HCL Technologies Ltd

NSE:HCLTECH

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the HCL Technologies Limited Q1 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. C. VijayaKumar, President and CEO, HCL Technologies Limited. Thank you, and over to you, sir.

[C. VijayaKumar, President & CEO]

Thank you. Good evening, and good morning to all of you. Welcome to the commentary on our first quarter performance for fiscal FY '19.Overall, our performance continues to be very consistent. On the last 12-month basis, we've crossed the revenue milestone of $8 billion, continued to deliver consistent margins, and in line with our desired margin range, which is what we have guided mostly in the beginning of the year.Our overall strategy around Mode 1-2-3 continues to work very really well. We are monitoring all of the dimensions of our strategy, and every dimension is delivering in line with our expectations or even better.And what is most striking is that the revenue per employee is the highest among our peers and even among the global competitors. It is among the top 3 for revenue per employee. Our EBIT per employee is also the highest, better than some of the largest consulting companies in the world.So all of fits with very good trend that we have been tracking, and we are very confident of executing to this.Now I will comment you the highlights about the quarter. Financial performance in Q1 FY '19 has been largely in line with what we had in our plan. We also had the highest ever booking this quarter, led by next-gen infrastructure services and are related to our Mode 2 services, primarily driven around Cloud Native and our digital offerings. This highest ever booking is significantly higher than the bookings plus the basis [indiscernible] quarter when we also mentioned that it was the highest ever booking quarter.There were 27 transformational deals, including the large strategic programs like Nokia. And the booking number and the number of deals excludes renewals, all of these are additional business from existing customers or are next new normals.One of the largest programs, greater than $0.5 billion in CPG that we won this quarter, was from Nokia networks. Here, the biggest ongoing theme was our next-gen infrastructure capability, which is mainly driven around modernizing the legacy IP [ application ]. And consolidating applications, rationalizing applications and reducing the footprint, that was the big [ win theme ]. And these will -- through this program, we are consolidating from -- at least to 4 significant service providers, consolidating all of the infrastructure and application services under our [ hold ].The bookings was also much significantly broad-based. Telecom, a couple of group deals, including Nokia. Financial Services [ 4 deals ] with large gains, which is also generating strong momentum. Retail, CPG and Utilities were other segments that just delivered significant momentum in terms of the size of the deals and the value of the deals.Our client partner program continues to deliver a good benefit. Our client parameters improved. Our $100 million client has gone up by 1 in the technology segment. Our $50 million-plus clients have gone up by 4 this quarter. So as we continue to cross-sell and up-sell in our existing clients to deliver the better client metrics.India SI business, we continue to go down the path of reducing our exposure there, and we have as per plan. As indicated this quarter, there was a $12 million reduction in our India SI business, which has now come down to past 2 [indiscernible] of our revenues.We also successfully integrated the C3i acquisition, which started early in the last quarter. And we're also happy to report that quarter's performance of C3i was in line with what we expected.As you have known, we announced a new acquisition, H&D International in Germany. We have been highlighting that geography expansion is one of our inorganic strategies, in addition to IP and digital or Mode 2. So this really can get a good intensive presence in Germany, and we'll also [ temper ] in the automotive sector, where there is some disruptive infrastructure transformation programs to enable autonomous vehicles and things like that are the prime drivers of the [indiscernible] acquisition.Moving to the next slide. We're very happy to share more details about all we are doing in our Mode 1-2-3 performance metrics. We were the first to the industry to share the share of revenue across Mode 1,2 and 3. And at this point, our Mode 2 and 3 revenues stand at 26.6% of our total revenues.This quarter, as we had committed earlier, we are sharing an additional information, which is really giving you the EBIT percentage by Mode 1,2 and 3. As you can see, our Mode 1 margins continue to remain stable around the company's margin levels, 20% -- approximately 20% of where we are driving and continuing to deliver on our Mode 1 business.Mode 2, while we continue to do very well, it has grown 8.2% quarter-on-quarter, but the margins of Mode 1 are below our company average and this is primarily driven by significant investment in talent and capability building through organic means in the last 2 years. We have built several innovation labs across the world, for digital, analytics, IoT WoRKS, Cloud Native. We have invested significantly in the Pivotal CloudFoundry partnership. So some of these investments are very deliberate. And some of the initial projects that we picked up, large and digital transformation projects, as a strategy, we are continuing to overinvest in those programs so that we can really deliver a very high revenue of business outcomes for the client, which will help us to deliver extremely good showcases which has all become the foundation of a number of skills as the skilled digital programs, which Anil will talk about a little bit later.We've also seen a significant resurgence in the next-gen infrastructure services. I once alluded to the fact that in H1, we will definitely see a revival, primarily from the -- from the general trends that we were seeing on some of the -- some of those divisions were getting delayed last year. But I think now we are -- we feel a lot more confident about the resurgence in the next-gen infrastructure services. Largely riding on the wave of software designed stacks -- the hybrid cloud, a significant traction in digital workplace and significant transformation opportunities in network and cybersecurity which is also now classified under infrastructure services.And on the Digital and Analytics front and Cloud Native Services, customers are primarily looking for transformational service providers, primarily large spenders in financial services and nonfinancial services, typically in the Fortune 100, 200, category, very large spenders who have multiple vendors in their ecosystem, are really looking at consolidating their growth with 2 providers with primary focus in the evaluation to see who has the right digital capability. And the digital capabilities, I would say there are 2 dimensions, but they are looking at not only the skill and the talent but they're also looking at the whole culture and the operating model. And I think -- and with a lot more onshore and nearshore capability, and the presence that we have, I think we are positioned extremely well to win large-scale digital transformation programs.Cloud adoption is continuing, and I would -- I mean, at this point, I think I would say customers cloud adoption is more to drive more innovation in that business model than costs out. The primary driver is innovation and it is not the costs out. I think a lot of large business -- large corporations with CIOs are recognizing that a public cloud is not going to deliver cost savings, but the reason why they're adopting is quite different, that it is all around innovation and some agility and flexibility that they want.The Mode 3 business is 11% of our revenues. The margins are 25.2% at an EBIT level, significantly higher than our company-level margins. All the IT partnerships are performing as per plan or better. Darren will share more metrics. This time, we are sharing how various products have performed and have taken 3 examples and Darren will run you through that.This Mode 2 -- Mode 3 has IP partnerships, which -- where we have invested, and it also has a good amount of organic IP. And the organic IP largely surrounds DryICE, which is our autonomics platform, which we built over the last almost 10 years, which we've deployed extensively in our infrastructure business, adding our application support and maintenance business. That's been -- that's one component of DryICE, which is being now taken to market as an independent product offering, driven by a separate sales organization.It also -- some of the IP which we had in our application services like a couple of quarters back, they announced that our higher model solution now is a part of SAP's product catalog, which is being made available to the entire client base of SAP, and we see that as a good growth opportunity.We also have some of the telecom products that we've invested in, in our engineering and R&D services. They're also contributing to the overall Mode 3.So when we did an analysis of our Mode 3 portfolio, there are 2 themes which are emerging. One is, a set of -- you can actually classify Mode 3 products into a Mode 1 or a Mode 2. Like some of them are enabling Mode 1, which are products which are probably either mid-to-late life cycle in their whole life cycle. And the second set of products are new. The products are an automation of AI, a lot of things that we built in DryICE as well as some of the IP partnerships which we entered into.So this business is -- there are 2 categories. And at this point, the split of the first and the second is 60% and 40%. So 40% -- 60% is in the mature product lines, which could be stable, declining or some of them are growing at single-digit levels. About 40% of the portfolio in Mode 3 now is all in the new areas and given the right sales focus, go-to-market focus, it isn't going to yield significant growth. I'm very confident of our -- 40% of our Mode 3 portfolio is delivering the double-digit growth.But one word of caution, while IP revenues contributed to 11% of our revenues, then EBIT stands out at 25.2%, the 2 IP revenues are cyclical, they're very, very similar to what the software product companies have seen. And the cyclicality, I'm sure all of you know, I mean, there is generally a higher momentum in the last quarters of the calendar year and probably the first quarter of the calendar year. And typically, the Q2 and Q3 of calendar years are somewhat soft. Q3 is actually, probably, the lowest quarter, most of these product companies.So while we started calling out revenues every quarter and as well as we're going to call out the margins, on both Mode 2 and Mode 3, you can expect some amount of fluctuations, these metrics will stabilize over a period of time, and Mode 2, we need to scale up a lot more. So I want to just add a word of caution, please don't start extrapolating these metrics. There could be a technicality in this. And you will start seeing it as we -- as we -- as we report this for our quarters. So overall, it's a pretty satisfying performance. It continues to give me confidence that we will deliver to the guidance that we have provided on the revenue, which is 9.5% to 11.5%. On the margin side, we remain confident of a 19.5% to 20.5% EBIT margin range. I'm sure all of you know that the ForEx -- dollar depreciation is providing us a little bit of a ticker on our margin front. But I am not very sure all of that ticker is going to flow into the bottom line because as a conscious strategy, we are open to invest on -- some of the pricing of new deals are getting driven around the higher dollar/rupee conversion ratios. So I don't expect all of that to flow into the bottom line. And so we remain confident of our 19.5% to 20.5% margin range.With this broad commentary, I will request Anil to provide you a little more details on the financials for the last quarter.

