HCL Q1 FY25 Performance: Revenue Surge and AI Momentum

HCL Technologies (HCL) has commenced FY25 on a high note, outperforming in a seasonally weak quarter. The company demonstrated resilience and strategic agility, achieving notable results across several key metrics. As HCL navigates the complexities of the global IT services landscape, its Q1 performance signals robust growth potential fuelled by innovation and operational excellence.

Revenue Review, Order Flow, and Deals

 In Q1 FY25, HCL posted USD revenue of $3.36 billion, reflecting a -1.6% QoQ decline but a solid 5.6% YoY growth in constant currency (CC) terms. This performance surpassed the industry estimates and aligned with market expectations. The company's HCL Software segment was influential, achieving 0.4% QoQ and 3.5% YoY CC growth, with annual recurring revenue (ARR) exceeding $1 billion. HCL Management had predicted a soft Q1, but the results exceeded those expectations. Net new bookings for Q1 FY25 were $1.96 billion, at the lower end of the $2-2.5 billion guidance range. Despite this, the company secured small and large deals, including significant wins in the Gen AI space. HCL's strong operational execution and strategic focus on AI and digital transformation position it well to capitalize on future growth opportunities.

Margin Performance and Cost Management

HCL reported an EBIT margin of 17.1% for Q1 FY25, slightly below but in line with market expectations. Due to seasonal revenue weakness, the sequential margin drop had an impact due to a decline in service margins, particularly in ER&D services. However, with stable cost structures, there is an anticipated margin recovery from Q2 onwards as revenues increase. Key verticals demonstrated mixed performance, with Telecom, Media, Publishing, and Entertainment sectors showing robust 69.2% YoY growth in CC terms. Retail grew by 9.7%, while manufacturing and technology services saw some gains. Conversely, healthcare and BFSI experienced declines, though growth is anticipated in these sectors from Q2 and Q3 onwards, respectively.

Generative AI and Innovation Initiatives

HCL is making a significant push into AI with the launch of AI Force and the HCLTech Enterprise AI Foundry. These initiatives aim to improve efficiencies in various domains, with expected 10-30% productivity gains, particularly in areas like ADM through GitHub Copilot. The company has set a goal to train 50,000 employees in AI skills by the end of FY25, and as of Q1, 33% of this target has been achieved.

Talent Management and Strategic Outlook

HCL's strategic talent management saw a net reduction of 8,080 employees, primarily due to the State Street divestiture. Despite this, the company hired 1,100 freshers in Q1 and plans to onboard 10,000 by the end of FY25. HCL has maintained its FY25 guidance for organic USD growth at 3-5% YoY in CC terms and EBIT margin guidance at 18-19%. This guidance does not include the pending CTG acquisition, which is expected to close within 6-9 months. Higher 'other income' from the State Street divestiture also increased PAT margins, which will remain strong into Q2 FY25.

Conclusion

In conclusion, HCL Technologies has started FY25 with a performance that exceeds expectations, demonstrating its strategic foresight and market adaptability. The company's robust Q1 results, marked by solid revenue growth and resilient margins, reflect its ability to navigate seasonal weaknesses and leverage innovation for sustained growth. With a solid deal pipeline, strategic AI initiatives, and effective cost management, HCL is well-positioned to meet its FY25 targets. As the company adapts to evolving client demands and prioritizes high-ROI projects, it stands poised for continued success in the dynamic IT services landscape.