will need. I think this is really required.
For the long term, I mean vibrancy of the business, and I think it's a very good investment to make. We have already identified a few products. AI Force is what I would strongly call as the killer app, which is really making a lot of big deals happen. We are competing head on with all the big players who have a lot of AI, whatever mindshare they all have, we have been able to kind of showcase b ecause of the technical depth of the product.
Especially when the client evaluates getting their hands dirty, we come out winners.
I think it's a strong proposition.
It's a big, big strategic initiative for us. We will not hesitate to make the right investments to make this a big success.
I don't have a revenue number as t o what our IP will be, but for sure it is going to consistently increase in our services portfolio.
Anything else I missed?
Yeah.
Regarding restructuring, Abhishek, in July we announced around 40 basis point impact of restructuring for the full year. We expect this to be only slightly on the higher side for the full year based on whatever visibility we have right now. As you would have noticed, we started this exercise in Q2 and this will continue through Q3, and we expect to have some spillover in Q4 as well.
Got it. Thank you. Perfect.
Thank you.
The list of IPs are already c alled out in our investor release for your reference.
Thank you. Ladies and gentlemen, we request you to please restrict yourselves to one question and one follow-up question. If you have further questions, you may rejoin the queue. Our next question comes from the line of Ravi Menon from Macquarie. Please go ahead.
Hi, thank you and congrats on pretty broad-based growth. First question is on the EBIT margin. If you adjust for that basis points of restructuring, you're almost back at your 18 - 19% range and you should surely get some cost benefit from restructuring going into next year. That's a question that I had, which is how much will the benefit be once you finish the restructuring? On a structural basis, how much margin improvement should we factor in because of the restructuring?
As we said, we have given the guidance for this year 17% - 18%. We talked about at the time of lowering the guidance last quarter, we did talk about one-offs which are hurting us, and we also clarified that we are not structurally lowering our margin band. In terms of what it is going to be next year, we would like to address that question when we give our next year guidance in April. Ravi, that is fair, just trying.
To understand what's the benefit that you expect to get, I mean, is it 20 bps, 30 bps? I mean, what should it be?
Difficult to call out. As I said, some of the one-off we talked about. I think we have recouped some of the benefit by restructuring. I guess whatever I think we should get, the process is still on. As I said, we had just started this exercise in this quarter. It's going to continue for next quarter and maybe it is going to spill over for Q4 also. Difficult to exactly pinpoint the kind of benefit we are going to get. Thank you.
We will definitely transparently call this out.
During the Q4 numbers, because there are a lot of moving parts, we'll definitely provide the transparency around that.
Thank you. I understand that only part of it is employees and part of it is, you know, rentals and things like that.
Okay.
The other question is most actually a lot of people have been worried about the impact of AI on the existing book of business. If I understood correctly, the most impact is happening in the area of development where GenAI pays a really significant improvement in productivity of coding.
In the more I'd say the IT outsourcing side of things, whether it's infrastructure or application maintenance, do we see a significant pressure on the existing book of business?
Yeah, I mean I think as I called out even in the investor day, we think the biggest impact is on the BPO business, which could be as much as 40 to 50%. SDLC, 25 to 30% is what we think is doable. With a lot of maturity in IT ops, application support and maintenance, it'll be 10 to 15%.
It also depends on where you a re in the automation journey in the infrastructure and application operations. A lot of work can be automated by the traditional machine learning and AI and rule-based automation.
If you have fully leveraged the e xisting machine learning and tool-based, rule-based automation, the incremental impact can be 10% or 15% kind of thing.
I think this is the direction.
Obviously, you know the mix of our business and some of this will play out over a longer period of time like software development. Even if we are able to deliver 25% - 30%, to scale for the entire 1,000 or 2,000 people, large setups, it does take significant amount of time. It could run into a couple of years.
I think this productivity will be r ealized over a period of time. There is a good headroom in improving either velocity or productivity, whichever way you want to look at it.
Thanks. Are you seeing wherever you have passes on, is there enough velocity in the demand to more than offset it?
I think the biggest demand elasticity is in the modernization.
While discretionary spend is whatever it is, we are seeing a number of programs which are coming up based on legacy modernization. Like we did call out a very large legacy modernization program for Ericsson in our investor release and a very large European retailer as well.
These programs, they probably were not even.
Looking at it a year ago with a lot of conviction and proof point.
On what can be done.
They are much more open and now these are close to $100 million plus programs, which is quite big from a discretionary spend perspective.
I think that is where the.
Demand could really be kind of open up as we see more and more success in this.
Thanks again. One last clarification. I know that you don't include renewals in your TCV, but even with a scope expansion, do you even include the expansion of scope like say the renewal of Volvo? Would any scope expansion be factored into the TCV?
Yes, any new revenue coming in scope.
