HCL Technologies Ltd (HCLTECH) Q2FY27 Concall Transcript - Sep-2026 Qtr
Moderator: Ladies and gentlemen, good day, and welcome to HCLTech's Q2 FY '27 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 then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Mohta, Head Investor Relations. Thank you, and over to you, sir.
Nitin Mohta (HCL Technologies Ltd): Thank you, Dorwin. Good morning and good evening, everyone. A very warm welcome to HCLTech's Quarter 2 FY '27 earnings conference call. We have with us Mr. C. Vijayakumar, CEO and Managing Director, 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&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 statement 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 a difference. Over to you, CVK.
C. Vijayakumar (HCL Technologies Ltd): Thank you, Nitin. Good day, everyone. Thank you for joining us for HCLTech's Q2 FY '27 earnings call. We delivered a solid quarter, and I would like to begin with the key headlines of the quarter. First, our advanced AI services continues to scale rapidly and is becoming a key growth driver for HCLTech. Number two, new bookings were the second highest in our history and the strongest first half of any financial year. Number three, margins expanded significantly through disciplined execution and higher margin advanced AI revenue. Before I go through the numbers, please note that all growth rates that I mentioned are in constant
C. Vijayakumar (HCL Technologies Ltd): except for bookings and ARR. Our Services business, which is more than 90% of our business, delivered a strong performance. Services grew 3% sequentially and 4% year-on-year, with organic growth of 2.3% sequentially. IT and Business Services grew 2.7% sequentially and 4.4% year-on-year, while Engineering and R&D Services grew 4.1% sequentially and 2.1% year-on-year. Growth was broad-based across verticals and geographies, reflecting how closely our portfolio is aligned with what clients, with what the clients are prioritizing today, be it AI, Cloud, Data, Cybersecurity, or Application Modernization. Advanced AI revenue reached $219 million this quarter, up 28.4% sequentially and 78% year-on-year. And the annualized advanced AI revenues are now $700-$876 million. This quarter's performance validates our strategy and advances our ambition to become the leading AI solutions company for the global enterprises. You can also see that we are able to offset AI-driven deflation by gaining market share in our core services and through our advanced AI offerings, which is helping us capture a share of the rapidly expanding AI spend across the technology ecosystem. This is the growth template we aim to consistently replicate going forward. Overall rev- revenue grew 2.3% sequentially and 2.6% year-on-year. Software revenue declined 5.8% sequentially and 11.2% year-on-year, and this weighed on our overall growth. HCLSoftware's ARR stood at $1.132 billion, sorry, $1.134 billion, up 7.6% year-on-year, which is the best measure of the health of this business and it is growing. A little later, Shiv will share more details on the factors driving the Software performance this quarter. Our EBIT margin was 18.2%, an improvement of 131 basis points sequentially and 71 basis points year-on-year, and it came ahead of our expectations. This expansion by was driven by higher margins in advanced AI and gains from AI across our operations. We achieved this while continuing to invest in AI capabilities, IP, and talent. Let me now turn to bookings. New deal bookings reached $3.3 billion, up 27% year-on-year and 35% sequentially. This is the second-highest bookings quarter we have ever recorded and gives us a strong start to FY '26. Clients are working with us on more strategic programs and are choosing us to shape their technology agenda. AI was a central theme in every large deal we won. I will discuss them when I go through the pillars of our AI strategy. Our people count stood at 230,339 as of the end of last quarter, a net increase of 6,450 sequentially. Attrition was 12.8% on LTM basis. Revenue per employee improved 2.4% year-on-year, a clear sign that our AI strategy is improving productivity across the business. I would also like to touch upon another topic. Over the last many years, we've ramped up our in-country recruiting efforts to build a significant local talent base. This is part of our talent strategy and we will continue with this. In the last couple of years, the number of PERM applications we have filed is a very small number. Hence, we do not expect the US Department of Labor decision to suspend the PERM program to have any material impact on our talent plans or client engagements. Turning to our AI strategy, we continue to execute against the five pillars of our AI strategy, and this quarter, we saw them contribute as one integrated growth model. Pillar one is proactively transforming our services where we are systematically embedding AI across our delivery model. And as AI adoption expands from targeted deployments to enterprisewide transformation across in-
C. Vijayakumar (HCL Technologies Ltd): and modernization, we're seeing three clear benefits. First, AI is improving productivity, quality and client outcomes. For example, for a leading private bank's complex core banking migration, we built an agentic AI solution that converts functional specifications into validated review ready code for the target platform in about 10 10 minutes per routine, with engineers approving every output. It averaged 87% accuracy for an estimated 9x productivity gain. Second, it is deepening client relationships and driving larger engagements. Guardian Life Insurance selected us to accelerate its AI driven technology transformation and deliver seamless customer experience. In this multi-year partnership, Guardian will use HCLTech's AI Force, our service transformation platform, to drive innovation across the enterprise. The third benefit we are seeing is AI led transformation is now a key enabler of almost all our large wins. For example, a leading global industry technology company selected us to modernize its mobile application ecosystem. Using AI Force and through a smart migration factory, we will deliver AI led assessment, disposition, conversion, upgrade and testing. This platform as a service outcome-based model is expected to enable rapid and largely touchless modernization and support the transformation of 7,500 plus applications. Pillar two is building