Ladies and gentlemen, good day, welcome to HCL Technologies Limited Q2 FY 2022 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. If you need assistance during the conference call, please signal an operator by pressing star then 0 on your touchtone phone. I now hand the conference over to Mr. Sanjay Mendiratta, Head of Investor Relations. Thank you. Over to you.
Thank you, Stanford. Good morning and good evening, everyone. A very warm welcome to HCLTech Q2 FY 2022 earnings call. We have with us today Mr. C. Vijayakumar, Chief Executive Officer and Managing Director, HCLTech; Mr. Prateek Aggarwal, Chief Financial Officer; Mr. Apparao V.V., Chief Human Resource Officer, along with the senior leadership team 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 on information presently available to the management, and the company does not undertake to update any forward-looking statements that should 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.
Good evening, everyone. I hope all of you are safe and keeping well. A very warm wishes for the festive season. Let me start by giving you a high-level commentary on our performance in the last quarter. We delivered healthy growth last quarter. We posted a revenue growth of 3.5% sequentially in constant currency and 10.5% in year-on-year basis. We continue to execute well, keeping our operating margins within the guided range. Our operating margin came at 19%. We continue to see strong demand for all our services, especially digital business, which is our application services, digital consulting and data analytics, and our engineering services and our cloud services. These three forms a big part of our overall services revenue.
This represents about 85% of our overall portfolio of the total revenue of the company, and the services portfolio growth 13.1% year-over-year and 2.1% sequentially in constant currency. The acceleration in demand for digital and cloud propositions, both in IT and Business Services and engineering services, reflects as a 36.3% growth year-over-year in constant currency for all our Mode 2 offerings. Successful ongoing client mining results in an increase in client additions across all categories. We grew our hundred-million-dollar clients by 1, fifty-million-dollar clients by 4. On a year-over-year basis, we've grown over 12 twenty-million-dollar clients by 5, and a million-dollar clients by 19. This reflects strong demand and relevance of our offerings for the G2000 clients. Each of these clients were large investors in technology and address a lot of their digital initiatives.
We also had strong TCV, which grew Y-o-Y 38%. We won $2.25 billion of net new deals. We also witnessed the highest net hiring numbers in the quarter, 7,135. All these stats, they augur well for our business momentum going forward. The $2.2 billion includes 13 large services deal and one significant product deal across telecom, life sciences and healthcare, manufacturing, and other verticals. I also want to call out that while there isn't a large deal in financial services, our services momentum in financial services is very strong, with significant incremental additions that happens in a number of our large clients. This quarter, we got a landmark analyst citation for our public cloud capabilities, where Gartner in their inaugural report ranked us amongst the top 3 leaders worldwide in public cloud IT transformation service providers.
We are the only India heritage player in this top group and actually the only non-consultant full-stack IT services vendor in this category. This is a great testimonial of our leadership in this space, and with cloud becoming the very backbone of enterprise technology modernization, we believe we are most strongly positioned to leverage the opportunities that this multi-hundred billion dollar market presents to us. We also received a leaders rating in the Forrester Wave application modernization and migration services report released this quarter. We are seeing the market awareness and the traction of HCL's unique offerings in the application space. This is increasing by the day. It will only get stronger, and we will be rewarded with the pole position similar to what we enjoy in our infrastructure and Engineering services.
We are also recognized in leadership position by various other analysts and advisers in various practices and offerings, and you will find this in our quarterly investor release. I'm very happy to share with all of you HCL has once again made it to the Forbes list of World's Best Employers. We emerged as number one among all organizations globally in the field of professional services and lead the rankings in the technology and services industry. We're also among the top 5 multinationals headquartered in India across all sectors in this list. This is a very influential global recognition and the one that is reflective of our commitment towards fostering a culture of empowerment, innovation, learning, and mutual growth. That's also the aspirational value of our employer brand. This quarter also brought another validation for our employer brand on the back of Forbes Best Places to Work global citation.
HCL America is now certified as a Great Places to Work in 2021. Brandon Hall recognized HCL in 8 categories, including Gold Award for leading under a crisis, Take Care HCL Program, recognized for our leadership strategy, and commitment to managing employee engagement, also through the pandemic. We're really proud of this recognition. Now I will throw some light on our segment 2 performance. In terms of segments, this quarter, we posted 5.2% sequential and 13.2% year-on-year growth in constant currency in our IT and Business Services. Our digital business, embedded in the app offerings, continued to grow faster within this segment, providing impetus to the overall growth led by various propositions like commerce modernization, client experience transformation, analytics, and so on. The strong growth reflects the solid pool of propositions we've made in this segment.
We have brought home many defining large deals across manufacturing, retail, CPG, life sciences, and high-tech sector in the last quarter. 2 examples. 2 U.S.-based major healthcare companies selected HCL to digitally transform and modernize their applications across the organizational landscape. Also, a Finnish consumer goods company chose us to drive digital transformation initiatives for an immersive omnichannel experience for their customers. 2 leading Canadian brands also entrusted us with their digital transformation journeys. We are also seeing a good momentum in integrated deals where clients are awarding us both application and infrastructure modernization programs. For example, a Europe-based consumer goods company selected HCL to deliver services in the area of data analytics and integration, marketing, sales, and trade promotion management. We will be responsible for application development to support the new projects across these product streams for this prestigious client.
