HCL Technologies Limited (HCLTECH) Earnings Call Transcript & Summary

Good morning and good evening, depending on what's time on your end. Thank you so much for joining us. We have with us today the CEO of HCL Technologies, C. VijayaKumar, goes by CVK. Welcome, CVK, and thank you so much for taking the time to talk to us today. And before we start...

Thank you, Ravi. Thank you for hosting this call.

Thank you. Before we start, I'd just like to formally announce that this call is being recorded. So we will start off with some questions that I have prepared, and some of you have also brought up. While we go through those, please do type in your questions in the Q&A box, and we will pick it up from there as well for the latter part of the call.

CVK, I think what I've discussed most of the investors is HCL Tech's Infrastructure Management Services business and whether and how cloud adoption impacts it. Let me first ask you whether there is any reduction in the need for infrastructure management services if a client adopts public cloud? And then let's try to follow that up whether peers trying to catch up in data center deals, what should them tell us about the attractiveness of this market? If it's still an attractive market why is this an attractive market?

Yes. Thank you, Ravi, and thank you, everyone, for joining this call. So yes, HCL had a very competent infrastructure management services. We led this service line, and we continue to be the top-rated infrastructure service provider globally. Now cloud has been on the horizon for many years. It's accelerating significantly in the last 3 years. And cloud presence, a significant technology shift, which is an opportunity across the entire landscape of IT services. Infrastructure is just one element. A lot of application modernization, a lot of analytics, a lot of digital engineering and the software product engineering, all of that has a significant tailwind due to this technology shift, which is being accelerated through cloud. Now coming specifically to Infrastructure Services, it is a headwind for general infrastructure services market because a lot of traditional players in the infrastructure business, they have what is called as an asset-heavy model. Like they built physical data centers. They bought hardware servers and they host it. So they've provided an end-to-end service. Whereas when HCL approached it even 15 years ago, we said we want to do an asset-light model. That was the differentiation between HCL and some of the traditional providers at that time, be it CSC, IBM and a few other large infrastructure players, HP services and things like that. So we consciously said, we will try and do this business as a pure services business and an asset-light business, which means we don't have data centers, we don't host buy and host servers. And the majority of them are in the client's data centers, and we provide all the operational and implementation and program management services. So now when it comes to cloud, the component that our clients owned, that is really shifting to cloud. A server, which is sitting in a client's data center is now moving to a cloud platform. So that ownership is changing. It is an -- it was a CapEx for the customer, it is now becoming an OpEx. But the service layer, which is on top of it, to first migrate and then on an ongoing basis, manage a very large part, continues to be with service providers like us. So for our business model, which is an asset-light business model, we strongly believe it's a big opportunity. The migration itself is a onetime opportunity. And -- which is on top of it, which also is a $150 billion kind of a market opportunity by 2025. But maybe the -- if $1 was being spent on managed services, the same $1 may not be spent in managed services in the cloud platform. It could be a little lower. At this point, a lot of that is getting offset through the migration and managed services business. And you asked about the attractiveness of this opportunity for the industry. This is the -- if you look at the $1 trillion IT services spend, the biggest component, I think more than 40% of that, is in the infrastructure space. So any broad-based provider cannot ignore such a large market opportunity. In the early days, 10, 15 years ago, when we were probably the only one who's really had a very strong proposition from an India heritage provider perspective, maybe it wasn't so visible. But today, in any market analysis, infrastructure is a big market opportunity. And a lot of our peer group are also significantly scaling up their capabilities on infrastructure side.

And you've been -- you being the market leader in infrastructure services, you said that you're the market leader. But given your market share, would it be very high, broadly, how much would this be?

Yes. See, it's a big market, but it's a quite fragmented market. Maybe if you take the top 15 players, maybe they will have maybe about 100 billion of annualized spend. And then if I were to do a market share, our market share is still low, right? I think -- but that 100 billion may have a little more of assets and all of that. And then if you look at services alone, maybe it will be at least in the top 15 players who will have 60 billion, 70 billion roughly of services revenue. So we have a modest, I mean, sub-10%, I mean, low single digits or high single digit kind of market share depending on how exactly your capital is. So there is a lot of opportunity. I mean market penetration, market share gain is the biggest driver for growth, while the overall infrastructure business, because of the modernization in cloud, is still growing at a low single-digit number. But I think our biggest opportunity is to gain more market share. There are 3 or 4 players who are considered traditional, and they're struggling in this business because of their fixed cost model and asset-heavy model. So I think that's a big opportunity for us, and we continuously win clients from some of the traditional players.