[Anil Kumar Chanana, Chief Financial Officer]

Thank you, Vijay. Thank you. Good evening, good morning, everyone. So the -- in terms of -- as Vijay mentioned, this has been a good quarter where we have built as per our plan. So our revenue growth, we have 2.7% in constant currency terms. In rupee terms, it came to 5.3% quarter-on-quarter and 14.2% year-on-year.The has been an expansion in EBITDA, operating margin and the net income. The EBITDA margin expanded by 20 bps from last quarter and 110 bps from the same period last year. The operating margin expanded by 10 bps, and the net income margin expanded by 40 bps from last quarter.The earnings per share at INR 69, higher by 8% as compared to last quarter and 14% from same period last year.Our payout ratio in the last 12 months has been at 54% of the net income and 69% of the free cash flow before considering any payments for IP-related. So it has been very good.So this is the summary of the financials. One more thing I would like to add is the increase in the cash flow conversion has been good. The net income [ overall ] to operating cash flow has been at 102%, but the free cash flow to EBITDA conversion has been at 67%. So the metrics have been doing good.So with this, I'll hand over to you.

[C. VijayaKumar, President & CEO]

Yes. So next, we are going to spend a little bit time on the next-gen infrastructure. Kalyan Kumar, who's our CTO of IT Services, who also runs the infrastructure practice as a part of this portfolio.Over to you, Kalyan.

[B. Kalyan Kumar, Corporate VP & CTO of IT services]