HCL will also transform the client's global workforce experience services, delivering a consistent and personalized experience across all endpoints. We will introduce a flexible, scalable, and agile delivery model to accommodate business dynamics across all markets and geographies. In our digital foundation and infrastructure proposition, we're starting to grow again at industry-leading rate after a relatively staggered Q1 on the back of recovery demand. We continue to win a good number of large deals in cloud migration, digital workplace, and cybersecurity across geographies and verticals. Now, coming to our Engineering and R&D Services. Led by a strong demand for industry Net Zero solutions and the digital engineering services, our ERS business posted robust 5.2% sequential and 12.7% year-on-year growth in constant currency.
Notable mention here is the strong recovery in asset-heavy industries after relatively a tough time post the first wave of the pandemic, 18 months back, while the tech and telecom segment continues to grow well. This quarter, three leading technology companies entrusted their product transformation journey to us to develop new use cases for their products, improve product revenue, and increase market share. Our key win here is a U.S.-based technology company that chose HCL as a product engineering and joint go-to-market partner for its workforce management SaaS offerings. HCL will provide accelerated roadmap, integrate newer technologies, and expand customer base by tapping into new industries and geographies. It's really heartening to see our engineering business retain its pole position in the market, even as this sector migrates from traditional project-led work to a digital engineering-led end-to-end transformation initiatives.
We see a lot of growth potential for more full stack in this business, and we'll continue our investments in this space. These are strong numbers in digital cloud and digital engineering. Our Mo2 portfolio continues to do very well, delivering almost 36% growth on year-on-year basis. Our products and platform declined 5.5% year-on-year in this quarter in constant currency. You probably know that June quarter is the biggest product in the new license sales for any software product business. We had a few deals which slipped from the September quarter to the December quarter. We expect to bounce back in O&D, including some catch-up for the timing delays of some deals in June. O&D is seasonally a strong quarter, and we're very confident of a very sharp bounce back in this segment.
During this quarter, we had 280+ new customer wins, a strong year-on-year improvement from the previous Jazz. One of the world's largest retailers expanded its relationship with HCL for new licenses for HCL Commerce, BigFix and Domino. HCL Commerce supports the customer's multi-billion-dollar online business while BigFix manages its countless endpoint devices. We launched HCLNow and HCL SoFy and have seen good initial uptake from the customers, though a lot of them are still in the early stages in terms of pilots and customers' interest. We've also seen positive recognition from industry analysts for our innovation and our cloud-native strategy for our product offerings. In all, it is expected to perform in line with our expectations as we've not seen any change in business fundamentals, be it renewal rates or demand pipeline. All remain consistent as per plans.
However, having experienced this quarter where some deals slipped towards the last few days of this quarter, we believe our earlier low single-digit guidance, it would be more appropriate for us to restate that to 0-1% growth in the Products & Platforms segment. After the segments, in terms of partnerships, we continue to work closely with hyperscalers, OEMs, and SaaS partners to offer best-in-class integrated solutions for our clients. In this quarter, we launched a dedicated Cisco ecosystem unit focused on creating solutions to accelerate clients' digital journey. This ecosystem will create leading-edge competency solutions and business outcome models by leveraging Cisco technologies. We also chose the RISE with SAP offering to our enterprise digital landscape. This expanded partnership will see HCL take the role of consumer and global strategic service partner for RISE with SAP.
As an HCL strategic partner, HCL will help its clients leverage its combined experiences in the industry cloud transformation space. I also want to cover a little bit on our delivery footprint and go-to-markets. We had earlier talked about a three-pronged go-to-market strategy last quarter that classifies our go-to-market into core markets, which is U.S., U.K., Nordics, and a few other English-speaking countries. The second one is the focused markets, which are five large geographies, Canada, Australia, France, Germany, and Japan. The new frontier markets, which are the seven countries where we are getting our presence established. Now, the GTM strategy is well supported by a delivery strategy led by the establishment of New Vistas globally. We've had some very good success in Sri Lanka, Vietnam, U.S., and Canada.
These would be in the form of onshore, nearshore, and offshore delivery centers, giving our clients all the options to address various business scenarios. We now have more than 15,000 employees in smaller cities in India, what we call as New Vistas locations. This has helped us significantly to address talent demand as well as provide flexibility during the pandemic waves. We also completed 1 year of operations in Sri Lanka and surpassed the milestone of recruiting more than 1,000 local employees, including both recent graduates and seasoned industry professionals. We entered Sri Lanka in 2022 with aims to make it a global delivery hub that works on technology programs for some of the biggest corporations in the world and we are well on our way to it. We are in the process of expanding these New Vistas footprints to Romania, Costa Rica, and Philippines.
You will see a lot of action emerging from these execution of these blueprints. In terms of our return-to-work strategy, planning has been initiated for a safe and calibrated return to office in a phased manner and in compliance with the local guidelines and controls in the respective geographies. We believe the future operating model is a hybrid operating model, and we believe a significant part of our workforce would be in the office in the next 12 weeks. Looking ahead, we remain very positive of our near-term growth by confidence generated by our bookings and pipeline numbers across every segment. We believe the market-leading momentum in the technology modernization and end-to-end digital transformation space across applications, engineering, infrastructure, and business process services, this augurs very well for our near-term growth.
