Alight, Inc. (NYSE:ALIT) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good morning, and thank you for holding. My name is Irene, and I will be your conference operator today. Welcome to Alight’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded, and a replay of the call will be available on the Investor Relations section of the company’s website. And now I would like to turn the call over to Jeremy Cohen, Vice President of Investor Relations at Alight. Please go ahead.

Jeremy Cohen: Good morning, and thank you for joining us. Earlier today, the company issued a press release with first quarter 2023 results. A copy of the release can be found on the Investor Relations section of the company’s website at investor.alight.com. Before we get started, please note that some of the company’s discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in the company’s filings with the SEC, including the company’s most recent Form 10-K as such factors may be updated from time to time in the company’s periodic filings.

The company does not undertake any obligation to update forward-looking statements. Also, throughout this conference call, the company will be presenting non-GAAP financial measures. Reconciliations of the company’s historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today’s earnings press release. On the call from management today are Stephan Scholl, CEO; and Katie Rooney, CFO. After their prepared remarks, we will open the call up for questions. I will now hand the call over to Stephan.

Stephan Scholl: Thanks, Jeremy. Good morning, everyone, and thank you all for joining us. Earlier today, we released our Q1 results and are pleased to report a strong quarter to begin the year, building on our momentum from 2022. At the start, we surpassed $1.5 billion in cumulative BPaaS bookings, nine months earlier than our original 3 year projections. This important milestone signifies how we have improved both the quality of revenue and the trajectory of our business. And the bookings are translating into top line performance, as we delivered quarterly revenue growth of nearly 15%, led by BPaaS growth of 50%. BPaaS represented over 20% of our total revenue for the quarter, a nearly 5 percentage point increase year-over-year.

And our pipeline remains strong with robust activity throughout the sales funnel, our platform and system of record combinations to drive employee engagement is resonating with customers that are looking to optimize the financial health and well-being of their people. The recent acquisition of ReedGroup has further amplified our pipeline by adding content and capabilities that allow us to support our clients through the lease process, creating even greater value for our clients and supporting our high retention rates. As we think about our positive trajectory, it’s rooted in the technology and business transformation that we’ve talked about in previous quarters. Let me focus for a moment on how our commitment to strategic investments is driving this transformation and enhancing our growth.

First, through our ongoing product innovation, we recently announced the latest release of the Alight Worklife platform. As you may recall, we are on a twice-yearly release cadence and this release focused on two key areas. First, expanding access of the Alight Worklife platform to employees spouses and families, and second, expanding and more fully integrating our well-being capabilities within the platform. Taken together, these updates will improve the user experience and drive higher engagement and utilization to all employees and their families through complex moments that directly impact their physical, mental and financial well being. As we enhance our offering, we’re also seeing market recognition of our leading capabilities. To that end, we recently announced an expanded partnership with Workday, a first of its kind to offer a powerful end-to-end solution in various European countries that empowers organizations to source, manage and pay their global workforce with a simplified and unified offering.

Additionally, our investments in product, technology and go-to-market are translating to new client wins and expanded relationships with existing clients. I’m excited to announce the expansion of our relationship with a Fortune 50 food and beverage company that has been a long time Alight client. We are building all Alight Worklife experience, which includes the integration of health, payroll and cloud, and we are bringing on the client’s retiree population. We’re also pleased to announce new agreements with MasterBrand, the leading North American cabinets manufacturer and Dentsu, one of the largest global marketing and advertising agency networks in the world. MasterBrand like many employers utilized a number of vendors, but it was a fragmented architecture that wasn’t having the desired impact for their workforce.

Alight Worklife brings the entire ecosystem together for their employees to get the dots between the unique needs of their people, whether they’re healthy or just diagnosed with a complex health issue. The relationship with Dentsu demonstrates our continued commitment to international markets and is an example of how we use the Alight Worklife platform to provide an integrated payroll experience. While we invest for growth, we’re also making progress on our previously announced restructuring program. As a reminder, this initiative is focused on improving the efficiency of our back end infrastructure, complementing the transformational work we have already completed on the front end. We are pleased to have completed Phase 1 of our migration to the cloud on time as we actively transition our customers and core applications.

As we complete this process of shifting out of physical on-premise data centers, we expect to enhance our margin profile by eliminating redundant costs related to running dual infrastructures. At the same time, the move to the cloud will accelerate our pace of innovation and enhance our ability to deliver for customers every day. In light of our continued progress on both top and bottom line initiatives, we are reaffirming our 2023 financial targets, which include double-digit growth, margin expansion and strong operating cash flow generation. And in less than a week, we’ll host an Investor Day at the New York Stock Exchange, where we will share the next phase of the Alight story. We will show how we drive outcomes for our clients and their people and how Alight is truly in a category of one.

We look forward to seeing many of you there. And with that, I’ll turn the call over to Katie to dive into our financial performance.

Katie Rooney: Thank you, Stephan, and good morning, everyone. We started the third year of our transformation on strong footing. As Stephan noted, our strategic investments are paying off and contributing to our positive results. Let me first start with our consolidated results. During the first quarter, we achieved revenue growth of 14.6%, highlighted by BPaaS revenue growth of 50% as prior bookings continue to translate into higher contracted revenue. As a result, we continue to see a shift towards more stable and resilient recurring revenues, which were up 16%. Recurring revenue comprised 85.7% of total revenue, a 130 basis point increase from the prior year. BPaaS bookings for the quarter were $75 million, and cumulatively, we have now achieved over $1.5 billion in total bookings since we began our transformation in 2021, which is 9 months ahead of plan.

