HCL Technologies Ltd. ADR (OTCPK:HCTHY) Q4 2022 Earnings Conference Call April 21, 2022 10:00 AM ET
Company Participants
Sanjay Mendiratta – Head, IR
C Vijayakumar – CEO and Managing Director
Prateek Aggarwal – CFO
Apparao VV – Chief Human Resource Officer
Conference Call Participants
Sandeep Shah – Equirus Securities
Kumar Rakesh – BNP Paribas
Ankur Rudra – JPMorgan
Nitin Padmanabhan – Investec
Ravi Menon – Macquarie
Gaurav Rateria – Morgan Stanley
Prashant Kothari – Pictet
Mihir Manohar – Carnelian Asset Management
Operator
Ladies and gentlemen, good day, and welcome to the HCL Technologies Q4 and Annual FY ’22 Earnings Conference Call. As a reminder, all participant lines will be in a listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]
I now hand the conference over to Mr. Sanjay Mendiratta, Head, Investor Relations. Thank you, and over to you, sir.
Sanjay Mendiratta
Thank you, Aman. Good morning, and good evening, everyone. A very warm welcome to HCL Tech’s Q4 and annual fiscal ’22 earnings call. Trust you all are safe and in good health. We have with us today Mr. C Vijayakumar, CEO and Managing Director [technical difficulty]; Prateek Aggarwal, Chief Financial Officer; Mr. Apparao, Chief Human Resource Officer; along with the senior leadership team to discuss the performance of the company during the quarter followed by the 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 on 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.
Thank you, and over to you, C.V.K.
C Vijayakumar
Yes.
Sanjay Mendiratta
I’m sorry, sir. We are unable to hear you clearly.
C Vijayakumar
Can you hear me now?
Sanjay Mendiratta
Yes, sir. Thank you.
C Vijayakumar
Yes. Good evening to all of you and I hope all of you are doing well. Thank you for joining us today for this fourth quarter earnings announcement for HCL Technologies.
Tomorrow, as all of you know, is Earth Day, which is – really reflects our support for environmental protection. At HCL Technologies, we have pledge to limit our greenhouse gas emissions aligned to a 1.5 degree pathway by 2030 and to reach net-zero by 2040. We’ve also defined what we call as material dozens commitment with focus areas aligned to create impact across sustainable development goals, but there are many programs underway at HCL Technologies both to reduce our own environmental footprint and also enable our clients in their sustainability journey.
On a related note, a few weeks ago, we were named Corporate Citizen of the Year 2021 by The Economic Times. This award recognizes and acknowledges companies who are flag bearers of social change and champions of good governance across ESG goals.
With that important message, let me get into our performance. I’m very happy to report that we have delivered yet another stellar quarter in our services business, where the revenue is up 5% quarter-on-quarter and up 17.5% year-on-year in constant currency.
If you’ve been following us over the last three quarters, our services business has been consistently growing organically at more than 5%, delivering one of the highest CQGRs in the industry. We posted a strong revenue growth of 12.7% in constant currency for the full year FY ’22. Our services business grew 14.9% year-on-year headlined by our digital application services, engineering services and the cloud transformation services.
I’m also very happy to announce that we’ve crossed a significant milestone of 200,000 employees. More than 200,000 Ideapreneurs across the world each doing their part in creating value for HCL, for over clients and for the communities we operate in. I want to take a moment and recognize and thank our employees for their unwavering commitment and hard work all through the year.
In Q4, we posted 1.1% sequential and 13.3% year-on-year growth in constant currency led by a very strong momentum – continuing momentum in our services business. Our net income grew 3.7% quarter-on-quarter and 18.3% year-on-year in dollar terms during this quarter, of course, without the milestone bonus impact of $78.8 million in JFM ’21.
Our operating margin performance for this quarter was 17.9% and the full year it was 18.9% coming in slightly below the low end of our guidance. This dip is largely due to the talent model transformation that we are investing in, which involves hiring a large-scale fresher hiring, nearshore delivery scale-up and the talent, skilling and training investments.
We believe that this investment is very timely. What we have been doing over the last three or four quarters has helped us and delivered strong momentum in our services business. And this is also very critical for our medium-term growth and that is the business rationale, which is driving us to invest in the talent.
We are seeing increasing acceptance of offshoring, especially in Europe due to the secular talent shortage trend and emerging geopolitical risks. In FY ’22, the relevance of our services and very strong client mining has resulted in very impressive client additions. Our $100 million clients increased by one, our $50 million clients increased by eight from 35 in the last year to 43 this year. We added 22 $20 million clients, we added 30 $10 million clients, we added 31 $5 million clients and 70 $3 million clients. This addition has been made possible over the focused strategy to work closely with large enterprise IT spenders, specifically in the top rung of a 500 and G2000 corporations.
We’ve also done this in a sustainable way by growing these accounts incrementally with multiple propositions of ours adding value to client businesses and not led by a single mega deal. What’s most satisfying about the growth last year, it’s been so secular and it is a – it is very strong in the top client category.
