HCLTech reports fastest Q2 growth in five years, calls AI revenue in a first

India’s third-largest IT services company reported revenue rising 2.8% sequentially to $3.64 billion; this beat the previous year’s estimate of $3.54 billion Bloomberg Survey in which 31 analysts participated. Its net profit also rose 8% sequentially in the quarter to $486 million.

The company became the first among India’s largest IT outsourcing companies to generate $100 million in revenue in the second quarter from advanced AI.

Before HCLTech, Accenture was the only major IT outsourcing provider generating revenue from AI. The world’s largest IT services company generated $2.7 billion in revenue from new technology; This accounts for roughly one-fifth of HCL’s total revenue in the last financial year.

Its growth trajectory, in particular, contrasts with larger peer Tata Consultancy Services Ltd, which reported weak second-quarter earnings last Friday despite making its biggest comeback by pledging to invest more than $6 billion in data centers over five to seven years.

The bulk of HCLTech’s growth in the second quarter came from banks and financial institutions, which accounted for a quarter of the $99 million in incremental revenue. In terms of geography, much of the company’s growing revenue has come from the Americas, which accounts for more than half of its business.

During HCLTech’s post-earnings media interaction on Monday, its top executive said the macro environment remains largely unchanged. “The overall demand environment is more or less similar to what we saw in the last quarter,” said C Vijayakumar, the company’s CEO.

“I think discretionary spending in some pockets has become almost mandatory,” he said, adding that much of the non-essential spending has been diverted to AI.

The AI ​​approach that HCLTech offers through its products and IP-focused platforms is similar to Accenture Plc and unlike TCS, which has gone the hardware route through data centres.

TCS also differed in its interpretation of the demand environment. “Ongoing uncertainties in the broader economic environment continue to be a significant challenge,” K. Krithivasan, the company’s chief executive and chief executive, said at the company’s post-earnings press conference on Oct. 9.

“Companies keep a tight grip on their discretionary budgets in response to economic and demand fluctuations,” Krithivasan said. he said. “Customers connect suppliers to achieve transformation goals effectively and efficiently.” TCS finished the previous quarter with revenue of $7.47 billion, up 0.6% sequentially.

HCLTech’s guidance

HCLTech’s moderate outlook on the demand environment is also reflected in its guidance. The company maintained its revenue expectation of 3-5% in constant currency for the full year. Fixed currency does not take into account currency fluctuations.

“We are increasing our full year services revenue forecast to 4-5% at constant currency from 3-5% at constant currency earlier. Given the softness in the software segment, we keep the company level forecast unchanged at 3-5% at constant currency,” said Vijayakumar.

At least one analyst echoed the company’s warning. “Revenue growth was better than our expectation,” said Amit Chandra, vice president at HDFC Securities. “The lower end of the growth in service revenues is good, but this does not mean optimism.”

Restructuring and layoffs

Management also shed light on the restructuring plan announced last quarter, which includes closing unnecessary facilities and laying off employees who cannot be redeployed.

“There will be some disruptions as you try to restructure, but that’s all managed through the orderly process that we go through,” Ram Sundararajan, the company’s chief people officer, said during the post-earnings call. he said.

However, the company increased its number of employees to 3,489 and completed the second quarter with 226,640 employees. This comes after TCS reduced its headcount by more than 19,000 in the same period. TCS announced on July 27 that it plans to cut 2% of its headcount, primarily in mid- and senior-level roles.

HCLTech, of course, was the only major IT services company other than TCS to call for workforce reduction last quarter and before that. At the company’s post-earnings press conference in July, management announced workforce reductions to meet the company’s operating margin target of up to 19%.

The company maintained its operating margin expectation for the full year at 17-18%, and its profitability increased by 110 basis points to 17.4% in the second quarter; management attributed this to the recovery plan announced last quarter. Margins also include restructuring costs of 55 basis points. A basis point is one hundredth of a percentage point.

No data center plan

In the post-earnings press conference, the company also rejected plans to enter the data center business as TCS did.

“From our perspective, we’re very focused on two broad elements in AI. One of them is, of course, building intellectual property,” said Vijayakumar. “Companies like Open AI and technology OEMs and hyperscalers are really investing and developing the intelligence layer. Now we see a tremendous opportunity to create IP to make that intelligence layer relevant and scalable for enterprises. That’s where we’re investing.” We’re doing it.”

He added that the second element includes the company’s physical and agency AI solutions.

His comment came after TCS announced its intention to set up AI data centers in the country in a bid to make itself the world’s largest AI-led technology services company. The company plans to invest more than $6 billion over the next five to seven years to build and operate a 1GW (gigawatt) capacity data center. Management attributed this move to creating additional revenue streams from Gen AI.

HCLTech’s shares remained flat ₹At the end of Monday market hours, it was 1,494.7. On the other hand, the 30-share BSE Sensex index closed at 82,327.05 points, down 0.2%. The company’s earnings were announced after market hours.