HCL Technologies Ltd

NSE:HCLTECH

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, good day and welcome to the HCL Technologies Limited Q3 FY '18 Earning 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. Hello everyone, wishing you all a very, very Happy New Year, and welcome to HCL's earnings call for Q3 for fiscal '18. This quarter has seen us deliver a strong broad-based and a industry-leading growth. Our revenues grew 3.3% quarter-on-quarter at constant currency and 3.1% in U.S. dollar terms. This translates to 11.2% year-on-year at constant currency and 13.9% Y-o-Y in U.S. dollar terms. Our net income grew by 11.2% year-on-year and the REBIT came in at 19.6%. With this quarter, we have now seen an incredible 12 quarter high booking performance. The highlight is that we are now seeing good momentum created by our Mode 2 offerings predominantly led by our digital and cloud offerings. The senior leadership that we have dedicated for Mode 2, the competence that we have built and the subsequent credibility that we've created in our offerings are in Mode 2, are helping us create unique value for our clients. This is helping us not only to displace long-term incumbents in the marketplace, but also to sell -- cross-sell other services from our traditional portfolio.Overall, this makes us optimistic about the future. With the record high booking performance, it also validates the success of our strategy and our execution. We are also seeing our Mode 2 deal scaling up in size, both from a scope and revenue perspective. These deals are also providing us with a strong differentiator for our Mode 1 services.We've also seen a healthy growth to our client portfolio in various categories. And a big contributor to our success has been the client partner program that we had rolled out 5 to 6 quarters back. We remain bullish about our performance and expect to close the year within the guided range for both revenue and margins. And FY '19 looks very promising as well.Now to some more numbers. This quarter, we won 20 transformational deals represented by a well-balanced Mode 1, 2, 3 services mix. A majority of this wins were powered by digital cloud, autonomics and AI-based offerings. One of the largest deals that we've signed had a significant autonomics and AI component as a part of the solution set. The performance of our services was led by our engineering and R&D services at a strong 13.6% quarter-on-quarter growth, application services at 1.6%, BPO at 5%. Our infrastructure services declined 1.2% due to an expected decline in our India business.Very significant accomplishment this quarter is our Mode 2 and 3 services have exceeded 25% of our revenues in this quarter. Our verticals of retail, CPG and manufacturing had a 6.6% growth and financial services grew at 2.8% without considering the DXC JV impact. It's very heartening to see that over the last 6 quarters, our financial services business has posted market-leading [ CPGR ] of over 3%. Americas grew at 5%, I mean 4.9%, Europe grew at 1.9%, RoW declined 3.9% which has again contributed significantly due to the decline in our India business.At the corporate level, we covered several milestones last quarter. Our Red Ladder Initiative was recognized as the finalist at the 14th Annual Stevie Awards for Women in business category, Women Helping Women. Samuday, HCL Foundation's biggest CSR project to create model villages in Uttar Pradesh was unveiled by Honorable Chief Minister of UP, Shri Yogi Adityanath. HCL Foundation benefited more than 100,000 disadvantaged children in calendar year 2017. While in the U.S. and U.K., HCL remained engaged in 2 specialized programs aimed at youth employment and training. In South Africa, we started working with the Nelson Mandela Foundation for creating e-libraries for disadvantaged students. Our Swedish operations were conferred with the key to the Heart of Gothenburg award by Business Region Goteborg, Sweden for being one of the most important international businesses established in 2016 and 2017.I will provide a quick update on our Mode 1 services, followed by Mode 2 and 3. Our Mode 1 services as all of you would know are the core services in the areas of application services, infrastructure management, engineering and R&D and BPO services where we significantly leverage DRYiCE autonomics platform to transform our client's IT landscapes to make them lean and agile. Last quarter, in the engineering and R&D services, we delivered a growth of 13.6% quarter-on-quarter in constant currency terms. The growth is primarily driven by 3 factors. One, core organic business in our ERS portfolio has done well. We are also recognizing the synergies from some of the acquisitions that we made especially Geometric, the PLM portfolio is also contributed to good growth in the last quarter. And the IP partnerships, including the seasonally strong performance last quarter also helped us drive very solid 13.6% growth in the engineering and R&D services.In application services, we delivered a growth of 1.6% quarter-on-quarter in constant currency, without the impact of our DXC joint venture, we grew 2.6% quarter-on-quarter. And this is primarily driven by an acceleration in our digital services across key verticals, and also the overall growth in financial services vertical is a key contributor to revenue growth in the application services.In infrastructure services, we declined at 1.2% in constant currency. This is an expected decline due to a reduction in our India business. Overall, the deal wins in the infrastructure business has been good and we do expect an uptick on the global infrastructure business during the first half of next year. It's very significant accomplishment that I want to point out is we signed a very large engagement with a Fortune 100 Global CPG company for a global digital workplace services deal. It's one of the largest deals that we've signed this year. Our BPO services, we grew 5% quarter-on-quarter in constant currency. The big part of it is contributed to the acquisition that we did, which is Urban Fulfillment Services. Our Mode 2 services where we deliver experience-centric and outcome-oriented integrated offerings across Digital and Analytics, IoT WoRKS, Cloud Native Services and Cybersecurity services [ up ]. Very good traction and to call out in digital and analytics, we have seen significant traction. This quarter saw us bring several strategic digital and analytics contracts like a digital transformation, automation and modernization engagement with a leading U.S.