We believe this upward trajectory will continue, and the enterprises should realize benefits from their first phase of digital investments, which should only give the conviction to accelerate technology spending in the coming quarters. In parallel with the business momentum, we also continue to invest and aggressively focus on our employee experience, value proposition, talent transformation, and the sustainability targets that we are designing for the company. Our aim is to continue to build a future-ready organization with a digital front runner and employee-centric, globally diverse, and a socially responsible organization. We've onboarded a digital sustainability head that's supported by a team of dedicated experts to integrate our sustainability in our day-to-day operations, and also ensure our ESG proposition results in higher value creation for all our stakeholders.
We also plan to enhance this to a sustainability and ESG consulting practice, which can work with our top clients in the technology aspects of the ESG propositions. On that overall summary, I will hand it over to Prateek to provide more details on financials and other details. Over to you, Prateek.
Thanks, Sridhar. Good evening, everybody, and good morning to the ones from the U.S., et cetera. Festive greetings as we go into the festival season. I'm going to change the order of my commentary from what we have been doing in the past. Some of this you would have seen in our investor release today. The highlights is what I'll start with. Because CVK has already covered quite a bit of it. The highlight of the quarter is obviously the services revenue growth, which is at 5.2% sequentially, and 13.1% on a year-on-year basis in constant currency. This has been driven by both the services engines, both the services segments. Engineering and R&D Services, ERS, has shown a growth of 5.4% quarter-on-quarter. Even on a year-on-year basis, it is 12.7%.
It has crossed the pre-pandemic peak, which was around INR 425 million, which was almost a year back. That has bounced back strongly in this quarter. The second segment, which is the largest segment, of course, is IT and Business Services. That has also showed a very strong momentum with 5.2% sequential growth, and 13.2% on a year-on-year basis. ITBS growth has been driven foremost by our applications practice, which obviously sits within it. As an overall services business, Mode 2 has been the driving factor, growing at 26% year-on-year and 12.5% on a sequential basis. As CVK covered, PMP revenue saw a deferment of a few deals and showed a decline of 5.5% year-on-year in constant currency. That is a bit of a blip in this quarter, which most of it should get recovered in the next quarter.
It is important in that context to remember that in the last 12 months, including this quarter, the PMP growth in constant currency is at a level of 3.6%. Even while obviously this quarter's 5.5% obviously doesn't look good, even including this quarter, it is 3.6%, which is pretty much in line with the commentary that we have given to you earlier. Even for H1, the first half of this fiscal, it is a flattish growth, which is -0.4%. Moving on to some of the other key metrics then in the order of importance to say. Deal wins came in again pretty strong for the third quarter running. INR 2.25 million, INR 2.45 million TCV, which is a 35% growth sequentially and more importantly, 38% on a year-
Excuse me, Mr. Prateek. I'm sorry to interrupt sir, we can't hear you. Mr. Agarwal, we can't hear you sir. Ladies and gentlemen, we request you all to please stay connected while we check the connection for Mr. Prateek Aggarwal.
Ladies and gentlemen, the line is reconnected. Sri, you may go ahead.
Yeah. I'm assuming you got dropped at a few metrics. Deal wins of INR 2 million-INR 4.5 million TCV, total contract value, which is a 38% year-on-year and 25% sequentially, is one of the biggest highlights. This is further backed by very strong net additions in the employee workforce of 11,100+. Net hiring over the last three quarters has been at about 28,000 in our employee workforce, and there is another 3,500 odd in terms of third-party contractors as well. The total is pretty much near 32,000 over the last three quarters itself. As a result of the services growth that we are seeing, our account mining has improved, and you can see it most prominently in the INR 50 million category. INR 50 million+ customers went up by 12 on a year-on-year basis to now 41 in number.
Even on a sequential basis, that number went up by 4. That was very heartening to see. Even in the INR 100 million plus category, we increased the customer count in that category by 1, both sequentially and on a year-on-year basis. The other highlight which we announced today is for our shareholders. Of course, let me just cover quickly the diluted EPS earnings per share for the last 12 months, which stands at INR 49.5, leaving out the milestone bonus. We are continuing with that practice, leaving that out. That INR 49.5 per share is a 9.5% increase on a year-on-year basis versus the previous last 12-month period. The new announcement we made today is on the payout policy. This has been a longstanding ask of almost all the investors and analysts I have spoken to in the last few years.
The board has today agreed to increase the payout policy now to not less than 75% of net income cumulatively over a period of five years, including this fiscal 2022 right up to fiscal 2026. This has been the ask for laying out a longer-term policy which gives some degree of certainty and direction and almost guidance. I hope our investors would be happy with this announcement that we are making today. In line with the revised policy, the dividend for this quarter, we were running for the last few quarters at INR 6 per quarter per share. With this change for this fiscal year, we are increasing that dividend to INR 10 per share, and we expect to follow a similar INR 10 per quarter for the balance 2 quarters as well. The other big announcement we made today was for the employees.
We are evolving our existing ongoing long-term incentive plan and replacing the tenure-based portion of that cash-based LTI plan with restricted share units, RSUs. What is currently 100% cash award plan will move to a mix of 70% cash, which is continuing to be performance-linked as usual, and the 30% tenure-based will be converted to RSUs at the market price on the date of the grant. This will obviously need to go to the shareholders for approval, which we will do over the next quarter, including the stock exchange approvals and processes. The good part, which I must share with you of this RSU plan is that the way we have planned it will be no dilution for the shareholder. That is simply because we will be buying these shares from the secondary market. There will be no fresh issue of shares.