On the headcount ramp up, it continues. We made record hiring this fiscal, 39,900 new additions to our family. Our attrition also remains lower than the industry at 21.9% on an LTM basis. In terms of segmental and sectoral performance, our ITBS service delivered an industry-leading growth of 16.2% in constant currency led by a strong momentum in our application services business, which is very successfully riding the digital wave.
A demand for our digital services continues to be very strong as clients spend on several key transformation initiatives. Some of these include cloud adoption for better resilience, agility and security, modernizing applications for cloud or SaaS for experience and efficiency, data modernization for deep insights from analytics using AI and a very important transformation initiative our clients are undergoing is what we call as an operating model transformation, which is product-led and leverages DevOps and intelligent automation for increased business agility.
We also see investments and initiatives in managing digital risk with continuous security and compliance at digital engineering, which is infusing new technologies like 5G, AR, VR, softwarization into every product and services that some of our large engineering customers – product engineering clients are under the transformation part.
And last but not the least, the digital workplace for enhanced employee experience and enabling hybrid workplace. We are capturing this broad-based growth very well. Our growth in this arena is fully organic, which validates the strength and scale of our capabilities in this segment. This is really a result of very thoughtful organic investments, which we made over the last few years to enhance our motto capabilities, which is really seeing maximum impact in this buoyant demand environment.
Our engineering and R&D services business continues on its steady performance trajectory with a double-digit or 23.7% year-on-year growth during the quarter and a 3.9% sequential growth in constant currency. Here, the trends of 5G, telecom modernization, Industry 4.0 and similar initiatives continue to propel growth in this segment.
Additionally, our recent acquisition of Starschema will strengthen our data engineering capabilities, providing us the ability to leverage the solutions and the talent in the European market. I’m also happy to share we were ranked as Number 1 Engineering Services provider for the U.S. in 2021 by Zinnov. We are one of the top global leaders in this space and that strength is only growing.
On the products and platform, it’s seasonally a weak quarter for the business. It declined from a quarter-on-quarter perspective as well as from a year-on-year perspective. This business continues to be volatile and we continue to see good synergies between our services and product business as we are already seeing clients consuming our products.
By the strength of all the good innovation and the great support that we have delivered to them over the last couple of years, they are already inviting us to a few of large services opportunities. We’re already seeing a 10% contribution to our overall pipeline, which is really emanating from our product client base. We still need to look at this products business as a software startup and hence proactive investments and constant product modernization will continue to remain the driving themes in this business.
In terms of verticals, we saw very strong growth in our telecom vertical, which grew at 6.8% sequentially and 20.2% year-on-year in constant currency led by a surge in demand in 5G and telecom modernization programs. This quarter, we also launched two new 5G applications to help mobile network operators optimize client experience and reduce energy consumption across their 4G and 5G infrastructure.
Our Life Sciences and Healthcare segments grew 18.5% year-on-year and took the second spot in the sectoral growth. Life sciences and healthcare industries are experiencing a rapid growth in remote patient monitoring, involving devices like BP monitors, sensoral patches, pulse oximeters, et cetera, that are highly regulated. To meet the rapidly expanding demand for medical device provisioning, HCL Technologies has obtained ISO 13485 certification for our European and U.S. hardware depot operations. This certification underscores our commitment to quality and safe handling of medical devices for our clients, fulfilling one of the critical requirements to provide safe and quality remote patient monitoring and clinical research services.
Our Manufacturing segment grew 16.6% year-on-year in constant currency. This quarter, we launched MVision, our framework to help manufacturing industries transform their traditional business processes into next-generation enterprises by deploying cutting-edge solutions that drive innovation and boost cost efficiencies. We also announced the release of CAMWorks 2022, a software that automates smart manufacturing for CNC programing and is the most advanced CAM Software available in the market.
Our financial services remains steady with a Y-o-Y growth of 10.2% in constant currency during this quarter. Our bookings remained strong, cutting across verticals, geographies and service lines. In FY ’22, we signed 52 new large deals, including 10 in Q4. Our TCV was a $2.26 billion, which is a growth over the last quarter. On a year-on-year basis, the TCV declined because our Q4 last year was a very, very strong booking quarter, but what is very heartening is from a year-on-year perspective, our TCV has grown 14% and given the mix of deals, our ACV has grown 21% year-on-year.
Some of the significant deals I want to highlight that we signed this quarter, include a U.S.-based large technology company, who selected us as an end-to-end R&D services partner in recognition of our digital engineering capabilities in the domains that our customer wanted us to deliver digital engineering services. As a part of this relationship, we will setup three R&D centers globally outside India.
A Europe-based public sector company selected us for provisioning and transforming their infrastructure landscape. A Europe-based manufacturing company signed up with us to accelerate their digital transformation journey underpinned by cloud migration and application modernization. Also, a European telecom company expanded its partnership with us for managing its cloud operations to accelerate digital transformation and drive meaningful operational efficiencies and achieve cost savings over time.
