HCL Technologies Ltd

NSE:HCLTECH

Earnings Call Analysis

HCLTech's Revenue, Profit Growth Amid Challenges

HCLTech showed resilience in FY '24, growing its annual revenue by 5% in constant currency and 5.4% in U.S. dollars. The services business outpaced industry growth with a 5.4% increase, while software grew 2.3%. Operating margins were stable at 18.2%. Free cash flow surged by 27.7%. For FY '25, HCLTech projects a revenue growth of 3% to 5% and maintains margin guidance at 18% to 19%. Despite macroeconomic challenges, the company focuses on integrating IT and engineering services to meet evolving client demands.

Revenue Growth Amid Cautious Optimism

HCL Technologies started the fiscal year with cautious optimism due to reduced discretionary spending and slowdowns in some verticals. Nevertheless, they achieved a 5% year-on-year revenue growth in constant currency, which is 5.4% growth in U.S. dollars. This growth was driven by both their services and software businesses. Remarkably, the free cash flow grew by 27.7% year-on-year.

Strong Performance in Services and Software

The services segment, which constitutes a significant portion of HCL's business, grew by 5.4% year-on-year in constant currency. HCL Tech boasts the fastest-growing Tier 1 IT services in the industry. Meanwhile, the software segment also saw a rise, achieving a 2.3% year-on-year growth in constant currency. The company managed to maintain an operating margin of 18.2%, within their guided range of 18% to 19%.

Organizational Changes to Drive Growth

In response to market demands, HCL made strategic organizational changes. The engineering and R&D services sales were integrated with IT and business services, forming a comprehensive go-to-market structure. This is expected to broaden the reach of their engineering capabilities and spur growth in both engineering and business services segments.

Q4 Financial Highlights

For the fourth quarter, HCL Tech's revenue was $3.43 billion, marking a 6% year-on-year growth in constant currency. The services segment achieved a sequential growth of 3% and 6.7% year-on-year. IT and business service revenue stood at $2.55 billion, up 4% sequentially and 6.7% year-on-year in constant currency terms. However, EBIT was noted at $603 million, a slight decline attributed to software business seasonality.

Guidance for FY '25

HCL Tech has set a revenue growth guidance of 3% to 5% for FY '25 in constant currency. Despite the strong exit momentum, they anticipate a challenging first quarter with a revenue decline of about 2%. The full impact of their divestiture with State Street will be realized starting July 2024. Operating margin guidance remains consistent at 18% to 19%.

Cash Flow and Dividend

The company reported strong cash generation, with $2.7 billion in operating cash flow for the last 12 months, an increase of 22% year-on-year. Free cash flow was $2.6 billion, up 28% year-on-year. Earnings per share rose by 5.6% to INR 56.86, with an interim dividend of INR 18 for the quarter, aggregating to INR 52 for the year.

Key Trends and Market Outlook

HCL Tech observed increased investments in AI and emerging technologies, even as discretionary spending remained under pressure. The company sees opportunities in vendor consolidation and aims to capitalize on growth catalysts such as GenAI and cloud services. They continue to invest in domain expertise and capacity to meet market demands.

Conclusion and Future Outlook

The company remains optimistic about its growth trajectory, bolstered by a balanced mix of services and significant organizational changes. With a strong brand and strategic investments in growth areas, HCL Tech is well-positioned to navigate the challenges and opportunities of FY '25.

Earnings Call Transcript 2024-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the HCL Technologies Q4 and Annual FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Mohta, Head Investor Relations. Thank you, and over to you, sir.

[Nitin Mohta, executive]

Thank you, [indiscernible]. Good morning, and good evening, everyone. A very warm welcome to HCLTech's Q4 and Annual FY '24 Earnings Call. We have with us Mr. C. VijayKumar, CEO and Managing Director, HCLTech; Mr. Prateek Aggarwal, Chief Financial Officer; along with the broader leadership team to discuss the performance of the company during the quarter, followed by Q&A. In the course of this call, certain statements that will be made are forward looking, which involve a number of risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those in such forward-looking statements.

All forward-looking statements made herein are based upon information presently available to the management, and the company does not undertake to update any forward-looking statements that may be made in the course of this call. In this regard, please do review the safe harbor statements in the formal investor release document and all the factors that can cause the difference. Over to you, CVK.

[C. Vijayakumar, executive]

Thank you, Nitin. Good evening, everyone, and thank you for joining us for our Q4 and FY '24 Annual Investor Call. Starting with the business performance. When we started the year, there was cautious optimism around growth in line with the market situation. And the backdrop of reduced discretionary spend and slowdown in some industry verticals.

Overall, as a company, we are very happy that we responded to the uncertain situation with the much-needed agility and flexibility, and I'm pleased that we've delivered good growth with good control over our profitability. Overall, our annual revenue grew 5% in constant currency year-on-year and 5.4% in U.S. dollar.

The strong growth is attributed to both momentum in our services business as well as our software business. And the most important highlights for the year, we translated this growth into even greater value creation for our shareholders with the free cash flow growth of 27.7% year-on-year. The entire growth came on the back of healthy growth across segments, different industries and geographies in services business as well as software business.

I want to thank all 225,000 HCL techies, for a phenomenal performance in what has been a challenging year for the industry. Our services business grew 5.4% year-on-year in constant currency, and I think that's the fastest growth in the industry. Software grew 2.3% in constant currency year-on-year basis, and our operating margins stood at 18.2%, well within our guided range.

Before I get into details of our performance, I want to share a few organizational changes that we've made, which we've been working on in the last few months. The first was really integrating our engineering and R&D services sales with IT and business services sales. Now we have an integrated go-to-market structure. And this is aligned with the increasing demand of clients seeking strategic partners with comprehensive capabilities across engineering and IT services.

