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HCL Technologies Ltd
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Ladies and gentlemen, good day, and welcome to HCL Technologies Limited Q3 FY '20 Earnings Conference Call.[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Mendiratta, Head, Investor Relations, HCL Technologies Limited. Thank you, and over to you, sir.
Good evening, and good morning, everyone, and welcome to the Quarter 3 FY '20 conference call for HCL Technologies. We have with us today Mr. C. VijayaKumar, President and Chief Executive Officer; Mr. Apparao, the Global HR Head, Mr. Prateek Aggarwal, Chief Financial Officer; Mr. Darren Oberst, Head, Product and Platforms, along with the key leadership team at HCL. I would now hand over the call to Mr. C. VijayaKumar to discuss the performance for the quarter 3. Thank you.
Thank you, Sanjay. Good evening, and good morning to all of you. Welcome to our third quarter results announcement. We've had a very good quarter. We're very happy to report that our annualized run rate has crossed $10 billion. It's a great milestone, and as HCLites, we are very proud, thanks to the contribution of 150,000 HCLites across the world. As you can see, our revenues grew 16.4% year-on-year, 2.1% quarter-on-quarter at constant currency. And this quarter, we again delivered a strong operating margin performance, which now stands at 20.2%. We've now delivered 2 consecutive quarters of 20-plus percent EBIT. This has come through a strong value proposition that we have to our clients, an efficient operating model and cost management and also a better portfolio mix that we have achieved, as you can see in the segmental results. To look at a little more details on the segments. The highlights of the quarter is our software business. HCL Software business delivered an outstanding performance, which has helped the Products and Platform segment to grow by 16.8% quarter-on-quarter in constant currency. This business scaled up impressively, added close to 4,600 customers across all parts of the globe, including some geographies where we are not present. While we were always very confident of our strategy in investments in the software products business, this quarter is a fitting validation of what this business can do not only in terms of growth in revenues, high profitability and also excellent cash conversion, which Prateek will highlight subsequently. Darren will also talk a little more about the software business subsequently. Coming to Engineering and R&D Services and IT and Business Services, our teams worked very hard during the last 2 quarters. We delivered very high growth. So this quarter, our employees and customers took a little more time off. So the furlough impact was a little higher. In spite of that, our Engineering business grew 12.8% year-on-year and 0.7% sequentially in constant currency, and IT and Business Services grew at 10.4% year-on-year and was almost constant sequentially on the constant currency basis. Of course, IT and Business Services also had a furlough impact. And also in the beginning of the year, we had identified a few nonstrategic engagements, which were not delivering the desired margins and had made some plans to exit out of them, some of that is playing out. Given that we have a strong organic growth momentum, we believe it was the right time to slightly strategically fine-tune our revenues. This quarter also was a very good showcase of a balanced portfolio mix that we have built and our business model has really delivered, which helps us in mitigating seasonal peaks and troughs in growth. As you can see, the top performance in Products and Platform has helped us better -- deliver better growth than the market expectations. In terms of the quality of revenue, it's getting better by every quarter with a better contribution from recurring services stream, which will make us more and more immune to economic cycles. We continued to deepen our propositions to take advantage of the cloud and other digital opportunities. One example is the Google partnership, which we signed as a preferred solution in several verticals that we operate. In terms of mode wise performance, combined Mode 2 and Mode 3 revenue stands at 34% of our overall revenues. Mode 2 grew 23.5% year-on-year while Mode 3 grew 55% plus year-on-year. In terms of geographies and verticals, 5 of the 7 verticals posted double-digit growth. In fact, some of them are in the 30% range. And Life Sciences and Healthcare delivered high single-digit growth. As you can see, Manufacturing, Energy & Utilities and Public Services have delivered stellar growth. In terms of geographies, all the 3 geographies; U.S., Europe and RoW, have delivered a double-digit growth on a Y-o-Y basis. And RoW led the growth with a 27.3% year-on-year in constant currency. This quarter, we closed and integrated the previously announced acquisition, Sankalp. This acquisition will enable us to expand faster in the semiconductor vertical. If you look at the clients, the $100 million plus clients have increased from 10 to 15 on a year-on-year basis, so are several other clients categories where we have seen an impressive increase in the client buckets.If you look at the wins this quarter, we continue to see a good traction in the market. However, this quarter, we experienced a dip in bookings, which I see as a timing issue, as some clients have taken a little longer to decide. However, the good news is our qualified pipeline is at an all-time high in the recent past, and we are expecting a higher conversion of pipeline to booking this quarter. If you were to ask me how much is your booking lower than last quarter, the obvious answer is I'm not going to give you a specific answer. It's a little bit lower than last quarter, but we are very confident of a higher conversion this quarter on a very high pipeline that we have. In terms of analyst recognitions, we continue to win number of analyst recognitions on the top quadrant as a leader, especially in a number of new areas: digital, cloud, IoT, cybersecurity and several other things. And in the Everest Talent Readiness for next-gen IT services, HCL came out on the top, demonstrating our readiness to deliver digital transformation engagements. I think that provides an overall commentary, and I will ask Prateek to talk through some financials. After that, we will go with Darren to talk about the Product segment.