-based railroad company. A strategic analytics engagement for a leading global biopharmaceutical company, and we were also chosen by a U.S.-based telecom services provider to create a 21st Century Enterprise by transforming next generation mobile virtual network operator applications based on modern application development frameworks. TIBCO conferred us with the 2017 Partner Excellence Award for digital transformation solutions and services. As a result of the accelerators and frameworks developed by HCL, many global enterprises have benefited from a quicker, more stable and wider adoption of TIBCO's digital platform solutions. In IoT WoRKS, we continue to see collaborative intersections with digital and cloud which are giving our propositions a lot of differentiation and recognition in the market. This quarter, a Fortune 500 medical devices company has engaged our IoT WoRKS team for cloud-based IoT solutions for diabetic products, while a leading Global 2000 pharmaceutical and healthcare company headquartered in Japan has contracted us for developing a smartphone-based passive sensing platform. We've also been chosen by a leading U.S.-based provider of supply chain communication solutions as a consulting partner for enhancing business operations with IoT and digital. IoT WoRKS and Indra have entered into a partnership to deliver Indra's Active Grid Management solution to the North American utilities, again a first of its kind. The solution is designed for utilities that are responding to significant and rapid changes in the way electricity is being generated.In Cloud Native Services, the cloud adoption is gaining momentum and is becoming a part of virtually all our deals. The kind of services we offer are value rich and are positioned more from a transformation perspective than just operations. For example, a leading U.K.-based gas distribution utility has contracted with us for migrating a significant application portfolio to AWS public cloud, and more importantly for modernizing their IT environment and driving agility and flexibility.Similarly a Global 2000 airlines signed an engagement for strategic IT planning, modernizing data centers and execution of its cloud first objective with an aim to bring flexibility, agility and an elastic cost structure. Our overall pipeline in the Cloud Native Services remains quite strong. In cyber security and GRC services, the dynamic security -- cyber security service framework continues to catch traction as validated by some of the strategic deals that we signed. We have been selected to automate risk and compliance processes for a Fortune 500 financial services company as well as a life sciences provider to manage their security infrastructure.On Mode 3, we continue to invest in internal IP creation, as well as enter into innovative IP-based partnerships, targeting some specific growth opportunities that we -- [indiscernible]. Last quarter, we established a new IP partnership with a [ wescos ] based technology major, which now becomes our third strategic IP partnership. This partnership includes areas of remote management and provisioning software.This quarter, we filed patents in various next generation technologies such as automation, data analytics, Blockchain applications, predictive analytics and aircraft data systems amongst others. Our products and platform offering are beginning to open doors for us in the markets. For example, our enterprise quality intelligence platform [ Equip ] which addresses the critical business need of providing quality metrics for meeting FDA guidelines, won us a large pharma deal this quarter.In a large strategic IP partnership, we continue to invest and expand in 3 areas. The 3 areas that we invested this last quarter was software solutions for application release management and governance, which is a very hot area from a DevOps and application release management perspective. The second product was endpoint lifecycle management which is again extremely relevant and growing product, especially in the context of cyber security threats. We also invested in forms development application for web and mobile categories.We continue to invest in our employees both from a re-skilling and up-skilling perspective. This past quarter, we trained 27,000 employees, most of whom are re-skilled with our Mode 2 and Mode 3 offerings. Our client partners who manage our top accounts continue to drive growth and are really driving significant cross-sell and up-sell in our accounts which is reflected in the growth in all categories of our client base.Overall, in closing, we've had a very promising quarter. Our growth is strong, our bookings are up, our investments continue to deliver returns and our strategy and execution are on point. The future looks healthy and we intend to close the year within our guided range for revenue and margins. We continue to remain confident and optimistic for the future.With this, I will request Anil to provide financial highlight and then we will go into question and answers.