Thanks, Vijay. Good afternoon, good morning, good evening. I want to spend the next 5 minutes running you through what we are really seeing and just to corroborate on top of what Vijay mentioned about the bookings, the large deals, especially giving some examples of Nokia, what is really happening in the infrastructure market, and really what we have decided to capture [indiscernible].There are 5 real trends which we are seeing in this, first one is about the customer spend in infrastructure, in shifting, it's not going down. It's just shifting from one bucket to another bucket where they're trying to build infrastructure for -- as a foundation for digital enterprise and also to use it to modernize their infrastructure, if they're running on older kit, old infrastructure, they're running on multiple data center footprint, they are trying to consolidate and bring them into a more hybrid model.The second thing which companies are starting to realize is that cloud is a means to drive innovation, new capability, drive modernization of applications, help build more digital applications. And not just across [indiscernible]. It's harder to ship your working machine from one place to another or trying to move a [ workload ]. So really use how to innovate and at a secondary [ level ] we can start to realize costs, and these customers are not really looking to develop holistic software-defined hybrid strategy. I want to modernize my data center using software-defined technologies, I want to use digital workplace as a lever to be able to drive significant employee experience and engagement utilizing all the new capabilities, AI, Cognitive, Cloud Native, move a lot of my productivity applications to SAP. And that's where the big shift is happening. And the third is the definition of the infrastructure is shifting from core infrastructure to application infrastructure and platform and data infrastructure. [indiscernible] really build infrastructure to support modernized applications in a hybrid way and be able to handle this massive drive towards the explosion of data that has been across the IoT, new social data-linked products, how we mix public data with private data and create a hybrid data as a scenario.So that's the big trends we are seeing in infrastructure, is the customer mind pattern is continuing to focus on modernization and new capability and a lot of spend happening around employee experience workplace. And the last but not the least, is seeing significant investment coming back into the network space. So what was typically thought to be just a [indiscernible] carrier fee [indiscernible] software-defined plans, software-defined networks and virtualizing a lot of network on this.So what are we trying to do to enable this also? So we started to release a new model called the next-gen infrastructure blueprint for digital transformation. It's been about 18 months in action. So this is a new blueprint to help a customer identify solution blueprint and [ reusable ] components and also prepackaged validated design. So we work with some of the new partnerships and systems. For example, we are one of the 3 companies worldwide, which are a member of VVD 4.0 certified. We have got [ people's ] reusable solutions packs and built on Pivotal CloudFoundry that type of [indiscernible] using modernized software-defined infrastructure hybrid converged platforms, building solutions around Microsoft 365, eSuite around the [indiscernible] space. So we started to create a new partnership ecosystem around this whole new infrastructure. The third is we started to see significant shift in the way people consume infrastructure services and the commercial models around it. So about a move from CapEx models to infrastructure utility, ability to consume them in a more flexible up and down model, newer commercial models are being -- evolving around infrastructure space. The fourth area which we are really focused is how do we modernize people and culture. So apps, the world is shifting towards the whole scale digital model, some of these principles and best practices are being built up in the infrastructure. How do we [ adapt ] that infrastructure? How are we [indiscernible] infrastructure or define that infrastructure as poor? How do I bring in some of the DevOps [indiscernible] and really bring tighter integration between infrastructure and make it more agile to serve the digital needs of an enterprise.And the last but not least, the most important is the operating model is changing and as Vijay pointed out before, that we are using a lot of our DryICE products into the core operating structure services business, driving autonomics at the center AI, significant AI machine learning and those capabilities.So to sum it up, we've seen a market shift in the way customers are buying . There is newer evolution happening on infrastructure, and we are rightly positioned and some of the examples that we [indiscernible] announced a few quarters back like Procter & Gamble and Nokia are really driving this whole piece around moving the [ growth ] blueprint.Over to Anand now for the [indiscernible].

[Anand Birje, Head of Digital & Analytics and Corporate VP]

Thanks, Kalyan. And good evening, good morning, good afternoon, everyone. I just wanted to give a few updates on our Digital and Analytics business globally and since it's a large part of our Mode 2 services. Kind of building on where CVK was talking about the growth that we've experienced in the last quarter -- in the last couple of quarters, actually.But here, highlighting a little bit of the trends and catching up also from what we spoke about last quarter which his enterprises are really moving away from proof of concept and small digital experimentations to embarking upon more continued digital journeys. And in those journeys, enterprises and especially Fortune 100, Fortune 500 customers are starting to rethink their application and infrastructure technologies, their business processes, their value chains and value capabilities. And actually, in that journey also, we're thinking, what are the service providers they are working with and rationalizing service providers based upon their digital capabilities and [indiscernible] roughly to capabilities around process and user experience, transformation, their capabilities around modernized application development and scale digital, scale agile approach to application delivery, and also around data engineering, data operations and analytics.And some of our investments in these areas over the last 2 to 3 years are starting to really pay off. Particularly, our experience is that we have developed in working with some of the front-running digital enterprises across the world and across the industries that started adopting such scale digital and scale agile journeys only in these last few years. And our experiences in working with them in these operation model changes, in the process changes and their -- of course, their technology adoption changes, are becoming really attractive to new customers. As they adopt and start their journeys in these transitions, they've seen the experience that we have garnered as an important element of differentiation.Again, I do like to highlight that digital transformations are moving away from simply strategies and POCs to ongoing digital execution and digital engineering programs. And that actually has reflected in the continued win momentum we're seeing in large-scale digital deals where ongoing digital execution, digital engineering partners, the status is what clients are looking to essentially define for their multi-year engagements. And this is happening across industries. This is happening across geographies over the last 2 quarters. It's only getting more and more validated. We're also sort of reformatting in how we are delivering and the format and design of our delivery centers that are ready for such scale digital deliveries. We established our centers in U.S., across Frisco, Texas, in Europe across Amsterdam, and Den Haag in Europe. And we are also bringing those same designs into the delivery centers that we have created in Noida. We recently leveraged and released actually a scale digital delivery center in Noida, which has become a key hub for delivering large-scale ongoing digital transformation programs. And we're going to replicate that sort of design and that approach in our digital delivery centers across the country going forward.Just a quick update on where we are and what's causing the momentum shift and the growth in our digital business. With that, I'm going to hand it over to Darren Oberst to give a quick update on our Mode 3 strategies, specifically on Products and Platforms.