We will buy these through our stock options trust, and those will be held in the trust for the people to exercise as and when they get their vesting after three years or so. That is something we have made sure that this does not lead to any dilution. It is also no extra cost because it is in lieu of the cash LTI and because it is being converted at the market price. It is just changing the form, but not really in substance it remains the same. Of course, we do hope that we are able to grow the share price and thereby gain from that perspective. Those were the bigger announcements of the day. I will now quickly cover some of the more usual highlights at a company level. The revenue was at $2,791.
I'm not going to go through all of that because I'm sure you would have lapped it up in the last 2.5 years as you usually do. The overall company growth was 3.5% sequentially, 10.5% on a year-on-year basis. EBITDA in US GAAP came in at 23.4% and in IND-AS, Indian accounting, IND accounting standards, it is 24.3%. The second number is more comparable because most of our peers are reporting in IFRS, which is practically the same as IND-AS. Our EBITDA in those terms is 24.3%. EBIT came in at 19% as you know very well, 65 basis points lower sequentially. In terms of looking at it, again, if you look at it on a sequential basis separately for the services business and keep the P&P business in a separate bucket.
You will notice that the EBIT margin for services is pretty much flat on a quarter-to-quarter basis. It was 19% last quarter. It is 18.9% this quarter. Pretty much the entire 65 basis points is practically driven by the lower P&P revenue and a little bit impact, 5 basis points type of impact due to the Forex fluctuations. Practically it's the P&P revenue which has gone into the next quarter and therefore this should be hopefully a moment in time kind of movement. Services margin, like I said, has remained practically the same as last quarter.
Within this quarter, of course, we gave out increments and there have been a host of costs which have been increasing over the last few quarters, you know, pretty much across the industry in terms of hiring costs, backfilling of the attrition, special allowances and hiring, different kinds of training and hiring costs. Of course last quarter we had some one-off costs. They have practically offset each other and that is why the solution margin is pretty much flat. Net income for the quarter came in at 15.8% of revenue, which is about 23 basis points lower on a sequential basis. In the net income, we did gain from a favorable assessment we received during the quarter. Our tax cost for the quarter is lower than what we had anticipated simply because we got a benefit from the assessment this quarter.
You would see that the ETR for the quarter is at 20.5% and therefore our full year guidance which we had earlier said I think 24%-25% now is revised for the full year to a narrower, I mean a lower range of 22%-23%. We are at about 21.1% or something like that in the first half. For the full year, the guidance is now revised to 22%-23%. Cash generation continued to be very good during the quarter. We generated $465 million of operating cash flow and $390 of free cash flow. OCF as a percentage of net income is 106% and FCF as a percentage of net income is 88%.
On a last 12 months basis, the number is $2.05 billion of operating cash flow, which is 117% of net income and free cash flow is at $1.8 billion, which is at 103% of net income. Last 12 months OCF and FCF yields remain at 4.4% and 3.6% respectively. We ended the quarter with a strong balance sheet, gross cash at $2.7 billion, which is an increase of about 20% year-on-year. Our guidance remains as we had announced right at the beginning of the year, revenue guidance of double digits and margin guidance of 19%-21%. With that, I'll return the call to the moderator. Over to you, moderator.
Thank you very much, sir. Ladies and gentlemen, we will now open the question and answer session. Anyone who wishes to ask a question, please press star then one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star then two. Please withhold all questions until someone is well asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star then one. The first question is from the line of Mukul Garg from Motilal Oswal. Please go ahead.
Yeah, thanks. Mukul, I think my first question is for Vishnuvaram from you. If you look at your guidance, which you guys have given, you have again reiterated the double-digit revenue growth guidance. The general sense which we are getting from your peers across the industry is that the demand visibility is actually higher than what usually is there in the space. Can you just help us understand what is the reason behind kind of shying away from giving at least a range, especially your employee addition number clearly indicates a very high degree of confidence internally.
Yeah.
Mukul. Go ahead, Prateek.
I t's better you answer this.
Yeah. Mukul, as we said, we are not keen on giving very specific guidance. We wanted to give a directional view, which is what we started the year with, and we will stay with that. In lieu of that, we provide the booking commentary every quarter, which consists of all the new bookings, and we're also giving you the headcount additions. I think these are the 2 clear metrics which we can confidently share. You should make your assumptions and do your models.
Sure. Seriously, another question again, kind of following on from this trajectory. If you look at the Indian IT industry post the initial shock from last year in Q1 and look at you versus your largest peers, you stood out in terms of the addition of employees you have added and prepared for the supply shock obviously placed among the large peer set. If you look at the monetization of the employee addition, because others have also been adding quite aggressively. They have been able to monetize it in a much better way than how we have done it. Hence, it has effectively ended up with your Q2 revenue per employee being down almost 9% on a year-over-year basis. What is the reason behind this gap which has been created?
While clearly the expectation kinds of builds are that you are preparing for growth down the line. If that is the case, how should or when should we expect you to go back to the earlier revenue monetization of your employees? If not, what has changed?