This quarter, we also expanded our large existing strategic partnerships with Husqvarna and Novo Nordisk, which we had announced recently. Some of these engagements, the growth is a reflection of the strength in our proposition. And coming to our pipeline, it’s very healthy, it’s got a good mix of large and small deals. While some deals are getting smaller and shorter due to the cloud program, the sizes of deals like ABM deals are up almost 20% over the pre-pandemic deal sizes. The market trend is also – the broad market trend for transformation is also noticed in a significant way in our pipeline.
On the pandemic, we continue to monitor COVID-19 pandemic with utmost priority and continue to fully comply with all the government advisories and recommendations. Proactive and continuous monitoring is in place on the new variants and infection trends across geographies in conjunction with medical experts.
Lastly, I also want to call out our HCL Grant program. This quarter, we announced the winning NGOs of the seventh edition of HCL Grant, our flagship CSR program. The winners were Professional Assistance for Development Actions, PRADAN, in the environment category, Association for People with Disability in the health category, and Language and Learning Foundation in the education category. We remain deeply committed to our goal of nation-building and rural transformation through this unique flagship CSR program.
Now, coming to outlook for FY ’23. We continue to remain confident of the market environment and the relevance of our solutions and services with respect to the emerging needs of our clients. With that confidence, we are guiding for 12% to 14% revenue growth in constant currency. In terms of operating margins, we are guiding 18% to 20% for FY ’23 as we see continued need to invest in the talent model transformation to prepare for the next big wave of digital spending in the market. We are entering FY ’23 with optimism and hope to continue to generate significant value to all our stakeholders across the board.
With that, I will request Prateek to dive deeper into some of our financials.
Prateek Aggarwal
Thank you, C.V.K., and hi, everybody, good evening, good morning.
I’ll add on some important data points over the commentary that C.V.K. just shared with you. As a first point, you may have noticed that we have moved from U.S. GAAP as the accounting principles that we were reporting so far for the last couple of decades. We have moved to IFRS now and the move has been done such that both the financial year that you see in the publications before you are in the IFRS terms.
So both FY ’21, the previous year, and FY ’22, the current year, numbers that you see are in IFRS, which by the way is not different from the Ind AS statutory numbers that we’ve been publishing in rupee terms so far. And that has been the starting point right from the beginning of FY ’21, which is April 1, 2020, which is the transition date for this move from U.S. GAAP to IFRS. None of the accounting policies have changed and the past numbers remain substantially the same as Ind AS numbers published earlier, so that should not change anything in your historical database or your models.
The highlight of the quarter, obviously, is the blistering growth in services business at CQGR of 5.2% in constant currency over the last three consecutive quarters. Services revenue in Q4 grew 17.5% year-on-year in constant currency, crossing an important milestone of $10 billion in services revenue alone over the last fiscal year and, as you know, most of which has been grown organically over the last two, three years primarily.
Within the services business, ITBS has shown strong growth with 5.2% sequentially and 16.2% year-on-year growth, which is a CQGR of percentage points over the last three consecutive quarters. ERS or ER&D, as some of you call it, also showed strong momentum with 3.9% sequentially and 23.7% year-on-year growth for the quarter, showing a CQGR of 5.9% over last three consecutive quarters.
P&P, on the other hand, continued to be volatile. We had an exceptionally good December quarter, but this time P&P revenue degrew 13.9% year-on-year in constant currency. As a result of both these components, the company revenues came in at $2,993 million, virtually $3 billion for the quarter, which was a growth of 1.1% sequentially and 13.3% on the March quarter last year.
Q4 EBIT came in at 17.9%. EBITDA was higher at 24% for the full year. The 17.9% for the quarter was down 109 basis points, 1.1 percentage point and on a year-on-year basis was 258 basis points, which, as you know, is largely due to the increase in salaries driven by the market factors that we have spoken about earlier as well. Net income for the quarter was at 15.9% of revenue and this was higher 48 basis points sequentially, and 97 basis points year-on-year.
And as you can see the components delivering that over-and-above EBIT was a higher ForEx gain this quarter. And as I talk about that, I would also like to draw your attention to the mark-to-market gains sitting in the balance sheet, which after discounting is at $74 million at the end of March this year. Also, helped – the net income was also helped by the lower effective tax rate for the three months ended March, which is at 15.7%. In Q4, certain one-time reversals has led to this lower ETR, which helped us improve the net income of profit after tax.
Quick overview of the fiscal year as a total. Revenue came in at $11.5 billion, $11,481 million to be precise and – which was a growth of 12.7% in constant currency terms year-on-year. EBIT came in at 18.9%, which was down 258 basis points on a year-on-year basis. Net income again at a company level for the full year came in at $1.8 billion, which is 15.7% of the revenue base, which is an increase of 3.2% on a year-on-year basis.