Thank you, CVK, and happy New Year to everybody on the call. I would give a quick commentary on the key financials, starting with the revenue number, the $10 billion run rate, $2.5 billion for the quarter, $2.543 billion to be precise. Revenue growth of 16.4% year-on-year at constant currency, 2.1% sequentially. And organic growth was just under 10% for the quarter and about 0.2%, 0.3% for the sequential. EBITDA is up at 24.7% for the quarter, about 124 basis points higher than the previous quarter. And EBIT at 20.2% is 28 basis points up from last quarter. Optically, it looks like 20 basis points, but it was 19.96% and now it is 20.24%, so 28 basis points. And this quarter, we faced a headwind of 6 basis points actually. And therefore the underlying normalized EBIT improvement was actually of the order of 34 basis points. And the largest contributor to that improvement was the added revenue and EBIT from the HCL Software, the P&P segment, at 32.9% EBIT. That addition of that $50-odd million revenue drove -- that itself amounted to 22 basis points improvement. And the rest was obviously from IT and Business Services, while ERS reduced a bit. In delivering all of that, we overcame the impact of the annual salary increments that were given during the quarter, which amounted to 60 basis points, which was all overcome through similar type of 60 basis points of better productivity, largely in the ITBS as well as in the P&P segment.Net income for the quarter came in at 16.8%, up 160 basis points quarter-on-quarter and 23 basis points year-on-year. There is a table in the presentation that gives the explanation of some of the movement in the tax rates. It's basically the difference between Indian GAAP, Ind AS, and the U.S. GAAP accounting. Basically U.S. GAAP allows you to account for corporate tax reduction only once it's been passed by the Parliament, whereas in the Indian GAAP tax estimates, we had already taken the benefit in the last quarter as per Ind AS and IFRS regulations. That's the reason for the $9 million difference that you see in the middle of that page on the website right now. And that explains why the number has certainly jumped up as far as U.S. GAAP is concerned. In tax terms, it has jumped up. In tax expense, it has gone down. Otherwise, if you look at the total YTD FY '20 book by Ind AS as well as U.S. GAAP, ETR is now at 22%. You will recollect, when we started the year, I had guided towards 24% as the ETR expected for the year. It has come down to 22%, basically driven by the corporate tax rate reduction by the finance minister and the Parliament, which has got baked into it. And the reason for that, as you may remember, was basically the high amortization of the goodwill and the intangibles, which we acquired as part of the products acquired from IBM. So just to clarify, the 22% YTD that you see in the ETR as per both the GAAP methodologies is the guided range for the full year as well. And that's why the income -- net income for the quarter is 16.8%, building in the cumulative benefit through the 3 quarters. I then move on to the cash conversion. And we have Page 17 in the slide deck again, which basically puts together the 3 quarters of this fiscal and the cumulative numbers in the last column. And as you can see, for the quarter, OCF is above USD 700 million, $709 million to be precise. And on a 3-quarter basis, as you can see, in the second last row last column, the OCF to net income ratio is now at 109% for the 3 quarters put together. This is what we have been commenting about guiding towards, all about the better cash generation, partly because of the contribution from HCL Software, the software business is -- as opposed to the services business, in the software business, you bill first and then recognize revenue later as opposed to the services business, where you do the work first, bill later and then collect 60 to 90 days later. So that cash conversion is starting to play out as we enter the second quarter of the software business. And also the fantastic work that the teams across the company have done in terms of billing early and collecting early and leaving no -- I mean, the minimum, minimum amount of unbilled revenue on the books. As I'm sure you will pick up from the balance sheet, the unbilled revenue that we have is amongst the lowest in the industry. So that has all aided great cash conversion at 109% of net income during the first 3 quarters. And if you look at free cash flow just a row above the 109%, that has crossed $1 billion for the 3 quarters put together. And just for the quarter 3, it is $657 million, which is, again, a very heartwarming kind of number. And OCF -- sorry, FCF, free cash flow, as a percentage of EBITDA is also at 61% for the 3 quarters put together. So all this cash conversion has made the net cash now go up to $1.1 billion, up from $496 million for the last quarter. So that's an addition of more than $600 million just in the quarter. So $657 million free cash flow has obviously helped that and we returned some of the loans that we had, et cetera and added $600-plus million to the cash balance, net cash. The DSO is at 83 days now, including the unbilled, which is down 7 days versus the last quarter, which was at 90 days. Like I said, due to significant reduction both in UBR and also in the billed receivables. Both unbilled and billed receivables improved significantly. That takes our last 12 months cash EPS, which is now at INR 48.7 per share, which is up by 21% on the same LTM basis for calendar year '18. So calendar year '19 over calendar year '18 has gone up 21%, INR 48.7 per share. And EPS is at not very far off, INR 4 difference. It is at INR 44.8, up by 16.6% year-on-year. The guidance is the next thing I want to quickly cover. We had guided at the beginning of the year to 14% to 16%, which we increased last quarter to a wide range of 15% to 17%. And in this call, we had broken it up saying the inorganic was going to be 5% to 6%. And now we are confirming that at 6%, the very top end of that guided