TBR. HCL Technologies PROFESSIONAL SERVICES BUSINESS QUARTERLY SM INITIAL RESPONSE

Transcription

1 PROFESSIONAL SERVICES BUSINESS QUARTERLY SM INITIAL RESPONSE HCL Technologies Third Calendar Quarter 2016 Second Fiscal Quarter 2017 Ended Sept. 30, 2016 Publish Date: Oct. 21, 2016 Author: Matthew O Blenes (matthew.oblenes@tbri.com), Professional Services Research Analyst Content Editor: Jennifer Hamel, Professional Services Senior Analyst TECHNOLOGY BUSINESS RESEARCH, INC.

2 Position ITO continues to drive HCLT s overall revenue growth; the new CEO and Mode strategy will advance broader digital transformation efforts Assessment HCL Technologies (HCLT) outpaced Tata Consultancy Services (TCS), Wipro and Infosys in 3Q16, recording revenue growth of 11.5% year to year, primarily attributed to expanding business due to the rise in digital transformation. Through initiatives such as BeyonDigital and next generation ITO, HCLT aims to build end to end ecosystems to deliver customized transformation services for clients across its vertical segments, leading to double digit year to year revenue expansion in Retail & Consumer Packaged Goods (CPG); Manufacturing; and Telecom, Media, Publishing and Entertainment in 3Q16. We expect accelerated year to year revenue growth in 4Q16 of 13% to 14% as HCLT leverages its Mode strategy to strengthen core services and expand in digital transformation areas. In $ Billions $1.8 $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 HCLT REVENUE, PROFITABILITY AND GROWTH 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Est. Revenue SOURCE: AND HCLT Operating Income Gross Income 14% 12% 1 8% 6% 4% 2% Revenue Growth YTY Revenue Growth YTY Corporate Strategic Objectives Cultivate sustainable client relationships by reducing IT costs and upselling additional services over time HCLT was awarded a deal from Australia based energy provider Synergy in 3Q16 to help the company drive adoption of its digital services in APAC. HCLT will work with Synergy to evolve its digital and business application infrastructures while providing operational efficiencies. HCLT aims to expand the Synergy engagement through upselling with customers to increase profit margins. Invest in delivery capabilities to improve customer engagement and extend global services footprint Following peers TCS and Infosys, HCLT opened a training and skill development center in Mihan, India. HCLT will focus on training young adults in the area in the latest software technologies across multiple verticals. The center offers HCLT long term recruiting opportunities, enabling the company to hire trained employees and reducing the likelihood those employees will go to competitors. Accelerate development of digital, Internet of Things and nextgeneration ITO services portfolios through alliances and acquisitions Partnerships with data infrastructure and container orchestration vendors such as Mesosphere support HCLT s nextgeneration ITO initiatives to deliver flexible and efficient infrastructure management that addresses increasing demands around digital, cloud and automation. 2

3 Executive Summary HCLT closes data centers while investing in next generation platforms such as DryIce to keep pace with the evolving ITO landscape Key Developments HCLT announced the closing of data centers to reallocate investments to digital transformation capabilities The decline of traditional ITO prompted India centric vendors to shutter in house data centers and shift to delivering cloud services on partners data centers. Following some of its peers, including TCS and Wipro, HCLT announced in September the closing of four of its six data centers in India. The closings coincide with the company s transition to expand its digital transformation capabilities. HCLT stated it will cease data center investments but keep the two remaining data centers running. believes closing the four data centers will offer HCLT internal cost efficiencies, such as lower operating costs. The cost savings will enable HCLT to reallocate funds to social, mobility, analytics and cloud (SMAC) investments as part of the company s stated goal to increase its IT budget for SMAC technologies from 6 to between 8 and 9 by As HCLT focuses on increasing cloud services, we expect the company to continue to rely on partnerships with cloud infrastructure vendors such as Amazon, Microsoft and IBM to win ITO deals. As India based vendors continue to invest in localized data centers throughout the U.S. and Europe, we anticipate HCLT will focus on cloud C&SI, orchestration and managed services. HCLT leverages its DryIce platform to boost ITO around IT process automation According to s IT Services Vendor Benchmark, As cloud adoption evolves, vendor management and support of complex, multivendor cloud environments become critical for successful operation after implementation. ITO remains HCLT s fastest growing segment as the company leverages its automation and orchestration platforms, such as DryIce, to provide enterprises a modular and scalable platform that reduces IT management costs. HCLT reports it has implemented the DryIce platform in more than 200 engagements, highlighting the company s success convincing clients of the solution s value proposition. DryIce integrates with HCLT s Management Tools as a Service platform to use machine learning and analytics to monitor and manage the IT environment and connects to other HCLT IPs such as MyCloud. believes HCLT can leverage its DryIce offering to support its Mode strategy and offset commoditization in traditional ITO services. 3