[Darren Oberst, Executive Vice President of Product & Platforms]

Perfect. Thank you, Anand. First, to kick off, I think as CVK highlighted, this was a solid quarter for us in our products and platforms business. It was balanced along multiple dimensions. As CVK highlighted, all of the products that we're working on, whether they're through IP partnerships with a number of global partners, whether they're acquisitions or organically developed IP, it's ultimately pointed in the direction of either number one, how do we enable and drive better automation in our Mode 1 business or play a key role in developing, innovating and transforming the new offer in conjunction with our Mode 2 service lines. So all of our efforts are ultimately pointed in those directions.A few of the key highlights in terms of this quarter. First, we did enter into an additional IP partnership with one of our large established partners in the area of digital experience platforms. We think there's tremendous capability, both with the current technology as well as opportunities to modernize and innovate it over time, tying in with many of the themes that Anand had just reviewed.Second, we continue to make progress in terms of developing new innovation organically within HCL under our DryICE brand. We've had several new successes with customers as well as new offerings. Really just a component of 21 new patents and new technologies that we continue to develop in next-generation autonomics areas.Our IP partnerships continue to deliver better performance than our investment business cases.And what I'd like to do is I'd like to take a couple of minutes and just highlight some of those case studies. This is -- I think one of the questions that we've gotten most consistently from the analyst community is help understand, at least qualitatively, what some of the work that HCL is doing? How is it unlocking value? And how is it leading to better performance in the underlying deal business cases?So I want to come to that and just jump into 3 specific case studies. The first of these case studies is a product that's actually in a fast-growing market. And it's in one of the fastest-growing market segments that we are in from a product and platform point of view. The market by most analysts' estimation is growing 10% to 15%. On most recent analyst report that I saw last week, it's 13% growth projected this year.This was a product family that had been underperforming over the course of the last 2 years. And actually, prior to the IP partnership, it was actually declining double digits. So rapidly losing market share in a market that required a lot of velocity, a lot of investment and a lot of ongoing acceleration towards innovation.So this is a product that we've been working with now for 18 months. And what you'll start to hear is, if I lay out a few of the steps that we've taken, are some of the themes that really have been part of the playbook we've built for the IP partnerships.The first thing that we did is we invested and expanded the engineering team, really clearing a backlog of requests from existing customers. We became laser-focused on the needs of those customers to really energize some of the core installed base, some of the most passionate users of the product.And we looked into them very carefully, and we made sure then that we will build a features and functional enhancements that were aligned to the real needs that they had in the product.That's typically the first step in any of these IP partnerships. It's just helping to energize and activate the existing installed base.Second, we brought in a lot of new capabilities though to drive this product set towards greater modernization and innovation. We brought in new product management. We invested in product-related services to help with implementation, upgrades, training as well as client advocacy, assigning an engineer from the team, to large customers to build a good technical dialogue and to make sure that the engineering team stayed in touch with customers and vice versa.We continued to invest in a fast-paced offering. We also innovated and pioneered the first of a kind machine learning capability in this technology set.Net-net, the results of it over the course of the last 18 months is the product has now been growing double digits for the last 1.5 years. And in the past quarter, it's actually surpassed that market growth rate.I think a key punch line, and you'll hear this on each of these case studies is we are also -- we've released in the last quarter an HCL-branded version of this product, and it's now available to be integrated in with our Mode 1 and Mode 2 service offerings so we can bring better automation and better solution value to our customers.Now if you move to the next case study. The second case study, it's a little bit different. This was a product in a market that also has growth, but grown a little bit slower. The product had been a little bit more [ toward north ]. It had some strengths and it had some weaknesses over the preceding couple of years. But at the time of the IP partnership, which was a year ago, it had really been suffering, and it began to languish in the market. The brand of the product had begun to diminish. Many existing customers were no longer seeing it as a core part of their future.This product -- and again, you'll hear many of the same themes that I went through in the first case study. We invested in engineering capacity. We invested in clearing the backlog of customer requests. We invested in the velocity of fixed and future packs. And within this quarter, in June, sort of culminating a 1-year cycle since the time of the partnership, we released a major new release of the product.So we believe we're skilled in early stage on the journey of this product. But what we can see is a stabilization of the revenue curve, and our expectation is over the course of the next 12 to 18 months to begin to move back to and to surpass the market growth rate.Again, as I highlighted in the previous case study, in the next quarter, we will be releasing an HCL-branded version of this product, again, to supplement our managed service and outsourcing offers to customers.Now coming to the final case study. Here's a product family that has more challenges to it. This was a product set in a market that was growing in single digits. It had matured, faced a lot of competition from open-source technologies as well as newer vendors. It was going through a lot of transformation in the way the consumer consumed these types of tools.This was actually part of the first major IP partnership that we completed over 2 years ago. So we've had a good history at this point of working with this product family. Again, many of the same elements that I've highlighted in the previous 2 case studies. This was a product family that was declining 15%, 20%, and looked rapidly on its way to obsolescence.It is stabilized today, it is still a declining product set. In fact, some quarters of growth, there are some products in this family that are growing. But still in the aggregate, it's still hovering in single-digit negative territory.Some of the steps that we've taken, we've had over 50 releases across this product family over the course of the last 2 years. We've signed a lot of advocates to work with many of these large customers, and we've really focused on finding those pocket of innovation within these products and in adjacent areas.I think what you're going to see again in an ongoing journey with these products is some really exciting things happening over the course of the next 6 to 12 months as truly next generation versions of these products are available and we're able to bring them to market.What's also been exciting about this product family is this is some of the first products that we released through the HCL channel to be made available to bring into integrated software-plus services deals to bring new solutions to our customers.We had several pilot wins in the last quarter. And I think over the course of the next few quarters, there are going to be a lot of major wins and major deployments that we will be able to feature as case studies.So hopefully, this is helpful, just to give some context behind some of the headline numbers and trends, gives you a view of some of the work that we've been doing around these IP partnerships and how we continue to create value and surpass [ our deal business ] cases at the time we make these investments.So with that, I'll now conclude and pass it back to CVK.

[C. VijayaKumar, President & CEO]

Yes. Thank you, Darren. And I wanted to just conclude the product 3 performance trends that Darren said, for this product line, we are still doing better than the business case. So that's the highlight of this.With that, we are pretty much done with our commentary. We are happy to take questions.