differentiated AI IP. As AI becomes universal, we believe differentiation will come not from models and compute, but from platforms, agents and engineering IP that let enterprises deploy AI securely, responsibly and at scale. We have matured AI Force into a platform supporting software engineering, legacy and product modernization, data engineering, COTS migration, business operations and IT operations. We released a new version this quarter, and AI Force Agent Store now offers 900+ plus agents, enabling reuse of proven capabilities and greater autonomy across enterprise workflows. Legacy and product modernization is emerging as an important growth vector. By combining AI Force with our engineering expertise, we apply AI across code analysis, documentation, remediation, testing, migration and support, lowering the cost, risk and time these programs have traditionally required. This opens a substantial pool of client spending with adjacent opportunities in cloud, data and operations. Our IP is also gaining recognition. HCL DevOps Loop from HCL Software, powered by AI Force, was named a visionary in the 2026 Gartner Magic Quadrant for DevSecOps platforms. We've built more than 20 industry AI solutions, moving us from horizontal capabilities to industry-specific processes and outcomes. And in physical AI, VisionX 3.0 introduced a fully agentic architecture with new releases for oil and gas and mobility industries. Finally, in our software business, we announced our intent to acquire robotiq.ai, a Croatia-based enterprise RPA platform provider, to strengthen orchestration across AI agents and enterprise applications in HCL Clara. Pillar three is expanding our AI services. This is an important growth engine and a strong area of momentum. The opportunity spans the full enterprise AI lifecycle: defining strategy and governance, building compute foundations, our software IP, and deploying and operating agentic AI, physical AI and industry solutions. Our agentic AI offerings has crossed $100 million per quarter this quarter. Clients increasingly want a partner that can integrate infrastructure, data, models, applications and operations. Our AI Factory proposition answers that need and enables HCLTech to participate across the AI value chain, from compute infrastructure through to applications and business outcomes. Working closely with Nvidia's AI Factory specialists, our AI Factory specialists were among the first and had built, validated and benchmarked 20
C. Vijayakumar (HCL Technologies Ltd): GB200 NVL72 systems end-to-end. Our AI factory proposition grew 64% Q-on-Q and is a meaningful growth driver. An AI research company based in the US selected HCLTech as a strategic partner for a large AI factory program. The company is focused on radically improving AI data efficiency and making AI models mirror human cognition. HCLTech will leverage its expertise in networking, cybersecurity, HPC infrastructure and AI software AI platform software to integrate and operationalize a production-ready AI factory. This win reflects an emerging category in which clients want a single partner to integrate, operationalize and ultimately manage highly complex AI environments. A US-based neo-cloud provider selected HCLTech to build and scale its AI-native architecture and infrastructure capabilities that enable hyperscalers and enterprises to unlock the full potential of AI at scale. A Europe-based financial services provider selected HCLTech to deploy an agentic solution to provide commercial relationship managers with real-time portfolio insights and proactive covenant monitoring, increasing capacity, reducing manual effort, strengthening risk management and unlocking new cross-sell opportunities to support up to 2x revenue growth. A US-based healthcare provider selected HCLTech to deploy ChatGPT Enterprise and establish a governed AI operating model that enables secure integration of AI capabilities across enterprise applications, delivering context-aware experiences that enhance employee productivity while maintaining enterprise-grade security, risk management and compliance. A US-based global power technology company selected HCLTech to build an AI-powered digital thread that combines agentic AI and intelligent orchestration to connect engineering, manufacturing, supply chain and service operations, enabling faster decision-making, accelerated time to market and enterprise-wide AI transformation. There are several other deals in the investor release. Physical AI continues to deliver encouraging revenue growth across robotics, IoT and Edge AI, building our engineering and building on our engineering and operational technology heritage. We are also continuing to find strong traction with our semiconductor propositions. A global semiconductor leader picked us to run a turnkey silicon development program from design through delivery for high-performance compute workloads aimed at the AI market. AI Advisory is gaining traction. This enables us to help our clients at the start of the AI journey and then extend into helping clients transform their operating model and change management for an AI-native world. For example, this is playing a key role in the large deal that we won with a global retailer and is currently under execution. In sovereign AI, demand is shaped by data residency, regulations, security and national capability. In India, we announced our plans for our first AI data center in Bhubaneswar in partnership with Sarvam and Government of Odisha. It marks a significant step in building the infrastructure layer of our full-stack AI strategy. Our fourth pillar is scaling strategic partnerships, combining leading technology innovation with our engineering depth, industry expertise, IP and global delivery. This quarter we achieved OpenAI Advanced Partner status and joined its Cyber Defense Initiative, jointly developed AI factory deployment and validation capabilities with NVIDIA, announced a family of Gemini enterprise offerings and a joint transformation program with Google Cloud, and are scaling Enterprise AI with ServiceNow, and signed a partnership with Cohere focused on Canada and Germany. Today, we announce a global premier partnership with Anthropic to accelerate enterprise adoption of agentic AI with a focus on safety, cybersecurity and governance. We will establish a dedicated Anthropic business unit and a Center of Excellence to accelerate deployments of Claude in enterprise environments.