The ETR, the effective tax rate, for FY ’22 finally came in at 20.3%, which was obviously helped by certain favorable judgments and assessments at various points in time at various quarters during the financial year, which has resulted in the lower ETR. When I talk about ETR, going forward, this is an important note for you as you make your models again. The effective ETR for HCL is going to diverge between what I call the P&L ETR and the cash ETR. One benefit of moving to IFRS is the cash shows very clearly in one line item, the cash tax that is paid by the company and that is the cash ETR that I’m talking about.
For us, it is going to be a large difference of 4 percentage points of PBT. And while the P&L is going to show ETR of between 24% to 26%, the cash ETR is going to be 4 percentage points lower at 20% to 22%. And the reason for that divergence is because we as a company will continue to pay M-A-T, MAT, in India using up the accumulated MAT that we have in the balance sheet. And you can see it in the balance sheet, it is an amount of $312 million, INR2,369 crores.
So for the next two to three years, we will see that this divergence between the P&L cost shown in the P&L versus the actual cash payout and this is a divergence of 4 percentage points for FY ’23. So, I do want you to make note of this as this is very important.
The second note that we have given in the accounts and in the investor release is all the year-on-year comparisons that we have done for the March quarter as well as for the full year FY ’22. We have taken a higher benchmark in the March quarter last year and in the FY ’21 numbers to make the comparisons of this current quarter and this current fiscal year.
There are two specific items. You may remember, we had paid out a special milestone bonus to all our employees in March quarter last year, which was an amount of close to $100 million, $99.8 million to be precise, which is the number that depressed the reported EBITDA and EBIT. And the same number at a net income level net of tax was $78.8 million compared to $9 billion, which reduced the net income of March quarter last year and FY ’21.
The second item was the one-time deferred tax expense of $165 million, INR1,222 crores, which, as we had explained last year, was a charge, which was completely a non-cash charge, it is a liability sitting in the Ind AS and IFRS now balance sheet, which is not really payable to anybody, but that is the charge we were forced to take as far as whatever accounting guidance that we got.
So we have excluded both these numbers, both of these hits in the previous year P&L and the comparison points that we have taken whether it is EBITDA, EBIT, or net income of the previous year, we have taken the higher benchmark, the tougher compare and that is how we have reported these numbers. That’s the second important note I wanted to leave behind with you.
Having said all of that, just a quick look also at the margin walk, EBIT walk from the previous year to this year – sorry, previous quarter to this quarter, from December to March. As you can see, the services margin has improved by 85 basis points and this is the recovery of the seasonal leave impact that we had in the previous quarter, which we talked about in the previous con calls and that has been recovered this year – this quarter, and that was about 65 basis points and the rest 20 basis points is other operational efficiencies.
The gain in the services margin, however, is offset by the seasonality and the volatility in the P&P part of the business, which has impacted the company EBIT by 178 basis points, resulting into the overall company EBIT margin of 109 basis points reduction on a quarter-to-quarter basis.
Last couple of points. One on the cash generation, HCL continues to generate solid cash flow. Operating cash flow came in at $735 million for the quarter and free cash flow at $685 million, respectively being 155% and 144% of net income. And for the full year FY ’22, OCF came in at $2,264 million, $2.26 billion, being 125% of the net income and free cash flow came in at $2 billion, being 113% of net income. Our balance sheet remains strong with gross cash now at $2.9 billion.
The net income translated to earnings per share of – for the full year EPS came in at INR49.77, which is 4.4% increase year-on-year. And the Board has declared INR18 for the quarter, which, on top of the INR26 per share that had been paid out in the first three quarters – for the first three quarters, totals up to INR44 per share for the full year. And that combined, INR44 versus the INR49.77 EPS translates to 88.4% of the net income.
With that, I’ll hand over to Appa for some commentary on the HR space. No? Okay.
Apparao VV
There are any questions. Okay.
Prateek Aggarwal
Suffice to say that we added net headcount of 11,100 employees this quarter and they were third-party contractors on top. And during the year, we added virtually 40,000 people, 10,000 virtually every quarter. That’s been a real high for the HRs and talent acquisition group.
With that, operator, we can go in for Q&A. Thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from the line is from Sandip Agarwal from Edelweiss. Please go ahead. Sandip, your line is unmuted. I request to please unmute and proceed with your question. I think there is no response from the line of Sandip.
We will move on with our next question that is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Sandeep Shah
Hello?
C Vijayakumar
Yes, Sandeep.
Operator
Mr. Shah from Equirus?
Sandeep Shah
Yes. Thanks for the opportunity. Firstly, thanks for a good payout starting with this year and hope this continues going forward. So, congratulations. And just the first question in terms of a guidance, which is roughly 12% to 14% in constant currency, can you throw some light, because if I’m not wrong, we may be building a higher growth in the services business versus production, platform? So, you can throw some light in terms of what are we baking in, in terms of different segments.