[Operator]

[Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Kumar Agarwal, Vice President]

CVK, just a couple of things. We have consistently been seeing last 4 or 5 months a significant amount of traction in the industry coming back, whether it is BFSI vertical, whether it is energy. So a lot of data is coming from different Central European companies and even Indian IT providers, who are clearly suggesting that there is a good traction in demand. And we have seen similar situation in even [indiscernible] from your company where the number of new deals which have got signed is around 27.That is probably a very, very good number. But just a couple of things, which I'm little curious about. One, what stops us from upgrading our guidance? Do you think that the old business is still killing our good works from the new business or the new deals which we are signing? Or you just think that the lag effect would not allow you to increase guidance just immediately? And second, what is your sense on the digital side? You very nicely explained, but just wanted to have a little bit more idea. Are you seeing the digital deals coming in from more number of clients? Or you're seeing the clients are scaling up significantly, they're gaining scale in that sense? And finally, if Anil could give out some number on how much of the current quarter's growth was inorganic, contributed by inorganic, if that's possible? That's all from my side.

[C. VijayaKumar, President & CEO]

Yes. Thank you, Sandip. So let me start with the guidance question. As we indicated, we are very encouraged. I feel upbeat about what has happened in Q1, especially on the bookings front. For the bookings to translate into revenues, we need to do some transitions, some transformation. And like for example, Nokia, the revenues I expect to materialize only in the OND quarter. So while we remain very positive, we continue to see a pretty good demand environment, not just in Infrastructure Services, but the Digital and significant amount of our Mode 2 offerings, and also in our engineering services. From a core organic perspective, it’s in good traction. I feel pretty positive. More positive than what I was in the last quarter. But I think we would want to -- it's still only 1 quarter done and we have 3 more quarters to go. There could be a number of things which could come into play, maybe some client specifications or whatever. So I'm not really mentally prepared. We're not prepared to increase the guidance. We feel good to be able to deliver within our guided range. And if there is any change, obviously, we will come back to you next quarter. But at this point, I feel good. Bookings are good, which really translates to a good longer-term growth rate rather than an immediate quarter-on-quarter growth rate. But having said that, I continue -- I will continue to -- we will develop an incrementally better quarter-on-quarter growth from here on. But that's really my expectation. On the Digital front, I will ask Anil to respond.

[Anil Kumar Chanana, Chief Financial Officer]

Thanks, CVK. So I think on the Digital front, we are seeing really a fairly even upsurge in the market across industries, firstly. So if we look at a year ago, a couple of years ago, mostly consumer-facing industry, whether it was retail, CPG, health care, or what is the forefront of digital spend. But really in the recent 1 or 2 years, every industry, whether it's a B2B like a manufacturing, energy, utility, oil and gas, pharma as well as B2Cs, continue to invest heavily their technology dollars for digital transformation. And really because it's not just about consumer engagement, but it's also about business operation transformation, operational efficiency gains and so many other aspects of this outcome that customers are seeking. So that's on the industry front. We're seeing a fairly even industry spend across industries. Now when it comes to net new customers versus existing, we're seeing a huge amount of opportunities in net new customers where, as I said earlier, customers who are rethinking on their branded portfolio. We're seeing opportunities where we were brought in as a net new vendor to replace some of the traditional IOP vendors or traditional Application Services vendors because they were seeking next-generation technology delivery as well as next-generation process delivery, which is a scaled agile delivery of application development and application build to deliver digital programs or digital execution. At the same time in existing customers, we see huge opportunities, specifically in customers where we were largely present on the infrastructure side of the business or on the other side of the business, c customers bringing us into new digital transformation opportunities through those vendor consolidations. So we're seeing a fairly balanced win rate, both in existing accounts and net new accounts, where there is a replacement of vendors happening.

[C. VijayaKumar, President & CEO]

So with reference to -- Sandip, your questions were with reference to the organic versus inorganic so PCA, which we consummated in the early April was -- it's included here, and which gives additional about 2% to the revenue this quarter.

[Operator]

Mr. Agarwal, are you done with your question?

[Sandip Kumar Agarwal, Vice President]

Yes, I'm done with the question.

[Operator]

The next question is from the line of Ankur Rudra from CLSA.

[Ankur Rudra, Research Analyst]

Just first question is on growth. It seemed a bit concentrated this time. In fact, on a sequential basis, almost every vertical except technology services, Public Services and Life Sciences, I saw a bit of a decline. And also, if I look at 2 of your biggest service lines, they were either flat quarter-on-quarter, then you have 2% to 3% on a year-on-year basis. So if I look at the balance of business, if you can give me a sense of when do you see the balance of the revenue decline from renewals on these applications for contracts turning more favorable from the new deals you're seeing.

[C. VijayaKumar, President & CEO]

Yes. Thanks, Ankur, for all the questions. As Anil indicated, there is certain dynamics around renewals. And some contracts aim for the annual cycle, so that had a step reduction. So that's one element. The second one is there were certain renewals which were renewed, but the effective dates were starting this quarter. So some of them are what is causing the reductions in manufacturing and the financial services. The public services growth has been very good. All of that is organic. Life Sciences is largely enabled by CPI, but the organic growth in Life Sciences was also pretty good, probably comparable or even higher than Public Services. In terms of the way forward, I see higher growth. Incremental organic growth is going to be -- continuing to improve in our Application and Infrastructure Services as well as our Engineering Services. That is going to reflect across multiple verticals. So I'm very confident of acceleration in our quarter-on-quarter organic growth from here on. And this is the only metric -- the LTM Y-o-Y numbers are very healthy, including Financial Services, which has grown 9% LTM Y-o-Y; and similarly, Retail, CPG has grown 7%; Life Sciences has grown 10%. So -- and telecom is something where we think we have had some excellent bookings in a couple of deals. And we see good pipeline in telecom. So I see that also picking up moving forward.

[Ankur Rudra, Research Analyst]

The color you shared this time on the IP business. Now that you've launched 6 to 8 IPs under the HCL branding, what horizon should we have to see significant -- or at least material customer migration to your branded IP, the impact on economics? And what kind of investments do you need to drive that?

[C. VijayaKumar, President & CEO]

Darren, do you want to take a shot at that?