4 Executive Summary Integration of digital capabilities within its ITO business strengthens Infrastructure Services value proposition Quarterly Segment Performance and Strategies Revenue (in $ Millions) 10 75% 5 25% $82 $86 $83 $69 $71 $71 $542 $556 $575 $673 $694 $720 $624 $633 $633 $649 $651 $665 $297 $291 $297 $299 $307 $318 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Est. SOURCE: AND HCLT Note: In 3Q15 HCLT realigned its reported service lines, combining Enterprise System Integration and Industry Application Services into one segment, Application Services. Percent of Revenue HCLT REVENUE BY REPORTED SEGMENT Business Services Infrastructure Services Application Services Engineering and R&D Services HCLT REPORTED SEGMENT AS A PERCENT OF REVENUE 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Est. SOURCE: AND HCLT Business Services Infrastructure Services Application Services Engineering and R&D Services Application Services (AS) $651 million, 4.3% YTY Engineering and R&D Services (ERS) $307 million, 3.4% YTY Infrastructure Services $694 million, 28% YTY Business Services $71 million, 13.7% YTY AS remained one of HCLT s largest revenue segments in 3Q16, as the company continues to promote automated maintenance offerings such as ALT ASM and modular, offthe shelf technology solutions to address client demands for speed, efficiency and cost reduction. Such offerings better equip HCLT to drive client satisfaction in existing application outsourcing contracts and secure new client wins to accelerate AS revenue growth. ERS growth was pressured in 3Q16 by the decrease in engineering outsourcing contract size. However, we expect the acquisitions of Geometric Limited and Butler America Aerospace, LLC will accelerate ERS growth in coming quarters. Infrastructure Services remained the fastest growing revenue contributor in 3Q16, as HCLT differentiates with its next generation ITO capabilities around hybrid cloud and IP offerings such as MyCloud and DryIce. Additional revenue contribution from Volvo IT as well as its alliance with Microsoft positively impacted revenue growth for the segment in 3Q16. Year to year revenue decline in Business Services was primarily attributable to individual account issues impacting the small segment. In 4Q16 we expect HCLT will continue to transition its portfolio to an outcomes based model, packaging Business Services into broader BPaaS and Internet of Things (IoT) engagements. 4

5 Financial Model Strategy Leveraging automation in platforms such as the DryIce enabled HCLT to expand margins in 3Q16 Revenues HCLT recognized $1.7 billion in revenue during 3Q16, with year to year revenue growth of 11.5%. The company outpaced year to year quarterly revenue growth of peers such as Infosys (8.2%), Wipro (8%) and TCS (5.2%). Increasing the company s investments in IoT, cloud and analytics resulted in Instructure and Application Services enduring as HCLT s main revenue drivers. believes the continuing contributions from the Volvo IT deal and the increase in demand for digital transformation will positively influence revenue growth in 4Q16. HCLT 3Q16 PERFORMANCE VS. EXPECTATIONS In $ Millions, Except EPS Estimate Actual HCLT Revenue $1,610 $1,722 HCLT Operating Income $355 $347 HCLT EPS N/A $0.21 HCLT 4Q16 GUIDANCE AND EXPECTATIONS In $ Millions Estimate Consensus HCLT Revenue $1,774 $1,789 HCLT Operating Income $355 N/A HCLT EPS N/A N/A SOURCE: AND INDUSTRY ESTIMATES Expenses Cost of revenue declined 40 basis points year to year, accounting for 66.4% of revenue in 3Q16, driven by HCLT s internal deployment of automated platforms such as DryIce. Selling, general and administrative expenses fell 70 basis points year to year to 11.8% as a percentage of revenue. Margins Operating margin increased 70 basis points year to year to 20.1% in 3Q16, as HCLT reduced delivery costs through increased offshore utilization and automation. expects HCLT to record operating margin between 19% and 2 in 4Q16 as acquisition expenses offset benefits from services automation and data center consolidation. Gross and Operating Margins 45% 36% 27% 18% 9% 33.2% HCLT GROSS AND OPERATING MARGINS AND PROJECTIONS 34.6% 34.9% 34.4% 33.6% % % 20.6% 20.1% 20. 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Est. Gross Margin SOURCE: AND HCLT Operating Margin 5

