Few numbers attract as much attention during earnings season as the value of new contracts signed. People who study IT Stocks often start their analysis with deal announcements, hoping to read the future in them. Those who observe the HCL Share Price around results notice that the market reacts not only to revenue but also to what management says about the pipeline. Learning to interpret these signals helps separate meaningful progress from marketing language.
What Total Contract Value Means
Total contract value, or TCV, is the value of all contracts signed during a reporting period (usually many different years). A high TCV is obviously good for the company as it represents demand, but this may not necessarily come straight to revenue due to the deal terms. A ten-year contract for a specific value will bring that company only 1/10th of it per year.
Compare TCV with revenue growth – if a company scores a contract win worth significantly more than its annual revenue, it means its future success is secured. If the TCV equals the company’s annual revenue, it probably only maintains its current level.
New Wins Versus Renewals
All contracts won fall roughly into two categories: renewals of past contracts and new business wins. The former implies client loyalty and satisfaction, and the latter implies the company’s attractiveness to the market. Ideally, the company scores both. Sometimes, the management reports the ratio of new wins to renewals. If new business dominates, it speaks of good growth, but potentially aggressive pricing. If the renewals dominate, the company is probably stable, but conservative.
Large Deals and Margin Trade-Offs
Large contracts, especially those concerning transformation or outsourcing, usually involve long-term commitments. In the short term, they usually pressure margins downwards due to various discounts negotiated with the client, as well as the expenses on transformation during the implementation period. Usually, the contraction momentum is short, and the margin growth resumes upwards. Nevertheless, some deals may permanently decrease the margins, and investors should watch out for them.
Conversion of Bookings into Revenue
Do not confuse contract wins with the actual revenue growth. It takes some time for the deal to ramp up to full value, and there is always a possibility of cancellation or postponement if the client’s priorities change. If the company has a consistent track record of turning wins into revenue growth, this is a good sign. However, if the company announces large wins quarter after quarter with little revenue growth, it is appropriate to ask the management for clarification.
The Importance of the Pipeline
Apart from the already closed deals, companies have an open pipeline of negotiations for potential contracts. Pipeline progress is usually vague and optimistic, so it is best to treat it as such. Some useful information may be extracted by watching how much the company speaks about large deals. If their discussion spans for many quarters, it is safe to assume that they will eventually close. A change in the decision-makers’ attitude to the company may also shape the pipeline: if the clients become more interested, it may signalize general bullishness of the market.
Client Budgets and Industry Spending
Spending power of a particular client usually depends on the industry they are in – banking, insurance, healthcare, manufacturing, retail, etc. The current state of these industries may shape the capital expenditures outlook. When the economy is doing well, and interest rates are low, companies feel more confident about large-scale transformations. A contraction in credit availability, on the contrary, usually shifts the priorities of firms toward cost-cutting and capital-efficient projects.
Both these strategies may involve outsourcing, but it will usually be on a smaller scale and with lower margins. The investor should understand which of the two scenarios is favored by the market conditions.
Using This Knowledge Practically
It is helpful to make a table in Excel with the following columns: TCV for the quarter, revenue growth, and margin change, plus an analysis of the management speak. After a few quarters, some patterns may emerge that will help assess the company based on its own data. This analysis should complement the financial and relative valuation analysis. After all, no matter how attractive the deal channel may be, it will not create demand if the multiples are not appealing. Comparing the growth rates and revenue multiples may provide the necessary context for further analysis.
Closing Thoughts
Deal announcements may provide some valuable insight, but they should always be weighed with respect to the company’s fundamentals. Remember to analyse the context of the deal, assess the likelihood of its conversion into revenue growth, utilise the deal channel analysis for the entire industry, and watch out for the company’s financial performance.
