Alight, Inc. (NYSE:ALIT) Q1 2024 Earnings Call Transcript

Alight, Inc. (NYSE:ALIT) Q1 2024 Earnings Call Transcript May 9, 2024

Alight, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and thank you for holding. My name is Evo and I will be your conference operator today. Welcome to Alight First Quarter 2024 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 it over to Jeremy Cohen, Head of Investor Relations at Alight to introduce today’s speakers.

Jeremy Cohen: Good morning and thank you for joining us. Earlier today, the company issued a press release with first quarter 2024 results. A copy of the release can be found in 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, and 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, during this conference call, the company will be presenting certain 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; Jeremy Heaton, CFO; Greg Goff, President; and Katie Rooney, who has announced earlier today will be stepping down from her CFO position and focusing on the COO role supporting the payroll and professional services divestiture until closure. After the prepared remarks, we will open the call up for questions. I’ll now hand the call over to Stephan.

Stephan Scholl: Thanks, Jeremy, and good morning. It’s an exciting time for Alight with our first quarter, highlighted by the announced sale of our Professional Services segment and HCM & Payroll Outsourcing businesses, which remains on track to close midyear 2024. Executing this transaction is a key priority for the long-term trajectory of Alight, and we have seen tremendous collaboration across both organizations as we prepare our clients and over 8,000 employees for this transformational deal. Based on the great progress we have made to-date and looking ahead to the closing of the transaction, we are reaffirming our midterm outlook on the remaining business with revenue growth of 4% to 6%, BPaaS revenue growth of at least 15% and adjusted EBITDA margin of 28%, which would mark a total of 600 basis points of margin improvement versus 2023.

This will be complemented by a stronger balance sheet, including net leverage below 3x, enhanced cash flow generation and an investor-friendly capital allocation framework supported by $248 million of authorized funding for share buybacks. With this attractive financial profile, we will emerge as a more simplified focused company steadfast in its mission to keep healthy and financially secure. Turning to the quarter and then our view of 2024, we started the year with total company revenues, excluding hosted nearly flat as lower nonrecurring project revenue offset strong growth of 22% from our BPaaS solutions. BPaaS revenues represented more than 1/4 of total company revenue. Profitability remained stable, a testament to our transformational efforts that have delivered productivity savings.

And building off a strong 2023, our operating cash flow conversion was 67% in Q1, up a full 20 points from last year. Given our typical seasonality, we don’t anticipate continuing at this rate all year. However, by completing the restructuring program and continued execution on working capital initiatives, we are well positioned to drive stronger cash flow generation. For the balance of the year, we expect 2024 to be a tale of 2 halves, with the first half adversely impacted by the timing of large deal go-lives, lower nonrecurring project revenue across both segments and the exit from the Hosted business. The second half will benefit from an increase in new deal go-lives for which we have high visibility today as we continue to build the book of revenue under contract, which at quarter end was up to $3.1 billion for 2024 for the total company.

Coupled with sales momentum and operational execution, our growth will ramp this year and quickly return to our midterm revenue growth target before year-end. Our confidence to sustain that growth post close is grounded in the recent history of the benefits business, which since 2020 includes a 10% total revenue CAGR with BPaaS as a driver at over 50% growth and has resulted in a $700 million increase to revenue under contract. Profitability will also improve through multiple levers, including an immediate uplift of margins upon closing the transaction. At the same time, we are on track to complete the back-end cloud migration in the second half, which should be a key inflection point for profitability. With the data center exit, we continue to expect $100 million of annual run rate savings for the total company with Alight retaining approximately $75 million of the annualized benefit.

Commercially, we continue to close meaningful BPaaS deals and our results demonstrate that our strategy is working. This quarter included large expansions with existing clients, where Alight continues to bring a differentiated set of solutions integrated through the Alight Worklife platform. With one of the world’s leading diversified manufacturing companies, our team demonstrated the value and outcomes with a real-life story of healthcare navigation. During the sales process, an executive asked if we could help one of their employees and family who was facing a healthcare crisis. Our team quickly mobilized by leveraging both the technology and our medical experts to bring the right support and care to this family. And through this example, the company immediately saw the value and impact the solution delivers while our value engineering team quantified the definitive ROI for rolling out this solution across the company.