This will enable a broader reach, a much broader reach of our ERS capabilities across all geographies, all the verticals, and we believe this will accelerate the growth for our engineering business and IT and Business Services segment as well. As we do this, we have the following 3 leaders with role changes as we get into FY '25. Kalyan Kumar, who was the Chief Product Officer for the software business and the CTO, our Head of ecosystems will now exclusively focus on the HCL Software business as the Chief Product Officer and taking it to the next phase of growth.

Vijay Guntur, President of our Engineering and R&D Services will now be our Chief Technology Officer and Head of Global Ecosystems. And with that, Hari Sadarahalli, who's led all our asset-heavy industries within engineering services will now lead the engineering services business and delivery organization in this expanded role.

I wish them and the larger leadership team very best in the -- all the new and [indiscernible] ahead of them. Coming back to our performance. IT and Business Services grew 6.2% year-on-year. Engineering Services declined 1.6% year-on-year in constant currency. Digital foundation, digital process outsourcing and over all portfolio of digital services contributed to the year-on-year growth. Even amidst slowdown in discretionary spend, our digital growth was 5.3% Y-o-Y and now contributes to 37.3% of our revenue.

We have a very strict classification of what is considered as a digital revenue. and we have discussed about that in the past conversations. While there was good growth in different parts of our digital business, the one that stood out is cloud transformation and cybersecurity, both of them had impressive growth, along with growth in our SaaS portfolio.

Software business grew 2.3% year-on-year in constant currency. This business has made significant strategic progress by focusing on subscription and support revenue and steadily growing annual recurring revenue. The subscription and support revenue has grown from 78.8% in FY '23 to 83.8% in FY '24.

You will see ARR growth slowdown on a year-on-year basis, and the drop on Q-o-Q is attributed to decisions we made to discontinue some small parts of our telecom product portfolio. In terms of verticals, our geography growth was led by Americas. The largest of the IT services geographies grew 6.8% year-on-year in constant currency, followed by Europe, 5.5% year-on-year in constant currency, while rest of the World declined 7.1% year-on-year in constant currency.

Our top-performing verticals were financial services. We have delivered an extraordinary growth in Financial Services, which grew at 12.1% amid the macro concerns, and manufacturing grew at 9.8%, of course, enabled a little bit by the ASAP acquisition and retail CPG grew 8.2% year-on-year.

During the year, we made very good additions to our client portfolio. We added 3 customers in the $100 million category. We now have 22 clients in this category. If I go further down the range, we have 137 clients in $20 million category, an addition of 6 on a year-on-year basis.

From a booking perspective, we booked $2.29 billion as new deal wins. And just to remind everyone, we call out only net new wins and renewals are not included in our total deal win numbers. Our annual bookings is at $9.759 billion, which is a 10.2% growth compared to FY '23.

During the year, we had a total of 73 large deals including 21 this quarter across products and services. Our pipeline continues to grow and remain healthy. A lot of brand transformation work that we've done over the last couple of years has also helped us emerge as the fastest-growing brand among the top 10 services companies according to 2024 brand finance reports.

Talking about a few wins this quarter. Most of them are in our investor release, but a few that I would like to call out a Euro-based manufacturing company selected HCL Tech as an IT transformation partner to manage its ERP landscape across SAP and other connected business systems, including SAP as 4 HANA landscape.

Our ecosystem partnership with SAP is now showing very good results. Japan-based global medical technology major selected HCL Tech as its strategic partner for R&D transformation and innovation. We will provide new product development, sustenance and digital engineering services to support the clients' global design centers and manufacturing sites.

This is a very good win in the world's second largest technology market. Our U.S.-based manufacturing company selected us to establish a product-aligned IT operating model to bring IT and business together for a faster go-to-market. We will transform the network backbone underlying commercial applications and critical business processes worldwide and leverage AIML technologies and extreme automation to deliver to this client.

On the product side, our U.S.-based advertising and marketing technology service provider has expanded its partnership with HCL Software. The advertising company will deploy Unica to deliver data-driven marketing campaigns and services to its clients reaching millions of customers every month. We also announced a deal. Of course, this is a deal for the current quarter with State Bank of India for the MarTech platform, which is the Unica platform that we have, the modernized Unica platform, to drive marketing automation and in customer experience management for over 0.5 billion end users.

Specifically on GenAI, we are seeing a lot of traction on AI and GenAI-related opportunities, where clients are seeking realistic benefits. We've had good success building a strong pipeline through successful POCs for various clients. We're also channeling our efforts to get people trained on GenAI to ensure we are able to deliver software development in the most effective way possible.

We also recently launched HCL Tech AI force, a generative AI and automation platform, that powers the dynamic sort of solutions designed to inject intelligence into every facet of software engineering workflows across development, testing, support and maintenance. AI force accelerates time to value by transforming the software development and engineering life cycle, delivering greater productivity, improving product quality and ensuring faster release time lines.

Talking about a few wins specific to GenAI, our global top technology company selected us to transform its product validation and sustenance experience with GenAI. A leading financial services provider selected us to migrate its existing machine learning models to new age GenAI platforms for greater agility, improvement and innovation in service delivery.

Our leading U.S. telecom company selected us to leverage data engineering and GenAI to automate the data pipeline for analytics and reporting needs of the sales and marketing team for the enterprises ensuring good governance and quality. In terms of people, our headcount ramp-up continues. We had 1,537 net new additions and added 12,141 freshers in FY '24, which is lower than last year adjusted for the market conditions.

Our people count at the end of last quarter stands at 227,481. Our attrition continues in the right direction all through the year. On an LTM basis, our IT services voluntary attrition is at 12.4%, one of the lowest in the industry. We continue to win several awards from analysts and advisers as a leader in many services.