range. And the inorganic -- and the organic guidance that we had given was 10% to 11%. And we are now guiding it to the top half of that range as well, 10.5% to 11%. So in total, we are 16.5% to 17% in constant currency is the guidance for the full year with 1 quarter left to go. And similarly, on the bottom line, the EBIT side, we had guided to a range of 18.5% to 19.5% at the beginning of the year. And we are happy to raise that also to the top half of that range, which is now at 19% to 19.5%. And we are happy to have 2 solid quarters under the belt with 20% kind of numbers and which helps us raise that number, that guided range to 19% to 19.5%. I'm also very happy to share we secured A- credit rating from S&P Global. These are global credit ratings with stable outlook. And I mean, just for comparison, these are -- this rating is 3 notches above the sovereign, which is at BBB-. So we are 3 notches above at A-. The last thing I want to talk about is the dividend. And as we had announced doubling of shares last quarter as a 1:1 bonus issue, we are continuing with a INR 2 per share per quarter kind of payout on double the number of shares this quarter. And that's the dividend that the Board has declared for the quarter. With that, I'll hand over to Darren to talk you through the great performance of HCL Software business.
Very good. Thank you, Prateek. We wanted to share and give you a little bit of color commentary on a few of the highlights. As both CVK and Prateek noted, this was the second full quarter since closing the acquisition of the IBM software products. And probably the overall headline is that we continued to see good progress in terms of the transactional momentum. To share just a few data points and to perhaps exemplify that, we gave a data point in the second quarter, around 1,500 total transactions that we completed in the quarter. By virtue of comparison, in 3Q, it was over 5,000 transactions. So over a 3x increase in the transactional volume. And as CVK noted in his opening, we've now onboarded and transitioned over to HCL over 4,600 customers over the course of the last 6 months. That actually represents customers and transactions across over 90 countries around the world with large-scale customer wins and proof points in every major geography. And especially notable to us was some of the large wins that we saw across Europe, Middle East, Africa, as well as Latin America, Japan and parts of Asia. Last quarter, we talked about our partner base. We built a partner base of 1,300 onboard, ready-to-transact partners in our first quarter. That grew almost another 50% in our second quarter. We now have over 1,800 ready-to-transact partners and resellers all over the world. And then we've also built out what we believe is a really good foundation and starting point to support a high-volume transactional business like this and to give us the foundation to continue to grow in the future. Just to share one data point that we thought illustrated that. We built out an e-commerce system and a set of processes around it. And in just Japan alone, in the last quarter, we completed over 700 e-commerce transactions. So hopefully, that gives a bit of a flavor for just the sort of sheer volume and scale of transactions that we've completed within the first 2 quarters. But I think what was really heartening to see in this quarter was the quality of those wins. I'll spend a minute and talk about this. We saw some larger transactions. We saw some growth transactions. And I think most excitingly, we saw a lot of new footprints, customers for the first time making a strategic technology decision to embrace one of these products. So again, just to give maybe a couple of data points around that. AppScan, one of our application security products in a fast-growing market, very well positioned product. AppScan alone brought on 27 new customer footprint wins in this quarter. And that was the most of all of our products. BigFix, which also is in a different part of the security market, had 23 new footprint wins. Looking a little bit beyond that, our business partners. One of the health metrics that we've been really focused on isn't just signing a partner up or seeing that a partner will support us with a renewal transaction, but really looking for signs of partners working with us to grow. And we're really happy to report that in this quarter, we had over 700 new license transactions that came through our business partners. Now this represents sales both to existing customers who are expanding their deployments as well as new footprint customers. And again, from our point of view, it's just the beginning, but it's a really nice validation point that across that partner community, there's confidence in HCL, there's confidence in these products and that they're looking to grow with us in the future. In addition, we saw an increase in $1 million-plus transactions. For those on the call that are used to looking at services numbers, $1 million might seem like a pretty small deal, but for software, a license transaction or renewal transaction, it's a pretty decent size. We saw a significant increase in those transactions in this quarter. And in addition, we saw many customers that were larger scale, $1 million and up, choosing to expand their deployments along with increases in overall deal sizes. Now underpinning a lot of this, over the course of the last 6 months, is a lot of lead generation and marketing. Just in the course of this quarter, we had 28 webinars. We participated in 21 events and conferences. We actually had over 150,000 unique visitors come just to the HCL Software website to learn more about our products. And then one -- another kind of symbol and signal point that we wanted to share is we've really started to roll out cross-selling, upselling, collaborative selling with our colleagues across the services and the core business of HCL. And we wanted to call out one win in particular, which was a new logo win, both for HCL Software and HCL Services around BigFix. And just