[Anil Kumar Chanana, Chief Financial Officer]

Sure. Thanks, Vijay. Good evening, good morning, everyone. So very strong quarter as Vijay mentioned, in terms of revenue growth 3.3% and in terms of EPS, the earnings per share have increased by 8% over the corresponding period last year, which was [ OND-16 ]. I just wanted to take a minute to just sort of go through the last 5 year picture and it's very interesting that the revenues over the last 5 years have grown by 12% while in this -- this last calendar year, they grew by something like 14.1%. The headcount increase over this period has been 7% and the net income has increased by 18% over this period. There have been significant client additions in terms of over the last 1 year in [ $100 million ] plus or [ $50 million ] plus, 1 each and 5 in the [ $40 million ] category, out of which 3 came in this quarter itself. And there is a good increase in the [ $1 million ] plus about [ 56 ] numbers increase in the [ $1 million ] plus category.If I -- sort of take you through the numbers. There is a -- at a gross margin level, there is a slight expansion by 30 bps. There is a -- at EBITDA level there is a [ 90 bps ] expansion. And SG&A has in value terms has slightly come down. This is a quarter where, I mean the travel et cetera doesn't happen so much, and even otherwise, we have been sort of controlling some portions of the expenditure in terms of travel et cetera. The EBIT margin there is a slight sort of a decline which from 19.7% to 19.6%, and this also incidentally has been the effect of the currency -- cross currency.Couple of questions have been asked from me during the day and I thought, I must sort of give the response to everybody. One has been in terms of the ROCE, what sort of a ROCE, I mean, we have invested in IP deals and other non-organic initiatives over the last, more than 1 year. And how our ROCE is playing. Since [ March '16 ], we have been on a -- if I take at -- on a LTM basis, our EBIT margin has been 20%. It was -- a year before it was about 23%. The ROCE in that year which was March '16 was 23.9%. In March '17, it came down to 23.5% and in the first 9 months period, it is at 23.8%. So in spite of these investments, the ROCE continues to be very good. The other question has been around the amortization expense. And the amortization expense has increased by about[ $20 million ] this quarter and the reason for that is basically the amortization of the intangibles which we inherited from the acquisitions we did that is 1 element. The second element is the -- which basically has 3 components; the assembled workforce, the contracts, and the other element is basically which we have mentioned earlier is the -- when we do the IP deals, whatever we are making the payments, we are amortizing the 100% of the payments, and that payment is being amortized in the ratios of the revenue. And this also sort of a -- got -- typically the OND quarter is a good quarter so far as the licensing deals are concerned. And so the number is high [ also and consonant ] with the revenue, which we derived from these deals.So these are the elements which have led to an increase in the charge on account of amortization. With reference to -- there has been another question basically on relating to the difference between the profit which the U.S. GAAP numbers which we sort of disclose as per the investor release and Ind- AS. There is a slight sort of a difference between the 2 set of numbers in terms of net income and this is -- there is a -- historically, there has been a difference the 2 numbers and it evens out over a period of time. In FY '17, if I go back, our U.S. GAAP profit was lower than the Ind- AS. In fact, the Ind- AS was higher by about INR 149 crores. In this period of 9 months, the U.S. GAAP profit is higher by INR 61 crore. This is basically the element of assembled workforce, which under Ind- AS is required to be charged off in full while under U.S. GAAP, it is amortized over a period of time. So just thought of highlighting this, since this number is -- you will -- when you compare the 2 numbers, you will be able to see this.So this is very much the roundabout about the financial. Okay, I hand over to the operator for any questions and answers.

[Operator]

[Operator Instructions] The first question is from the line of Diviya Nagarajan from UBS.

[Diviya Nagarajan, Executive Director and Research Analyst]

Two questions here, one, how are you seeing the budgetary environment starting out this year? I know, it's a little too early for budgets to be fully [ frozen ] but some color there will be appreciated by sector.Second, it’s been few quarters of some of the early IP deals. Could you just give us a sense of the product improvements that you have been able to achieve and initial reactions in terms of either the revenue momentum or client feedback on that front as well? Thank you.

[C. VijayaKumar, President & CEO]

I will take the first question which is on the client budgets. While it's still early days to get a good sense of the FY'18 budgets. My sense is, it is going to be largely flattish and it continues to be optimizing on some of the traditional spend which will get directed towards some of the change in the business and transformation type of initiatives.This would be a very broad stroke. We still don't have a good sense from our top clients from their budget perspective, but the indications are I would expect it to be flat. And I will ask Darren to give you a color of the product improvements that we've made, especially like some products now it’s been 6 quarters. So over to you, Darren.

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

Great. Thank you, CVK. So it is still early days, but now that we have a track record of several quarters of working with these products. I think, we can begin to report if some of the progress that we've made in both energizing and modernizing and beginning to innovate around some of these core products. Where I would focus is we've been looking at an older products, and what are the key elements, what's the road map that we need to build to systematically modernize these products.And there are few core technologies that we've been focused on. The first is around ease of installing the product and increasing the cloud enabling those products. So Docker as an example is a core technology that we've been deploying into the road maps across all of the products in our portfolio. Second key area. It is a lot of low hanging fruit. Is around UI and UX improvements. So similarly, we've built a methodology again drawing upon a lot of our underlying engineering experience and the type of design work that we do with our clients to bring those capabilities both to improve the user experience of these products but then also bringing just modern UIs, so increasingly moving beyond thick clients, java applets moving into full thin clients, HTML5 and mobile clients. Third major area that we've been focused on is around openness and extensibility. So when you look at a lot of products that have been developed over the course of the last 20 years to 25 years, regardless of what the underlying implementation is, if you expose modern APIs, you can then bring those technologies, often times very robust, mature, scalable, proven technologies into any new ecosystem. So we're a huge proponent of Rest APIs and building out comprehensive Rest APIs across our product portfolio. These have been 3 key areas. And if you think about it, it's taking an old product, it's making sure that it's easy to install and to deploy across a variety of different environments whether it's cloud or on-prem really being agnostic to that from a deployment point of view. Making it open and extensible so you can bring it into new environments. And then finally, transforming the experience of it through the UI and UX. Those are a few of the key technologies that we've been deploying in terms of modernizing it. The second part of your question was around how clients have been responding to it. And I think, the response has been very, very positive. As they have started to see the focus on the products, more energy around the products , but then also a long-term modernization road map.