Notable ones beyond the areas we are well known includes SAP S4 HANA services, digital commerce, hybrid enterprise cloud services, where we were recognized by [indiscernible]. Another important one this quarter, HCL Tech received Gold award at the Economic Times Human Capital Awards for innovative hiring and unique practices for our TechB program, which is HCL Tech's early career program.

Also, [indiscernible] has named HCL Tech among the 2024 world's most ethical companies. NCSI ESG assessment kept us at a AA rating for a second consecutive year. And for the second year in a row, we are included in the S&P Global Sustainability Yearbook for 2024.

Now I want to talk a little bit about the few key trends that we are seeing in the market. Amidst the cautious optimism, enterprises are focusing on specific strategic priorities such as AI, engineering and FinOps while discretionary spending is yet to rebound. Overall enterprise IT spending is expected to remain moderate or healthy.

Our discretionary project-based spending remains under pressure, and AI-related spending is coming at the cost of other areas in the IT budgets, effectively leading to doing more with less or at least doing the same with less. Enterprises have big plants around AI, but have learned from the cloud migration journey. So the widespread adoption of GenAI customers are cautious to ensure ROI is not compromised for the speed of execution.

Engineering and R&D spend and outsourcing of that continues to grow globally. Enterprises are preferring partners with comprehensive portfolio of IT, business services and engineering services as it offers multiple advantages to them. Like the way we integrated our infrastructure, which is now digital foundation and digital business services led to more integrated opportunities and really created a new revenue stream for us.

We believe bringing IT and engineering capabilities together makes [indiscernible] unique service and solution offerings, which is going to drive a new set of deal momentum for us in the market. GenAI will serve as a growth catalyst for data, cloud services as well as the past market.

We are making sure our data and related practices have the right offerings and capacity to address the market demand. It's also important to bring the domain expertise into picture to get the full benefit of this, and we are investing in that as well.

Moving to FY '25 guidance, I believe FY '25 will be a year of consolidation, both on the demand and supply side. Our clients have been consolidating their technology spends over the last many quarters. We expect them to invest this back into AI and other emerging technologies that drive productivity, resilience and business growth.

This year would also be an opportunity for vendor consolidation, and it will benefit the providers who can scale and deliver the best quality of services. Coming to guidance for FY '25, revenue growth, we are guiding for 3% to 5% in constant currency. Of course, all of you must be wondering with the strong exit momentum why is the guidance 3% to 5%.

But there are some final details on Q1, which Prateek will share and operating margin guidance is 18% to 19% range. We've delivered 18.2%, and we continue to remain focused on improving margins. However, the guidance for the year remains the same ranges 18% to 19% as we had in the last year. With that, I will request Prateek to share more details. Over to you, Prateek.

[Prateek Aggarwal, executive]

Thank you, CVK. Hello, everybody. Good evening, good morning, good afternoon, wherever you are. Hope all continues to be good with you. I'm going to quickly cover the results at a high level in some detail for the quarter, quarter 4, and then go into the full year and then go to the guidance and all of that.

So to start with the quarter overview, HCL Tech revenue stands at $3.43 billion for the quarter, 6% up in constant currency terms year-on-year and services is at $3.1 billion, which is up 3% sequentially and 6.7% year-on-year in constant currency. We, therefore, continue to be the fastest-growing Tier 1 IT services company amongst our peers.

IT and Business Services revenue stands at $2.55 billion, up 4% sequentially quarter-on-quarter and up 6.7% year-on-year in constant currency. And R&D is up 6.4% year-on-year in constant currency as well. HCL Software is flat year-on-year in constant currency terms. The EBIT clocked in at $603 million, which is 17.6%, which is down about 48 basis points year-on-year. Services margins reduced sequentially by about 73 bps and year-on-year by about 29 bps.

And the net income for the quarter came in at $480 million, which is 14% of revenue and which was flat year-on-year.

To give you a sense of the -- where the margin moved during the quarter at a total level -- at a company level margin, EBIT margin reduced by 218 basis points, which was, as you know, caused by the seasonality in the software business, which had an impact of 156 basis points.

So software seasonality, December quarter being peak quarter came down in revenues, and that had an impact of 156 basis points and the balance drop for insurances. On the services margins, the 73 bps drop is primarily due to the increment. There was an increment that we had called out earlier.

But over and above that, given the good year we had, we went over up about that to give about 20 bps increment -- equivalent increment for even the E4 and above the middle and senior leadership, going beyond the incremental block that we had placed 6 months back in July of 2023.

So that was the biggest reason. And then there was some seasonal travel and marketing events which took away about 25 bps. And the balance was really exchange-related small drop because of the way the ForEx currency has moved.

Moving on to the FY '24 overview, therefore. The total company revenue came in at $13.27 billion which is 5% year-on-year in constant currency terms. And software was up 2.3% year-on-year. And the ARR now stands at INR 1.02 billion, which is an increase of 0.7% on a year-on-year basis.

Services stood at $11.92 billion, which is 5.4% up in constant currency terms, and we continue to be the fastest-growing Tier 1 IT services company for the full year as well. And IT and business services revenue in that number came in at $9.8 billion, which is up 6.2% and ERS 1.6% increase in constant currency terms.

The EBIT at a company level was $2.4 billion at 18.2% of revenue and that was an increase of 5.7% year-on-year. On a year-on-year basis, the services margins increased by 11 basis points. And the net income for the year came in at $1.9 billion, $1.896 million, which is 14.3% of the revenue and increased by 3.2% year-on-year. In rupee terms, it increased by about 5.6%.

Return on invested capital is an important metric we have been focused on. We publish an entire page giving details of that calculation as well. And given our continued focus on the profitability and managing the capital efficiency, the last 12 months or the FY '24 ROIC stands at 33.8% for the company as a whole, which grew 3.4 percentage points, 341 basis points year-on-year.