a nice proof point and a nice example of some of the synergy that we hope to build upon in the future in terms of finding collaboration across our business portfolio. So hopefully that gives a flavor for some of the transactional momentum and some of the sort of the quality and caliber of some of the deals that we saw. Finally, I do want to take a minute, and we'll do this every quarter in our readout, is really talk about product innovation. Because at the end of the day, the lifeblood of any software business is continuing to have velocity in your road maps and bringing new innovation to your customers. So this quarter, we had one very large product release. It was a new major release of Domino, Domino v11. The announcement was on December 4. And it really represents, from our point of view, another major milestone and proof point of the commitment that we made when we first got involved with this product, its 15,000 customers around the world that we were going to be investing in supporting our customers to be successful, but more importantly, really helping to modernize and innovate the very large application ecosystem around this development platform. There are over 10 million enterprise-grade Domino applications all over the world. And so the Domino version 11 release really focused around major new capabilities around application development, making it very easy and almost seamless to build mobile and thin client applications with Domino, really extending Domino so that it becomes easier to federate, integrate Domino with other applications within the enterprise. And then also really excitingly, building out new business user tooling to make it much easier from a no-code and low-code point of view to deploy new Domino applications. Now a couple of early data points around this rollout. The event was actually done in Tokyo. We actually hosted it in Tokyo, where we have many large customers across the Japanese market. But we also ran a series of digital viewing parties, where we had over 50 business partners around the world, actually bringing together their customers to participate virtually in this kickoff. We've had over 10,000 views, repeat -- replay views of the keynote announcing the launch of Domino version 11. And probably more significantly, again, in the symbol and signal category of where we're looking to go and some momentum that we're seeing around this, in the third quarter, we had 18 customers come back to Domino. That's a really meaningful number to us. These were customers, and there are many thousands of customers that had used the product in the past and, for one reason or another, did not see the pace of innovation and investment, and they had lapsed their use of the product. And with the investment that they're seeing, some of the acceleration they're seeing from HCL, we had 18 customers restart with Domino in the past quarter. And within just the first few days, post the announcement of version 11, we had several dozen more come to us who are in our pipeline. So again, a very nice, I think, signal of the kind of momentum and a validation of the strategy that we've been rolling out. So it's still early days. We're learning every week. We're really focused on getting better and really building great value for all of our customers and partners. And it was very fulfilling just to see, again, some of the very early signs, a validation of that strategy within this quarter.
Now we can open up to question and answers, please.
[Operator Instructions] First question is from the line of Sudheer Guntupalli from Motilal Oswal AMC.
Just wanted to double check. Prateek, at the beginning of the call, you said the incremental revenue of $50 million from the IBM products came in during the quarter. However, your sequential increase in Mode 3 looks like it's just $37 million. So if I adjust for the incremental revenue, this segment has actually reported a decline sequentially, that too in a seasonally strong quarter for Products. So any color on this?
Sequentially 11%. So I was talking about the P&P segment that has grown quarter-on-quarter in constant currency by 16.8%. That's the growth I was talking about.
Yes, Prateek. So what would be the inorganic component in this? Because last quarter, if you remember, we have not recognized the ideal run rate of revenue from the IBM acquisition. I think $106 million was recognized in the previous quarter. So what is the incremental revenue that came from this segment in this quarter?
So Sudheer, in the Products business, typically, you cannot look at it on a quarter-to-quarter basis. I guess, that's where the difference in thinking may be. What I was talking about is just the increase on a -- more on a year-on-year basis, which the team has delivered, that $50 million extra is what I was talking about.
Yes, sir. So you haven't -- I mean, just to be clear on this, is there any incremental revenue, which came in from IBM deals in this quarter or the run rate is just $106 million?
No, Sudheer, I think the $105 million, $106 million, which we talked about was September quarter '19 over September quarter '18, right? So I wasn't talking about incrementality right now. I wasn't going down that path. I was just talking about the increase in the Products and Platform revenue. Just give me a second. I'm just...
Sure, sir.
We'll go forward. I'll come back to you, Sudheer, on this.
Sure, sir. And my second question is on some of the large deal ramp-ups, which came in the first half of this year. So that has actually set up a high base in terms of organic growth. And this year, we did not seem to have announced any mega deals like the way we announced towards the end of the previous fiscal. In conjunction with the U.S. election-related uncertainty, how do you feel about the organic growth for the next 12 months, given the deal wins or deal pipeline we have in front of us? I'm not asking for any quantitative guidance, but directionally, how do you feel about organic growth shaping up, an acceleration trend or a deceleration trend?