6 Go to market and Services Strategies HCLT added clients across revenue categories by combining core outsourcing strengths with digital transformation capabilities Signings and Pipeline HCLT continues to execute on core capabilities and upsell digital technologies such as IoT, cloud and analytics to capture growth opportunities as organizations transition to become more agile and data driven. HCLT s contract with Synergy highlights HCLT s ability to win digital transformation contracts. In 3Q16 the company reported 12 transformational signings. HCLT also added accounts in each revenue category, including adding a client in the $100 million plus segment after losing one in 2Q16. Alliances and Acquisitions HCLT announced in September its partnership with Mesosphere, a data infrastructure and container orchestration company. The partnership will combine Mesosphere s Datacenter Operating System (DC/OS) with HCLT s next generation ITO abilities to support customers operational efficiency as they transition to digitalization. In October HCLT announced the planned acquisition of U.S. based Butler America Aerospace, LLC, supporting HCLT s investments in growing core services such as ERS. The acquisition is expected to close at the end of 4Q16. Key 3Q16 Customer Wins Synergy (Australia): HCLT will deliver application management services to transform and support Synergy s digital and business applications infrastructures. Under the agreement with Synergy, HCL will partner with Ignia to provide next generation digital services to improve the customer experience. HCLT'S CLIENT DISTRIBUTION CALENDAR QUARTER 3Q15 4Q15 1Q16 2Q16 3Q16 FISCAL QUARTER 1Q16 2Q16 3Q16 1Q17 2Q17 CLIENT DISTRIBUTION BY REVENUE CONTRIBUTION $100 Million plus Clients $50 Million plus Clients $40 Million plus Clients $30 Million plus Clients $20 Million plus Clients $10 Million plus Clients $5 Million plus Clients $1 Million plus Clients PERCENT TOTAL REVENUE FROM TOP CLIENTS Top 5 Clients 13.2% 13.6% 13.6% 13.6% 13.6% Top 10 Clients 21.7% 21.9% 21.7% 21.8% 21.8% Top 20 Clients 32.4% 32.4% 32.4% 32.2% 32.2% Repeat Business 92.9% 95.7% % 96.5% SOURCE: HCLT AND 6

7 Go to market and Services Strategies North America continues to drive revenue growth, highlighting HCLT s success selling transformation services in its core geography Percent of Total Revenue Percent of Total Revenue Financial Services Retail & CPG Life Sciences & Healthcare Others SOURCE: AND HCLT 10 75% 5 25% SOURCE: AND HCLT HCLT VERTICALS AS A PERCENT OF REVENUE 0.6% 0.6% 0.6% 0.5% 0.4% 0.4% % 11.1% 11.7% 10.9% 10.5% 12.4% 12.2% 12.8% 11.9% 12.6% 12.4% 9.6% 9.7% 9.9% 9.1% 9.4% 9.5% 8.8% 9.5% 9.2% % 10.6% 32.5% 31.5% 31.4% 33.2% 32.2% 32.3% 26.1% 25.9% % 24.1% 24.3% 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Est. HCLT REVENUE BY GEOGRAPHY Manufacturing Telecom, Media, Pub. & Entertainment Public Services 9.6% 9.1% 9.1% 8.7% 8.8% % 29.9% 28.4% 31.4% 29.3% 28.7% 58.7% % 59.9% 61.9% 62.3% 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Est. Americas Europe Rest of World Vertical Performance Manufacturing remained HCLT s largest vertical, contributing nearly one third of total revenue in 3Q16, and grew 10.5% yearto year. Revenue growth is mainly due to organizations implementing digital manufacturing, smart manufacturing and Industrial IoT. We expect once the acquisitions of Geometric Limited and Butler America Aerospace, LLC close, they will provide an additional inorganic lift for HCLT s manufacturing revenues. Retail and CPG revenue increased 31.8% year to year in 3Q16. We attribute revenue growth to previous contract wins and renewal with a Nordic based retailer, in addition to a deal with a Fortune 500 retailer to integrate service desk, retail infrastructure, and retail and merchandising development. Geographical Performance North America remains HCLT s primary source of revenue. Revenue in the region grew 17.6% year to year in 3Q16. Recent partnerships with Mesosphere will help support cloud services growth in North America as HCLT drives digital transformation. Rest of world revenue grew 2.2% year to year in 3Q16, ending a six quarter year to year negative growth streak. Revenue growth reflects HCLT s ability to secure contract wins outside core markets, such as Synergy in Australia and a camera manufacturer in Japan.