Thanks, CVK. And the perception has been that HCL lacks peers and application services. Do you think that this perception is true or was true? And could you go back to the historical reasons why this could have happened? And then could we take up whether the digital transformation opportunity is a good time to catch up in applications?

Yes. So if I just reflect back a little, a few years, a couple of decades ago, I think the whole software services business, application business was catalyzed by the Y2K opportunity, right? That is when a lot of India-headquartered companies really gained access to significantly large technology spenders, typically, the big banks. They gained access, and that was the entry into the market. And honestly, at HCL, we missed the bus. We did not actively participate in the Y2K opportunity. And at that time, we were pivoting from an India-headquartered hardware company into an engineering services company. So that is why if you see our engineering services, has almost a 14-plus-year heritage. And we have a very strong presence in engineering. So we -- our start point was definitely not the same as others, so -- which obviously meant our client access was not so great for the application services. So that was Y2K. And then, I mean, that gave a lot of impetus to the industry, and all the big companies grew. And I mean, HCL had a much lower footprint on the application services. Now in the last 5 years, we consciously said we need to create this Mode 2 services, where we will focus on the digital transformation aspect. We will not worry about the traditional aspects, the application support, the mainframes and the regular traditional application development, and instead we will focus on all the modern AD, modern application development, application modernization, data analytics. So we've -- and SaaS. And these are the things that we put emphasis on. And it was a very small part of our application business. Now in the last 5 years, it has become more than 60% of our application business. The new part, new services. So as we stand today, it's a very strong offering. If you look at our FY '22 revenue, almost 50 -- in fact, more than 50% of the incremental revenue that we clocked in, in FY '22 came from those application services, which is the digital transformation, analytics, SaaS, a lot of SAP migration to cloud, SAP modernization. So today, it's a very strong capability. And we have also approached it a little differently. We consciously ignored just the stand-alone application support and maintenance type of deals. And we focused on integrated opportunities, because we had a very strong capability on the infrastructure management. So trying to bring infrastructure and application management together. So in the last year, we won at least 20 deals, which is integrated infrastructure and application integrated, and then take responsibility of operations and then take responsibility of modernizing that landscape, migrating to cloud, modernize application. So we then get into the change of the business or the development spend of our clients. And when this is happening, from a business perspective, there is an operating model change. Lot of customers had the traditional waterfall kind of approach. Now almost everybody has adopted DevSecOps and agile operating model. So we talk to customers about what is called as product operating model, and that's a model where we are leading the market. We're able to displaced several traditional long-term incumbents in the application space through this. So today, it's the fastest-growing business for us.

Very good. And do you think that this technology change is a good time to catch up because credentials matter less? Is that why you've chosen to accelerate your focus on applications now?

See, credentials in a certain -- in a new way, right? I mean there is a big incumbency in this space. And if you're able to approach it in line with what the customers today want, then you have an opportunity to think clearly with an open kind of charter. And that's where our focus on changing the operating model. That is from a horizontal model to a more product-centric operating model, which is what a lot of our client CEOs are trying to transform their operating model. So I think that's where -- we also acquired some capabilities. Like we acquired a company called Strong-Bridge Envision, which is focused on the change management and the operating model change. So I think bringing that capability with the modern AD and bringing cloud and integrated operations. Today, we have a very, very compelling proposition to companies, and that's -- like recently, one of the deals that we announced, customers consolidated multiple vendors into one strategic vendor, and everything, infrastructure, application, all the development and the modern operating model, all of that is with us as a single provider. But because of the compelling value prop and the capabilities that we could bring to the table. And there are many, many deals in this construct as we speak.

