One-Off Costs Slash Hexaware Profit, Casting Shadow Over AI Future

Global IT services firm Hexaware Technologies presented a mixed financial picture in its second quarter, as a significant surge in one-time expenses overshadowed its revenue growth. While the company reported a year-on-year revenue increase of 11.1% in Indian rupees and 8.6% in US dollars, a ₹142 crore spike in other expenses cut sharply into its profitability, causing concern about growth saturation and weighing on its margins. This development has cast a shadow on what was otherwise a period of continued investment in its core artificial intelligence capabilities and strategic acquisitions aimed at long-term growth.

The company's revenue for the second quarter reached ₹32,607 crore, or $382.1 million, showing a modest sequential growth of 1.6% in rupee terms and 2.8% in dollar terms.[1][2] However, the quarter-on-quarter growth in constant currency was only 1.3%, a figure that fell below analyst expectations and signaled a potential slowdown.[2][3] The primary drag on the company's bottom line was a substantial increase in 'other expenses', which ballooned to ₹142 crore from a mere ₹8.7 crore in the same quarter of the previous year.[2] These were not operational costs but a series of one-off charges, including ₹78.2 crore in provisions for customers, a ₹39.4 crore impairment related to a past acquisition, ₹12 crore in ERP transformation costs, and ₹12.8 crore in acquisition-related expenses.[2][3] This spike caused the company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to fall to ₹404 crore, a significant drop from ₹527.8 crore in the preceding quarter and ₹431 crore in the corresponding quarter last year.[2] Consequently, EBITDA margins shrank to 12.4%, down from 16.5% in the first quarter and 14.7% in the second quarter of the prior year.[2][3] Despite the hit, the company stated that adjusted for these one-off costs, the EBITDA margin would have stood at a healthier 18.1% and has maintained its full-year margin guidance.[3]

This financial performance stands in contrast to the company's more robust first quarter, where it had reported a 12.4% year-on-year revenue jump, attributing the growth to its AI-led transformation deals and a strong client pipeline.[4][2] Hexaware has been vocal about its 'AI-first' strategy, embedding artificial intelligence across its service portfolio and internal operations to drive efficiency and innovation.[5] The company has invested heavily in training its workforce in AI and Generative AI and has developed proprietary platforms like Tensai®, an automation framework, and RapidX™, which accelerates software development.[6][5] These platforms are central to its strategy of helping clients modernize operations and build new AI systems.[4] In a statement, CEO R. Srikrishna acknowledged the challenging global macroeconomic environment but emphasized the company's solid execution on revenue and profitability, highlighting the continued investment to "lead our customers into an AI-powered future."[1][7][2] The company's focus on AI is further evidenced by its securing of major deals, including modernizing a grants management system for a global financial institution and building an AI-driven settlement platform for a travel analytics company.[4]

Despite the strategic focus on AI and digital transformation, Hexaware is facing headwinds from a cautious market. The company noted that while small and mid-sized deals are progressing, decision-making on large consolidation deals has been delayed, dampening the outlook for the remainder of the year.[2][3] This delay in client spending and project finalization is a challenge impacting the broader IT services industry, not just Hexaware.[8] To bolster its service offerings and market position, Hexaware recently made a significant strategic move by acquiring SMC Squared, a leader in building Global Capability Centers (GCCs), for up to $120 million.[9][10] This acquisition is intended to provide Hexaware with immediate access to established GCC expertise, enhancing its ability to offer end-to-end solutions for setting up and managing these centers globally.[9] By combining SMC's domain knowledge with Hexaware's strengths in AI, analytics, and cloud, the company aims to capitalize on the rapidly growing GCC market in India, which is projected to exceed $100 billion by 2030.[9]

In conclusion, Hexaware's second-quarter results paint a complex picture of a company navigating a challenging economic landscape while making significant long-term strategic bets. The substantial one-off expenses have undeniably taken the sheen off its growth figures and raised questions about near-term profitability. The company's stock reflected this uncertainty, slumping over 7% following the earnings announcement.[3] However, Hexaware's leadership remains publicly confident, pointing to the underlying strength of its business when adjusted for the extraordinary items and reiterating its commitment to an AI-centric future.[1][3] The success of its strategic pivots, particularly its heavy investment in AI capabilities and the integration of its recent acquisition, will be crucial in determining whether the company can overcome the current market sluggishness and convert its technological prowess into sustained, profitable growth.