8 Resource Management Strategy Investing in skills training in India will position HCLT to expand next generation services delivery in low cost locations Strategy and Investments HCLT announced in September it will invest to increase its skills in its offshore delivery capabilities by opening a training and skill development center in Mihan, India. The center will employ 1,000 young adults by 4Q16 and be fully operational by 2019, including doubling the number of employees to 2,000. Training at the center will focus on industry specific software in verticals such as healthcare and financial services as well as lines of business such as infrastructure management and engineering. Mihan is an increasingly popular special economic zone in India, with peers such as Infosys and TCS also investing in the region. The new center will improve HCLT s ability to compete for young talent in a lower cost location. 3Q15 3Q16 YTY Revenue per Employee $59,256 $61, % Operating Income per Employee $12,512 $12, % Blended Utilization (Excl. Trainees) 83.6% 85.3% 170 bps Attrition 15.2% 17.2% 200 bps SOURCE: HCLT AND ESTIMATES HCLT Efficiency Metrics Organizational Changes In October HCLT announced the appointment of C VijayKumar as CEO following his elevation to chief operating officer in June. VijayKumar will drive the company s Mode strategy to improve efficiency in core business and expand next generation services such as BeyonDigital, IoT Works, cloud and cybersecurity services. Headcount 125, ,000 75,000 50,000 25,000 0 SOURCE: AND HCLT 75.4% % 27. 3Q15 HCLT HEADCOUNT 105, ,795 3Q16 YTY Growth: 4% Low cost Onshore 8

9 Income Statement HCL TECHNOLOGIES LTD. Consolidated Statements of Income (in U.S. $ Thousands Except per Share Data) CALENDAR QUARTER 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Est. FISCAL QUARTER 1Q16 2Q16 3Q16 1Q17 2Q17 3Q17 Est. Total Revenue $ 1,544,519 $ 1,566,127 $ 1,587,241 $ 1,690,651 $ 1,722,397 $ 1,774,069 Cost of Revenues $ 1,031,574 $ 1,024,925 $ 1,033,021 $ 1,109,662 $ 1,144,219 $ 1,170,885 Gross Profit $ 512,945 $ 541,202 $ 554,220 $ 580,989 $ 578,178 $ 603,183 Selling, General and Administrative Expenses $ 193,180 $ 204,188 $ 201,228 $ 205,025 $ 202,645 $ 221,468 EBITDA $ 319,765 $ 337,014 $ 352,992 $ 375,964 $ 375,533 $ 381,715 Depreciation & Amortization $ 20,708 $ 23,132 $ 23,315 $ 28,018 $ 28,926 $ 26,300 Operating Income (EBIT) $ 299,057 $ 313,882 $ 329,677 $ 347,946 $ 346,607 $ 355,415 Finance Cost $ 3,957 $ 3,493 $ 3,713 $ 4,202 $ 1,605 $ 3,335 Other Income, Net $ 40,919 $ 57,431 $ 33,188 $ 65,561 $ 36,728 $ 43,175 Provision for Income Taxes $ 72,287 $ 76,995 $ 73,815 $ 80,942 $ 80,381 $ 74,840 Share of (Income)/Loss of Minority Shareholders $ (31) $ (15) $ (66) $ (489) $ (107) $ (169) Net Income $ 263,701 $ 290,810 $ 285,271 $ 327,874 $ 301,242 $ 320,246 Diluted EPS N/A Diluted Shares 1,412,745,610 1,411,549,109 1,410,916,234 1,412,206,169 1,412,305,547 N/A AS A PERCENTAGE OF REVENUE Total Revenue Cost of Revenues 66.8% 65.4% 65.1% 65.6% 66.4% 66. Gross Margin 33.2% 34.6% 34.9% 34.4% 33.6% 34. Selling, General and Administrative Expenses 12.5% % 12.1% 11.8% 12.5% EBITDA 20.7% 21.5% 22.2% 22.2% 21.8% 21.5% Depreciation & Amortization 1.3% 1.5% 1.5% 1.7% 1.7% 1.5% Operating Margin (EBIT) 19.4% % 20.6% 20.1% 20. Finance Cost 0.3% 0.2% 0.2% 0.2% 0.1% 0.2% Other Income, Net 2.6% 3.7% 2.1% 3.9% 2.1% 2.4% Provision for Income Taxes 4.7% 4.9% 4.7% 4.8% 4.7% 4.2% Net Margin 17.1% 18.6% % 17.5% 18.1% SOURCE: AND HCLT Note: In 1Q16 HCLT announced a change to its fiscal year, which will now end March 31 instead of June 30, complying with 2016 amendments to India's Companies Act, As a result, calendar quarter 2Q16 is HCLT's fiscal quarter 1Q17. 9