And within that, services increased by [ 430 ] -- 4.3 percentage points year-on-year to a number of 41.6% now on a last 12 months basis. Even software continues to deliver good ROIC at 16.5%, which obviously has all the investments in the denominator.

Getting to the guidance band then as CVK already pointed out and you have read 3% to 5% is the guided band. And we've received quite a few questions on that since we published this, so we are just sort of answering that upfront. And obviously, the question arises that we are exiting FY '24 on a strong note. And the exit run rate itself sets us well to deliver the lower end of the guidance that we have given. And therefore, let me explain our guidance with some more details.

In Q1, as you know, over and -- I mean there is the usual annual productivity pass back that we have on a -- for a large number of our clients. And the same impact would be there this year as well. But over and above the usual annual productivity passed back, there is an offshoring impact in one of the large SSDs that we started last March, which is expected to land the Q1 revenues at about minus 2% versus the minus 1.3% that we had in the June quarter of last year.

So minus 1.3% was the June '23 quarter versus March '23 quarter. And this year, we expect June '24 to come in somewhere around that minus 2%. And therefore, based on that as the starting point from that quarter, the guidance of 3% to 5% that we have given basically turns out to be a CQGR beyond that in a range of about 1% to 2.5%.

Also, please note that the June '24 quarter, the Q1 does not have a material impact of the sale of the BPO JV with State Street, which we have already announced, as we will be recognizing some revenue as per certain contractual clauses even in the June quarter.

As you know, we have announced already that the deal closed on second of April. And this is how the accounting will pan out. And the full impact of this divestment will actually start flowing from first of July 2024. So I've already talked about the CQGR to -- given the Q1 expectation that has been baked in, it translates to 1% to 2.5%.

That is the math behind our guidance and given our strong double-digit growth in TCV of the new deal wins in the previous year we are confident to deliver that. And as far as margins are concerned, we continue to hold the margins expectation at 18% to 19% for the fiscal year coming ahead.

Cash generation has been a great story. I mean cash generation in the last 12 months, we generated operating cash flow of $2.7 billion, which is an increase of 22% year-on-year. And the free cash flow of $2.6 billion almost was actually up 28% year-on-year.

And as a percentage of net income, the typical ratio that we look at, OCF as a percentage of net income was 143% and free cash flow was 136% of net income. Our balance sheet continues to grow in its strength and gross cash at the end of March is now $3.39 billion and the net cash is $3.11 billion.

The cash generation that I talked about was driven by a 5-day reduction in the DSO, the days sales outstanding, which reduced on an including unbilled revenue basis, from 88 days in the last March quarter to 83 days in this last -- in this quarter that just ended.

From a shareholder perspective, on a payout perspective, I mean, the EPS, the earnings per share, came in at INR 56.86, which was an increase of 5.6% year-on-year. And the Board has declared an interim dividend of INR 18 for the quarter, which brings it to a total of INR 52 for the full year. And given that EPS is INR 57.86, that is almost 90% of the total for the year.

The record date for the dividend is 7th of May and the payment date would be 15th of May as per the regulations. So we continue to payout in the range of 87%, 88%, 89%, 90%, which is obviously much higher than the 75% -- minimum 75% that we had mentioned about 2.5 years back.

Well, I have -- that's all I have for now. And moderator, over to you for Q&A.

[Operator]

[Operator Instructions]

The first question is from the line of Kawaljeet Saluja from Kotak Securities.

[Kawaljeet Saluja, analyst]

I have a couple of questions. The first question is for Prateek. Prateek, I'm just trying to understand the math that you gave for revenue decline in June quarter of 2%. Now let's say if you have a mega deal, let's say, $600 million over a period of 5 years, so maybe like $120 million, $125 million of revenues. Even if that shifts offshore, should it lead to such a big swing in a quarter even just from offshoring?

[Prateek Aggarwal, executive]

Yes. Are you asking the second question now or...

[Kawaljeet Saluja, analyst]

I can go ahead and ask a second question as well. The second question relates to the deal wins now. If you look at FY '24, if I strip off the contribution from Verizon, then the deal flow actually in FY '24 has been quite moderate and which is a little bit counterintuitive because in a challenging environment, you have longer tenured deals that normally flow through.

So your normal TCV should ideas of good, whereas actually for you, it has been deteriorating. So is there anything related to the competitiveness or anything that you are basically seeing in terms of win rates that are different?

And the final one actually is for CVK. CVK, I'm just curious about the change in the org structure or rather integrating ERS with IT and business services. Because if you look at ERS, historically, the decision maker in ERS has been your Vice President of Engineering of the product owner, whereas for IT, it is the CIO or the business owner to whom we are basically selling those services.

So when you're integrating the sales, right, who is the decision-maker actually -- has a decision maker from the client change for you to integrate ERS and ITBS sales process?

[Prateek Aggarwal, executive]

Okay. So let me take maybe the first 2 questions and then CVK might have some additional comments and of course, the third question. So Kawaljeet, the thing is for these large deals or any deal for that matter, there is a fair valuation that is required by the accounting standards, which is what we do.

And therefore, for the period that the work is being delivered only or predominantly on-site in the high-cost geographies, there is revenue which gets allocated to that period more than proportionately. It's not a straight line. And also when the work moves offshore, then the revenue for the offshore part is proportionately lower than the straight line method. So that's the basic math.

I don't want to sort of go deeper than that. But hopefully, that gives you the answer while that take a big impact. And this is a very large team as we seem to know. The second question is, I'll start with -- you cannot really ship out by largest deal and start looking at numbers that way. I mean all selling done, we delivered almost a total of $10 billion for the year, which is an increase of 10%. And that's the only way I would suggest to look at it. And maybe CVK would want to add a few things on top to answer your rest of that question. So over to you.

