ITO continues to drive HCLT’s overall revenue growth; the new CEO and Mode 1-2-3 strategy will advance broader digital transformation efforts, says Matthew O’Blenes, research analyst at TBR.
During 3Q16 HCL Technologies (HCLT) recorded revenue growth of 11.5 percent year-to-year, primarily attributed to accelerated expansion in IT outsourcing (ITO). HCLT experienced faster top-line revenue growth than those of its peers, including Infosys (8.2 percent), Wipro (8.0 percent) and TCS (5.2 percent) over the same period. During the earnings call, HCLT announced the appointment of C VijayKumar as its CEO following his elevation to chief operating officer (COO) in June. VijayKumar will drive the company’s Mode 1-2-3 strategy to drive efficiency in core business and expand to next-generation services such as BEYONDigital, IoT Works, cloud and cybersecurity services.
Through initiatives such as BEYONDigital and Next-Gen 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) (59.7 percent), Manufacturing (10.5 percent), and Telecom, Media, Publishing and Entertainment (26.6 percent) in 3Q16. HCLT also continues to invest to grow core services areas such as engineering and R&D services, announcing plans to acquire U.S.-based Butler America Aerospace in 4Q16.
HCLT reported an operating margin of 20.1 percent in 3Q16, an improvement of 70 basis points year-to-year. We attribute this increase to HCLT’s ability to leverage automated frameworks such as its DryICE platform and artificial intelligence technologies internally, offsetting the company’s increasing onboarding of expensive onshore resources. We expect accelerated year-to-year revenue growth in 4Q16 between 13 percent and 14 percent, as digital transformation will continue to strengthen Infrastructure Services, Application Services, Engineering and R&D, and Business Services segments.
HCLT announced the closing of data centers to reallocate investments into digital transformation capabilities.
The decline of traditional ITO has 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, such as 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 the company will cease data center investments but keep the two remaining data centers running.
HCLT’s shift to close four data centers to drive digital transformation will offer internal cost efficiency as the company lowers operating cost margins. 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 60 percent to between 80 percent and 90 percent by 2019-2020. 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 infrastructure outsourcing (IO) deals. As cloud providers 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
TBR’s IT Services Vendor Benchmark research finds, “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 improves costs.
HCLT reports it has implemented the DryICE platform in more than 200 engagements, highlighting the company’s success convincing clients of its value proposition. DryICE integrates with HCLT’s Management Tools as a Service (MTaaS) platform to use machine learning and analytics to monitor and manage the IT environment and connects to other HCLT IPs, such as MyCloud. TBR believes HCLT can leverage its DryICE offering to support its Mode 1-2-3 strategy and offset commoditization in traditional ITO services.