[Operator]

The next question is from the line of Pankaj Kapoor from JM Financial.

[Pankaj Kapoor, Research Analyst]

CVK, my first question is on the deal wins. You mentioned, it was probably one of the best quarter on events and you also won a very large deal in the CPG space. So is it possible to maybe quantify the size of the deal wins, the combined TCV in this quarter? Or give it a comparison like the way we used to give it in past to get some sense in terms of how it has progressed over the last couple of years.

[C. VijayaKumar, President & CEO]

Yes. Since the time we started giving guidance, we feel it's really not required to give the quantum of deal wins. But if you want to get a qualitative flavor, this was -- in the last 12 quarters, this is the highest booking performance. So I think that should give you some indication.

[Pankaj Kapoor, Research Analyst]

Okay, and right. But I would be right in presuming that most of this would be in the IMS space and that's the one, which has given you confidence about recovery in the growth in that area from first, second quarter of next year onwards.

[C. VijayaKumar, President & CEO]

See, I think there are 2 dimensions to this. I think, a few large deal wins, at least a couple of them. One very large which I talked about and 2 or 3 mid-sized deals are infrastructure, but we have fairly broad-based momentum across all services. We have number of mid-sized deals in our digital offering, in our core application services, especially in financial services, including the traditional businesses. We've had good bookings in our engineering services as well. So I would not say this is largely infrastructure, it's somewhat proportionate to our business size, I would say.

[Pankaj Kapoor, Research Analyst]

Sure. And on these IP partnership, again, since now we have expanded our relationship beyond IBM to other partners as well. Will be able to now give some color or quantify their contribution and how it has been progressing?

[C. VijayaKumar, President & CEO]

I think, we still think it's early days. We -- our large partner, which we announced, we continue to invest. This quarter also we invested. And last year, last quarter we announced about the DXC, IP partnership. This quarter, we signed an IP partnership with a third strategic partner. It's a small transaction compared to some of the transactions that we have done earlier. Maybe, I think, we would honestly expect this portfolio to get a little bit more diversified before we are able to report some specific numbers, but what should give you all comfort is, we have a very strong software product portfolio strategy. We are very happy to explain what the strategy is. And second is, all the financial metrics continue to be very positive. The business case that we had on all these products, we are performing to the business case. Our profit -- our EBIT margins have been stable. As Anil mentioned, our return on capital employed has also been stable. So I think, all these indicators should give you some sense that this is going in the right direction. And maybe to just help, get a little more clarity on what is the strategy since we are acquiring so many products, how does all this fit together? And what is our portfolio strategy? Maybe, I will ask Darren to kind of spend a couple of minutes to explain that. That should help you to give you a slightly broader perspective on this.

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

Sure. So as you know, through these IP partnerships, we believe that it's first a compelling financial model. One that builds off a lot of the underlying strengths and capabilities of HCL from a services point of view. But that isn't the endpoint of the strategy. Our aspiration is to build a large scale software business, really with the capabilities from engineering and capabilities around the IP partners, but then also developing organic IP and really building out a complete value chain from the development of the products, all the way through selling it successfully and bundling it into service engagements. So where we are today is still in the early innings of executing upon that strategy. Where we started, we believe these IP partnerships are very compelling entry point for us. They enable us to build off a lot of our core competencies and strengths, while working with partners that we can learn from as well as benefit from the complete value chain that they have in these market segments. At the same time, we have been very aggressively investing in developing out our organic IP portfolio, focusing on the core strengths of our services business, around automation, around DevOps and within all of our digital and application portfolios. So what we're doing and I think, what will become increasingly apparent over the course of the next few quarters is as we start to put all of these building blocks in place and really begin to bring to market both software as well as integrated solutions that combine software and services to our clients.

[Pankaj Kapoor, Research Analyst]

Sure. So if I have to then look at the growth of around 14% Q-on-Q that we reported in the R&D space, is it some vehicle give a slice of that, how much of that was because of the contribution or the growth in the IP business and how much was of that was from our traditional engineering services business. So even directionally, if you can give a sense that was there any significant acceleration in our core engineering services business?

[C. VijayaKumar, President & CEO]

From our core engineering services growth -- I mean if you take on a year-on-year basis, it would be comparable to what we've had in the last couple of years. And the top-up of that has probably from some of the acquisitions that we did in ERS and also from the IP partnerships.

