HCL Tech likely to hit slow lane in product biz

Cutting Down Seasonality In Product Biz

- Revenue comprises 3 components

- About 5% comes from Professional services around products

- Subscription and Support revenue contributes 67%

- Remaining comes from Product License sales

Bengaluru: IT services major HCL Technologies is likely to witness subdued growth performance from its product & platform (P&P) business in the current financial year. According to experts, the Shiv Nadar-promoted company is focussing now more on subscription-based model for its software products to reduce the volatility seen in the P&P business. However, outcome of these efforts may take a few years to reflect on the top line.

"Product & Platform (P&P) business of HCL Technologies is likely to remain subdued in the near-term because of the volatility seen in the product business. The company has said that it will focus more on subscription-based revenue model for its software products. If that happens, volatility seen in the P&P segment is expected to reduce," said Ashis Dash, research analyst at brokerage firm Sharekhan by BNP Paribas.

The Noida-headquartered firm has seen seasonality coming into play in its P&P segment in the last fiscal year. For the quarter ended March 2022, HCL Technologies' revenue from this segment declined 24 per cent at $304 million. In FY22, HCL Tech's revenue from this business fell 1.3 per cent at $1.39 billion, constituting around 12 per cent of its total revenue.

The company management said that its product business required investment and a mindset of a startup. "We still need to look at this products business as a software startup. Hence, proactive investments and constant product modernization will continue to remain the driving themes in this business."

HCL Technologies is the only IT major to have strong focus on the product business among all Indian firms. In 2018, the company bought IPs (intellectual properties) from IBM for around $1.8 billion. Thereafter, the company had given a blue print of the revenue growth projections to investors. However, sources said that the company might be failing in achieving some of these milestones.

To reduce seasonality seen in the product business, the company is planning to focus on subscription-based revenue model that will give stability to the revenue flow.

"The revenue comprises three components. One, which is the largest component is the Subscription and Support revenue, we get for the products. It's about 67 per cent of the revenue comes from Subscription and Support services. And about five per cent comes from Professional services around products, and the remaining comes from Product License sales. So, our endeavour has been to convert the product license sale, which comes in as a lumpy revenue, whenever we sell products into subscription-based service models," C Vijayakumar, CEO at HCL Technologies, said in the post-results conference call.

"We are in the very early stages of that journey, and 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," he has added.

Our endeavour is to convert the product license sale, which comes in as lumpy revenue, whenever we sell products into subscription-based service models. We're in the very early stages of that journey, and it's a multi-year journey, which will really reduce the volatility in the business

C Vijayakumar, CEO at HCL Technologies