[Darren Oberst, Executive Vice President of Product & Platforms]

Yes. So I'll take the second part last in terms of the investments. This is work that is underway. So in terms of many of the investments that we've discussed, that's baked in the cake, so to speak. So I don't anticipate incremental investments relative to kind of margin profile, revenue curves and everything else that you've seen. Now coming to the first part in terms of when will we begin to see a significant customer deployment. I would expect to see that quarter after quarter after quarter, growth and momentum as we begin to embed these IPs within some of our larger customer accounts and outsourcing deals. So I would expect that within FY '19, I would say from a proof point and case study point of view, we will have case studies to report. The real question you're asking is when we will begin to see material uplift from a financial point of view. That will certainly take a number of quarters before that revenue stream becomes significant.

[Ankur Rudra, Research Analyst]

Just last question on margins. I saw the segmented margin this time, there was a bit of a different trend on Infrastructure versus Apps despite similar growth. And also surprised to see BPO margins were not really impacted much by the acquisitions. If you could just elaborate on that point?

[C. VijayaKumar, President & CEO]

So there are 2 ways, Ankur, to look at the margins. One is, of course, the way you described. And probably, I think, the better way will be to look at on a Mode 1, Mode 2 and Mode 3 perspective [ and this year approaching 30% ]. And if you look at the margins whereas in Mode 1, it's very much in line with the company-level margin. With Mode 2 we are seeing the investment is happening, and which is slightly below the company-level margin. And the Mode 3 is at the higher end, significantly higher than the company-level margin. I think that's the trajectory. Other than that, it can be a variation on a quarter-on-quarter basis with the numbers. Sometimes like in the Infrastructure space, there are a lot of things which are -- it is in the acquisition phase and are moving into a steady state where there is a lot of investment taking place. Similarly, in the Application space among the digital deals need investment, so it gets reflected in a different manner. But I think the classic expression has given you a more clear picture.

[Anil Kumar Chanana, Chief Financial Officer]

And just to add a point on BPO, the organic business margins also saw some uptick and the inorganic margin was somewhat comparable to the BPO margins that we had. So that's why we moved the [indiscernible] materially impacting that.

[Operator]

[Operator Instructions] We move to the next question from the line of Pankaj Kapoor from JM Financial.

[Pankaj Kapoor]

My first question is on the Mode 3 business. Is it possible to get a sense how much of this is constituted by the Life Sciences IPs and how much of this could be from the organic IPs?

[C. VijayaKumar, President & CEO]

Actually, this is what I was worried about. The more details we share, you're going to ask me more, Pankaj. At this point, I think we don't want to call out organic IP and the rest of the business. But what will be more relevant will be the split that I called out, right, 60% of business is in a mature products and the 40% is in high growth, very new and significantly -- significant growth opportunities. That would be the mix. And even the IP partnerships has a decent mix of mature and high-growth products.

[Pankaj Kapoor]

So CVK, I mean, if I look at then the split that you spoke of 60% being basically enabler of Mode 1 services, where the growth is still very weak. I'm presuming that the investment that we are making and what Darren referred to is going to probably accelerate the growth here. So you think we can really get to Mode 1 services which are relatively mature, again, growing at double digit with these investments? And if so, when do you think can that happen?

[C. VijayaKumar, President & CEO]

Yes. I think while IP partnerships and the products are definitely -- are embedded into our outsourcing deals, we don't see that as a driver for some differentiated growth because the numbers are very, very different. But again, our regular Mode 1 business, I think there are, I mean, both Infrastructure business and the Engineering business, we see a lot of opportunities to innovate and dedifferentiate it and create those opportunities. And in our Application Services, most of the business is really transforming into a digital business. Then again, I think we have a solid proposition. Whenever there is a large engagement, where 5 or 6 traditional vendors are there for Application Services, and they're looking at new-age partner. We have definitely been one of the top 2. So I think all of this augers well for the long-term growth in our traditional businesses. I would not comment on whether it is going to be double digit or anything like that. And we see good growth momentum, growth opportunities, and we are also feeling extremely confident of our differentiation and our ability to win.

[Pankaj Kapoor]

Okay. So just lastly, CVK, would it be possible to quantify the deal booking that you had in the quarter, so we can better understand the scale and how it can play out in the coming years.

[C. VijayaKumar, President & CEO]

Pankaj, we are not calling out the total value of the deals, 27 large transformational deals. It's significantly higher than the quarter that we had highest bookings earlier, which is the last quarter -- or in the quarter of the last year, and whatever it is coming is generally baking into -- baked into guidance. So I would encourage you to use the guidance as the real number and if and when we feel we can do better than the guidance, we will be very happy to let you know.

[Operator]

The next question is from the line of Diviya Nagarajan from UBS.

[Diviya Nagarajan, Executive Director and Research Analyst]

But I think somebody already asked this in a couple of different ways but I will attempt this again. You're clearly seeing the momentum pick up and thanks for providing us details on the IP side as well. What should we look at as the time frame for an inflection point on your organic revenue momentum from these activities? That's question number one. Second is, you spoke about why your Mode 2 services have lower margins right now because of the investment, what is the time frame that you are looking at for those investments to normalize?

[C. VijayaKumar, President & CEO]

Okay. On the organic business, as we've said, I mean, this was the strongest booking quarter. And if the same trend continues for a couple of quarters, that will truly be a big inflection point for the organic growth. And the pipeline is good, we feel there's an opportunity for us to clock in a similar or comparable levels of booking in the coming quarters. However, at this point, I'm not able to really provide a perspective on where we will land in the next 2 quarters in terms of booking. But if the continued booking performance repeats, it will definitely be inflection point for organic growth. Mode 2 has multiple services like -- and each one is at a different skill, like public cloud adoption is a big theme, but there are 3 large sort of solutions. So each one we need to build the capability, partnerships. So the number of areas where we have been investing, in Digital and Analytics, there are at least 10 different areas. Everything has got different dimensions like our whole UI, UX it significantly has been built on organic investments. So that's an area we will still happily invest, and that's the capabilities we need to make it much more global in nature. Right now, we're just focused on U.S. and a little bit in -- even in U.S., it is the main customer in locations and one location in Europe, so we need to kind of expand on that. And IoT works is in the very, very early stage of big market opportunity, and it has created a big impact in terms of good case studies, analyst recognitions, proof points, and security is again an area where we have to invest. So I'm not in a hurry to really optimize the margins and Mode 2. This is the time for us to see what all we need to do correctly to enable the momentum in this business because a lot of our future in the traditional IP space is dependent on this. So I think it's a long-term thing, but you will still see some incremental uptick in margins, as we move forward, but that would be small.