[Pankaj Kapoor, Research Analyst]

Got it. And the last question is on the BPO, so if I strip off the acquisition impact, it looks like there was a decline in the organic business on a sequential basis. So just wondering, is it similar to what we experienced in the first quarter, is there some client specific issue over there?

[C. VijayaKumar, President & CEO]

I think, it's primarily contributed by one client in the telecom sector who is undergoing some significant challenges and the associated impact on the revenues from that client.

[Operator]

[Operator Instructions] We have the next question from the line of Ankur Rudra from CLSA.

[Ankur Rudra, Research Analyst]

Thanks for the color on the deal wins and IP business. I just have a question on IMS. CVK, if I look at the business growth there, overall growth on a Y-o-Y basis for the quarter has slowed down to mid-single digits, and obviously the lowest you've seen in a while, and perhaps more because of offshoring and India decline. But from a long-term perspective, could you update us how the infra portfolio breaks up between the services that benefit from cloud adoption and the services which are under threat from cloud adoption, so for example, cloud migration cyber versus remote infrastructure management and so and so forth?

[C. VijayaKumar, President & CEO]

Broadly, our infrastructure business has 4 broad components. About half of the business is data center. So it has definitely certain headwinds from a revenue perspective, driven by cloud adoption. The second one is good component of that is our Workplace Services, digital Workplace Services. We see the intensity of Workplace Services, the expectations of end users from the workplace applications and end user devices is increasing. The consumption is increasing. Like each end user, many end users have multiple devices and things like that. I continue to see a good long-term growth in end user computing space. Network is the third component, which is again fairly robust in terms of growth, but unfortunately that space is a little bit more dominated by some of the telecom service providers than IT services players. The fourth component was security which we have largely called out as a separate service line and it’s got extremely high growth potential. Does it help or you want to add some more?

[Ankur Rudra, Research Analyst]

No, that definitely helps. In terms of the overall portfolio, how should we think about growth here? Do we think that given it's a much bigger portfolio and 50% is still data center which has headwinds, it will be difficult for it to match company average growth going forward?

[C. VijayaKumar, President & CEO]

Yes, obviously, we need to win more new logos and that will drive growth. Existing portfolio will have some pressure, one is due to automation, renewals and cloud adoption. But I think, we are quite confident that the market opportunity still is quite big, and we have not really opened up in a significant manner. Some of the markets like Germany and even Australia, penetration from an infrastructure services perspective is very modest. So I think, winning new markets and new logos is really the big growth driver. Existing portfolio will continue to have some pressure, especially the data center portfolio.

[Ankur Rudra, Research Analyst]

That's helpful. Just one quick follow-up. Anil, if you could just elaborate on the puts and takes on the margins for this quarter?

[Anil Kumar Chanana, Chief Financial Officer]

Well, I think, I mean, of course, one was the currency impact which was about 10 bps. And then there were some efficiencies which were gained through the, particularly the Everest cost optimization which even otherwise is lower this quarter. And then we had the headwind in terms of salary increase which also came in through this quarter. So this broadly is the...

[Ankur Rudra, Research Analyst]

And what would be the impact on -- of the salary increase versus the rest?

[Anil Kumar Chanana, Chief Financial Officer]

I think about 50, 60 bps.

[Operator]

The next question is from the line of Sandip Agarwal from Edelweiss.

[Sandip Agarwal, Vice President]

Yes, you have mentioned that in this quarter the Mode 2 and Mode 3 services were like 25% of the business. So is it primarily because of some kind of inorganic contribution which has come because if you remember correctly, then you know, this is really significant number compared to what we were targeting initially in this short span of time. So if you can throw some light what is happening there? And also this 25%, obviously, doesn't have the new deal win yet in. So this proportion can go up much faster than anticipated in next few quarters?

[C. VijayaKumar, President & CEO]

Yes, I think the growth is contributed by -- we had a good growth in digital services. If you see our growth in financial services has been pretty robust and that's fueled by little bit scale adoption of digital in a couple of accounts which has contributed to this. And across the board, our wins in cloud services are -- cloud services has got 2 components, right. One is, earlier like we used to provide infrastructure, but now we also provide public cloud services in an aggregated manner to several clients, so that also causes an uptick in revenue. And of course, we had good growth in the Mode 3 services. This is a seasonally a very good quarter from a production platform perspective. So all of this contributed to an uptick which crossed 25% levels.

[Operator]

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

[Sandeep Shah, Vice President]

Yes. Just looking at some of your IP deals now, more than 4 or 6 quarters old, is there any of those deals were looking at the traction for the 4 to 6 quarters. You believe that the assumption of 10 to 15 years of amortization is aggressive or you believe that it is like, looking at the current traction, it is fairly more or less exact?

[C. VijayaKumar, President & CEO]

Yes, I will have Darren respond to it.

