The lack of discretionary spending across clients through the past two quarters and limited resumption visibility on customer expenditures have been the key factors for slashing organic revenue growth guidance between 4% and 5% in constant currency terms (from earlier 6% and 8%) despite strong growth projections. Edited Excerpts:
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What is the rationale to cut down guidance if you expect growth in the next two quarters?
Our Q1 and Q2 performance was pretty much in line. So if there is one thing which was not in line with what we had anticipated was that discretionary spend where customers initiating new projects reduced in the first two quarters. So that’s why you see revenue growth in the first half of the year for us.
However, with the highest booking we delivered in Q2, which is $4 billion, this is almost double that rate in the past. This is going to translate into strong revenue momentum in Q3 and Q4. So, the best way to look at the guidance is, this year how much are we going to grow in Q3 and Q4 and that’s going to be a very strong number. And that’s what will lead to overall 5- 6% growth for us for the year (overall) , which will be industry leading by a big margin when compared to us.
And what makes you confident about this revenue inflow over the next two quarters?
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I think first is the execution of the deals that we won in the last two quarters, if you see, $4 billion plus $1.6 billion in the prior quarter, total is about $6.6 billion. Even if you take an average of $2 billion per year, which is actually $4 billion, this is at least 50-60% higher than that. So from this booking, a lot of business will start translating into revenue in the third and fourth quarter.
So that is going to be the biggest contributor for growth. In addition, there is going to be a seasonality in the software business. The December month is when it really peaks, and so that will add handsomely to overall growth.
“We have seen services revenue growth at 1.5%. We have been able to deliver that with the existing headcount. We also did not have to backfill some of the attrition that happened because we had a lot of freshers who were underutilised and could easily redeploy them. So that is the main reason for cost efficiency this time.”
What cost efficiency measures were deployed and will they be sustainable to achieve the margin guidance of 18-19%?We have seen services revenue growth at 1.5%. We have been able to deliver that with the existing headcount. We also did not have to backfill some of the attrition that happened because we had a lot of freshers who were underutilised and could easily redeploy them. So that is the main reason for cost efficiency this time.
The second is we reduced a lot of third-party subcontracting work and got our own people to do the work. The travel was very high in April, May June quarter, so we moderated that and put some controls in place. And generally when we are talking to our customers on cost optimisation, so why would we not do cost optimization internally? So that was the thinking to run in a lean manner.
We currently have roughly 50% of the employees coming back to office and I think this can go up a little more by another 20%. That cost is built into our forecast.
“So our prescribed operating model is virtual plus hybrid and depending on the client’s requirements, we will mandate people to come to work either full time or three days a week, but our own corporate mandate is three days a week.”
Your peers want employees to come to office five days a week, what is your approach?
I don’t think that is required. We believe three days a week would be very good. We want to give some kind of flexibility to our employees. But at the same time, we want to engage with them to make sure they’re very well aligned to the organisational objectives. They get exposure to the leadership and do different things within the company in a more real way, rather than being just an online presence.
So our prescribed operating model is virtual plus hybrid and depending on the client’s requirements, we will mandate people to come to work either full time or three days a week, but our own corporate mandate is three days a week.
Your peers have announced buybacks this year, will HCLTech announce something?
Strategy has been to remain very consistent and dividends have been the preferred way of giving back to our shareholders. It can be given every quarter and it can be given in a very predictable and consistent manner. That’s the strategy that we are adopting.
“BFSI has grown over the last two quarters. It’s very different from the industry narrative, our BFSI continues to grow well on the back of some solid propositions around wealth management and hybrid cloud and including Gen AI propositions.”
Which verticals are you expecting to grow over the next two quarters?
While our growth is broad-based, obviously telecom will grow a lot more in the next 2-3 quarters. BFSI has grown over the last two quarters. It’s very different from the industry narrative, our BFSI continues to grow well on the back of some solid propositions around wealth management and hybrid cloud and including Gen AI propositions which we have been successful in solutioning for a couple of clients.
Of course, December can always have an impact due to furloughs announced by the clients but otherwise BFSI will continue to be a very strong area for us. It’s about selecting a few propositions. If you do a lot of traditional application support and development work, which is fine, but I think sometimes they will have a certain limitation and so being present in banks with a much wider set of services has helped us.
Do you expect more projects like Verizon in the pipeline, even if not of the same size but type of engagement? And so such projects bring in the price premium or margin benefit over traditional ones?
Our pipeline is at a little less than at all-time high. So, we have a number of large deals in the pipeline…but there are definitely a number of $100 million dollar deals and a number of $500 million dollar deals in the pipeline.
Can you give some color on this expected revenue push? You mentioned a focus on revenue quality as well- how do you define that?
I think first and foremost revenue has to be coming from the client segment which we consider the strategics, which are G-2000 (global 2000) companies, that is number one. Then, the revenue has to come from services which is where we are adding value. There are many areas where you can sell assets, software, use some data centre hosting, they are really not core services but really a pass through kind of services.
So I would not consider them as high quality. All our engagements are very, very high quality assets here and there but it is a very small percentage of our business maybe 1-2%. All our engagements are ofvery high quality with a small percentage coming from this non-core type.