C. Vijayakumar (HCL Technologies Ltd): become an Anthropic ISV partner, embedding Claude and Claude Code into select enterprise products with frontier safety guardrails. We are utilizing all our ecosystem relationships to develop engineering capabilities and new offerings that create new sources of growth. The fifth pillar of our strategy is developing talent at scale, AI talent at scale. This pillar enables the other four. We believe leadership in AI will depend on combining AI skills with deep engineering, solutioning, and industry expertise. We continue to enable our employees to become AI builders, AI super users, and AI operators. We are scaling a differentiated forward deployed engineer capability that combines deep AI engineering with customer discovery, solution architecture, and rapid prototyping, taking opportunities from use case to production. We are developing a centralized FDE Academy with tracks aligned to OpenAI, Anthropic, AWS, Google, and NVIDIA. We're also investing in the next wave through an applied research program with MIT focused on safety and agentic systems, and working with Microsoft to build a frontier transformation engineer program that further strengthens specialized talent aligned to strategic ecosystem platforms. Our focus now is to leverage these five pillars to create long-term growth through deeper adoption and emerging accounts, new relationships through advanced AI, and participation in large transformation programs. Beyond these five pillars, we make several other moves this quarter that will support our future growth. We launched HCLTech Pulse, a dedicated business unit for fast-growing enterprises with an annual revenue of $500 million to $5 billion, a segment we believe is underserved. It brings together our AI competencies to help these clients modernize and unlock value faster. We completed the acquisition of HPE's Telco Solutions Group, adding differentiated IP across OSS and 5G subscriber data management. We also expanded our India footprint alongside our AI data center in Bhubaneswar. We announced a Global Technology Center there to deliver AI solutions for global enterprises. We opened a new Global Technology Center in GIFT City, Gujarat, focused on financial services clients. And we launched our advanced semiconductor lab in Bengaluru with an investment of 185 crores, providing post-silicon engineering, testing, validation, and failure analysis aligned with a spec-to-part business. Each of these will contribute to our future growth. Now, coming to the pipeline and the demand environment and outlook, our pipeline remains strong and is quite balanced across service lines, verticals, and geographies. We saw healthy demand towards the end of the quarter. However, we know that the environment has been fluid and very dynamic, and the demand is influenced by various factors, so we remain cautious. As we see today, clients are prioritizing AI, data, and operating model transformation whenever there is a clear case for efficiency, innovation, and business resilience. We have strong propositions to address these. As we look ahead, we are optimistic, driven by record first-half bookings, strong demand for our advanced AI propositions, improved margin performance, and our full-stack AI offering that is being built incrementally. We will continue to invest the gains out of our operational efficiency to expand our AI advantage by investing in capabilities, IP, and AI talent. Our FY '27 growth guidance is now 2.5% to 4%, and the EBIT margin guidance remains at 17.5% to 18.5%. Services revenue growth guidance is 3% to 4%. Our revenue guidance includes impact of our acquisitions, and Shiv will provide you more details. Our confidence in this guidance rests on our strength of booking, our healthy pipeline, and sustained momentum in AI-led services. With that, I would now request Shiv to take us through the detail numbers.
Shiv Walia (HCL Technologies Ltd): Thank you, CVK. Good morning, good afternoon, and good evening to all of you. Thank you for joining our Q2 FY '27 earnings call.