[C. Vijayakumar, executive]

Yes. Kawal, on the TCV and the tenure of whatever duration, we did not see any change. The large deal, of course, it was a 6-year deal, but other than that, the large deals have mostly been a 3-year tenure. And this whatever $9.8 billion has a mix of small deals and large deals. And large deals are -- I mean average will be 3 to 4 years and small deals are a much shorter duration.

And all of this is net new. Renewals is usually where you tend to do a 5-year. We don't include any rate card and all those things. So we think the booking has enough momentum to -- especially what we have done in Q4 will have a good execution in the coming quarters. So that should help us. Now coming to the more strategic question on organization structure and the integration of IT and engineering services from a sales perspective.

If you look at the TMT segment, Telecom, Media and Tech, in most large organizations, the CIO is really part of a overall CTO organization. And there is -- a lot of IT functions are managed by the platform organization, and it's a part of that decision-making hierarchy. So we see a lot of joint propositions in this segment, which will really help us, first of all, have a much bigger reach and help us to kind of sell a little more differentiated solutions in this segment.

And when you look at the asset-heavy industries, of course, CIO is making a lot of decisions on IT, but a predominant amount of [indiscernible] is really happening outside the CIO organization, like the Head of Manufacturing, Head of Supply Chain, the ITOP integration programs, the IOP programs, digital manufacturing.

A lot of that, while they are engineering heavy, but there is a significant amount of IT landscape, which supports it and especially in a cloud kind of operating model, the decision-making is much, much broader. And also you look at in the other segments where we don't play for our engineering services like a lot of service-led verticals like media, retail, and a lot of these organizations have -- the marketing organization as CMO spend is not something which we have targeted in a big way.

But given a lot of capabilities of how we are present in the PMT segment on the CMO propositions, we think we can make a greater impact in the service-led verticals through this integrated offering. So we've been thinking through this for maybe last 2 years, and we've done a few verticals in the middle of last year. And now all the verticals are joint integrated where the market motions.

[Kawaljeet Saluja, analyst]

But CVK, I think fair point on high-tech and media. But let's say, if you look at something like an auto. I mean, what was a middleware or, let's say, consolidation of ECUs into BCUs. What has that got to do with what you are doing on the ERP or enterprise IT side, actually?

[C. Vijayakumar, executive]

Yes. In fact, automotive is a classic example where combining this is a much greater value proposition to our clients. Because if you see even the most hot segment in automotive is really like -- the -- most of the NVIDIA GPUs, almost 50% has been sold to the private instance of AI. And half of that has been sold to the automotive segment, which means you need to build the entire data stack, you need the entire data engineering. There is an underlying IT stack. All of that is not really the -- not under the CIO organization. In fact, we believe we can capture greater IT and engineering spend by a much more integrated proposition in verticals. And automotive is definitely one of the top segment there.

[Operator]

The next question is from the line of Gaurav Rateria from Morgan Stanley.

[Gaurav Rateria, analyst]

My first question is with respect to the offshoring of the large deal. Just out of curiosity, isn't this something that should be part of -- part and parcel of the normal business costs every year in terms of deals moving from on-site to offshore and impacting some amount of revenues. Is it like materially different than what you have seen in the last 2, 3 years, which is why you're calling it out and having kind of an impact on your guidance for the next year?

The second question is on your medium-term outlook of margins of 20% on the upper band that you had shared in the past. What kind of revenue growth is required to hit that? And where are we in the journey of our talent pool in terms of incorporating more of pressures and improving the pyramid? Where are we in that journey? How much of scope is there to improve the cost structure to be able to hit that 20% mark?

[C. Vijayakumar, executive]

Thanks, Gaurav. So I agree with you, it's not something completely out of ordinary. It is business as usual in any normal quarter, there would be some deals like that happening pretty much all the time. The difference and the reason we called it out is simply because it is this quarter, which is the June quarter, which is -- which has traditionally been a weak quarter, which is the reason I called out the numbers from last year for the same quarter.

So it happens to be on top of that. And second, obviously, it is a big TCV number, and it does have a larger than most of the deals kind of a thing. So those are the real 2 factors which lead to calling it out. And to be honest, I would rather tell you and all of you and all the investors upfront rather than you coming to find out next quarter when I declare the results.

And I think it's a material fact, which helps us explain the guidance that we have given. So that's the certain substance of it, Gaurav.

[Prateek Aggarwal, executive]

Okay. On the margins, of course, our aspiration continues to remain 19% to 20% is our aspirational margin range. This year, we are forecasting it to be 18% to 19%. And if you look at the overall cost structure and the supply chain of our talent, we had almost doubled our pressure hiring from FY '21 to FY '23. I think 13,000 to 27,000 roughly. Those are the numbers. But this year, the number reduced to 12,000.

And as you know, it's a proportion -- it's very linked to the growth. So I think growth is going to be an important thing when the discretionary spend is back, I do think that is a time when the fresher hiring will again pick up. And that will continue to create a tailwind for margins.

As we had indicated, this is a long-term journey. We need to have a sustained focus on shaping our cost structure and business journey, and we are -- obviously, there will be some moderation based on the growth that happens every year. And last year, growth was much lower than the FY '23 growth. So I think that has some impact, but I think the trajectory and the aspiration and the momentum and focus on this continues.

[Operator]

The next question is from the line of Ravi Menon from Macquarie.

[Ravi Menon, analyst]

Just on the guidance again. Lastly, if I look at your IT business services was almost just flat [indiscernible]. ER&D not declined, and we have talked about how some large programs have got terminated and we would be back to growth in that. And even the year before that, IT business users and ER&D have actually a decent Q1. So struggling a bit about how we can get to this low end of the guidance [indiscernible] the minus 2% in Q1?