Sudheer, the reason we have not announced large deals in the last few months is really because -- I mean not every customer is comfortable about releasing a PR related to a large deal. So a lot of them wanted to keep it confidential. So that's why you will not find a large deal announcement in the last few months. However, in the first half, we had decent booking. I mean, obviously, some of this -- I mentioned there is a dip in booking this quarter because if you look at the last year, we had 2 big peaks. So we had a billion-dollar deal -- a couple of billion-dollar deals in the last fiscal. Obviously, we have not had a billion-dollar deal this fiscal. However, we've had good booking. And most importantly, the pipeline at this point is at its peak. And I'm very positive about the conversions that will happen. In fact, we are literally signing large deals as we speak. So I feel confident about a good booking this quarter, which will help us end the year with an overall good booking. It may still be lower than last year because of very large deal wins that we had. So overall, at this point, I would not be able to comment on what FY '21 organic growth will look like. We have anyway provided you guidance for the coming quarter. That should give you an indication of the exit numbers. And we will really give you a good view when we come in next quarter.
Sure, sir. One last question. So one of the key concerns earlier was the low EBIT margins in Mode 2. So this seems to be inching up over the last couple of quarters. So any color on what is driving this increase? And what would be the steady-state EBIT margin expectation for this segment? That's it from my side.
As we said, as we scale this business, the EBIT margins will go up because there is obviously a set of investments which we have done and we continue to do. And that gets a little better spread out when the business scales. However, I think you will see a sharp increase in margins in Mode 2 this quarter. Do not take this as a trend. We should wait for a couple of quarters more to kind of see if the margins are going to be higher in this business. However, whether it is Mode 1 or Mode 2, I mean, in the beginning of the year, we did make a decision to drop some business, and you see that reflecting in our margin improvement across the board, whether it is Engineering Services or even in digital, because if you look at the skills for digital, they are becoming more expensive. So we really need to get the right rates to deliver the right margins. So to that extent, we have done a little bit of strategically selective and dropping in some -- dropping some businesses. So you will see that moderating revenue a little bit, but definitely, it's all in the right direction. And this is a strategy which we can very safely adopt in a year when we've had a historic growth. So that's really what's driving both an improvement in margin and whatever slightly lower growth in the Mode 1 business.
Sure, sir. That's very helpful. All the best for the rest of the year.
And Sudheer, just coming back to your first question. So the number for P&P in the last quarter was $290 million and that number has gone up to $334 million. That increase of $44 million just pure quarter-on-quarter is the kind of number I was talking about. I rounded it up to $50 million, colloquially speaking. That's the number we are talking.
No, Prateek. I think -- so when we acquired the IBM products, we were expecting $625 million run rate, so $625 million for the first year and $650 million for the next year. And on a quarterly basis, it should roughly be around $150 million. In September, I think we recognized only $105 million. So my question is more about, in December quarter, have we recognized that delta of $45 million, $50 million odd?
So that, let me come back to you separately because I really haven't looked at the incremental commentary that we had given earlier. The $50 million, which you asked about, I've just clarified, that was just a simple quarter-on-quarter increase, and that is after taking into account some about $5 million of ForEx impact as well. So the total growth is of the order of $50 million on a quarter-on-quarter basis in the P&P segment. Regarding your other longer-term question about that $625 million, is something I'll have to check on that and come back to you separately on one-on-one basis. I'll do that.
And just to add to what Prateek said, I mean, obviously, the HCL Software business has grown, which is also reflected in the P&P business very smartly. And we are pretty much close to the run rate that we would expect in this business at this point in time. So that should give you a good indication of where we are.
[Operator Instructions] The next question is from the line of Sandip Agarwal from Edelweiss.
Happy New Year to the management team. CVK, I have just one question basically around some weakness, which we have witnessed in this quarter on Mode 1 and Mode 2 services, number one. And also some weakness we have seen in the U.S. as a geography, whether there is a correlation to that? And similarly, some comments on technology services and life sciences. Now is it purely because of the base effect? Or it is something else? So if you can throw some light on this correlation of this 3 -- 2 services with the geography and the Mode 1 and Mode 2.
Yes. So Sandip, as I highlighted earlier, the furlough impact has been a little bit more in the both Mode 1 and Mode 2 business. IT and BS and Engineering and R&D, on both, the furlough impact has been a little higher. The second thing is, I mean, we've dropped some business. In fact, it's not that we did it this quarter. If you see Q1, when our margins came down to 17.1% or even before when we plan for the year, we were a little bit concerned about the drop in margins. So we did consciously take a call to drop some accounts, which were not yielding much strategic value. So some of that obviously did not happen at that time. It is happening gradually. Other than that, if you look at normalized organic growth in ITBS and Engineering Services, it's very good. And we are very confident of good momentum in our core services as we move forward. Geographies, again, I think the 2 aspects that I highlighted, that plays out a little bit more in the U.S. this quarter, and that's why you'll see U.S. a little soft. I hope that answers your question, Sandip.
