HCL Technologies held a conference call to discuss the second quarter financials for FY2009. Mr Vineet Nayar, President & CEO, amongst others addressed the call.
Highlights of the call
- HCL won 20 deals worth US$ 1 billion during the quarter out of which 3 deals are in excess of US$ 100 million each and 5 others in excess of US $ 50 million each. The age of deal is 3-5 years with one deal for 7 years. Any contract takes transition time of 3-6 months.
- The IT spent is down. The customers are converting their fixed costs to variable costs, consolidating vendors and asking for better value.
- There is pricing pressure seen by the Company. However, it is giving the value proposition.
- The EBT going forward will be impacted by 200bps on Axon amortization and 300bps on higher interest cost. However, OPM would remain at similar levels no reason for fall.
- Axon plc added revenues of US$ 17.8 million for the quarter under review and has booking of US$ 95 million for Q3FY09. Axon transaction was completed on December 15, 2008 and the integration would be done by Q2CY09. The total payment for Axon was US$ 678 million plus expenses of US$ 10 million totaling to US$ 688 million. Of the amount US$ 550 million would be Goodwill, US$ 122 million as intangible assets and US$ 16 million tangible assets. The funding of the amount is US$ 103 million as equity and US$ 585 million debt at cost of 4.14% excluding hedging. The Company is bidding for about 100 deals worth US$ 1.2 billion of which 4 have been won. Offshoring of services has not started.
- The BPO acquisitions: Liberata Financial Services contributed US$ 15.9 million and Control Point Solutions contributed US$ 6.6 million.
- For the quarter ended December 2008, consolidated operating revenues grew 5% at Rs 2490.80 crore, largely driven by 11.1% rupee depreciation, cross currency headwinds impacted 6.6%. The revenue growth was aided by 2.8% volume growth, 7.2% on acquisitions, hedging gains of 0.2% whereas cross currency headwinds impacted at 6.6%, lower number of working days impacted 1.8% and volume dip in BPO from one client impacted 0.4%.
- For the quarter, IMS grew by 7% in US dollar terms of which volume growth was 12.8% with cross currency impact of 7.7%.
- On constant currency, Core IT services grew 3.6%: IMS grew 14.8% and IT services 5.6%.
- On constant currency realizations for onsite was down 1.2% and for offshore was up 1.5%.
- Blended operating margins improved 10bps at 22.5%. Productivity gains were 114 bps and exchange movements benefited 129bps whereas less number of working days impacted 144bps and lower margins of acquisitions impacted 93bps.
- IT services margins were impacted by amortization of US$ 1.4 million, interest cost of US$ 0.3 million and forex loss of US$ 9.1 million.
- HCL has forward contracts of US$ 1.58 billion as against US$ 1.9 billion in the sequential quarter. Of this, hedges to the tune of US$ 1.3 billion follow cash flow hedging and US$ 85 million follow MTM accounting. The Company has converted hedges of US$ 48.5 million into MTM hedges. The Other Comprehensive Income was at 207.5 million up from US$ 156 million at the end of sequential quarter.
- Of the forex loss of US$ 29.1 million for the quarter, US$ 9.5 million pertains to forex loss on payment for Axon.
- The effective tax rate for the quarter was up 450bps at 15.5% on the back of higher treasury income. The Company converted Mutual Fund investments into Fixed Deposits. For FY09, the tax rate would be 15%, FY10 15-16% and FY11 the peak rate would be 28% and depending on operations and SEZ contribution the tax rate would come down.
- Accounts Receivables stood at US$ 545.1 million of which 79% are for less than 60 days, 11% 61-90 days and 10% more than 90 days.
- Capex for FY09 would be US$ 125 million of which for H1FY09 it was US$ 64 million.
- HCL added 243 (net) employees during the quarter taking the employee strength to 52957 as on December 31, 2008 excluding 2000 employees of Axon plc. For the quarter, HCL added 263 (gross) and reduced 34 (net) employees in the Core Software business, added 941 (gross) and 691 (net) in Infrastructure Services and added 1731 (gross) and reduced 414 (net) employees in BPO. The total head count is 52957 employees with 31237 in core software, 8970 in Infrastructure services and 12750 in BPO. The attrition (LTM) was 13.4% (14.2% in the sequential quarter) for Core Software, 13.4% (14.3% in the sequential quarter) for IMS and 12.7% (16% in sequential quarter) on quarterly basis for BPO.