You spoke of how you paid one acquisition, but I think that you've not made too many to help your buildup in digital. And you start to do that organically and your instant allocated capital to the acquisition of IBM products, I think this was an interesting choice that people have thought of this as some end-of-life products. But what gave you the confidence? We know HCL has been having a history as an ISV support partner. But why did you choose to acquire these particular products? And what gave you confidence that you can sustain and even grow these products?

See, first of all -- I mean, from a strategy perspective, we said all the services capability is much more efficient or easily built by organically building capability because it's really about getting the right talent and then scaling that up because you have a good client base. So we chose that approach. If you see it from 2016 to 2020, we -- our Mode 2 margins were significantly low, which means we were investing organically in this business, and that was very evident in all the numbers that we have listed. And Mode 3 was -- again, it was a strategy. We wanted to -- while we have a big services business, we also believe that services is something, in the long run, can continue to be commoditized. So it's always good to create an intellectual property-led business stream, and that's where we've been looking for software product companies to acquire. And this is also coming from our engineering heritage. We build software products for a lot of companies as a part of our engineering services. And they have created more than 100 million market cap for our clients. So -- but we have taken end-to-end responsibility in such scenarios. So bringing our engineering capability and our desire to build a software product business, we thought that is the best way to do it. The first and foremost is to really have market permission for us to play as a software product company, and market permission is possible by acquiring an installed base. I think we looked at the IBM products as acquiring an installed base more than the specific products where products itself was one of the criteria. But the biggest thing is the client base. IBM has clients all across the globe, very strong installed base. And these products are embedded. And some of them are -- I mean many of them are in the mature stages, mature life cycle. But they're all very sticky. I think one constant question I get asked is about Domino, for example. Domino is -- there is Lotus note, which is an e-mail component, which is a very small part of the Domino, maybe 10% of the Domino installed base is Lotus notes. But 90% is all the applications that have been set up. Today, they are so embedded in a lot of large clients. So -- and to really modernize and migrate to a new platform is a very expensive proposition. And customers had no option because IBM was not modernizing these products. They have not released new versions for 5 years, 7 years. So we found an opportunity there that we can modernize and provide a path for customers to be on a new platform, which is a modernized version of Domino. And that strategy has been very successful. The installed base is very sticky, and we've been able to renew and maintain the revenue stream, very profitable revenue stream. It may not have growth, but of course, it's a stable and highly profitable revenue stream. Now if you have an installed base where you have market permission to sell software products, you have the relationships, you have the software and license agreements, now we can sell a lot more newer products into that base, and that was the whole hypothesis, like DryICE, our industry software solutions. The Actian has products like Avalanche, which is a hybrid cloud data warehouse solution. So I think we're trying to inject more new products into this to really leverage this whole big base that we have and continue to find growth opportunities.

If you think that the product acquisition has been successful, why not actually go in and acquire something that's an established and fast-growing product right now?

Yes. First is I think the objective is to get an installed base, which we have. We have sales teams, which is a completely independent sales team. This team works as a separate organization. It only consolidates at my level. There is separate marketing, separate HR financing, everything is separate sales and engineering, everything. So I think that if the installed base and the whole operating model is what we wanted, I think that is -- we have it at a very, very good scale now. Whether we can buy high-growth products, big products? I don't think so. We think there are some niche high-growth products, either in our portfolio or maybe there are some potential acquisition opportunities, but they are not big. They're small, high-growth, more newer areas is what we will look at. But at this point, a lot of focus is on how can we grow this business organically.

So I need to mentioned this, I mean I think something along the lines of what you've done was Actian taken that...

Actian had a very good project. There's a lot of products around machine learning and AI ops. A lot of it, we have it in our DRYiCE portfolio if there are some gaps that we need to plug in that portfolio. Today, we may be buying that software from another vendor. Maybe there are possibilities to look at that.

The R&D portfolio, that's growing faster than app and infra. You did say that HCL has a 40-year history in engineering services. So -- but why is the R&D growing now faster than applications and infra? And what specific parts of the portfolio are growing? And how sustainable is this?