C Vijayakumar
Yes. Sandeep, we have given you a guidance for the whole business and we will stop at that. We are not going to break up services, products and things like that.
Sandeep Shah
Okay, okay, C.V.K. But is it fair to say the growth outlook for production, platform may be marginally going up, or you still believe we do not have too much of visibility entering FY ’23 for that segment?
C Vijayakumar
Sandeep, you’re basically asking the same question in different ways. So, I think, see, as an overall business, we’ve given you a very clear guidance, I think. It factors in the ups and downs in different parts of the world, different verticals, different segments, so it’s a model based on a number of factors and the pipeline, the wind, the book that we have all of that. So, I cannot add anything more, Sandeep.
Sandeep Shah
Okay, okay. And just on margin, Prateek, I think, if I’m not wrong in FY ’22, we had a 100 bps of more or less…
C Vijayakumar
Sandeep, I’m sorry. We do need to give time to the others, so please make this the last part of your question. Thanks. Go ahead.
Sandeep Shah
Yes, yes, yes. So, what I’m saying is – yes, in terms of the margins, what I’m saying is, last year FY ’22, you had a 100 bps worth of discretionary spend. Is it fair to assume that may not continue in this year plus generally, we are not making incremental inorganic investment on products and platform, so saving in amortization cost may also continue. So, from a exit rate of 18% EBIT margin, is it fair to assume, achieving a midpoint of the guidance is not out of reach?
Prateek Aggarwal
So, Sandeep, I’ll kind of repeat what C.V.K. already said. We have given you a range and a range means a range. I’m not going to be more specific within the range. I will add this though that the investments we talked about last year do continue and there would be probably some incremental spend on that because we are talking about at least 12 countries right, five focus countries and seven new frontiers.
So, while a lot of what we wanted to do has been done, as that engine matures and starts driving forward, there will be a little bit more, but that is all factored into the guidance that we’ve given.
The discretionary spend you’ve talked about is not going away. It continues, but hopefully, in a few quarters’ time, it will start delivering the fruit of the investments and start delivering some return on that investment. I’ll leave it there.
Operator
Thank you. Our next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Kumar Rakesh
Hi, good evening. Thank you for taking my question. My first question was about – in the prepared remarks, C.V.K., you talked about that the Product & Platform segment needs proactive investment. Can you please elaborate what kind of investments we are looking at, its quantum, and by when we are expecting the results of those investments coming around?
C Vijayakumar
Yes. First of all, whatever investment that we plan to make that is already part of our margin guidance. The second aspect, to give you a little more flavor, we have a number of products. There are a few products, which we have identified as products where we should invest to kind of create the right acceleration and there are market opportunities. So, selectively, there will be few areas and as we have a large portfolio of products and we invest close to $200-plus million in R&D. We have the flexibility to dial down the investment on some and dial up the investment on others. That’s the broad background to that comment.
Kumar Rakesh
Got that. And this segment over the last couple of years, barring FY ’22, has seen very strong growth. So, in the recent quarters, you talked about that – this segment is volatile. What essentially is driving that volatility, and how do you see you addressing back from leadership perspective?
C Vijayakumar
Yes. Great question. See, our software product business is about $1.4 billion in space. The revenue comprises of three components. One, which is the largest component, is the subscription and support revenue we get for the products. It’s about – 67% of the revenue comes from subscription and support services. And both 5% comes from professional services around products and the remaining comes from product license sales.
So, our endeavor has been to convert the product license sale, which comes in as a lumpy revenue whenever we sell products into a subscription-based service model. And some of the products are also now available as cloud-native solutions where customers can deploy these products on three hyperscaler partnerships that we have. So, some of these strategies will play out over a period of time, which will – I mean, our business strategy is to convert more product licenses into more subscription-based revenue models.
And this is the transformation most software companies go through when they move from an on-premise to a SaaS model. And we are in the very early stages of the journey and it will – it’s a multi-year journey, which will really reduce the volatility in the business and make it more predictable and it’s more subscription-based service model.
Kumar Rakesh
So, you said that we are in the early part of this journey. So, is it fair to say a large part of our revenue in this segment is still coming from the product license change to…
C Vijayakumar
Yes, it’s about – talked about less than 30% comes from product licenses. 67% or two-thirds comes from subscription and support services and 3% to 5% from professional services, so.
Kumar Rakesh
Okay. Great. That answers my question. Thank you for taking my question.
Prateek Aggarwal
Thanks, Rakesh.
Operator
Our next question is from the line of Ankur Rudra from JPMorgan. Please go ahead.
Ankur Rudra
Thank you. And thank you C.V.K. for the elaborated guidance and also improved payout. Just one quick clarification, was the payout this year a one-off? Is there any – should investors assume any change in your sustainable payout ratios going forward?