Shiv Walia (HCL Technologies Ltd): you through our financial performance for the quarter. Starting with the revenue performance, please note that all growth numbers quoted are in constant currency unless noted otherwise. Total revenue for the quarter is $3,724 million, a growth of 2.3% quarter-on-quarter and 2.6% year-on-year. Services revenue for the quarter came in at $3,442 million, a growth of 3% quarter-on-quarter and 4% year-on-year. Our ITBS services grew by 2.7% quarter-on-quarter and 4.4% year-on-year. The ERS segment grew by 4.1% quarter-on-quarter and 2.1% year-on-year. HCL Software revenue for the quarter is $294 million, representing decline of 5.8% quarter-on-quarter and 11.2% year-on-year. Let me provide some additional context on HCL Software revenue performance this quarter. At the beginning of financial year '27, we had anticipated a softer performance in this in this software business. I want to explain the reasons behind behind it. This year and particularly in Q2, we had lesser multi-year licenses that were due for renew- renewal compared to last year. The same is visible in the additional disclosure in the Investor Release this quarter. You would notice that the revenue recognized from multi-year subscription license has gone down from 81 million in Q2 of FY '26 to 39 million in Q2 FY '27. As you would know, the revenue recognition for an on-premise term license varies based on the term of the licenses. Typically upfront revenue recognition is around 80% for a one-year license and as much as 60% to 70% of the entire term for a two to three-years license, with the balance recognized over the contract term. The reported revenue declined does not accurately reflect the underlying health of the software business. The same is evident in the healthy ARR growth that we have witnessed even in this quarter. Now let me break out the inorganic revenue contribution in the quarter. HPE telco solutions were consolidated for 2 months in Q2 and contributed approximately 21 million in revenue, helping Services sequential growth by 62 basis points. Justsoft was consolidated for the full quarter giving us approximately 15 million. Total inorganic contribution in the quarter stands at $35.6 million which aided sequential growth revenue growth by 97 basis points. In terms of geographies, during the quarter the USA grew 3.5% year-on-year, Europe declined by 0. 3%, rest of world grew 11.4%, and India grew 21.8%. Moving on to vertical's performance. Our Q2 growth was broad-based with five out of seven verticals registering year-on-year growth. Growth was led by retail and CPG and financial services, which grew 14% and 7.1% year-on-year respectively. In terms of clients, our continued focus on deepening customer relationship has helped us expand the numbers of large client relationships. On a year-on-year basis, we added 1 client in the USD 100 million+ category, 8 clients in the USD 50 million+ category, 10 clients in the do $20 million+ category and 33 clients in the $10 million+ category. Let me now share the details on the profitability. Our EBIT is at $377 million representing 18.2% of revenue. Adjusting for restructuring expenses of 84 basis points during the quarter, our Q2 EBIT margin was 19% compared with 17.5% in the previous quarter. Net income for the quarter is $538 million, represented representing 14.4% of revenue. In terms of EBIT margin walk, there is a sequential improvement of 131 basis points in
Shiv Walia (HCL Technologies Ltd): in Q2. The margin bridge explaining the same is as follows. Project Ascent including AI driven efficiencies gave us 73 basis point. Superior margin of services offering under our advanced AI revenue gave us 32 basis point. Operating leverage at SG&A level due to growth acceleration gave us 50 basis point and forex gave us 23 basis point. On the headwinds, there was 22 basis point impact on account of higher restructuring costs in this quarter compared to previous quarter and 25 basis point impact due to HP Telco Solutions acquisition. Moving on to Return on Invested Capital, ROIC, our ROIC continues to remain strong, supported by our ongoing focus on profitability and efficient capital management. The last 12 months ROIC is at 41.2% for the company, up 261 basis point year-on-year. Services ROIC is at 49.4%, up 411 basis point year-on-year. HCLSoftware ROIC is at 19.2%, down 264 basis point year-on-year. In terms of cash generation, over the last 12 months, free cash flow is at $1.78 billion, representing operating cash flow at whereas whereas operating cash flow is at $1.96 billion. Operating cash flow to net income conversion is 95%, while free cash flow to net income conversion is at 87% for the last 12 months. Our balance sheet remains strong with gross cash at $2.66 billion and net cash at $2.56 billion as on 30th September 2026. Total DSO, including unbilled receivables is at 84 days, representing a decrease of 2 days quarter-on-quarter. And now for our shareholders, normalized diluted EPS for the last 12 months came in at ₹70.22, representing growth of 5% quarter-on-quarter and 12.2% year-on-year. Including the one-time impact of new labor codes, diluted EPS was 67.56. The Board has declared an interim dividend of ₹12 per share for the quarter. The record date is October 16, 2026 and the payment date shall be October 26, 2026. This brings our last 12 months pay-out to ₹60 per share, effectively distributing 88.6% of our net income. Now on an update on our guidance, FY '27 guidance. For FY '27, constant currency revenue growth is expected to be between 3% to 4% for the Services business, and at the company level, the revenue growth is expected to be between 2.5% to 4%. The full-year revenue growth guidance now includes inorganic contribution of 62 basis point for Services and 87 basis point for the company. This implies that midpoint of our organic growth guidance both at Services and company-level company level is broadly unchanged. EBIT margin is expected to be between 17.5 and 18.5 for FY '27. That is all from my side for now. And I would now like to hand over to this session to our moderator for a Q&A session. Thank you.
Moderator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove 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 with Motilal Oswal. Please go ahead.
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