Yes, yes.
Next question is from the line of Sandeep Shah from CGS-CIMB.
Just one question on the Products side of the business. Can -- is it possible to tell us what proportion of the total client base would be Tier 1? And what could be their contribution to the Products and Platforms? Tier 1 means, I mean to say the larger client base.
I don't know if I can give you an exact number, but this is enterprise software. And generally speaking, all of the customers are large enterprises. And again, I don't have an exact breakdown. Certainly, there are the exceptions. There are a few smaller entities or academic institutions that may be customers of the products. But generally speaking, the sweet spot of that customer base who we're selling to tend to be the sort of the Global 5000 customer profile.
And again, the client base is far wide and deep. I mean, as diverse as a bank in Indonesia to a railway in Brazil, and it's quite wide and...
Governments.
Governments. But if you look at our core markets, U.S., a large part of Europe, Australia, Singapore and Japan, I think if you look at our -- let's say, if I define the target market as Fortune -- I mean, Global 2000 companies, both listed companies that are in Global 2000, but if I just take a similar profile of companies, maybe top 5000 companies, at least half of them would be clients of the -- half or more will be clients of the software products.
Software products.
Okay, okay. And I do agree that in the analyst meet, we clearly said that we are not looking for a joint selling, and we want to keep the sales and marketing function separate, but is there any road map, strategic plan in terms of tapping some of those larger customers, where on an organic basis, we don't have a presence, but we can go through a product side? And any initial success on that?
So I think as we highlighted, I think the first focus is to ensure we sign up contracts with all the customers. So it's going to take us at least 2 more quarters to sign up with possibly 90% plus of the customers and the 10% will be a long tail because some of them have signed up for a 3-year deal, so their renewal will come later. So I think next 2 quarters, we will still remain very focused on maximizing our reach out to the acquired client base and signing the software business. So while I'm saying that, there is already some level of cross-sell that's already happening, like for a BigFix customer could be getting serviced on AppScan or -- and Darren did talk about a lot of new footprint, what does that mean? I mean, they're already a customer for one product, we are able to sell another product. And there are also a number of new customers that we have signed up. So in terms of services synergy, I think it's going to take at least 2 more quarters. We are working on creating services sales engines in a number of geographies where we have access to clients through the software channel, but we may not have services sales present. So we are trying to build those presence, which will set up very nicely in a couple of quarters from now, to completely look at new markets for our traditional services and digital services.
Okay, okay. And CVK, just on the large outsourcing deal wins, especially on the Infrastructure Management services, we have seen last time when the election happened in the U.S., those announcements got pushed out. So are you witnessing that same could be a possibility in CY '20, where the big bang outsourcing deals may not be announced or may get delayed?
Actually, if you really look at the history, it's only after the election results, the dynamics changed. There wasn't too much of a change in the outlook. Even maybe 3 months before the elections, things slightly started changing. So I would think it's a little early. In a couple of quarters from now, I think we will have a better view of that. At least for the next 6 months, I mean, this quarter and the next quarter, I'm not seeing any change. Customers are truly making their decisions on what makes sense for their business. And even in the current scenario, after the initial hesitation, a lot of customers went back to doing what is right for their business and not necessarily getting constrained by the political undertones. I largely see a similar thing happening, which means they will continue to take decisions based on business case rather than getting concerned about the political undertones. However, we should wait for another 2 quarters before really taking a view on that.
Okay. And just last follow-up. One of your large global peer in the last earnings call has said that the pressure on traditional outsourcing services is getting stabilized. So are you witnessing the same, especially for contracts which you have signed on Infrastructure Management services, which are coming for renewal?
See, especially on renewals, we've had a fantastic renewal season. And in fact, last quarter, many mega deals that we have, big large accounts renewed, I mean, exceptionally well. I wouldn't say the competition in renewals is moderating. I see not only global players, Indian players getting quite aggressive. So obviously, as I mentioned earlier, I mean, we are definitely very keen to maintain our margin profile. And we do believe our prices are very competitive, our automation strategy is very strong. But sometimes, it's possible that some of the players get very aggressive. So I mean, we wouldn't definitely compromise on the margin profiles that we want. So that's the strategy that we have taken, which has worked well. Last quarter, we renewed everything. But if it is -- if we need to drop some business because of margins, we will drop.
Okay, okay. But the inward inquiries from the clients on automation or in terms of pricing pressure, is it reducing?
I think it's stabilizing, I would say, because I mean, I think there was a euphoria where when there was a 5% year-on-year reduction, expectations had gone to 15% and 20%, but I think that's kind of normalized, I would say, and it stabilized.
[Operator Instructions] The next question is from the line of Rahul Jain from Dolat Capital.