Expansion gets added to booking numbers.
Thanks so much.
Thank you. The next question comes from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management. Please go ahead.
Hi CVK and team. Congrats on a good quarter. As the largest IMS player globally, how do you see the need for enterprise data center refresh as we go through the AI upgrade cycle? What would our play be in this value chain? Will we continue to focus only on the managed services piece, or are we willing to now offer services on colocation and cloud service provider modes as well?
We strongly believe in an asset-light approach.
Business model, and I think there is enough opportunities in the current world to really do a very, very good asset-light business scale up.
If you see our direction, it is a ctually, going slightly in the reverse, we are going to build more IPs and monetize IPs. Of course, this AI Factory is all about servicing large mega giga data centers that are being set up by large tech players.
I think that itself is huge.
Services opportunity and it is really getting very, very specialized. Fortunately, we have one big program which we are managing for one of the large tech companies and that itself can expand. There are at least 20 such players and sovereigns and some enterprises who are building this. That can be a big, big opportunity without having to invest in big assets and data centers and real estate and all that.
Sure sir.
If you look at the IMS cycles, they have their own rhythm, a little bit different from the app development and modernization. Do you see the next upcycle in the IMS space beginning anytime soon, partly led by this CPU to GPU upgrade of the existing data centers?
Yeah, we are seeing some traction.
I don't think it's really picking u p from an enterprise side, it's still not picked up in a big way, but there are some edge.
Use cases where we see edge compute with GPUs and all that is becoming relevant. I would think it's early days to really look for a large cycle of enterprise upgrade of CPUs to GPUs.
Sure sir.
Thanks, and all the very best for the future.
Thank you, Sudheer.
Thank you. We have our next question from the line of Abhishek Kumar from JM Financial Limited. Please go ahead.
Hi, good evening and good insight on our AI strategy and progress. I have one question on bookings. You mentioned that we are proactively cannibalizing the existing business and also in some of the SOWs that we have got renewal, the existing SOWs have seen which we have been able to offset through new scope, etc. In that context, I just want to understand how relevant is the net new number because it is coming at the expense of renewals. Maybe some color on how has the overall deal bookings growth has been and if we can, going ahead, provide full TCMA that would give us the full picture of renewal plus netting. That's the only question for myself.
Actually.
Obviously, we track renewals very, very closely.
Internally, but we are not ready with the numbers to share. From a growth perspective, it's really the net new booking which really matters, and obviously there is some dependence on some ramp downs and things like that, which I think has been quite stable. We don't see anything unusual now. I think our net new booking will be a very good quarter correlation for growth. This renewal deflation I did call out last quarter; in eight of the nine deals, we got additional business. This time, we did call out among the top 10, only five of them gave us additional business. The other five of them had specific SOWs which saw some deflation. What is comforting is these are large clients of us.
One segment of the work, there is some deflation, and there is a lot of book of business that we can consolidate with these large clients. Based on the proof points of proactively delivering AI-led productivity, I think that's a very good indicator for you to see how things are playing out.
Sure.
Maybe just a quick follow up on this. Our net new has been around $2 billion for a couple of years now compared to, you know, past where probably the deflation was not as much in renewal. Should we look at slightly higher net new run rate to assume similar growth as we have seen in the past?
Yeah, we are. Obviously, we had mentioned that we want.
To up our run rate from $2 billion to in and around $2.5 billion. That's something which we've been working with a lot of rigor and a lot of science behind it, and we think we will get there soon. This quarter obviously was a $2.6 billion without a mega deal. I do think our pipeline is good, our win ratios are good, and we are well set up for a $2.5 billion kind of run rate. Of course, this can always be spikes sometimes, but on a run rate basis, I think we feel good about achieving this.
Sure.
Thank you and all the best.
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 and congrats on the solid performance. CVK, just a couple of questions from my side. Just wanted to pick your base on the auto vertical. I think the manufacturing vertical seems to have kind of lifted a bit from the last quarter. Where exactly do we see that? Do you still see weakness in the auto segment, especially in European markets? What's your outlook for that segment, let's say over the next two, three quarters, do you think the weakness will.
Persist.
Is there some signs of turnaround happening in that? I'll just follow up that with the next question. If you can answer this please.
Yeah.
Auto vertical pipeline continues to look very.
Very strong, but decision making is just not happening. It's taking its own time, and some of the opportunities are kind of replacing incumbents and things like that. They're all taking a long time.
Given the stress in the industry, it's only a matter of time when.
We see some large outsourcing possibilities, but we have to wait it out.
Got it, So, round the corner, at least at this point of time, as you see it.
Yeah, I would agree with you. Sure.
