HCL Tech in Q2 FY19: another brilliant quarter for ERS
HCL Tech’s ERS unit had another impressive performance with a CC growth in Q2 FY19 of +26.3% yoy. ERS’ revenues were approximately USD 535m this quarter, not very from the revenues of Alten (EUR 556m), the number two ER&D service vendor.
Unfortunately, HCL Tech does not detail much the revenues of ERS. There was an element of M&A: the company acquired during the quarter, a German IT and ER&D service vendor, H&D, whose main client is VW. Yet, the vast majority of the growth of ERS (and also, to some extent, its IT infrastructure service business) continues to be driven by HCL Tech’s ambitious mode 3 strategy, which essentially is its software product business.
Mode 3 revenues were USD 227 during the quarter, and now represent 11% of HCL Tech revenues and the company continues to develop its mode 3 business, through IP partnerships, acquisitions, and home-grown IPs. In Q2 FY19, the company did not announce any new IP partnership during the quarter but closed the acquisition of Actian, the former Ingres. HCL Tech has high growth ambitions for its mode 3 business and will not stop where it is now.
The consequences for ERS are clear: the unit will continue its hypergrowth. While CC growth has slowed down significantly from 48% in Q3 FY18, it remains at high levels, at approximately 25%. At this pace, HCL Tech’s ERS will become the largest ER&D service globally soon. Of course, it will have a very specific profile with software product engineering representing most of its revenues.
Has HCL Tech found a winning combination? The mode 3 strategy certainly has a positive impact on ERS. HCL Tech must still prove it can handle having both an IT services and a software product business. Also, it is suffering from flat to mid-single digit growth in its two largest business: IT Infrastructure Services and Application Services. HCL is also heavily relying on M&As, much more than its peers: its CC revenue growth guidance for FY19 is approximately 10% but half of that growth will result from acquisitions. One may – or may not disagree – with HCL Tech’s strategy. What’s clear is that HCL Tech has a different and bold strategy that differentiates from other very successful firms such as TCS, Cognizant, and Infosys.