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HCL Technologies Ltd

| Q3 FY26 Earnings Conference Call

BULLISH SENTIMENT

Report Source

⬤16th Jan 26

Summary : HCLTech delivered a strong Q3 FY26 with robust revenue growth, record bookings, and improved margins, driven by significant traction in AI-led services and strategic acquisitions, leading to raised full-year guidance.

Management Perspective positive : Management expressed being 'very pleased' with a 'standout quarter' and 'excellent top line growth,' demonstrating ability to 'capture market opportunities.' They are 'executing well' and 'confident of the growth trajectory.'

Concall Report Analysis & Insights

Business Overview

  1. Q3 FY26 revenue reached $3.79 billion, up 4.8% YoY and 4.2% QoQ in constant currency.
  2. Annualized revenue crossed $15 billion, reflecting platform scale and growth durability.
  3. Services business grew 5% YoY; Engineering and R&D Services grew 10.8% YoY.
  4. Operating margin improved to 18.6% QoQ, excluding one-time labor code impact.
  5. Net new bookings were strong at $3 billion, a 43% YoY increase, highest in four years.

Future Growth Prospects

  1. AI-powered solutions, AI Factory, and custom silicon engineering drive momentum.
  2. AI Force platform deployed across 60 priority accounts, a major market differentiator.
  3. Strong demand for Gen-AI, Agentic AI, Physical AI, and AI Factory capabilities.
  4. Acquisitions like Telco Solutions and Jaspersoft strengthen key offerings.
  5. Raised full-year services revenue growth guidance to 4.75%-5.25% in constant currency.

Management Insights

  1. Reported a standout quarter with strong revenue, bookings, and margin improvement.
  2. Performance is driven by AI vision, engineering heritage, and client value creation.
  3. Executing well on improvement plans, on track for medium-term growth.
  4. Focused on industry-leading growth with a disciplined approach to margins.
  5. Confident in the growth trajectory and strong pipeline for the business.

Signs of Skepticism

  1. Headcount declined slightly by 0.1% compared to the previous quarter.
  2. Enterprise AI adoption revenue and spend are still considered 'not very high.'
  3. Manufacturing vertical, particularly auto, remains 'muted' with tariff uncertainty.
  4. Q4 services guidance implies a slight decline at the lower end despite strong deals.

Risk Factors

  1. Forward-looking statements involve inherent risks and uncertainties.
  2. Global market uncertainties persist, slowing traditional spending growth.
  3. Manufacturing vertical, especially auto, remains muted due to tariff uncertainty.
  4. Enterprise AI adoption revenue and spend are currently low.
  5. Potential impact from pending labor code regulation clarifications.

Good To Know

  1. Attrition rate decreased to 12.4% on a LTM basis.
  2. Recognized in Forbes list of world's best employers for the sixth year.
  3. Over 38,000 employees trained on GenAI, 600+ on responsible AI.
  4. Launched AI Force 2.0 beta, with General Availability expected soon.
  5. Formed major partnerships with NVIDIA and SAP for Physical AI and industrial AI.

Key Drivers

  1. Strong AI-led deal wins.
  2. Raised full-year revenue guidance.
  3. Highest ACV bookings in four years.
  4. Expanding AI-powered solutions.

Key Analyst Discussions

Competitive Environment

  1. HCLSoftware achieved major competitive wins, displacing incumbents.
  2. Data intelligence portfolio is a compelling offering, replacing competitors.
  3. Secured significant wins in marketing automation for sovereign solutions.

Market Trends & Consumer Behavior

  1. AI discussions evolved to holistic organizational transformation from point solutions.
  2. Clients focus on foundational data and cloud migration for AI benefits.
  3. Strong demand for 'Day -1' AI services like custom silicon and AI data centers.
  4. Traditional discretionary spending has slowed, but AI infrastructure investments continue.

Financial Highlights

  1. Restructuring costs are a one-off, expected to conclude in Q4 FY26.
  2. Normalized Q3 margins were 19.4%, indicating structural margin health.
  3. Services margin dip due to wage hikes and furlough seasonality.
  4. Full-year EBIT margin guidance of 17%-18% remains on track.

Product Composition

  1. HCLSoftware saw strong sequential growth due to seasonality and data intelligence.
  2. Perpetual license revenue had a marginal uptick due to seasonality and one client.
  3. Strategy is to minimize perpetual licenses, converting to subscription models.
  4. Actian is now among the top three products by revenue.

Strategic Considerations

  1. AI-led legacy modernization is a significant opportunity over 2-3 years.
  2. Infrastructure business expects private data centers to refresh for AI workloads.
  3. Manufacturing vertical growth driven by aero and defense, mobility stabilizing.
  4. Bookings are spiky, but a moving average suggests $2.5 billion per quarter.
  5. All four largest Q3 deals were powered by the AI Force 2.0 Agent platform.