C Vijayakumar
Yes. It’s in line with our guidance of minimum of 75% of our net income. And being the last quarter, we felt – we haven’t done any acquisitions, we don’t intend to do any, so the obvious option was to payout. And as a strategy, we’re not going to – because our capital allocation is a lot more tuned to payout at this point in time, and there is not too much of a CapEx plan, or there isn’t any acquisition plan of any reasonable size. So, we wanted to make sure we payout as much as we can.
Ankur Rudra
Appreciate that. Then, secondly, just if I look at the overall business over the last three or four years, especially in the last two years, clearly, looks like a case of two cities, right, between products and services. Services seems to be on an all-time high and growth at least on last decade or so, but on products, it’s clearly been quite volatile.
Now, given it’s been three years since the IBM deal, it seems like almost half the period has been surprisingly volatile and the business has not displayed tangible signs of either sustainable growth or margins. How are you thinking about this now and do you think it’s still – do you still call it a start-up or are you thinking about rationalizing this going forward?
C Vijayakumar
Yes. I think, it’s like any software start-up. I mean, it has its ups and downs. And the fundamental hypothesis of our strategy is to really have market permission to play in the software product space, which is completely established. And the second hypothesis is, we are going to get access to a very large client base, gain many customers, especially large clients in different geographies, where we don’t represent.
Here, in the first three years, we had really not focused on the expansion into the client base. In the last six months, we’ve definitely turned our attention to what can – gain clients and we are already seeing good relationships and good delivery of some of the product roadmaps for our clients. We have seen a few RFPs which we would have never got because we’ve been working with these clients trying to get into their large spend bucket, but we are already seeing us being invited.
We’ve had some wins, but at this point, I see a good pipeline building from the large clients. So, I think, this is also going to play out, but that revenue impact will show up in services. And product business itself, we should treat it like a product start-up and it will have its ups and downs. The good part of it is two-thirds of the revenue is stable and growing. There is this less than 30% of this, which could be a hugely fluctuating, depending on the quarterly bookings and things like that.
As we move forward, we will make this more predictable, as we move a lot of on-premise software into a subscription-based model or a SaaS-based model. That journey is in the beginning. Like most software companies, this will be a multi-year journey and we will also start publishing what our subscription revenue is in the coming year, starting from Q1. So, your real metric should be, how is our subscription revenue growing. I think, that’s really the baseline for this business.
Ankur Rudra
My broader question – so, actually my broader question also was, sounds like it’s a very different business than what we thought it was. Given what you’ve seen of it over the last three years, should it be within a services organization?
C Vijayakumar
Yes. So, basically, it’s a separate organization that is set up. We call it as Products & Platform. We have separate sales channel. The marketing is separated. We have all the corporate functions catering to this in a dedicated way. So, it’s really a software start-up within a services margin business, which has got enough flexibility and agility that is needed for a software product business.
So, at this time, we see – we don’t see it like something which should be a completely separate organization, a separate entity. I think, the current operating model is serving its purpose. We have great collaboration between services and these software products team and the synergy benefits are at the tip of the iceberg. That’s what I would say.
Ankur Rudra
Okay. Thank you for the color and best of luck.
C Vijayakumar
Thank you.
Operator
Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Nitin Padmanabhan
Thank you for the opportunity. I had two questions. So, one was on the products business, typically, you have mentioned that 75% of the business is sort of going low double-digit, 25% is sort of declining high double-digit. So, when you sort of overlay with that with the – what you’ve explained today, how would you visualize this business on a going-forward basis in terms of the pain points that you are trying to tackle? So, just to summarize, do you think that the declining businesses sort of – should sort of fizzle away in two years and the growth business should take over maybe in a year or two? So, that’s one.
The second is, by when do you think the leadership will be in place considering it’s a completely different og? And the last and final on the services side was, typically, Q1 has been weaker due to productivity benefits and so on and so forth. Do you think that trend still continues or there is some change at this point as you see it?
C Vijayakumar
Okay. So, what was the first question?
Nitin Padmanabhan
The first one was 75% versus 25%. 75% being…
C Vijayakumar
Yes, yes. Right, right. So, I think the product mix assumptions what we had and the way it’s – we expect it to play out remains the same, Nitin. Obviously, there is again in every – both the segments, there is a subscription and services revenue and a product license revenue. So, depending on the new product sales, things can fluctuate quite a bit. But as time passes, this should get evened out as we are really transforming this business model to a – from a non-prem to one-time software sale to more of a subscription-based and SaaS-based solution. That’s the response.
On the organization structure, we have already implemented a new organization structure, two-in-a-box structure with two HCL senior leaders, one, Rajiv Shesh, who has taken over as the Chief Revenue Officer, starting this quarter, and Kalyan Kumar, who has been our CTO has taken over as the Chief Product Officer for this business. So, this is the long-term structure, which we think is going to give the rhythm and the scale of running a large software portfolio as well as it has the leadership to innovate and to really transform this business from an on-premise to the newer models. So, that structure is already in place.