Yes. So yes, in the last 6 quarters, we've had some amazing growth, very consistent almost 5% sequential growth. And we continue to see a similar momentum moving forward. It's primarily triggered around the whole deal engineering, which is Industry 4.0, Internet of Things, softwarization, converting on-prem ISV software products into cloud. So these are the big opportunities. And we play in 2 segments. One is, again, all the communications, technology and Internet and software platform company, which is almost half of our engineering business. So there continues to be a very good demand for platform engineering, platform support, testing, all of that. And then there are certain other industries, like manufacturing and industrial manufacturing and health care, life sciences, which is also driven by the manufacturing value chain. So there, again, the Industry 4.0, IoT works, the smart manufacturing and digital twins. So these are all in the early stages in a lot of big industrial firms. So I think we are quite entrenched there. Auto is again a big space. Transportation is a big space. So I think it's a very -- I would say, a very secular kind of demand trend in all these areas. And the only thing is the opportunities come, may not be big opportunities. It may not be like -- there are not too many hundred million dollar kind of deals in engineering services. A big part of it is land and expand. You do one program very well, then you get more trust and expand. And we have a very good customer base, almost, I think 60 of the top 100 R&D spenders are our clients. So that base is also growing quite nicely. So I think it's a more secular trend driven by technology. Our technology transformation that's happening in the industry, our unique positioning as a leader in this space, we have the largest number of R&D engineers delivering outsourced R&D services for the clients in the world. There may be others who are bigger in revenue, but in terms of -- I mean -- that's because of the more Europe-centric players. But if you take our global delivery model, we are the largest talent for delivering outsourced R&D services, and that's the largest in the world.

I think one -- so you had mentioned that your senior management team, you've seen extremely good retention. Can you try to quantify this?

Yes, I think during the Investor Day, I did say this. I think over the last -- we have corporate officers for my indirect reports. We've lost only one person in the last 3 years of 30 people. So it's a pretty stable leadership team. We continue to hire some talent from outside for some of the leadership roles. Like we hired a Chief Marketing Officer. She joined us a year ago. So 1 or 2 positions. Like this compliance person was hired about 6 years ago. So a large part of the team really enjoys the culture of the company. And the culture I would kind of put it in 2 key things. One is people. We're very, very people-centric. Even today in this great resignation kind of market, our attrition is one of the lowest among the peer group. It could be lower, but everything is driven by the market dynamics. So -- and then the amount of passion that people have, the entrepreneurship, the innovation kind of mindset, I think that's what is the core to its DNA. And from a leadership perspective, I think they're entrepreneurial DNA. Like the level of independence, the level of decision-making that some of these leaders can do on an ongoing basis. I think they really enjoy the culture and the space that they have to perform.

You spoke about attrition. So I think we should move on to talking about people. I think I had been under the impression that a large part of the hires that you did last year where 12 standard graduates, correct me if I'm wrong. And how has your experience been anywhere with hiring 12 standard graduates?