Yeah. Mukul, pretty long question, but I think that the one simple thing is the headcount additions should be looked at with respect to how our services business is doing. That's what will follow a logical sequence. If you look at we had very strong growth this quarter. We had good additions last quarter, that is reflecting in good growth this quarter. The net additions as a function of laterals and freshers. This quarter, we've hired almost 5,500 freshers. They will take maybe an additional quarter before they become productive. The rest of the people hired, they've been hired all through the quarter, pretty much in a linear way. That's how the revenue will flow. As far as the revenue per employee is concerned, I think it went up at some point.
If you take the overall revenue per employee, there is so much seasonality in our product business, which is really not dependent on people and headcount. Of course, we're trying to make some of the offshore onsite headcount reduced, and that got reflected as some offshore headcounts. That also has a significant impact to revenue per employee, because the realization rates offshore are significantly lower. These are some of the dynamics. Other than that. The boost is happening significantly in the higher-end services. We feel pretty confident of how the revenue growth and services head count growth match up, especially for these factors.
Just a quick question on this element. The dynamics for offshore shift and other changes over the last one year have been fairly uniform for the Indian IT industry as a whole. Even if we look only at the revenue on the IT services and R&D side, and we take the whole base because product employee base is quite small, even that has been a fairly sharp decrease, which we have not seen in the previous year. Do you see a chance where this will normalize, as you said, you are adding pressure to employees over during the quarter. Do you think this will start reversing at some stage?
Mukul, I don't see anything unique with the services business which would change any cause, any major divergence from what the industry is. I have not done my comparison myself, but I'm confident of how our discount growth and revenue is tracking. I'm happy to do some more detailed analysis and see if there is something which is different purely on the services business.
Sure. That should be all, sir. Thank you for answering my query.
Thank you.
The next question is on the line of Pankaj Kapoor from CLSA Companies. Go ahead.
Pankaj, how should we be looking at the revenue trajectory in the coming quarters? You are talking about a potential catch-up of some of the spillover of the product contracts in the P&P business, which can obviously push up the third quarter numbers. How about the rest of the services business? Historically, you have said that the deals that you do, they translate into revenue only at least a couple of quarters lag. Is this trend going to hold out for the recent deals as well? Which means that we will see the reflection of that only in FY 2023. You see some of these deals start pushing up into the numbers in Q2 as well. We may actually see a fairly comfortable performance in the third quarter.
Pankaj, I think a big part of the ramp-up in Q2 has been the highest booking that we ever had in Q4 of last year. It obviously translated after 1 quarter's delay. That would be the normal kind of delay, 1 to 2 quarters, and I think that will be the same for the deals signed in this quarter as well. Head count additions minus the pressures, I think that should give a good view in terms of what can be expected on the services business. On the product business, yes, obviously, P&P is a seasonally strong quarter, and there is a certain switch agency used in Q2. We expect some of this to recover in Q3. There is a possibility of a very strong quarter in Q3.
Actually, the dynamics of product business is lots of transactions happen, and they all kind of queue up towards the end of the quarter. In fact, ourselves we were surprised on the outcome this quarter because it happened in the last seven or eight days. There's a lot of dependence on one quarter closure. Now given that we've experienced this, we are just factoring that in, and that's where we have provided a 0%-1% growth for the full year. We've just taken the learnings, and we are respectively revising our guidance from a low single digit to 0%-1%.
Just to clarify, does it mean that when you're giving out this guidance, you're presuming that we probably will be at the lower end, or you see a risk to this guidance itself, if this kind of shifts happen, so we might end up with a negative growth as well?
Pankaj, we are reasonably confident of a flat to 1% growth based on a lot of things that we are seeing. Of course, there is always this uncertainty at the end of the quarter. I really cannot model that in any meaningful manner. We're going to do everything possible, and maybe, Darren, you can add any more color on this aspect.
I think you summarized it very well, CVK. There is just a higher dependence in the product business on a quarter closing. There is seasonality. I think you covered all the key points.
CVK, if I can just squeeze one more. The kind of a misstep you had on the product side of a low single digit now to 0 to 1. Can we presume that on the services business you are on track to whatever numbers you had modeled in at the start of the year, which is behind that, at least the quadruple score guidance? The only incremental impact that would give you slightly lower growth in TMC, or you think the outcome from services business also might have changed, either for better or for worse?
I think, I do believe even if there is some slip in product business, maybe a few % factor in consumption, which is pretty much INR 25 million. I think we will make that up in the services business given the momentum and things like that. My year beginning outlook for the full year and for the variables, we are pretty much in control and I'm pretty confident of the outcomes.
Understood. Thank you.
Thank you.
Next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.
Yeah. Hi. Good evening, and thanks for taking my question. TVK, I have only one small question that.
Sandeep, we missed a little bit of your beginning. Can you repeat?
Yeah, sorry. Good evening. Thanks for taking my question. I just wanted to understand this. My last two quarters, you see we are stuck. We were losing on the platform and product revenue from 68. Again, it fell to 60. Again, we have a decline in quarter 1 and again in Q2. While I understand that changes from quarter to may reflect it less. My bigger question is that, TVK, it is looking like that this 11%, 12% of the business, if it doesn't grow, it actually took some of our business growth by 1% or 2% and at least for as because of our strong positioning in the IMS space, we should be the preferred choice for the hyperscalers and we should be the beneficiary of this wave which is there.
Look like our whole efforts and good hard work is being taken away by Products and Platform. Will it be fair to assume that Product and Platform business may not be only looked at from the revenue perspective, but we start looking it from the services fee or is there something more than that? It is now fourth quarter in a row where we are seeing decline in this business.