10 Balance Sheet HCL TECHNOLOGIES LTD. Consolidated Balance Sheet (in U.S. $ Thousands) CALENDAR QUARTER 3Q15 4Q15 1Q16 2Q16 3Q16 FISCAL QUARTER 1Q16 2Q16 3Q16 1Q17 2Q17 ASSETS Current Assets Cash and Equivalents $ 118,496 $ 124,324 $ 110,069 $ 183,685 $ 186,578 Accounts Receivable $ 1,502,773 $ 1,500,897 $ 1,618,266 $ 1,615,788 $ 1,561,227 Treasury Investments $ 1,654,863 $ 1,638,025 $ 1,678,647 $ 1,686,072 $ 1,731,934 Other Current Assets $ 403,718 $ 420,954 $ 363,752 $ 369,288 $ 406,810 Total Current Assets $ 3,679,850 $ 3,684,200 $ 3,770,734 $ 3,854,833 $ 3,886,549 Property, Plant and Equipment, Net $ 596,098 $ 601,346 $ 652,407 $ 984,197 $ 1,080,757 Intangible Assets $ 812,291 $ 868,699 $ 968,763 $ 941,832 $ 935,756 Investment in Affiliates $ 1,851 $ 24,979 $ 24,434 $ 22,533 $ 22,074 Other Assets $ 471,221 $ 490,779 $ 585,370 $ 574,771 $ 575,621 Total Assets $ 5,561,311 $ 5,670,003 $ 6,001,708 $ 6,378,166 $ 6,500,757 LIABILITIES Total Current Liabilities $ 1,431,579 $ 1,388,204 $ 1,434,984 $ 1,690,044 $ 1,630,452 Long term Debt $ 35,032 $ 24,158 $ 146,875 $ 117,130 $ 89,706 Other Liabilities $ 177,736 $ 172,404 $ 190,677 $ 268,254 $ 286,173 Total Noncurrent Liabilities $ 212,768 $ 196,562 $ 337,552 $ 385,384 $ 375,879 Total Liabilities $ 1,644,347 $ 1,584,766 $ 1,772,536 $ 2,075,428 $ 2,006,331 STOCKHOLDERS' EQUITY Total Stockholders' Equity $ 3,916,964 $ 4,085,237 $ 4,229,172 $ 4,302,738 $ 4,494,426 Total Liabilities and Stockholders' Equity $ 5,561,311 $ 5,670,003 $ 6,001,708 $ 6,378,166 $ 6,500,757 SOURCE: HCLT Note: In 1Q16 HCLT announced a change to its fiscal year, which will now end March 31 instead of June 30, complying with 2016 amendments to India's Companies Act, As a result, calendar quarter 2Q16 is HCLT's fiscal quarter 1Q17. 10

11 About Us Contact Us Connect With Us Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators info@tbri.com 11 Merrill Drive Hampton, NH USA Twitter LinkedIn Webinars Serving a global clientele, provides timely and actionable market research and business intelligence in formats that are tailored to clients needs. Our analysts are available to address client specific issues further or information needs on an inquiry or proprietary consulting basis. Download All reports are available in PowerPoint and PDF. If you are viewing a PDF and require access to data, tables, etc. for use in internal documents, please visit and download the PowerPoint version. has been empowering corporate decision makers since To learn how our analysts can address your unique business needs, please visit our website or contact us today. TECHNOLOGY BUSINESS RESEARCH, INC. This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. The information contained in this report and all other products is not and should not be construed to be investment advice. does not make any recommendations or provide any advice regarding the value, purchase, sale or retention of securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.