No, I wouldn't say in large part. In fact, it's a small part of our total hiring. I think we talked about -- in FY '22, we talked about 23,000 fresh hires, I think, and we're talking about 30,000 to 35,000 this financial year. So it's a small part. Maybe in last year, it was 10% of our fresh hires. In fact, 10%, also, they joined us as trainees. They take a year before they come back. So if you really see the people who completed training last year, maybe less than 5% would be the twelfth-grader students. But this is a model which is giving us a lot of confidence. We started this in 2017 in a small way. We hired just 50 or 60 twelfth-grader students. And we had a very stringent criteria. We picked the top of the class who have -- who want to make a difference, who have a bigger aspiration. And they want to do things differently, right? And that talent, the experience we have with them is quite mind-boggling. The amount of energy, enthusiasm, learning ability, all of that, even the soft skills communication skills. A lot of them are even better than fresh graduates that we hired, because fresh graduate pool, there are some real limitations, right? If you see the engineering, computer science, electrical, electronic branches, approximately 300,000 people graduate every year. And like last year, for example, the top 5 companies hired pretty much the entire pool. So there is -- if you really want to hire more, then you are going to compromise on the quality of the graduate hires. So that's also the reason we increased the compensation significantly at the graduate level. And this twelfth-grader is a model today. I think a lot of companies are using it globally. I mean I see a lot of tech companies using it. And in fact, while we started in 2017, I saw a study last year, a Harvard study, which said the graduate requirements in all the new job postings has come down by 30% to 50%, 30% at the higher skill levels and 42 or something in that range for the mid level. And the predominant shift has happened in the tech sector, right? And I think there is a lot more emphasis on skills and capabilities than a graduate degree. And today, every big company is in the -- at least global companies, they're all adopting this. But we have a head start. We have a good model. We have experimented it. We have fine-tuned this model, and most of them enroll in a full engineering program. We have a few colleges. And we've expanded this in the U.S., we call it as apprenticeship. And here students can graduate debt-free. And that's a huge value proposition for young people, especially in some of the Western countries because otherwise, they end up taking a lot of debt. So we have created a model where they can graduate debt-free. We've started in Australia. It's again picking up. Of course, U.S. and Australia are still very, very small numbers. And even this year, we may hire close to 5,000 of the -- 5,000-plus we may hire in this category. But it's a very successful model. We feel extremely confident. We get very good feedback from customers. It takes about a year, 18 months, before you really can get them to a good productive model. And it's -- again, it's not a cost play, it's more of a stability and quality because we pay them after this stipend -- payment after this 1 year, and they get stipend. After that, they get paid very close to what a graduate engineer would join us at. Much more stable because they go through the education program and at least 6, 7 years of stability is a big thing, whereas with the graduates, that's definitely not there. The other good attrition happens after 2 years, 3 years because of captive, start-ups, all of other sources.

And we have also heard that HCL is the only firm among the large Indian service providers that actually charges people for training. Can you correct that impression?

Yes, I've heard this before as well. I think it's a -- there is a small fraction of our fresher hires who come in through 1 year train and deploy model. And they come from -- while they all have graduate degrees, but they're not really fit for deployment within 3 months training. They need a significant amount of intervention. And this is the below the 300,000 that I talked about it, and people from mechanical, civil, lot of other branches. And from colleges where there isn't a great infrastructure, I mean, to really increase the skills and capabilities. So it's almost like an extension of the college. So we put them through a 1-year program. And this is a small percentage, maybe for less than 10%, 15% of our fresher hires would come through in this model. And with our increased salaries in the campuses, where that component is -- the component where we charge for 1 year, that is even reducing further. So it might become 0 very soon.

And when we talk about attrition, I think we've always had this impression that growth and margins go hand in hand. I mean it's been very rare that we have good growth and then we can't actually get margins. But now with the pressure on the lateral hiring market, it doesn't seem to be the case, right? So is there a sweet spot where you can balance between growth and margins now? And do you see this as a more or less permanent shift? Or should we think about this as something that's temporary, and we will go back to where growth actually means better margins as well?

Yes, it's a very deep question. I think it's -- I do believe this is a short-term challenge that we are facing because the demand went up and there wasn't adequate supply. So that created this huge imbalance. And for people, it was just like musical chair, people going from one company to another, getting some device and things like that. And the virtual operating model also made it easier for people to just keep looking for opportunities and things like that. It's already -- we are seeing some moderation. I do think in the next 2 to 3 quarters this will moderate due to 2 reasons. One is a lot of freshers that all the big companies hired are also coming into production. If you look at some of the hiring numbers, they're also moderating because everybody has a training bench, which they want to productively deploy and things like that. Eventually, the growth margin should also improve, in my view.

Now we'll take a few questions that have come up. One is not sure about but it says, HCL scores poorly on privacy and data security, and MSCI, ESG puts HCL in the first of the fourth quartile with low rating. What does the company done to enhance its privacy and data security? Are there any trainings or security policies or infrastructure?

Yes. So there are multiple ratings. If you look at the BitSight score, HCL has the highest BitSight score. So I will specifically look into this. But we have very strong data security, privacy. We have a Chief Privacy Officer who's part of our risk management office. And I would feel very, very strongly about our process, policies and compliance. So I can come back if there is anything specific on this front.

Could you spell out the -- you said that according to a particular report right now? Who did you say is the benchmark that we should look at?