As we’ve mentioned before, our bookings profile will continue to be impacted by the timing of large deals. Our pipeline remains robust, and we continue to expect full year BPaaS bookings of $900 million to $1 billion. Turning to profitability. Adjusted EBITDA increased 8.5% to $154 million with an adjusted EBITDA margin of 18.5%, which reflects the impact of certain strategic investments that I will describe in detail momentarily. Even as we make these investments in product, technology and our go-to-market strategy, I’m pleased to say that we are still driving robust cash generation, delivering operating cash flow of $72 million for the quarter. This translates into an operating cash flow conversion rate of 47%, significantly ahead of our 13% conversion rate last year, even as we account for both our investments and restructuring activity.

Let me spend a moment contextualizing those investments. For the year, we highlighted approximately $50 million in investments. Of that, roughly $30 million represents ongoing annual investments that span the full year. As noted, this includes investments in product and technology, specifically connected to our Alight Worklife platform, as well as in our go-to-market strategy. The remaining balance of $20 million is concentrated in the first half of the year in connection with our product release schedule as well as the transformation of our ongoing delivery and customer care model, which support our company defining 2022 Q4 deals, including GE and a Fortune 10 company. These investments are positioning us to sustainably capture the long-term opportunity.

Next, I’m going to discuss the performance of our two segments. As we discuss the segment, it bears reminding that we recently realigned our three reporting segments into two, moving hosted into other as it is no longer core to our business operations. In addition, as you’ll see in our disclosures, we changed how we present segment profitability from an adjusted EBITDA metric to a gross profit metric. We believe this best aligns with how we allocate resources and assess performance and will better represent the impact of our transformation and investments. So let me now turn to the Employer Solutions segment. First quarter revenue was up 16.1% with recurring revenue up 17.4% and project revenue up roughly 2%. Contributing to our growth was the federal Thrift go-live, as well as increased net commercial activity, volumes and the impact from the Reed acquisition.

Our strong growth translated into improving profitability with first quarter adjusted gross profit up 19.5% to $264 million. Adjusted gross margin increased by 100 basis points to 36.5%. Turning to our Professional Services segment. First quarter revenue was up 8.9% to $98 million, driven by 10% growth in recurring revenue and adjusted gross profit was up $1 million. This represents Professional Services best quarterly top line performance since going public, reflecting the strength of our OneAlight [ph] sales pipeline and backlog entering the year. Turning to our balance sheet. Our quarter end cash, and cash equivalents balance was $239 million, and our total debt was $2.8 billion. We continue to actively manage our debt with key actions taken during the quarter.

First, we increased our hedge portfolio and are now 84% fixed through 2024 and 60% through 2025. Second, we modified our debt maturity profile by completing a leverage-neutral add-on of our $65 million 2024 term loan, and combined it with our 2028 term loan. As a result, we now have no debt maturities until 2025. As part of the March secondary offering, we opportunistically repurchased 1.1 million shares at an attractive price. As of 3/31, our remaining share repurchase authorization stood at $78 million. As always, we will continue to evaluate stock buybacks against other attractive opportunities we have for investing in the business organically and inorganically through disciplined M&A. Turning to our outlook. We believe our strong first quarter performance keeps us on track for another successful year.

Revenue under contract at quarter end was 87%. And while we remain confident in our visibility and trend line, as a normal course of business, we continue to watch the macro environment with project revenue tending to be impacted first by a huge swings. We are reaffirming our full year 2023 guidance, consisting of revenue up $3.47 billion to $3.51 billion or growth of 11% to 12%: adjusted EBITDA of $735 million to $750 million or growth of 12% to 14%, with EBITDA margin expansion of 15 to 50 basis points even with the aforementioned $50 million of investment. Adjusted EPS of $0.62 to $0.67 or growth of 9% to 18%. BPaaS total contract value bookings of $900 million to $1 billion and an operating cash flow conversion rate of 45% to 55%, up from 43% in 2022.

From a phasing perspective, we expect adjusted EBITDA to be weighted towards the second half with higher investments in the first half, and we expect revenue growth to be weighted towards the first half, in part due to the go-live of our large Federal Thrift contract last June and as we monitor project based work for the second half. As mentioned previously, we’re hosting our Investor Day at the New York Stock Exchange on the afternoon of May 15, and we’ll be providing further color on our next chapter. In closing, we remain excited about our path ahead and believe our first quarter performance is yet another indication that our transformation is working and positioning us for long-term profitable growth. This concludes our prepared remarks, and now we will move into the question-and-answer session.

Operator, would you please instruct participants on how to ask questions.

Q&A Session

Operator: Thank you. [Operator Instructions] The first question is from Scott Schoenhaus of KeyBanc Capital Markets. Please go ahead.

Operator: Next question is from Tien-Tsin Huang of JPMorgan. Please go ahead.

Operator: The next question is from Kyle Peterson of Needham & Company. Please go ahead.

Operator: The next question is from Peter Heckmann of D.A. Davidson. Please go ahead.

Operator: The next question is from Kevin McVeigh of Credit Suisse. Please go ahead.

Operator: The next question is from Heather Balsky of Bank of America. Please go ahead.

Operator: There are no further questions at this time. I would like to turn the floor back over to Stephan Scholl for closing comments. Please go ahead, sir.

Stephan Scholl: Great. Thanks very much, and thank you, everybody, for joining us today, and we really look forward to seeing many of you next week at our Investor Day in New York. Have a great day.

Operator: Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.