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

Sandeep, as far as the amortization is concerned, I mean, I think the deal period varies and typically the earlier deals had a 15 year period and some of the deals had shorter period. We look at the -- basically the, essentially the life of the product and accordingly decide how much we want to sort of a contract. We typically sort of do it in the proportion of revenue and this is very much relevant when you -- over a period of time if this is a mature product, we are able to sort of amortize more at the initial period than at the later period. So if you look at, that's why I said even in this quarter, you find a immediate jump of about $20 million from last quarter in the amortization [ touch ], partially is because of the technical[ amenities ] we had consummated in the earlier quarters and the full impact of which came in this quarter. And also the revenue from the product, the licenses and the maintenance is typically high in the OND quarter seasonally for the product companies is the best quarter. So is also in line with that.So to put you another, to give you another example. I mean, for the deals which were signed initially for which we have completed something like maybe just a year. I would say, 1/10 would have got written off. So we are very conscious of the, as we do sort of keep on looking at it and keep on measuring against what the original assumptions are and then amortizing it. And you also see the return on capital employed. Also is another testimony to the fact that these deals are giving us the returns which are, I mean, equivalent to the other ways the business is generally giving.

[Sandeep Shah, Vice President]

Anil, what can help us if you can give us some color on the $1.1 billion to $1.2 billion worth of investment, which we've done in the IP?What could be the balance average amortization period one can built in? Because some disclosure here would really help in terms of predictability of the revenues as well as in terms of the impact on the margins.

[Anil Kumar Chanana, Chief Financial Officer]

So in the financial statement under the U.S. GAAP, we are required to provide a schedule of amortization but that is we keep on doing it at every quarter depending upon the revenues derived et cetera. So that could be one of the guiding factors which you can take and we can offline sort of talk about it as well. It's very much clear that it moves to the -- in the financial statement.

[Sandeep Shah, Vice President]

I think that speaks more as a policy, which could be 5 years to 15 years, but I'm just speaking about the one, which we are actually partnering with where if you can give some color. Is it, because it's likely to be much higher than the 5 years.

[Anil Kumar Chanana, Chief Financial Officer]

No, just as a value there. I am not talking about the life per se, it is the values.

[Sandeep Shah, Vice President]

Yes, for the next 2 years, 3 years. You also give amortization schedule.

[Anil Kumar Chanana, Chief Financial Officer]

Correct, I am talking to that. Yes, the value that I indicated, yes. We can off line discuss about it.

[Sandeep Shah, Vice President]

Just the second question in terms of deal closure for you also, I think CVK said that is the largest deal, which you have closed which has a angle of digital plus some IMS. So CVK, is it, that trend has just started? You believe that trend has a more upside or you believe it is too early to call for, going forward? And second question in terms of the risk of the data center operation, I think in your last Analyst Meet, you also said to defend that risk that the percentage of your clients who would be moving to the Cloud, would not be that big versus the people who are moving to the public cloud are more SME kind of a client. Is that actually your belief is changing, which gives you a bit of a jittery where you are saying that this could be a risk going forward?

[C. VijayaKumar, President & CEO]

I think, the only thing that has changed by a big margin from that conversation and today is, I think the way customers perceive security on premise and they perceive security on a public cloud has dramatically changed. At that point, customers had security as a concern for moving to a public cloud environment. Today, there are many customers who are moving to public cloud to enhance their security posture, because the whole -- the security environment has become so complex, it becomes so difficult for a lot of enterprises to invest and keep themselves abreast of on the security requirements. I think, that's one significant change in the way customers are seeing. I would still maintain for about a good Fortune 100, 200 even 500 kind of customers, would have a 30% to 40% of the environment could move to cloud. The rest would remain on-premise. But a lot of mid-sized customers, there is still a very strong fraction of moving to public cloud, but there are still concerns about what would happen to performance, how would the latency be, how would applications interact and all of that. It is an evolving landscape. And we should also call out that into public cloud providers are also launching an on-premise version of their public cloud stack, like what Microsoft is launching. So I think, it's really a moving target and it's really difficult for me to kind of provide very firm view on where this will eventually land.

[Sandeep Shah, Vice President]

Answer to a second question about the deal momentums, can we say that more such deals can be signed where the client's decision making is better in terms of IMS or a large outsourcing, especially in U.S., as well as in Europe?

[C. VijayaKumar, President & CEO]

We are seeing traction. I mean, very similar to what it used to be. But deal sizes are definitely smaller than what it used to be. I would say significantly smaller, 30%, 40% lesser than what it used to be. So we have to win lot many more deals to reach the same TCV levels and kind of create growth. And of course, the reason deal sizes are smaller is the cost per management for a device or the expectations on automation and optimization is high, some components or solution with public cloud in mind. So some of these things are bringing the deal sizes to be smaller.

[Sandeep Shah, Vice President]

Okay, just last question, if I can squeeze on the guidances. Last time, your comments were that you would be at the lower end of the guidance. Looking at your performance in the Q3, your required rate for the fourth quarter is [ 1.6 ], plus you have also announced a couple of other IP partnership. Just want to know that this time, can we in between the guidance rather than at the lower end of the guidance.And second, I think those IP partnership which has been announced in this quarter, is it baked into the guidance or is it outside the guidance?