BitSight is an organization which scores all the providers, external vulnerability, data security and all of that. And -- that's a metric which a lot of firms use, and we're -- we have the highest score there. Of course, this is an area where we constantly need to improve and evolve. Nobody is perfect or nobody can be assured that everything is absolutely full-proof, but we constantly work towards it. But let me come back on this MSCI's rating and come back.

Okay. I think the next question is not factually right because it is about the company's attrition rates and saying that 23% over 2018 to '20, it is higher than the industry average of approximately 14% in FY '21. I think they are probably not in the right time frame because '21, I think everybody's attrition was low because of COVID era. But overall, though, I mean, how are you thinking about attrition? What are you trying to reduce?

I think it's just a focus on career development, training, upskilling. I think that is the, in my view, the most important lever. And my comment was on FY '21 and '22. '21, we were probably the lowest and FY '22 also, we are in the -- from a retention perspective, top quartile. It's not related to contract workers or anything. That's what I see in the question. I mean that's not -- we don't track attrition in the contract workers.

And your headcount -- your disclosed personnel count does not actually in pure contract...

The same employees.

And the next question is about -- there was an investigational report that unless HCL was underpaying foreign workers on HMB. Is there any update? Or do you have a response?

No, I think there's -- we are very, very compliant with every regulation. And probably this report had a significant amount of data inaccuracies. And there was nothing to be done. Somebody wrote an article, and from our perspective, we are very compliant, and that's it.

Next one is about your client focus. I think there are so many questions that are coming up, sorry, it's scrolling past me. Let me take this one. Clients are focusing on cost takeout and infrastructure services will probably face a little bit more pricing pressure. And do you think -- first of all, do you agree with that statement? And how can we mitigate that?

Yes. I think -- see, it's not just infrastructure services, any run the business scope that you have for the customers, whether you're managing a business process operations, infrastructure operations, or application operations. I think customers are going to expect lower cost because of the economy and things like that. So automation is the most important lever that we have. So there are -- I mean we've constantly brought in automation as a big lever, and that's only accelerating in this current environment. With more tools, more technologies AI, machine learning-led resolution, we can resolve 50% of the infrastructure incidents automatically. And that's probably a very high benchmark across the industry. And that's because we have the run book repositories, the automation tools, all of that. I think, well, there is a fair expectation on cost takeout. We do think we can bring automation and deliver the savings that our customers are expecting in most scenarios. And for all the modernization projects, in fact, we are able to get better rates because there is a talent shortfall and -- so the niche skills and modernization in the new areas. Absolutely, customers are open. And -- especially where we have people who have very strong domain knowledge of the clients' business, I think customers have been very supportive.

And that is one of the questions here. That even though there is a supply shortage, why can't IT services firms take up pricing? I think it's not only for new business or even for the existing contracts, which are coming up for renewal. Can we actually take up prices given the current environment?

See, there are certain provisions we have like cost of living adjustments and things like that. We have been able to negotiate more than what we had in the contract in some of the situations. But it's also a competitive market. So I mean there are some areas where we can get better price. There are areas where we have to optimize more and deliver the reductions the customers want.

And do you think that now is the supply of talent building up faster than demand? Are we near the end of this supply shortage?

I would think there was a big gap between the demand and supply. That has narrowed down. I still think there is a gap. It's not that we have a situation which is reversed. I think the gap is narrowed. I think we are still in a supply constrained environment.

And do you think that would change at all if there is a U.S. recession?

It can. It can. And basically then there also you have to now split the whole talent base into 2 categories. I think in the newer skills, I think that that's not going to be bridged anytime sooner. Like the demand for security professionals, the demand for analytics, a lot of this SaaS and cloud modernization, all of that, I think it's going to remain supply constraint for a few years. But for some of the traditional skills, also there was a big constraint -- supply constraint because people were leaving the workforce and -- so a lot of customers wanted to outsource and things like that. So I think the gap is getting bridged quite fast.

And why not divest in IP installed base or like more products, et cetera? I think we -- and you answered that partly. I think there's a follow-up with that. Do you envisage HCL creating products organically, which can become 100 million-plus on their own?