[Operator]

The next question is from the line of Sandeep Shah from CIMB.

[Sandeep Shah, Vice President]

Just on the infrastructure management side, if I look at the Y-o-Y EBIT margin as well, it has on absolute basis, it has actually -- the EBIT has declined, so what could be the reason? Is it largely the renewal? And do you believe, CVK, this time, the renewal pressure is higher than the earlier years?

[C. VijayaKumar, President & CEO]

Yes. I think we had renewal and structured reductions, which happened at the beginning of this year. Some of that will take some time to optimize, sometimes the optimization is leading the reductions that we planned. In some other cases, the reductions are a little earlier. Maybe the reductions are a bit earlier and the optimization is lagging behind. I think that, that's really the reason. And some of our investments in cloud and security, and that will also be in the infrastructure segmental earnings. But if you see in Mode -- if we really segregate Mode 1-2-3 that gives you a good perspective. I think our core organic -- core business and infrastructure, I think margins are fairly stable. They probably vary between plus/minus 1% or something like that.

[Anil Kumar Chanana, Chief Financial Officer]

And then the leverage...

[C. VijayaKumar, President & CEO]

And there are also -- yes, there are a lot of deals in transition. Some of that is going to -- also caused some bulges in the costs.

[Sandeep Shah, Vice President]

Okay. Okay. And if I look at the revenue breakups, you said, within Mode 3, 40% of the revenue on new technology, so that works out to be close to 4.4%. And Mode 2 being 15.6%. Is it fair to say 20% is a pure-pure model on new digital technology as a percentage to your revenues versus for peers, it is anywhere between 25%, 30%.

[C. VijayaKumar, President & CEO]

Yes. I think there is a [ tax ] there, Sandeep, because a lot of our modernization work, like software-defined infrastructure, all of that are sitting in Mode 1. Because I personally don't see Mode 1 as something old and which has no opportunity to grow. So I think we have decided to classify them in a manner that which provides the right focus on some of the market trends. And even the 60% which is there in the Mode 3, which are in the mature products, there is a lot of opportunities to innovate and classify and modernize. So I think that is the fundamental assumption -- fundamental criteria for us to do the product, is there an opportunity for us to modernize and transform and create a growth trajectory? So actually [ if you really ] compare an industry like-to-like perspective, apart some of the revenues and modernization in Mode 1 is also part of the overall new technology and services revenues.

[Anil Kumar Chanana, Chief Financial Officer]

Just a quick one on cloud, was there some differentiation?

[C. VijayaKumar, President & CEO]

Yes. And again -- cloud, again, there is a significant amount of private cloud and utility services, which the industry tends to classify them as Mode 2, [ or as ] digital and things like that, whereas our Mode 2 has what I call is cloud-native services, which is all public cloud of SaaS. That is all the private cloud work is happening in the infrastructure numbers. So I'm not really finding it. I'm not going to spend more time trying to classify their infrastructure and utility and hybrid, I mean, private cloud and things like that. So we've defined certain categories, and we're very clear how these are defined and give us a pretty strong criteria to classify something else as Mode 2 and 3. And Mode 3 has some services, but all the services in Mode 3 are built on top of an IP business units. So that is the real criteria for services, and a little bit of services that comes in Mode 3.

[Sandeep Shah, Vice President]

Okay. Okay. This is helpful. Just last question, last time we said 130 bps of the guidance is built through acquisitions. So there are 2 acquisitions: One is the large German acquisition and in this quarter there's an additional investment of IP. So do you believe these 2 are enough in terms of compensating that 130 bps inorganic growth, which we have planned? And secondly, gross margin in this quarter has gone down by 60 basis points, so what are the various reasons for the same?

[Anil Kumar Chanana, Chief Financial Officer]

Sure, Sandeep. So thanks for the question. To answer your question I'm taking the second first. So with reference to the gross margin decline, I think the C3i acquisition which we said is a low single-digit EBIT margin deal had an impact on the gross margin, and then there are some -- and we just talked about some of the deals ramping up and those investments ticking up as well as some of the anniversary sort reductions which took place. So these all impact us in terms of gross margin. But we do believe that we will continue -- we will meet our guidance in terms of 19.5% to 25%. We're very confident of that. Second to answer your question with reference to the guidance we have given. I think we are -- in India we have yet to close H&D transaction and then we should be depending upon that closure to happen, I think we should be -- next quarter when we talk to you, we have better [ fix on the number ].

[C. VijayaKumar, President & CEO]

And the new IP deal is also under transition, so once it is done, we will get a better grip. I mean we would wait for a quarter. But I think the good part of that number is potentially being covered if these 2 transactions happen as planned.

[Operator]

The next question is from the line of Kawaljeet Saluja from Kotak.

[Kawaljeet Saluja, Head of Research]

Just a couple of questions to Anil. Anil, first in your financial statements, there's a line item called contract assets of $73.5 million. Can you -- and please detail out as to what that relates to? And second, if you can just quantify the amount invested in the latest IP deal? And finally, your tax rates were 20.5% over the quarter, which was lower than your guided range, and does that change your tax rate assumption for FY 2019 as such?