[C. VijayaKumar, President & CEO]

At this point, our position is we will be at the lower end of the guided range. There are some ups and downs. I mean, as we mentioned in the last quarter there is a steep decline in our India business. There is some headwinds due to our DXC partnership restructuring and of course there is some tailwinds due to some more additional IP partnerships that we have signed. Those impact of that would be very marginal because we close them only end of the year and that will have minimal impact into the -- this quarter. So we would stay with the lower end of the guided range.

[Sandeep Shah, Vice President]

Okay. And the new partnerships is being included in the guidance?

[C. VijayaKumar, President & CEO]

Yes. But the impact of that as I said is very, very marginal.

[Operator]

The next question is from the line of Siddharth Vohra (sic) [ Ashish Vohra ] from Reliance Life Insurance.

[Ashish Vohra, Executive Director]

Anil, just one clarification. As you have explained about IP amortization so far. Does it mean that amortization number will keep on varying depending on how our IP revenues come out in the coming quarters?

[Anil Kumar Chanana, Chief Financial Officer]

Yes, so it will vary because last as I said OND quarter has the -- is good in terms of the licenses and the maintenance revenue, so therefore will be, it will vary quarter-on-quarter.

[Ashish Vohra, Executive Director]

So as if depreciation holds a certain value after achieving, your amortization number may keep on going up and down, the way your IP revenues come in?

[Anil Kumar Chanana, Chief Financial Officer]

Correct.

[Ashish Vohra, Executive Director]

And just, this in terms of the split, the [ $300 million ], which you have spent in terms of IP deals this quarter, do you have any split on this, whom, to which, have you done it with?

[Anil Kumar Chanana, Chief Financial Officer]

So [ $50 million ] was DXC and then there are 2 partnerships. One was basically enhancing the existing partnership with IBM where a good amount went and the second was as Vijay mentioned, that's smaller, but I think now we have diversified into 3 partners.

[Ashish Vohra, Executive Director]

Okay, got it. CVK, Just 1 clarification. You've said that, we've had the highest amount of bookings during the quarter. At the same time, you've said that client budgets look flattish. So any disconnect between or we're gaining market share as it stands currently?

[C. VijayaKumar, President & CEO]

Yes, I think, I was also quite clear in my earlier commentary that and probably, Rahul can also add a little bit more color. There is some level of fatigue in some of the financial services clients with the existing incumbents. I think, there is some wallet share gain that's happening there. And while client budgets are flat, they're shifting the spend from some traditional services into investing in new technologies which we have seen has been the real strategy for many clients for the past several quarters. Maybe Rahul, if you can add a little bit more dimension from a financial services perspective as well here, that will help.

[Rahul Singh, President of Financial Services]

Yes, sure. Thanks, CVK. So essentially if you look at financial services, there is a higher pace of adaptation of new technologies, correct. So both for existing accounts and for new accounts we are seeing that our clients are looking at higher pace of new technology adoption and as that happens, technically deal sizes becomes smaller because old technology -- old outsourcing was largely around people and volume-based people-related kind of work. But while the new work tends to be more outcome basis and it tends to be smaller with faster delivery cycle. So I think, that change is happening in financial services.So if you look at HCL Financial Services, in effect what happens is that for our existing customers, we are focusing on renewals, which means that we are trying to get their share of the new technologies as they are spending more in that. So trying to move from what traditionally we're providing to what new services that they want. And there protection of existing clients becomes important, correct. So as a customer moves from old to new, you want to retain the customer and therefore deal renewals become very critical for us. And very happy to share that our deal renewal continues to remain pretty good. So most clients are renewing transactions deals with us. At the same time, as CVK mentioned, there is a fatigue factor with existing incumbents and other accounts, which gives us an opportunity to break into new accounts. And we've been successful in that as well, both in Europe and some parts of Asia as well where we've got some new wins, because their existing incumbents perhaps concentrating more on Mode 1, old way of doing things are happy to bring in partners which can get higher Mode 2, and specially add scale, Mode 2 add scale, which means that how do you digitize and how do you get into digital world for financial services at a very high volume. Volume in the sense here means more transactions and more higher velocity of execution of project. So it's a combination of that which is happening here. So the new deals tend to be in the new areas, new areas tend to be smaller deal sizes and therefore, you need to do many more such transactions to continue to get the same volume in your business. So I hope, that answers the question that you asked.

[Ashish Vohra, Executive Director]

Sure. That's really helpful. Just one more, in terms of the various IP investments which we do, do we take the sales and marketing force from our partners or we keep on incrementally investing in the same?

[C. VijayaKumar, President & CEO]

Yes, there are 2 components. The primary sales is the responsibility of our partner, but to enable that, and also create some amount of cross-sell in our own portfolio of clients, we have wherein started investing in the sales team which is also part of our overall business plan for each of the product investments. And over a period of time, we plan to build a fairly strong direct sales team for product sales which is very critical to continue to expand in our software product portfolio.

[Operator]

The next question is from the line of Shashi Bhusan from Axis Capital.