And coming to your services question on the quarterly trends. Yes. Usually, there is a certain seasonality in Q1. I think, I would expect it to be similar in nature.
Operator
[Operator Instructions] We have our next question from the line of Ravi Menon from Macquarie. Please go ahead.
Ravi Menon
Thank you. Gentlemen, congratulations on a really strong performance on the services side. I have one suggestion that is if you could disclose your geography and vertical segments just for services and maybe separately for products, that will help us see the actual impact because when – in a quarter like this, there is a revenue decline, it’s difficult to make out how the services have performed at an individual geography or vertical. C.V.K., you talked about the products being a start-up. And just wanted your sense on if you were to think about it – you said that the already established HCL as a – you’ve got the license to play. Now, should we think about three to five years or what’s the right to win and should – are we thinking about our own products? Could you talk a little bit about what sort of organic investments are we doing here?
C Vijayakumar
Yes. So, Ravi, first one good suggestion. We will look at it and come back. Obviously, in a quarter like this, you are not able to figure out which vertical is firing on the services side and which is not, but I think the year-on-year trend should give you a reasonable visibility. In terms of the long-term, yes, it is like a start-up. Now, there are definitely – we are also bringing together all the software product businesses, which were operating like separate business groups. While HCL Software was the biggest division, we had Actian, we have DRYiCE, we have industry software group.
So, in the new structure, all the four business divisions come together under one cohesive two-in-a-box structure with the Chief Revenue Officer and Chief Product Officer. We have altogether 60-plus products in this portfolio. There are 20 products, which we believe have a very strong market momentum mindset, where we will continue to invest and grow that and that will really become the bedrock of our growth moving forward. So, I think that’s why I call it as a start-up because these 20 products they have – like in AI, machine learning, analytics like a cloud data warehouse, we have Avalanche, which is again a terrific product.
We have modernized the commerce product, we’ve modernized Unica. Some of the world’s largest companies, Fortune 10, three of them use Unica as a marketing automation platform. So, some of this is – will also migrate to cloud transform. So, I think, it’s a transformation journey for traditional products. We have a very, very defined strategy on how to sustain that, we call it as horizon one.
So, we have a strategy to sustain those products and horizon two is where we see good growth, and horizon three are really disruptive ideas, which will get infused into some of the products that we already have. That’s how we see it. It’s a long-term journey and I mean, we’ve taken a very strategic decision to invest in this and we’ve taken some big bets. So, we will walk the course. We feel pretty confident of strategy and the outcomes in the mid-to-long term.
Operator
Thank you. Our next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.
Gaurav Rateria
Hi, congrats on good numbers. Two questions, first for C.V.K. On Europe, you are seeing macro to be more volatile than last year, but whereas, when we look at your deal flow, lot of the large deal wins have been announced actually in Europe, so what are you seeing on the ground in terms of deal pipeline, decision-making cycle and conversion trends? And second question is for Prateek. In terms of 18% to 20% band, what would be the impact of salary hike? Will it be similar to last year and what will be some of the offsets? Will pricing be acting as a tailwind this year? Thank you.
C Vijayakumar
Yes. On the deal flows, it feels like it’s in proportion to our overall business, and, of course, 60% is from North America, 28 odd percent from Europe. I think it’s pretty much in proportion. Even my forecast for growth is also fairly secular. Now, maybe it’s just coincidental that this quarter will be – we called out four or five deals and they seem to be – couple of them are – three of the four is in Europe, but I don’t think you should read anything specific. We have pretty strong pipeline in U.S. We are already looking at a strong booking quarter in AMJ. So, we are really in a good situation from our secular growth.
Prateek Aggarwal
Gaurav, just to add on to that one, it could just be a question of which client gives us the permission to announce by May and which doesn’t, so…
Gaurav Rateria
Right.
Prateek Aggarwal
Don’t read too much into it. On your other two questions, we have factored in normal kind of increments for now, but kept some space. I know you – the question behind your question, which we discussed when you were here in Noida and we met is related to the higher inflation, which could make it higher-than-normal kind of increments. But we’ve kept some stress, we’ll see what transpires over the space of next one or two quarters.
Secondly, on the pricing side, as we have mentioned before, we find customers are receptive to our request for price increases, especially in the move to kind of – or change the business kind of spends and which we are reaching out. The thing remains that it does take time to sort of get that down on paper, and then, start realizing it in the P&L. So, while those efforts are well and truly underway, it will probably take a few quarters – quite a few quarters to fully come back to us.
The wage increments and the costs of hiring and attrition and all of that obviously come first, whereas the pricing increases with it come later. All of these factors, whether it is increments or pricing are built into the guidance that we’ve given on the margin side aiding to 20%, and that is one reason why it’s – it continues to be a wider band.
Operator
Thank you. Next question is from the line of Prashant Kothari from Pictet. Please go ahead.