Sandeep, see the Products and Platforms, especially the IBM divestiture, had a lot of dynamics of one-time payouts and settlements and all of that in the last year. Of course, there are certain product segments that we discontinued. All of that is playing out. Most of it is in line with what we expected except for the miss this quarter. Our fundamental book of business on the product side remains intact. Our hypothesis of modernizing these products and getting them into leaders quadrant in various industry analyst papers is very much on track. The products are being used by some of the largest companies, like the biggest retailer in North America, almost tripled their capacity on our Commerce product in the last quarter. I think the fundamental hypothesis is intact, but obviously there are some moving parts given the nature of this transaction.
I'm pretty confident of the long-term roadmap. The question of synergies is still very low. There is a very conscious effort to drive more synergies, especially that we have opened up so many new geographies where we are not present, as well as some top clients, even in the core geographies, we are getting access. It should help us a little bit on the services side as well. I don't know how much is it. Definitely there is an influence on this.
Okay, thank you. That's very helpful.
Thank you, Sandeep.
Next question is from the line of Moshe Katri from Redburn. Please go ahead.
Hey, thanks for taking my question. I hate to kind of dig even more into this, just talking about the slippages that you talked about during the quarter into the December quarter. Are you suggesting, based on the recent comments, this is predominantly due to the IBM assets that came on board? Are there any specific enterprise-related issues that caused this slippage, maybe regional-based, maybe vertical-based? Any color there will be really helpful. Thanks a lot.
Moshe, thank you for the question. If you see, we followed our revenue in three segments: IT and Business Services, Engineering Services, and Products and Platforms. The first two segments are the core services segments, which contributes to 88% of the revenue. We've delivered very strong quarter-to-quarter segments for growth on both the segments. The IBM products are house branded our Products and Platforms segment, that is where we have these moving parts. This was a declining business. Our hypothesis was to re-energize, modernize, make them cloud-native, and get into leaders quadrant and drive more growth. That journey is taking a little longer, the Products business itself is a very different dynamic from the services business. Last few days can determine what will happen to the quarter. We had a miss probably the first time since the acquisition. We've had a miss here.
I think it's a blip, and I don't see it like a fundamentally or structurally, which should be concerning.
More specific or maybe regional specific.
No, it's Okay.
Thank you. The next question is on the line of Apurva Prasad from Elara Capital. Please go ahead.
Good evening. Thanks. This is my question. C Vijayakumar, wanted your comments on whether we are getting rate card increase broadly and more specifically within Mode 2, and also particularly in Europe, where I'm noticing a lot more larger deals after acceleration there. Is there also an increase outsourcing there and more price benchmarking by enterprises?
Yeah. We talked about our emphasis on Germany and France as geographies where our presence was a little bit less than what the market opportunity was. Over the last couple of years, we have really invested in building the right local presence and relationships. You see Germany and France doing very well in the recent few quarters. That's 1 reason why you will find Europe give more announcements. Of course, Proximus was a big deal, which is going to be a defining deal from a telecom segment perspective. We have pretty nice deals in U.S. as well, like in life sciences and healthcare, as I called out 2 large deals. 1 is a sizable vendor consolidation deal where 1 of the incumbents got completely replaced, large incumbents. Another provider segment will be infrastructure and application outsourcing.
There are pretty nice deals of decent size in U.S. and Europe.
Right. Just the earlier part of that question, C Vijayakumar, on the rate card increase, how widespread is that?
Yeah, sorry.
Yeah.
Rate card increase, definitely, obviously, given the supply situation, we are doing everything possible to get increases. Definitely, new deals are going in with a slightly higher price. Even negotiations, we are probably being much more firmer on our price. Of course, existing customers, it's difficult. At least for some very niche skills, specialized geographies, even existing customers are a little bit understanding. If you look at your overall 183,000 people, getting a few things here and there still does not move the needle. There are certainly some green shoots of getting better rates, especially in our applications because of engineering business.
Got it. I have just one more on the Products & Platforms, please. More from a medium-term perspective, wanted to understand your outlook, you may have covered this in an earlier question from the strategy. How does this tie in with these topics also around the partner ecosystem? Is there a trade-off between the two, do you think that there could be synergies to exploit now with the platform partnerships or with the hyperscalers? This is more from a-
Yeah, absolutely. Yeah. Like, for example, Commerce is now cloud-native on Google Cloud Platform.
Okay.
Unica is cloud-native on AWS. We have modernized, containerized, put these products on these hyperscaler platforms. Obviously, our close relationship has also helped us get that traction going. Now it's a part of their rate card. They're part of their last quarter where some of these offerings are that the hyperscaler sales teams are also carrying with them. This is what our KTS now proposition is, where we are offering commerce as a service, where we provide the software, we host it, we provide all the operating services. That's just started in the last, actually July is when we formally launched it. We're seeing some good traction. Obviously, that is increasing some costs as well because we've hosted a lot of products which customers are trying out on a number of hyperscalers. The outcome from that is very promising.
Thanks for that. All the best.
Thank you. Apurva.
Thank you. The next question is from the line of Prashant Kothari from Pictet. Please go ahead.
Yeah, hi. My first question was on the Products & Platforms. I mean, given the slow direction we are progressing now, is there any need to do any more write-offs?
Sorry, any more need for?