Yes, definitely. I think the thought process, at least, we have 5 or 6 very strong products like our launch is one. We have a low code platform called Volt MX. And big fix, again. It's already a multi-hundred million dollar product, but it has got a much stronger growth trajectory. AppScan is another one. And then this whole AIOps, the entire DRYiCE automation framework. So there are many new products, which have 100 million kind of potential in our portfolio at this point.

And how can we differentiate ourselves in the new spend areas and what is our go-to-market in Horizon 2 and Horizon 3 spends? And are we trying to be leaders here in these areas?

Absolutely. I think cloud, if you look at the Gartner Magic Quadrant, HCL is in the leaders quadrant for the second consecutive time. There are very few -- there are only 3 players, last year and this year, there are 4. And we were in the Leaders quadrant. And Gartner has written very nicely about how we have differentiated, how we have created the ecosystem business units. It's not just a business unit, but extends into delivery solution, offering all of that. So I think the whole on the cloud, we are positioned as a very, very strong player. A little bit is coming due to our infrastructure heritage and also a lot more is coming due to the new modernization -- application modernization, the topic that I talked about in the earlier part of this conversation. And the second aspect is on the application side, it's just the product operating model, which is what most big customers who have a set of legacy incumbent application providers are constantly looking at bringing differentiated challenges. So we are positioned as a differentiated challenger. And that positioning is resonating very well. And some of the big deals that we have won are really taking away market share from incumbents in defining the new operating model. I think that is a difference that we've been able to provide.

Yes. I think we saw one of the examples, one of the case studies during analyst meet of T-Mobile how you guys played a role there?

That's right. That right. Yes, a lot of them, I think you had a number of big customers talk in our analyst meet.

So what were your expectations at the time of acquisition of the product business from IBM? And where have we reached? And how you made significant changes to these products, which are distinguished?

I think it's still work in progress. I think we are doing whatever financial business case. I would say we are definitely doing better than the financial business case. But how to leverage this installed base and create growth -- organic growth for products and also leverage this installed base for services, I think those 2 are the focus now. We're already seeing some good traction in some of these installed base clients looking at some big services opportunities, where we had a good edge over our competitors. It's still early days, I would say, to leverage the synergy. We have a lot more work to do.

Question, not growth that many larger firms and smaller firms have been able to grow faster than us. And what do we need to fix to become industry leaders on growth as we used to be?

Well, I think if you look at our services growth, year-on-year, we have grown 19%. That's pretty much the highest growth in the industry, if you take out some pass-through type of revenues that some other players have. So I don't know where this question is really coming from. Our growth has been the highest. Services growth has been the highest in the last 5 quarters. I think there's a product which is a -- product business is a drag on the overall growth, and that was expected. And that's a different business model, and it was the right way to compare our services. And I think we are winning very well. We are executing. We are being also selective, right? We are not picking up a lot of pass-through revenue. We have -- when you do large deals. We're consciously structuring the deals to take the pass-through components and keep it outside our book. We also want to grow in a very capital-efficient way. So all of that considered, I feel we are doing very well and even by any comparisons that you want to draw from industry base.

I think there is some...

And we can do more. I do think we can do more because all the services are [ firing ], right? I mean our application service was a little soft maybe 3, 4 years ago, and that's really now the leading service line. And engineering services is growing much faster than the company. Infrastructure has been a stable growth story. So I think services growth is very strong.

First question, it's probably that it's framed differently, but it's a question about the margins. Again, the deals that we signed would have been not really anticipating the high talent costs. How do we make the correction to the framework to ensure that new business will get us to 19%, 20% EBITDA?

I think from [indiscernible] lower rate cards and the costing and all that. Ravi, can you hear me?

We can hear you.

Yes. So we -- I think some deals that were signed in the second half of last year when costs went up, pricing did not proportionately go up. From January, we have revised on all the deals that we've signed from January are using the new cost structure that is there. And we have a lot of levers to improve margins. While there are headwinds like average compensation, average employee compensation continues to go up, even if you hire freshers. Because if you lose some people, you backfill them in the market, that cost us. While the rate at which the average compensation was increasing, that has come down. But if you see quarter-on-quarter, there is a marginal uptick in the average compensation. So that continues to be a headwind. But I think the tailwinds is -- I mean our utilization -- I mean, a lot of talent that we hired, they still need a little bit more deployment and realization. And I think ultimately, we have to get better realization from the customers, and that's our biggest focus. And wherever possible, we've been able to position the right win-win teams with our clients and get the increase. And in the -- run the business, we have to drive more automation. I think there is -- during the COVID, some of those initiatives took a slightly backseat from an automation perspective. Now they are, again, the top of the mine, then there is an opportunity there. So I think all of this is what is going to help us improve margins. We remain quite positive on how this will turn out.