[C. Vijayakumar, executive]

So Ravi, are you talking about annual -- what is that you said IT business was flat?

[Ravi Menon, analyst]

The Q-o-Q growth in Q1 FY '24, if I recall, and that is just about flat Q-o-Q, right? IT and business services. ER&D had declined by about 5%. Is that correct? But that was due to some deals that we had, I think, in high-tech, that rundown. But overall, that shouldn't really recur...

[C. Vijayakumar, executive]

Yes. I mean I think we have done our forecast based on where we are in Q4 and now Q1 will pan out. I wouldn't be able to exactly compare the drop in Q1 of FY '23 and what were the drivers and -- what are the drivers for this. But generally, I mean, of course, ER&D was an outlier in Q1. I don't think we're looking at a similar situation, we will do better. But I think on the IT side, we will see a drop. So collectively, that's where the numbers will land.

[Ravi Menon, analyst]

Right. And CVK, the other thing is, overall, the deal wins. You're talking about a deal tenure being 3 to -- 3 years, mostly except for the very large deal that we won in communications to just 6 years. Overall, I take a 4-year kind of average, we should be looking at adding $2.5 billion more or less. And with the revenue runoff, even if you take that over 10%, which I think is on the higher side, because typically, I think retention rates are much better on that.

Even then, we should be adding $1.2 billion in revenue, that should be a 9% growth year-on-year. So I'm still -- [indiscernible] where the headwinds are? Is the environment getting a lot worse compared to where we were at this time last year? Are you worrying that it might actually get a lot worse?

[C. Vijayakumar, executive]

Yes, yes. So okay, fine. I think you crunched a lot of numbers. But see, first is the runoff is of 2 categories. One is there is some productivity benefits, which is year-on-year that has some declining characteristics. And the second one is in the existing book of business, there are a lot of programs that our teams are working on.

And based on clients budget prioritization, some of that runs off. So we have assumed the same level of runoff that happened in FY '23 -- FY '24, we have extrapolated that to be happening in FY '25. So I think you will see some kind of logic, which will moderate some of your numbers. And of course, Verizon contributed to almost 20% to 23% of the booking that was 6 years.

And I think last quarter, what we saw was more 3-year tenure deals and a good mix of large and small deals. But general trend would be a 3- to 5-year kind of window. And now you cannot extrapolate, it's all net new wins, but the ACV of this will have to be offset with a lot of project spend, projects which come to a conclusion.

So I think all of this math will eventually work out to the 3% to 5% guidance and with the State Street divestment as well are being factored in.

[Ravi Menon, analyst]

And one last one on the software products. That was up 5% year-on-year last quarter. But now we are flat year-on-year. I mean you did speak about a telecom product being divested, but apart from that, anything else that could cause this to go down materially?

[C. Vijayakumar, executive]

No, I think -- I mean, we had a $13 million drop because of the decision that we made a few quarters back on discontinuing some of the products. And that had a $10 million impact on the ARR. That's the only thing that's visible. Otherwise, I think we've had a good growth in the software business. It is the strategic direction and all the changes that we initiated all of that is kind of panning out as planned. We are happy with the progress that we're making on that front. And as you know that we're also, at the same time, we are looking at converting a lot of perpetual to term licenses. That also saw a good uptick from [ 79 ] to [ 84 ] or [ 83 ]. So I think we are progressing in all the levers quite well.

[Ravi Menon, analyst]

And with the offshore inquiries, wouldn't we see a bit of at least a margin improvement. So should we expect that next quarter?

[C. Vijayakumar, executive]

Yes. I think in a big portfolio, there are lots of puts and takes. So I think all of that is factored in an 18% to 19% guidance.

[Operator]

Thank you. The next question is from the line of Vibhor Single from Novama Equities.

[Vibhor Singhal, analyst]

Congrats on very solid performance in this quarter. So I think we're all kind of hoping disappointed in the guidance. But yes, I think [indiscernible] quite well. But just [indiscernible] one last bit on this project [indiscernible] So I mean...

[Operator]

Sorry to interrupt, but the line for you sounds muffled. If you could please use the [indiscernible] while speaking, sir, it would be better.

[Vibhor Singhal, analyst]

Sorry for that, sir. So again, just starting on that, again, offshoring on the part. So Prateek, as I think a lot of people have asked before, I mean this generally should be business as usual in a normal course of business. But if it is as big as to be called out separately and impacting the growth for the full year. So one, I mean, any other project that you see in our portfolio where you could probably I mean, similar kind of negotiations are happening or they -- given the environment, they could run the risk of or similar kind of runoff?

And secondly, in the overall scheme of things, I mean, is the impact on revenue is that big, wouldn't it also help our margins as well? So I mean, do we -- I mean, giving the guidance I'm saying, does that mean that there will be some at least -- there should be at least some benefit on the margin front, if we are losing out on the revenue part?

[C. Vijayakumar, executive]

So I think if you have a mega deal and if you have done a lot of people transfer and year 1 revenues are higher and then when we convert it to a delivery model which is a solution for the client, there will be a drop. And of course, one large deal is kind of impacting from March. And the other large deal that we've signed is of course Verizon, which will have its impact sometime towards the end of this calendar year. So all of that we have baked in into the numbers.

[Vibhor Singhal, analyst]

Right. And my first question, any other deals where you think this could or a similar risk stance or there could be similar kind of runoffs?

[C. Vijayakumar, executive]

No, I don't think so. I think generally, if you sign a mega deal, I think some of this is to be expected. And we do hope -- I mean there are a lot of good pipeline and we do hope to sign mega deals this year as well, given the overall pipeline. And to some extent, it will compensate but that will happen as the year progresses.