Any tax rate amortization, mainly spending write-off of the invisible debt reporting.
Nothing that I'm seeing. Maybe, Shashank, you can put in point of view.
No, Prashant. As of now, we haven't really baked this into this. This is something we typically do on an annual basis. As of now, there is no trigger that I see. Like we discussed all through this call right from the beginning, this is more of a postponement from this quarter to the next. Given the complexities, we are just penciling in a slight lowering of the outlook that we had given earlier during the year.
At this moment of time, I don't expect it to have any major impact. We really haven't done the numbers based on that.
Okay. My second question was just on the growth expectations that you have. Over the long period of time HCL Technologies has been a large IT company from India, and we seem to have lost that mantle. What are our expectations today when there are certain peers which are outgrowing us? Do you see a path of regaining that, or has this just stalled something?
No, I think, Shashank, if you look at our services business, our quarterly growth is already picked up and it's really industry leading. As we go through the quarters, I believe we will close the gap on year-on-year numbers as well. Our aspiration is supposed to be the growth leader, and we have every dimension of service offerings, client relationships, and sales and delivery organization, and a great team of leadership. I personally don't see why we cannot be a growth leader. Our aspiration remains, and there has been a little bit of slow growth in the last couple of quarters, I mean Q4 and Q1. Q2, we have demonstrated a pretty nice ramp-up across all services, and our booking and head count addition, all of that is also quite promising. I feel pretty confident that we will start narrowing the gap.
Okay. Thank you very much.
Thank you. The next question is from the line of Ashish Aggarwal from Principal India. Please go ahead.
Yes, hi. One question my side. When we said that in the contracts business there has been a delay in signing and pushing to Q3, have those contracts been signed? If you can give some idea on that.
Yeah. Darren, do you want to take this?
Yeah. We had one very large contract that slipped, and then a number of other small to mid-size deals. It was a handful. None of those deals have yet closed. These are all work in progress. None of them have been lost either. We are still working them. We do anticipate closing most, if not all of them, in L&B.
Perfect. Thank you.
Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Hello. Yeah. Thanks for the opportunity. CVK, if I look at the services growth in this quarter, 5% looks healthier, my sense is it could have been even better or higher than this. Why I'm saying this is if I look at the last 4 quarters new business TCV, it's close to around $8 billion. If I apply a 5-year tenure, it could be close to $1.6 billion new business, which would have been 16% of the revenue base. We are coming off a low growth base in Q4, Q1. In that scenario, my question is it the leakage in the existing revenue is higher than anticipated, or there are some delays still continuing in terms of conversion of deals into the revenue annualize?
Listen, I think your equation would be accurate if the entire business is annuity business. There is a significant part of the business in our application and engineering services, and even a little bit in the infra services, which are project-based. Some of the new booking goes to fill the projects which are rolling over as well. I don't think it's a direct equation. That's why the headcount numbers and the booking numbers both will have to be correlated to some kind of a model.
Is it stated renewal pressure on some of your infrastructure legacy business is higher than it was in earlier years, or those pressures are no longer upstate or material to call out as a whole?
I don't think renewal pressures are anything material to call out. As I said, in the past, renewal rates are 97%-98%. The 2%-3% that go away are because there is M&A or there is some consolidation work which is driven by some other triggers. Like if I were to acquire a company, then there is some trigger to drive business in a certain direction and things like that. That trend has not really changed. 97%-98% is our annuity business, which is getting renewed every quarter.
You also said Q2 growth is a reflection of the Q2 order book, while Q1 and Q2 order books seem stronger but much lower than the Q4. Is it fair to say what we have seen in the Q2 in terms of the growth momentum and services may not be same or slightly lower in Q3, Q4?
Yeah, possibly if they extrapolate the data points, it could.
Okay. A question to Prateek. Prateek, the guidance of 19%-21%, is it applied only on a yearly basis or also on a quarterly basis? Because we are in Q2 at 19% EBIT margin, which is lower end of the band. So do you believe it can be slightly lower looking at the supply side pressure that recent challenges happened in Q3 or Q4, or do you believe this guidance is applicable even on a quarterly basis?
Sandeep, our guidance is always on an annual basis. It is never on an individual quarter basis.
Okay. Looking at supply side issues, there is a possibility we can be in a particular quarter lower than the lower end of the band.
My guidance is on an annual basis. I'm not going to comment on quarterly numbers.
Okay. Fair enough. Thanks, and all the best.
Thank you.
Thank you. The next question is from the line of Gaurav Rati from Morgan Stanley. Please go ahead.
Hi. Thank you for taking my question. Two questions. Firstly, is there a reason to believe that the momentum what we have got in the services business in the last 2 quarters of 12%, 13%, is that going to decelerate either on the higher comps or because the completion of the deal win will only take 1 or 2 quarters before it starts flowing into the revenues? Is that a correct interpretation? The second question is on, just want to understand a little better on what are the potential risks to the margins in the second half. What are the levers which can help you to keep your margins stable in the second half? Although it may be still within the band, just trying to understand the levers better. Thank you.
Gaurav, I didn't understand your first question. Would you mind repeating it?
Yeah. The services business has seen 12, 13% constant currency growth in the first half. Is there a reason to believe that the growth might decelerate in the second half either because of higher comps on a YOY basis or because the deal wins what we have done in the last 1 or 2 quarters will only flow through with a lag of 1 or 2 quarters?