[Shashi Bhusan, Executive Director of IT and Telecom]

We have done some investment of $1.2 billion to forge partnership with 3 tech majors to get some growth. In terms of risk assessment, what can go wrong? I mean, what I mean is if you can cite few risks that you foresee in this partnership?

[C. VijayaKumar, President & CEO]

Yes, I think, I mean, when we have talked about this earlier as well, I think the risk that we see in these relationships are quite complex. There are multiple businesses that we interact with. I think, the relationship [ is the key element ] where we need to be consistently focusing on risk mitigations. From a technology and from a market perspective, maybe Darren, you can provide a little bit on this.

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

Yes, I mean, I think in terms of what could go wrong, betting on the wrong products, and the wrong technologies, I think when we -- before we enter into one of these partnerships, we do a pretty extensive amount of due diligence. We draw upon a lot of the expertise and experience across HCL, work we do with our clients. And one of the things we focus on is where we believe there is enduring value and enduring client needs and products that has been battle tested. But I think, that's certainly a risk area if we're wrong, if some of these technologies become obsolete, faster than anticipated. I think that would be one of the key risk factors. The second then would be risks associated with the partners themselves. And again, we've done a lot of due diligence on the partners we work with. They are large leading global companies that in most cases, we've had very longstanding relationships with, but that's certainly another component of the relationship is, will those companies remain vital in the market? Will they continue to have large sales and marketing presence in focus with their customers around these products. So again, I probably highlight those as 2 of the risks, or 2 of the things that could go wrong but also trying to give you a sense for some of the risk mitigation strategies and some of the things that we do before undertaking any of these investments.

[Shashi Bhusan, Executive Director of IT and Telecom]

Can you please explain, what particularly you mean by saying that you do interaction with the multiple businesses as one of the risk, because if my understanding is right, it's mostly to do with 1 product, that would be 1 division, right. I mean, if you are taking Rational Rose, product of IBM and it's Rational Rose. Why there would be interaction with the multiple businesses in -- with IBM for Rational Rose?

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

Well, I think that's exactly right. I think, we were explaining in the context of just multiple products working within multiple divisions and that's were parts of IBM. So while it adds to the complexity of the relationship, it in itself is a risk mitigation strategy because we aren't dependent just on 1 product or 1 division of IBM. We actually work across multiple parts of their organization.

[Shashi Bhusan, Executive Director of IT and Telecom]

So is it possible that if we don't do justice with or if we do some mess up with one of these product, we might lose other contracts as well with say, IBM?

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

Certainly there are multiple products [ within ] multiple of these partnerships with IBM, but as I said, we work in multiple different areas. So again, if something were to go wrong with a particular product, we don't think necessarily that that would carry across the whole portfolio or the whole relationship with IBM. But certainly, we take all efforts that we can to make sure that we're doing a good job and we're fulfilling all of our obligations for each product.

[Shashi Bhusan, Executive Director of IT and Telecom]

I'm sure you would and all the best for that. And just 1 more question that, what would be your growth in the quarter outside IP deal, if we exclude contribution from IBM or DXC?

[C. VijayaKumar, President & CEO]

As a practice, we don't want to call out each service line and each partnership and things like that. We would be comfortable to just call out the overall growth. And you already have enough dimensions across for example, verticals, across service lines. And you know, where some of this IP partnerships and acquisitions are being consolidated. So I think, I mean, you have a fairly good visibility of what it could be. But formally, we are not calling out organic and inorganic growth.

[Operator]

The next question is from the line of Ravi Menon from Elara Securities.

[Ravi Menon]

Just a broad question. Darren did say that the endpoint for the software strategy is not really to create some synergy with the services but go beyond that, create the entire software division [ of such ]. But do you think that somewhere closer to where we are now, we should start seeing some new service propositions emerge from these IP deals?

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

Absolutely. And as we have undertaken all these partnerships, obligation #1 is to make sure that we're transitioning and stabilizing and then undertaking a lot of the efforts that we've discussed. Energizing that customer base, modernizing the products and focusing on innovating them. Such been the core mission, but in the course of the last couple of quarters, we've also begun undertaking the efforts to take these underlying IPs and start to fertilize them across the HCL channel bringing them into different solutions and service offerings and starting also to bring them together with our organic IP portfolio, so that we can really bring dramatically differentiated propositions to our customers by combining all of these different offerings together. So I think, that is still early days, but absolutely. I think, it's something to look for, and I would expect to see a lot more proof points of that over the course of the next few quarters.

[Operator]

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

[C. VijayaKumar, President & CEO]

So in closing, I mean, as we spoke for the last 1 hour and shared all the details. It’s really been a very good quarter on all fronts. Industry-leading growth, excellent bookings, probably a record booking over several quarters. Our execution and transformation into increasing our pie in the next generation services [ in our ] clients been very rewarding and we are very encouraged by the success that we've seen in our strategy. So we will continue to execute on this and the future looks quite healthy, and we remain pretty confident of demonstrating continued industry-leading growth. Thank you all of you and look forward to talking to you during the next quarter call. Thank you.

[Operator]

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