[Prateek Aggarwal, executive]

Vibhor, I'd just like to -- the word that you used risk. These are all predetermined fair valuation is the accounting term for it. So these are not risks that are transpiring or runoff. That's the other word we used. It is not something which is depleting from the earlier plan kind of a thing. It is very much a part of the plan.

As you yourself mentioned and I think Gaurav mentioned earlier, these are business as usual. These are no mean advance. It is just that there is a time period between the work that gets done onsite predominantly. And then at a certain point in time, it gets offshored or predominantly offshore, depending on the size of the deal and the timing of it, it could be material to the overall company's numbers.

But the guidance that we are giving you is for the total year as we do every year. And we have a good solid track record to sort of deliver on the guidance, which obviously we want to maintain. And that's the spirit in which we give the guidance, not everybody does, as you know. So we are giving you the guidance based on things which are preplanned and pre determined by the accounting rules. So there's no surprise in it is all I'm trying to call out here.

[Vibhor Singhal, analyst]

Got your point. I think it was more of a surprise to us than to you, completely taken your point. Just my last question to CVK. CVK on the tech vertical, I think this year -- I think most of our verticals have done quite remarkably well. Is the tech vertical, which has kind of dragged the overall godown? What is the outlook on that vertical? What was the -- I mean, what was the overall phase that you saw or weakness, the reason for the weakness this year? And do you see that changing next year? Or do you think it's going to be more of a design segment this year as well?

[Prateek Aggarwal, executive]

So I think our tech vertical is a very concentrated portfolio. So if you take the top 10 customers in the tech vertical, I think they will contribute to a very large percentage of revenues, more than maybe 60%. And these are obviously very large tech platform companies.

And last year, definitely, there was a significant pressure to cost reduction and efficiency across most of these customers. And as we speak, we think we see the pipeline is looking better. I do think a lot of the tech companies are investing, especially in more R&D kind of work. And we expect this vertical to grow in FY '25.

[Operator]

We have the next question from the line of Surendra Goel from Citigroup.

[Surendra Goyal, analyst]

CVK, if I understood correctly, you mentioned that generative AI spends are possibly crowding out discretionary spending and there is a negative impact. Given that GenAI projectiles are relatively small at this stage, would that mean that the net impact of this trend from your and IT services perspective is a net negative? How would you really think about this?

[C. Vijayakumar, executive]

I think GenAI has 2 dimensions, of course, the efficiency dimension, which, from our perspective, the biggest opportunity in the software development, product engineering kind of areas. And second is the business or vertical use cases, which starts with POCs and based on the success and confidence in POCs, they will scale into larger programs.

At this point, on the first software development efficiency, that is where we have a head start with our AI Force platform. I mean Microsoft also recognized the effectiveness of this platform in deploying co pilots and how we can deliver an end-to-end efficiency in an effective way.

So we are looking at this as a way to gain more market share in the software development, large programs in existing clients and new clients. And we have the secret sauce of how to get this efficiency done in a predictable way based on a number of internal and client programs that we've done.

So I think it's more of using generative AI as a differentiator. Of course, it's a capability available to everyone. But given our long heritage in software engineering, we had built significant capability in using AI in product engineering. Now, the same platform with some more augmentation is super effective for large software development shops.

So that's the first piece. I think it is more about gaining market share with the differentiation that you can bring and how well you can execute to that proposition. The second one is really still POCs. We have not seen any large program. The maximum deal sizes under $10 million in many of these POCs and programs.

And I think it's going to take some time for those programs to scale because -- the results of the POCs are, of course, there is some exciting benefits that will accrue out of this. But to really get it operational at an enterprise-wide level, it needs a lot of other things to be streamlined, including your data architecture, the security, whether you want to do a private AI stack or do you want to do a hyperscaler. And do you want to customize an LLM or you don't want to customize, whether you were willing to take the liability or some of the providers are willing to take the liability.

So there are many intricate issues, which is going to take some time to kind of find the right balance and right solutions. So I see only the POCs continuing to increase and it will pick up slowly. But I think the efficiency paradigm is where we will really make a big impact in the short term.

[Surendra Goyal, analyst]

Yes. So CVK, that helpful, but my question was more on the interplay of generative AI and discretionary spending that you spoke about. Like this kind of explains how generative AI can help. My question is more on why like what is the net impact of these two things.

[C. Vijayakumar, executive]

I think see the -- any generative AI program brings a lot of surround spend to the higher priority levels. So I think it will cannibalize some discretionary spend, but it also paves way to some newer areas where the client should put more emphasis on. And data is number one.

And cloud migration or repatriation both are also getting a little more attention due to GenAI. So I think these 2 or 3 areas definitely have positive effect. But of course, they will try and look at other areas to optimize to put money here. So that's why we have assumed the same environment as FY '24 and FY '25 as we plan and guide for this year.

[Surendra Goyal, analyst]

That's helpful. Just one quick question for Prateek. So 1Q, you kind of explained like minus 2% as a possible likelihood. Even the second quarter, with the State Street impact, right, and the fact that your deal flow has been in the $2 billion range and if one assumes that Verizon ramp-up is largely in the base, then even that quarter looks tough. So is the guidance more back half ended this year? Just wanted to understand that.

[Prateek Aggarwal, executive]

Generally speaking, Surendra, yes because Q1 and Q2 have already called out these 2 factors. But it is key to remember that we did book $2.3 billion this quarter, which will start playing out some in the next quarter and definitely all of it in the September quarter.

So -- and we'll continue booking hopefully, around that $2 billion mark that we have been doing for a long time now. And hopefully, keep us increasing a little bit as we go along. So it's a running book of business. And just because we are giving a full year guidance, and we wanted to explain that in detail, we typically do not ever give you a quarter guidance, as you know. The only reason we mentioned that is to explain the guidance, like I said before, and also because we did not want you to get that surprise post facto, I would rather tell you before that.