Gaurav,
CVK, sorry to interrupt you, but Gaurav, like I replied to Sandeep in the earlier question, we really don't want to get into giving quarter-on-quarter guidance. Our guidance is given at an annual level, and that's where we intend to keep it. I would leave it there both for the margin question and the services question. CVK, sorry, please go on whatever you were going to say.
Yeah. That's what I was going to say as well, so.
Thank you.
Thank you. The next question is from the line of Mr. Sudheer Guntupalli from Investec. Please go ahead. Sudheer Guntupalli, your line is unmuted. Please unmute the line from your side and proceed. Mr. Sudheer Guntupalli from Investec, your line is unmuted. Please unmute your line from your side and proceed with your question.
Hello, can you hear me now?
Yes, we can. Please proceed.
Thanks for that. Thanks for taking my question. My question was on the Products business. Typically, Products business, I assume, when you sign a deal, you basically sort of record a deferred revenue, and every quarter, the revenue sort of recognized. For sort of almost $30 million sequential drop, would it mean that the kind of mix that happened is primarily because of very large renewals? Maybe you just have one or two things for it.
Let's begin.
Why don't you answer that?
Yeah. Listen, it's not that simple. There is a mix of what is-- You refer to renewals, that's what we call subscription and support, SNS for short. There is a mix of that, where typically it works the way you described, there is another significant component, which is new licenses. New licenses, most of it is recognized upfront when the deal is sold, when its booking is done. That is the type of deals that slipped in this current quarter. That has got nothing to do with recognizing it ratably across the 12 months cycle.
Good. Basically, on the new licenses, it's more like a one-time product sale for a specific period, and it's recognized upfront. I understand.
A large component, yes. I also want to pick on the point you made about the sequential number. As we have been explaining for quite some time now, this is not a sequential business. Products business in any company is never a sequential business. There is a seasonality, and the only correct way to look at it is year-on-year. That number, as we have talked about, is -5.5%. It was a number of $344 million in September quarter last year. This time it is $325 million, and that is a drop of $19 million, not $30 million like you said. That is the right comparison. I just want you to be conscious of that, otherwise you might land up making some erroneous decisions.
Absolutely. Completely understand that. Just one more. This new license, typically license as a proportion of revenue, is that quite significant from a portfolio perspective? That's one question. Second, considering that this year we are sort of literally surprised on growth in Products & Platforms. I think last time you had mentioned that 25% of the business is on a declining trajectory where the remaining is doing very well. Do you think that by next year, typically, this business should get back to growth considering most of the declines should have happened and the proportion of declining business should be lower on the overall portfolio for HCLTech?
You're right. Obviously, we haven't done a detailed plan. I would hesitate to comment on next year. We will provide that outlook as we get to the next year. I just want to clarify one more thing. Even though they're new licenses, a large part gets recognized in the quarter in which it is booked, but the small part gets converted into an annual stream for the same year, and for the next year it will come in as a subscription revenue.
Yeah, sure.
Your earlier question about license versus total. That is a proportion that is growing pretty much every quarter. Obviously, it has its seasonality. September quarter being the smallest quarter in the 4 quarters. December quarter, on the other hand, being the peak quarter. There is a seasonality, but on a general trajectory, if I was to see across the 9 quarters that we have been running this business at the front end, it is going up as a proportion of the total pretty much every quarter, seasonally adjusted.
Sure. One last question, if I may. I think across companies on the peer set, when we look at the IT industry, one commonality is that growth from existing customers is very strong. In the context of your earlier comment on existing projects getting completed and that sort of preventing the sort of impact in the backfill. Ideally in this environment, should that sort of be taken care of considering the demand strength?
Yeah, absolutely. You're right. That's why you will see our client category, every category clients have grown. That is projects getting over and new projects being won, and new projects won gets into the new bucket.
Right. In that context, when we say $3.2 billion in Q4 getting converted into revenue this quarter, I was just wondering whether some of that $3.2 billion is yet to be converted to revenue going forward or the entire thing has already happened and there was some project.
No, no. It's a mix of multi-year contracts and further incremental ramp-ups in a lot of existing clients. It's a mix of that. Incremental ramp-ups will depend on the duration of the project. Many of them are 12 months, 18 months, and then they get renewed after that. Long-term contracts are three year or five years. There is a time to transition, and after that, there is somewhat stable revenue stream for three to five years.
Sure, fair enough. That's very helpful. Thank you so much, and all the very best.
Thank you.
Thank you.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. C Vijayakumar for closing comments.
Thank you, all of you, for joining the call. In summary, we feel very confident of our business trajectory, especially our digital business, our Engineering Services, and cloud transformation. All of these are playing into the strength of HCL. We feel confident about harnessing the best out of the market momentum. Our complete Product Business is unique in itself. I would encourage all of you to look at the Services Business and Product Business with a very different lens, and all the positive work which we're doing and delivering very good growth in the Services Business is results of the centerpiece of propositions and relevance to our clients. I think overall the outlook is very promising. Thank you for joining the call, and I look forward to talking to you during the quarter and during the next quarterly calls. Thank you, everyone.
Thank you, everybody. Happy Dussehra.
Thank you very much. Ladies and gentlemen of Jefferies HCL Technologies Limited, thank you for this conference. We thank you all for joining us, and you may now disconnect your lines.