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Tata Consultancy Services Ltd kicked off the quarterly earnings season on a gloomy note, clocking the worst third-quarter revenue decline since December 2015. The key reason: Subdued business in the US and Europe, the biggest markets for India's largest IT services company.
TCS reported December quarter revenue of $7.54 billion, down 1.7% from the September quarter, and close to the $7.55 billion estimated in a Bloomberg analysts' poll. This was also its worst quarterly revenue performance since K. Krithivasan took over as CEO in June 2023.
“Given the seasonal weakness and software discretionary demand environment in this quarter, most of the verticals and markets saw a sequential negative growth on a quarter-on-quarter basis,” Krithivasan said at a post-earnings press conference. To be sure, TCS had pointed to the impact of seasonality and discretionary spending in the previous quarter as well.
Even as regional markets, including India, grew about 3% sequentially to $1.23 billion, overall growth suffered as revenue from each of its other businesses declined sequentially. Even revenue from Bharat Sanchar Nigam Ltd (BSNL), which shored up revenue from regional markets, could not boost overall growth. TCS is setting up data centres for the the state-run telecom operator across India as part of a $1.83-billion 4G network deployment order it won in May 2023.
Also read | IT: Forget Q3 results, focus on commentary
The company added $997 million in incremental revenue in the April-December period, up 4.6% from the same period last year. While TCS does not offer revenue guidance, at the current pace, its performance will not be much better than last year, when revenue grew 4.1% on a yearly basis.
Still, TCS reported $1.46 billion in net profit, up 2.6% sequentially, and in line with $1.46 billion estimated in a Bloomberg survey. In another bright spot, the company managed to snap the steady margin decline that began early 2024 - Profitability in the third quarter stood at 24.5%, up 40 basis points sequentially.
It may be noted that the December quarter has fewer billing rates than in other quarters due to multiple holidays in the quarter.
TCS was not perturbed about the debate around H-1B visas in the US. There have been demands from US President-elect Donald Trump's support base to restrict the visa programme critical for software services companies with large work forces in the US.
“We have a global operating model, and we have a global workforce,” Milind Lakkad, chief human resources officer said at the press-conference. “And while we obviously want to provide opportunities to people, eventually, depending on the visa category, I don't think that is the major concern for us, because we have a global model in place,” said Lakkad.
At the heart of TCS’s underperformance is the Europe business, which fetches almost a third of its revenue. Business from Europe was down 5% sequentially to $2.3 billion. In line with the company’s commentary last quarter, slowness continued in this region.
Among business segments, revenue from banks suffered the most. TCS got $2.3 billion in revenue from banks and financial institutions, which is 2.7% lower than in the preceding quarter.
At least one analyst attributed the muted revenue to a weakness across industries.
“TCS's weak Q3 performance was on account of muted revenue performance across key developed markets such as North America, UK and Europe as well as key clients across financial services, manufacturing, telecom, life sciences,” said Manik Taneja, executive director for IT services at Axis Capital.
In contrast to peer Accenture Plc, which counted $900 million in revenue from Generative artificial intelligence (GenAI), TCS has yet again refrained from mentioning specific revenue earned from the emerging technology. However, the management stated that clients were now adopting the technology in real time at a faster clip than in the past.
“On GenAI, you would probably see more and more adoption. At this time you saw some daily pilots, everyone wanting to try out something new. But now this will become more and more purposeful,” said Krithivasan.
Till now, none of India's top five IT services companies have categorized revenue from GenAI.
Hiring, a key growth indicator for India’s $254 billion IT industry, was on the decline. TCS saw its headcount shrink by 5,370 in the latest quarter, ending with 607,354 people. The cooling hiring engines challenge the narrative that the worst is behind the IT services industry, which grew at its slowest pace last year. Still, TCS managed to add 5,808 employees in the first nine months of the current fiscal.
The domestic business outperformed. Business from India surged 70% over the last year to 9.8% of its quarterly revenue, the highest since it went public in August 2004.
The management was sanguine about the future.
“You see more confidence in the customer in terms of discretionary spend, which we are not seeing in the last few quarters. And we also saw the overall deal cycle reducing by a few weeks in this quarter compared to previous quarters. And mix of deals that we are winning, that also has a slight increase in terms of discretionary spend. All of them put together, makes us believe that clients should be more focused on change,” said Krithivasan.
TCS declared its results after market hours. Its shares ended 1.72% lower at ₹4036.65 earlier on Thursday.
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