Congratulations for a very strong execution, especially on the P&P business side. I would appreciate some clarity you may add to our understanding here. A, when we say we added 500 more partner addition that is taking the count to 1,800, is it re-signing of some of the existing partner IBM had? Or these are -- many of them are absolute new people, and that is increasing the total canvas opportunity beyond this 5000 name that we are talking about?
Darren?
Yes, it's a great question. And now that you've asked, I should have come prepared with the answer. And the short answer is, I don't know how many are incrementally new partners. I think it is safe to assume that the overwhelming majority are partners that had a history working with these products. In some cases, those are partners that have worked with the products for 10, 15, 20 years all over the world. And that is certainly the lion's share of the 1,800. But we will track that. And so actually, next quarter, we'll try to report out on how many of the total partner base are truly new and incremental partners.
Right. So -- and also, in -- I mean, how would you think you need to add more metrics around this business because this business has really different metric than what we typically add on the services side? And of course, you said that it's too early to talk about the $625 million number, but the first 6 months into the business, are we seeing this to be much better than what we initially thought or anything you want to share on that?
So Rahul, let me put it this way. It is a huge transaction volume that we are talking about. We have been talking about clients of the numbers of 15,000 plus. And some of the transaction volumes for the quarter and for the previous quarter that Darren shared are huge, right? And whatever amount of planning you do, when the actual transaction volume hits you, it's another story. So I just look at it as a pragmatic business plan as a baby starting to crawl before it sits up and starts walking and starts running. So the last quarter was the crawl phase. This quarter is the starting to walk phase. And I'm sure we'll hit the running phase very soon, maybe in next quarter itself. So $625 million, $650 million are all great numbers, maybe we'll actually exceed them over a period of time. It's not that I'm shirking away from having a report card like a good student. I would just say, just give that 1 gap of quarter and look at the 4 quarters starting October, October to September, and you'll have a number much better than $625 million, I believe.
And in addition, we had called out that first quarter, I mean, we had underestimated the effort required to recontract with a lot of customers, right? So that's why you saw the first quarter was soft. And as I said, this quarter, we have reached the run rate. So we hope to maintain the run rate, and that should give you an indication of where we are likely to land.
Okay. And on the same analogy, I think you would have a marathon run on this very soon.
Thank you for those wishes, Rahul.
The next question is from the line of Dipesh Mehta from SBICAP Securities.
Two questions. First on the BFSI. If you can provide some perspective about how you're seeing demand outlook in Financial Services. This quarter seems to be a bit softer, partly maybe furlough, but if you can provide some better clarity about how one should look Financial Services. Second question is about the effective tax rate. Can you help us understand what one should build ETR for the current year and next year?
I will request Rahul to respond. Rahul is on the call. And then Prateek will talk about the ETR.
So I think the point about the furlough is absolutely correct because in Financial Services, we are -- we deal with the large clients as global clients, the big -- the clients which have got a global footprint. And furlough was larger this year as compared to previous years. That impacted us. At the same time, the outlook continues to be strong. Because of our pivot to Mode 2 and at the right time, a lot of our clients, which are in the retail space, especially, we have seen their increased spend coming in the digital side. So from our retail clients' perspective, we are seeing a good momentum. We have a lot of deals in the pipeline. And I'm talking of deals within the existing client base, right? Because the client already is there, and we are expanding our footprint within their retail digital journey. On the capital markets side, their cost constraints were there last year. We believe that those have now been contained in the sense that more or less what had to be reduced, et cetera, has happened. We are now seeing spends happening in the capital markets side on the regulatory and compliance digitization, right? So we are seeing inputs coming in and our funnel also has items where the capital market clients are opening up purse strings to spend money on compliance and on regulatory and digitizing those activities. So we're seeing that flow also into the future. So I think last quarter is aberration because of the furlough. I think should be -- going forward should be quite okay.
ETR.
Yes. Dipesh, on the ETR, the number is 22% for fiscal year '20. At this moment of time, we really haven't built the annual plan for FY '21. We'll guide you to that number next quarter. But for this quarter, it is 22% as opposed to the 24% that we had guided at the beginning of the year. And this number has come down from 24% to 22% because of the tax rate cut, basically.
Yes. Even after -- earlier, I think, Prateek, you indicated about tax rate likely to inch up when we enter into FY '21. Those factor holds true even now? Or you expect it requires rethinking?
Dipesh, I'll reserve comment at this moment of time. It's just one quarter. Let me see what pans out. I'm not giving you guidance for FY '21 right now. I'll come back next quarter.
The next question is from the line of Mukul Garg from Haitong Securities.
This is -- again, like, sorry to come back to the Product and Platform. And this is regarding CVK's last comment that you guys have hit the run rate in the inorganic business, and you will continue with that in Q4. So is it a fair assumption to take into account that this is partially because of the seasonality where Q3 is stronger and given that you guys will probably add a lot more customers in Q4, that seasonality impact will limit incremental revenues coming in Q4 from Q3?