Prashant Kothari
Yes. Hi, thank you for the opportunity. I just wanted some sense on the margins. I mean, we’re seeing the margin guidance kind of going up and down in a, I mean, not a very wide range, but they are still kind of going up and down over years. I just wanted some sense on how you think about that one, in terms of the overall industry in terms of the ability to make margins on – based on the competitive kind of scenario? And secondly, kind of looking internally in terms of our ability to do better than others in terms of our operating efficiencies, I mean, how do you kind of reflect upon that where we are today versus where we were like few years back? Thank you.
C Vijayakumar
Yes, yes. Prashant, see, first of all, our margins have been stable. If you look at the last five years, it’s been fairly stable, except there has been a COVID-induced savings in the last couple of years, which gave us a little bit of spike. And in FY ’22 we did – we made a conscious decision to invest almost 1% of our revenue into some specific areas, which is kind of made out. But FY ’22 saw a significant talent supply-demand situation, which obviously kind of took the cost structures a little higher.
So, that decline is somewhat in line with the industry, barring that 1%, which we consciously invested. And given the current talent supply situation, we are already at 17.8% or 17.9%, so we have guided 18% to 20%. We hope to see the margins increase incrementally from here based on all the interventions, including rate hikes and talent strategy. So, that’s clearly the broad commentary. And Prateek, you want to add anything?
Prateek Aggarwal
Yes. Prashant, I would also like to bring your attention to the much higher depreciation and amortization charge that we as HCL have, especially if you compare it with some of our larger peers. It is a factor, which is 5%-plus. And if you look at our EBITDA numbers, they are not reflective of the EBIT of 18.9%. Our EBITDA is at 24%, which I think is a fairly decent number. It is just that
Because of the investments that we made in building that products business that has a significant amortization charge, which you will appreciate is a non-cash charge. And therefore, the cashflows that I talked about at the beginning of the call, do reflect the real cash generated by the business, of which EBITDA is always a better indicator. So, I would definitely invite your reddish attention to the EBITDA numbers as well.
Prashant Kothari
Thank you. Would you say that our competitiveness, our efficiencies has kind of largely remained the same kind of relative to the peers that we kind of compete against?
C Vijayakumar
In fact, competitiveness has improved because of very strong application and data modernization skill sets and the – some of the solution accelerators, which are a part of that. And our digital engineering capability in engineering services is highly differentiated. And there also the leaders – as we called out earlier on the Engineering and R&D services. And the biggest proof point for our competitiveness and success is we’ve had – in the last three quarters, we delivered 5.2% CQGR in our services business, which is highest among our peer group. So, which is the real proof point of our success in the market and the new demand environment.
Operator
Our next question is from the line of Mihir Manohar from Carnelian Asset Management. Please go ahead.
Mihir Manohar
Yes. Thanks for taking my question, and congratulations on a good set of numbers on the IT services side. My question was specifically on the demand environment. I mean, last time I remember that – I mean, in last time call, there was a greater sense of optimism on the overall demand environment, whereas as of now, I am seeing – I’m not seeing that sense of optimism. So, I just wanted to get some sense of understanding, I mean, how are you seeing the demand environment as of now? I mean, is it still mid-teen kind of an industry growth being there? Yes, that was my question.
C Vijayakumar
Yes. I think, from our vantage point, I mean, compared to what we – the commentary in December to now, we feel actually more optimistic because our pipeline is higher than what it was in December. It’s the second highest that we’ve ever had. Our booking forecast for this quarter is very, very robust. So, our demand environment commentary, I would disagree. We are very positive and that’s really the seven or eight big themes, which are playing out. And if you felt it was less optimistic, let me clarify that. We remain more optimistic than what we were in the last quarter.
Mihir Manohar
Sure. Yes. Thank you very much, C.V.K. Thank you.
C Vijayakumar
Thank you.
Prateek Aggarwal
Thanks, Mihir.
Operator
Thank you. Ladies and gentlemen, due to positive ring, that would be our last question for today. I now hand the conference over to Mr. C Vijaykumar for closing comments. Thank you, and over to you, sir.
C Vijayakumar
Yes. Thank you. And we’ve had a very satisfying year. We started with a double-digit guidance. We delivered 12.7% constant currency and numbers. Of course, the operating environment from a talent supply perspective was more challenging than what we expected in the beginning of the year, so we came a little lower on the margins.
But as we move forward, as we look at our client relevance, our competitiveness in the market, in the services business, we feel very positive about the outlook and that’s really giving us the confidence and comfort to commit to a guidance of 12% to 14%, which is, in our view, a very good outlook based on the demand environment.
And thank you for your support and I look forward to continuing to interact with all of you. We have an Investor Day coming up in mid-May and we look forward to seeing all of you. We are going to be in-person in Mumbai, and look forward to seeing as many of you as possible during the Investor Day. And thank you for the time and have a great evening.
Prateek Aggarwal
Thank you.
Operator
Thank you very much. Ladies and gentlemen, on behalf of HCL Technologies Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.
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