- The Company is resorting to just-in-time recruiting. Going forward, as deals start maturing the hiring would begin.
- Revenue break-up geographically in US$ terms, US grew 5.7% contributing 59.8% (57.3% in sequential quarter), Europe dipped 4.4% contributing 27.1% (28.7% sequential quarter) and Asia Pacific dipped 4.7% at 13.1% (13.9% sequential quarter). The currency billing is in line with the mix with Europe mix between Euro and GBP of 50:50.
- Revenue break-up as per service offerings in Core Software services in US$ terms: Enterprise Application Services grew 16.2% sequentially at 12.5% (10.9% sequential quarter) of total revenues with Axon contributing US$ 17.8 million and dip in non-Axon business, Engineering & R&D Services dipped 1% at 25.7% (26.3% sequential quarter) and Industry Solutions dipped 6.9% to 32.9% (35.8% sequential quarter) of total revenues.
- In constant currency terms, Enterprise Application Services grew 20.4% sequentially with Axon contributing US$ 17.8 million and dip in non-Axon business, Engineering & R&D Services grew 0.1%, Industry Solutions grew 1.1%, IMS grew 14.8% and BPO grew 27.5% benefited by the 2 acquisitions by US$ 22.5 million.
- Revenue break up as per industry verticals in US$ terms: BFSI increased 1.3% contributing 27.5% (27.5% in sequential quarter), Hitech & Manufacturing grew 0.7% contributing 30.5% (30.7% in sequential quarter), Telecom de-grew 3.6% contributing 15.7% (16.5% in sequential quarter), Retail dipped 4.8% contributing 7.7% (8.2% in sequential quarter), Media & Entertainment de-grew 0.5% contributing 5.5% (5.6% in sequential quarter) and Life Sciences de-grew 0.4% contributing 5.8% (5.9% in sequential quarter).
- Revenue break up as per industry verticals in US$ terms: BFSI increased 13.1%, Hi-tech & Manufacturing grew 1.4%, Telecom grew 7.6%, Retail grew 4.4%, Media & Entertainment grew 2.4% and Life Sciences grew 2.5% and others grew 37.8%.
- Repeat business accounted for 90.9% of the revenues as against 92.9% in sequential quarter. The debtor days have increased to 82 days from 80 days in the sequential quarter and 72 days in the corresponding previous quarter.
- HCL added 26 new clients during the quarter taking the total active clients to 315 clients. Offshore revenue contribution increased 150bps at 53.5% and in terms of efforts offshore increased 40bps at 75.3%. Number of million dollar clients for the quarter stood at 218 against 205 in the sequential quarter. US$ 5 million + customers stood at 68 (68 in sequential quarter), US$ 10 million + customers increased to 39 from 36 in the sequential quarter and US$ 20 million + customers increased to 19 against 17 and US$ 50 million + clients increased to 4 from 3 in the sequential quarter and US$ 100 million + clients remained unchanged at 2.
- HCL saw marginal decrease in percentage of contribution of Top 5 and 10 clients (in US$ terms). Top 5 clients contribution was down 1.8% in absolute terms contributing 25.3% (26.1% in sequential quarter), top 6-10 clients dipped 5.4% at 9.8% (10.5% in sequential quarter) and top 11-20 clients increased 6.3% to 12.8% (12.2% in sequential quarter).
- For Control Point Solutions and Liberata Financials, the Company has not won any new deals, nor have they lost any clients nor have they done any offshoring.
- Treasury income was US$ 24.8 million against US$ 11.9 million in sequential quarter. Treasury Investments stood at US$ 270.1 million against US$ 490.6 million at the end of sequential quarter.
- Cash & Cash Equivalents stood at US$ 691.1 million (Rs 2026.5 crore) and debt of US$ 636.2 million (Rs 3098.3 crore) for Axon acquisition.
- ESOP charge for Q2FY09 was US$ 3.8.
- Utilization for the quarter improved 10bps at 74.5% (including trainees), up 30bps at 75% excluding trainees and up 90bps at 97.4% for onsite.
- The Company has firmed the life of Independent Director at 9 years and age of retirement of Director at 75 years.