See, I think in the model that we had earlier, where our partner had the last quarter as Q4, which is O&D quarter, it was very customary to have a big peak in December. That need not be true in our model. I do think it will be more stable. There could be a little bit of peaks, but it will be more stable. So that's what we foresee at this time. But I think we will need to really look at this for 8 quarters to really build a robust model on the seasonality. But as we see, we do have reasonable visibility for the next 2 quarters. And that's why I said we've kind of hit the run rate. You could always have little variations, but I think we are at the right run rate on this business at this time.
Understood. And if I may just follow that up with just a quick clarification from Darren. Darren, you mentioned earlier on the call that you have now signed up about 4,600 customers. If I believe, the number earlier, total number was about 25,000. Is that growth something which is satisfactory in your view? You have any sense of, over next 2 quarters, given that you're planning to target about 90% of the customer base, should we expect a very accelerated sign-ups over the next 2 quarters?
So I think in short, the answer is, yes. I think we are satisfied with the progress we've made over the last 6 months. I think it is largely on track with what we expected it to be, just in terms of the overall transactional volume and the number of customers that have moved over. And I think, again, we'll try to be as transparent as we can be this quarter and next quarter on those totals. We would expect, as CVK mentioned, that from a total customer number point of view, most of those customers are on annual cycles. So upon the 1-year anniversary of the closing of the transaction, we would assume that the overwhelming majority of customers would have migrated over. But there is a long tail of some larger customers. So that is disproportionate to the value. Some of the large customers purchase multiyear ELAs and so that transition process will continue all the way through 2020 and into 2021, even into 2022.
Understood. And just a clarification, CVK. You -- I think you mentioned on the TV interview that, I think, similar to your peers, you are also quite positive on the demand environment? Is that reading right?
Yes. I mean, my reflection on the demand environment is less based on macros. It is more based on the pipeline that we have and the client engagements. So as I said, the pipeline is at a historic peak based on the past several quarter data that we maintain in a certain way. And I think that's why I'm positive about the demand environment. The closure timings could vary a little bit here and there. But overall, the pipeline is very good.
The next question is from the line of Diviya Nagarajan from UBS.
Congrats on the strong execution. My question is on what you talked about exiting some businesses in Mode 1 and Mode 2. Specifically, you talk about exiting some digital work as well. I'm trying to understand the rationale behind it. Did you find -- did you feel that those kind of -- that kind of work is never going to be profitable? Is that why you exited? And could you kind of also tell us what kind of services those were?
So Diviya, thank you. And it was largely in Mode 1. And in my view, I mean, there are a little bit in Mode 2 as well. But like there are -- in Mode 2, while we're executing to a client in a global model, I mean, it may not be meaningful for us to engage with them in all geographies due to certain reasons. So some of that we have dropped. While initially we've picked up on a global scale, we found it was not making sense for us to do certain programs in certain geographies, so that we dropped in digital side. But I think a lot of it is largely is in Mode 1. And in fact, I mean, even on the traditional side, in one of the renewals where we didn't believe that we will make meaningful margins if we continue with the engagement, we decided to not bid. So I think these are some examples. I hope it helps.
Does this answer your question, Diviya?
Yes. Just a quick follow-up on margins. I think since we've had the IBM products come in, there's been a definite improvement in margins. Just trying to understand how much of your margins coming in at the top end of the range is driven by that? And what kind of organic improvements you'd seen in margins through the year as well?
I mean, you can see the -- we have a segmental P&L. Even in ITBS, the margins have improved. Engineering Services, maybe on the previous quarter, it was a big uptick and this quarter, it is slightly moderated.
Despite wage increase.
Yes, despite wage increase, despite furloughs. So I think there is a very healthy improvement in margins in the core organic business. And I'm sure a lot of that was expected because when we started the year, we had reduced from the previous year's 19.5% to 20.5% to 18.5% to 19.5%. So we took several measures to improve margins. And some -- a lot of that is playing out. And while giving guidance, we were a little cautious, but we were definitely executing very strongly to ensure that our margins improve, not only margins, cash flow, cash conversion, all of that, right, has been very, very diligently planned and driven, and you see that delivering results now.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Mr. C. VijayaKumar for closing comments. Thank you, and over to you, sir.
So overall, I mean, as I said through the call, we've had a fantastic 9 months of industry-leading growth, both organic and a very good execution of the largest acquisition that we did. So we are very happy with where we are as a company. And there is a lot of optimism that is lying ahead. So thank you for joining us and look forward to talking to all of you during the next quarterly results and the full year results. Thank you, and good night, and good day.
Thank you.
Thank you very much. Ladies and gentlemen, on behalf of HCL Technologies Limited, that concludes this conference call. Thank you all for joining us, and you may now disconnect your lines.