That's my last question on the headcount numbers given. I mean we were the first one who started calling out our AI revenues. How do you see the overall headcount evolve, let's say for the company or for the industry over the next, not just quarter, let's say over the next two to three years with the advent of AI? Do you think we'll be able to do more with less? Do you think the headcount number where we are today would actually be the same number? We might be looking at maybe two or three years down the line with very limited net new additions from the current levels. If you can give some color on that, that would be really great.
Yeah, I think it's directly a factor of growth. I mean, if you see our revenue in the last couple of years, we've grown 4% - 5% and our headcount has not grown.
I think that gives you a s ense there is some non-linearity playing out even this quarter. I mean our whatever revenue growth and hit people count, there is at least 1.5% or 1% at least there is a difference. When you take a year-on-year, there is a 1.8% increase in revenue per employee.
I think that is the kind o f uptick that we expect to see. It should gradually improve as we create more platforms, more IP, more solution and services as a software kind of propositions with agent take and all of that. We believe there is certain non-linearity.
Even if you are able to achieve a 1% differential every quarter, I think it will start adding up to a meaningful nonlinear pattern.
Got it.
Great.
Thank you so much for taking my question, and I wish you all the best.
Thank you.
Thank you. Our next question comes from the line of Surendra from Citi. Please go ahead.
Yeah. Hi, good evening C. Vijayakumar. Good evening Shiv. Good quarter and thanks for all the details that you shared. Just had a couple of questions. Firstly, this was asked earlier, but you said that out of top 10 renewals, 5 had increased, the scope increased ACV. Is it possible to give a sense of what the aggregate trend for those 10 deals would have looked like? What kind of growth in ACV would it have translated for all of those 10 deals put together?
Surendra, we don't have the numbers ready, and we didn't intend to share.
This was only to give a directional v iew of our proactive approach of p ursuing t he clients to implement AI in a very meaningful way.
I think we wanted to give.
We are also tracking to get some comfort if our hypothesis of proactively driving this will drive more mindshare and more wallet share. At this point, we feel confident.
I think the difference is not every s ervice provider is being proactive. A lot of providers are defensive as well, and that itself is an opportunity for us.
Fair enough, CVK . Is it reasonable to say that in the five instances where you gain shares, it would have come from peers in the industry?
Yes.
Maybe some things might have been i n house as well.
Understood. Just the second question on the.
In financial services at least, it is a meaningful gain share.
In financial services, meaningful gain share is something which I can confidently share. Thank you. Which is reflected in our 11%.
Understood. Last question on H1B, as you and your competitors all try to localize, and I understand that you are more localized than your peer group, but everybody tries to localize. Do you expect this to be some kind of a margin headwind as we go into next year?
Yeah, it's definitely something to watch out for.
Because obviously this trend will mean some higher investments in training, local hiring, and all of that.
From a wage perspective, we have more.
There's very little difference. Availability and all of that, we'll have to see how we will manage it.
Fortunately, the dependence is very low.
That way we feel comfortable.
Is there a risk of higher?
Sorry to interrupt. Surendra, we request you to please rejoin the queue if you have further questions. Thank you. Our next question comes from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah, thanks. Thanks for the opportunity. CVK, in one of the replies on the AI impact on the different horizontals, you called out it will take another two to three years because there are new things which need to be done before AI can be scaled up by enterprises like modernization and other stuff. In that scenario, is it fair to assume that in the next 2, 3 years AI can be addictive in terms of demand rather than definitive? The second question is on EBIT margin. This year we have a lot of one-offs, so why are we still not seeing that next year we can be back to 18-19% EBIT margin? What holds you back to commit that? Because we are doing better in terms of margin even in this quarter, including one-offs.
Sandeep, I think you are a little confused on this modernization thing. Modernization is an independent stream. What I mentioned about scaling in the existing SDLC landscape is really to get.
A small group of people fully used, leverage, train them and measure productivity, ensure that we are getting the productivity and the entire change management for a large software development organization. I think that's what I am saying. It is going to take a couple of years, and modernization continues to be a separate motion. A lot of customers are looking at modernization.
I think that is definitely an additive.
In terms of overall revenue for the industry.
Now, with all puts and takes, where will it land?
depends on what the portfolio that one has. You have a sense of our portfolio, so that's broadly where it is.
Thank you.
To add, you know, we are on track to recoup the margins we have initialized in last quarter like one-off reversals and improved utilization. However, our clear focus is to cement our position as industry growth leader during this tectonic shift in the industry. To that end, we will prioritize investment in AI to help us grow the disciplined margins. That's our focus and as I said, we are not going to call out the margin next year. We'll call out the margins when we do our financial year 2027 guidance in April.
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.
In closing, we are energized by our. Performance in the quarter gone by.
We are confident of our trajectory.
Rest of the year.
Thank you for your continued support. Wishing you and your families a very.
Happy Diwali and joyous festive season ahead. Good evening and take care. Thank you.
Thank you. On behalf of HCLTech, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.