[Operator]

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

[Ankur Rudra, analyst]

CVK, I know we've disturbance to that so far on the call, but just taking a step back, 1Q [indiscernible] we get it. But overall, you're starting -- you've had a very good year, you've got great momentum and good signings. If I just take a step back and just look at the full year FY '25 or FY '24, What does it seem like your commentary and guidance suggests that '25 will be a weaker year than '24, given how the good things [indiscernible]?

[Prateek Aggarwal, executive]

Ankur, at this point, our guidance is 3% to 5%. Definitely, there has been a learning from how the FY '24 transpired. We came off a very good year in FY '23. So there was a little more optimism and we had -- we factored some softness in the environment based on what we saw by end of '22.

But what panned out was much, much higher. Now we have factored all of that a similar trend in FY '25. So I think it's the vantage point with which we entered FY '24 and what we are entering FY '25 does have an impact on this. At this point, I mean, obviously, 3 to 5 means the growth is going to be lower in FY '25 than FY '24, assuming the environment would be the same.

[C. Vijayakumar, executive]

I mean just the number of questions on this guidance, I was resisting, but I'll come out and say it. There's only one other company which gives guidance like we do. And our numbers are kind of better. And compared to most others, I think we would still be -- we have been at the top end of the group amongst the Tier 1 players in FY '23, when we look at the services growth, 15.7%, I think.

And then last year, FY '24, again, we are at the top 5% total and 5.4% in services. Even with this, the bottom end of this range would be higher than most others. So I don't want to -- it's not the end of the world. It's lower than what you were expecting. I know. It's -- we have tried to explain it in the detail that we have. But yes, we are just starting the year, and we'll see where we go.

[Ankur Rudra, analyst]

Absolutely. Just one clarification on the guide. I think from what I can understand, you're not baked in any discretionary spend or ER&D spend recovery in the guide now versus the before?

[Prateek Aggarwal, executive]

So Ankur, in every year, there is some amount of runoff and some amount of backfill that happens as well, right? It's not that, see, discretionary spend, let's say, from 100% reduces to 90%, that can have an impact on growth rates, significant impact on the growth rates. So it's not that we are assuming there will be no discretionary spend. I mean, we're saying there is a similar pattern that we saw.

Of course, industries, clients that might vary, but we've taken the total quantum of existing book of business where clients reduce the spend due to business prioritization. It's a very, very involved exercise. We've done that for the last 4 months. And we've factored a similar proportionate number in this year. But that does not mean that there is no discretionary spend at all. I mean, there are lots of things which keeps happening.

And as you would know, in any year, the book of business that we have is not 100%. I mean, maybe up to 70% is where we have firm booking order book, [indiscernible] but there are a lot which happens during the year, and some of that is definitely there in the guidance.

[Ankur Rudra, analyst]

Okay. Understood. Just building a bit more on the last question that Surendra asked. If I just bake in the 2% decline in 1Q and maybe a softer 2Q because of the State Street rampdown you highlighted. We ask for the upper end of the guidance seems to be in the 3% to 4% range for the second half. Is that sensible to you to your comment about -- it is the second half semi guidance?

[C. Vijayakumar, executive]

Yes. I mean, Ankur, I think if you look at our trajectory in the last 4 years, I think we start Q1 very low and Q2 picks up, Q3 peaks and then Q4 moderates. That's the kind of trajectory that we've seen. And all the pipeline and the bookings that we expect, I see a very similar trend this year.

[Ankur Rudra, analyst]

Okay. Just last question. You've got great visibility on software and services...

[Operator]

So sorry to interrupt, but we have reached the end of the question-and-answer session.

[C. Vijayakumar, executive]

We can take -- we can take one last question and then...

[Operator]

Sure, sir. Ankur, you may proceed with your question.

[Ankur Rudra, analyst]

Okay. Appreciate this. So my question was, you can look at both sides of spending wallet for your customers, software services, impacting on hardware. [indiscernible] perspective, do you think generative AI is helping software spending and relatively crowding out services spending right now because we can see generally software parts of most global pure portfolios are doing well, services under a bit more pressure. What are you seeing in -- what you see on that side?

[C. Vijayakumar, executive]

I think software vendors are able to get away with the significant price increase, which customers are left with no option, but to kind of agree to this -- the increase in price. And obviously, then they look for efficiencies elsewhere. So either if you are in a large -- if you have a large footprint, customer expects more for less. And in some areas where they have not really outsourced, they tend to outsource more.

So that's the reality. Even if you say the overall IT spend is growing at whatever percent, a significant percentage of growth that incremental dollars is because of the inflation in the software costs. So that's just the additional color that I can provide you.

[Operator]

Thank you. Ladies and gentlemen, we will take that as a last question for today. I would now like to hand the conference over to Mr. C. VijayKumar, CEO and MD, for closing comments. Over to you, sir.

[C. Vijayakumar, executive]

Yes. So thank you, all of you, for joining the call and a lot of interesting questions. As we have delivered industry-leading growth in FY '23 and industry-leading growth in FY '24, we continue to remain very optimistic about our differentiated portfolio and the balanced mix of services that we have and some of the significant organizational changes that we've made, all of that, we expect to really augur very well for our services business.

And our stability and increasing growth in software also continues to give us confidence. So from, of course, the guidance for this year and mid- to long term, I think our business is getting more and more stronger. The mind share for HCL Tech in the G2000 category has significantly catapulted, and our overall leadership position in the industry is very strong, and we expect all of this to continue contributing to healthy growth and market share and mind share for us. And thank you for your support and look forward to talking to you in the next call. Thank you, everyone.

[Prateek Aggarwal, executive]

Thank you, everybody.

[Operator]

Thank you. On behalf of HCL Technologies Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.