[Anil Kumar Chanana, Chief Financial Officer]

Sure, sure. So let me start with the last one, and you have to remind me about the other questions. So in terms of the tax, I have totally guided out between 22 to 23. I do believe we will be -- we will be at the lower end, rather than the upper end. But there is a variation which will always happen depending upon the assessment getting completed in the various sort of jurisdictions in which we operate. So basically that sort of an impact will be there. So that is so far as the tax is concerned. But overall, for the financial year, any moment we can assume [ 22% ] as the guidance. Your other question was with reference to IP deal investment, for the net-net investment is about [ 877 million ], the number you will see in the financial statements and you can look at the -- in detail, the numbers may be lower which is about [ 125 million ]. I think there is a currency impact which has come this quarter, more because of the depreciation or the sharp depreciation of the rupee this quarter. So what was the second question and just remind me about the other...

[Kawaljeet Saluja, Head of Research]

I have something on the contract. Contract assets of $73.5 million in your financial statements and so...

[Anil Kumar Chanana, Chief Financial Officer]

So this is -- it's basically that the implementation of ASC 606, and we are really required to now classify the unbilled receivables into 2 parts. One is with the reference to the fixed-price contracts, it's partly related to the fixed-price contract to become part of the contract assets. Together with the -- some of these deferred costs, which will also fall there. So it's more of a reclassification in line with the new accounting standard.

[Operator]

The next question is from the line of Surendra Goyal from Citigroup.

[Surendra Goyal]

CVK, your earlier strongest quarter on deal wins which was a couple of quarters back has not really resulted in much of an acceleration so far. And if I kind of look at the transcript, at that point, the expectation was we would see an acceleration in the first half of this year. So why is that -- why has that not really resulted in an acceleration so far? And why do you expect the outcome of another large deal win quarter to be different this time?

[C. VijayaKumar, President & CEO]

Yes, Surendra, in OND quarter we said it was the highest booking quarter, and it had one large consumer product deal as a part of that. If we take an example of that deal, the [indiscernible] has actually gone live on the -- early this month. So some of the transitions were planned in a manner that they were taking time because they were global transitions transitioning from a difficult [ incumbents ], so it's taken time, and we see that ticking in, in this quarter. And also a couple of deals there were cloud migration and transformation deals. But some of the cloud migration and transformation deals are taking a little longer than what we anticipated. I see that it's coming into this quarter that we are now running. And I think probably a booking in 1 quarter is going to translate into revenues, probably 4 months after that. I think that's what I see. The only outliers was in Q4. I mean December quarter, the large deal was -- actually it was a 6-month transition and 2 cloud opportunities, which are also sizeable bookings that was taking time. It's really implementation delay. And it's really the complexity of what we are doing and a lot of things have been done for the first time there. That's what is driving it. And if I give you good indication of the bookings this quarter, some of that will -- bookings last quarter, which is again the highest -- significantly higher than what we have in OND. The Nokia billing will get into -- in revenue in OND and maybe subsequent quarters. I think there is a lag, but apart from a little bit of pressure due to renewals and some of the reductions that is happening in a structured way. I don't see any other dynamics. We feel pretty good that this is -- there's been 2 quarters in the last 4 quarters having significantly higher booking rates. This is going to help us accelerate our organic growth from a quarter-on-quarter perspective in the next 3 quarters.

[Surendra Goyal]

And just to be very clear on that, so what you are suggesting is it is due to delays or in ramp-ups or taking more time in ramp-ups, rather than because the business getting net-off because there is pressure on the older part of the business. Is that understanding right?

[C. VijayaKumar, President & CEO]

Yes. I think there is certain directions which are planned like, for example, one, Volvo starting April had a reduction, so -- and India business we planned a reduction of 12 million. So there are some planned reductions but beyond that it is just -- some of them are planned in the manner of longer transitions and a couple of them are really Q2 execution delays, which is -- I'm not surprised it's a lot of learning most of these programs, across the industry it's being done for the first time, moving some significant landscape, but very, very complex integrations into AWS and things like that. So we -- that's really an execution delay, and which will come into the revenues in the coming quarters.

[Operator]

The next question is from the line of Ashish Chopra from Motilal Oswal Securities.

[Ashish Chopra, Research Analyst]

CVK, you mentioned that you would look to see if there is a good amount of conversion of the pipeline in the following quarters as well to get that inflection for organic growth. So I just want to understand as to whether it is really a function of the win rate this quarter, which is driving the confidence or as compared to maybe last quarter, when you mentioned that probably the guidance of organic and inorganic splits half and half. Is the confidence coming because the pipeline is also now much more improved versus what you were seeing before?

[C. VijayaKumar, President & CEO]

The pipeline is I would say incrementally better, not really significantly better. I think one change from last quarter currently now is, I think, last quarter I said large deal momentum is not that number of deal sizes are small, but now I'm seeing at least 3 or 4 large opportunities where we think we have a good shot at. So it's either 0 or 1 situation, the pipeline may be incrementally better, but it's 3, 4 big deals which can make or break, but that's the way we are in.

[Ashish Chopra, Research Analyst]

Fair enough. And just one more question from my side was, so when do you expect to see the decline in the India SI business? Should it last for the course of this year as well or are we nearing the end of it?

[C. VijayaKumar, President & CEO]

It has now come down to 0.5% of our revenues. It is probably going to become a 0.25% of our revenue next quarter. So after that, I think, I don't expect it to have an impact.

[Operator]

Ladies and gentleman, this was the last question for today. I now hand the conference over to Mr. C. VijayaKumar for his closing comments. Over to you, sir.

[C. VijayaKumar, President & CEO]

Thank you, everyone, for joining this call. It is probably getting late and really appreciate all the insights and the questions that you asked. Overall, it's been a good quarter as per plan. And the momentum that you're seeing and the win rates and the pipeline, all of that, continues to give us the optimism to deliver to the guidance that we have provided. And I think our overall strategy of focusing on Mode 2 and 3, with very, very dedicated leadership. And a pretty creative thought process around deal constructs and how we believe some of the investments are really creating more annuity streams rather than most projects and fluctuating streams. I think this really augers well for long-term stability and growth of us for our business as an overall portfolio. With that, I sign off and look forward to meeting some of you next week and probably talking to you during the next quarter. Thank you, everyone.

[Operator]

Thank you very much. Ladies and gentleman, on behalf of HCL Technologies Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.