I think the next question on SaaS. Do you think that SaaS offerings can be better than your products? I think that's a confusion about the license model I think . It can be a SaaS. Maybe you can explain that better than I can.

See here, I mean, a majority of our installed base, 99% is on-prem installed base. So you can have a perpetual license or a term license, but it's still on-prem. So we are gradually -- we have now the SaaS version for a number of products. Now gradually, we are trying to convert. I think there is -- while initially customers are keen, but that uptick is not going to be dramatic. It is going to happen slowly. And we will give you some more metrics on how SaaS option is happening as we move forward.

If you look at the gross margin change, I mean no, I think I'm not sure -- I think this is about a bit promptly, that its margins are down almost 600 basis points in the last 6 quarters. Do you think that this shows a lack of pricing pressure, and we've not been able to get price hikes?

No, I think the whole pricing conversations have started only in the last 4 months. It's not -- it was -- we always believe it's a temporary situation, and we will be able to recover. But maybe from the beginning of this year, we've been a lot more focused on, of course, increasing our rate cards, getting better pricing, all of that. See, I -- we have a certain goal of how much rate increase that we need to achieve for this year. In the first quarter, we did achieve what we wanted to achieve. So that was also one reason margins were lower. I feel confident that we will be able to achieve the annual number on the price increase that we wanted to achieve.

How should we think about the -- talk about recession? I mean do you think that -- when you're talking to clients, are you seeing [indiscernible] about spending? Are you seeing them start to, at least, talk about putting some programs on hold? Or are you starting to see any signs that people may be turning very cautious?

Sorry, can you just repeat that again?

With the -- talk about the U.S. recession, do you think that clients are turning more cautious now? And are they starting to talk about putting any programs on pause?

In some pockets, yes, definitely. Some long-term programs, which were in the early stages, probably customers have -- are still looking at it. But a lot of them are also at the same breadth saying that these are very important and we have to continue. So I would say some pockets. We've seen some pull back. It's not something material to look from an overall demand environment perspective. Because even in the, let's say, 3 months ago, we were still having a lot of demand and we were not able to fulfill all the demand. So even if the demand comes down a little bit, it's still -- the growth trajectory is expected to continue.

And I think that -- let me clarify. We are also talking about no changes, too. So people are actually putting pause on beyond new programs, right? Anything that's really in flight, what is happening right now. No one's talking about cutting any of that?

In fact, they want to accelerate and realize the benefits faster. So that's what we're hearing.

And if Europe actually has a recession, do you think that visibility in the R&D and bullish outlook for that segment, will that change?

Marginally, yes. I mean our R&D business is -- predominantly a big part of it is in the U.S. And there can be some projects which can slow down. But in a tighter economy, there are value props that we have, which becomes much more like the entire run the business, cost takeout which is that even in engineering. A lot of traditional products, customers may want to take out significant costs and leverage our global delivery model. So that also triggers some sizable opportunities on the engineering front. So I think in each of the service lines, we have a good mix of more change of business and development type of programs, and run the business and operations. So I think that is -- what I feel confident will help us continue growing well.

We'll take one last question here. I think it's a funny one. What would be the one thing that you'd like to change for HCL right now, and possibly HCL 5 years from now?

I think we need to -- our marketing and brand is one thing, which I think we need to invest in. We've generally been a best kept secret kind of thing for the type of work, amazing client base, the programs that we do, the recognitions that we have. We are a little bit underleveraging that. So if there's one thing, I would think a little more visibility in brand is what I would think.

Thank you so much, and we are at the top of the hour. Thanks so much again, CVK. Thank you, everyone, for joining us. Have a good night and have a good day.

Thank you. Thank you.