In another example, our team closed a $50 million public sector contract, where we will provide the technology, administration and domain expertise across 60,000 active members. We won because our decades of experience in this space working with the largest organizations have solidified Alight as a tested and trusted partner. These wins are a microcosm of what we’re seeing broadly. Large enterprises are continuing to invest in their people and solutions that drive engagement, better outcomes and cost savings for the employer. While competitive, we believe the market continues to validate that the winning formula is grounded in a platform-based approach that simplifies the end user experience. And so as we continue building and closing deals in our pipeline, we’re also simultaneously advancing our technology road map and building upon our platform advantages.

Ongoing product innovation is core to the platform strategy, and we recently announced the latest release of Alight Worklife. This biannual release focused on 3 key areas: strengthening our AI-driven support, deepening the integration of leaves and health navigation, and delivering tools that empower greater financial wellbeing. Taken together, these updates will enhance the employee experience with greater self-service and personalization features and deliver improved employer ROI with greater functionality and improved cost savings. I’m also excited to discuss the leadership announcement this morning, which is the result of thoughtful long-term planning publicly demonstrated by Katie’s promotion into the COO seat last summer. By extension of her promotion, Jeremy partnered closely with Katie for a natural succession into the CFO role with the global finance team reporting into him for the past 9 months.

I am thrilled to have Jeremy officially in the CFO role as he leverages his in-depth knowledge of our business, finance function and investor base to advance our strategic initiatives. And with this transaction as a turning point, after 15 years with Aon and Alight, Katie will now focus on the COO role supporting the closure of Payroll and Professional Services divestiture, after which she will step down. Katie, as many of you know, has been instrumental to the foundation of Alight and our public listing. Personally, she has been a tremendous partner to me and a visionary for what Alight has become. Though we will miss her, she has built an outstanding team that we are confident will continue to execute on our transformation moving forward.

I’m also pleased to announce Greg Goff’s promotion to President of Alight, which includes this continued oversight of product, technology and delivery. Greg and his team have moved mountains with their infrastructure planning and post-transaction his voice and expertise with AI, analytics and platform will be even more important. Overseeing product and delivery, Greg is best positioned to lead our teams in integrating our platform technology with our world-class services on a day-to-day basis for clients, and we look forward to him taking on a more public-facing role as you may have seen through recent investor meetings, including today’s call. We’re excited about what he’ll accomplish in his new position as President. My congratulations to Katie, Jeremy and Greg on their next chapters and my heartfelt thanks to each of them.

And as announced on Monday, we are also pleased to have reached a constructive settlement with Starboard who sees the value in where we are headed, and we look forward to their continued engagement and support. We’ve added 2 new Board members, Dave Guilmette and Coretha Rushing and welcome their deep domain expertise and diverse perspectives as we collectively push Alight forward. Over the past 2 years, we have now refreshed half of our Board. Overall, we’re moving fast, and as I stated, executing the transaction is a key priority to achieve our long-term goals. None of this is possible without the hard work of our colleagues who continue to serve our clients with excellence. Their dedication to our clients and to each other is how we will continue to succeed and is why we recently had the honor of being named a Top 100 Places to Work by Fortune Magazine.

With that, I’ll turn it over to Jeremy to walk us through the financials.

Jeremy Heaton: Thank you, Stephan, and good morning, everyone. I want to add my personal thanks to Katie, who has been a tremendous mentor and surrounded me with a winning team. Alight’s opportunity ahead is a testament to her hard work, team building and vision. I’m honored and excited to lead the team forward, continue driving the transformation of our company and to spend more time with many of our key stakeholders. As Stephan said, closing the transaction is front and center across our organization and is on track to close midyear, which will accelerate many of our strategic and financial objectives. Upon closing, we estimate an immediate 300 basis point increase in our pro forma adjusted EBITDA margin to approximately 25%, which includes an estimated $20 million of dis-synergies that are temporary and will be managed out within one year post closing.

Shortly after the closing, we expect to use net proceeds from the upfront $1 billion payment for debt pay down as we delever to below 3x. And importantly, the difference in proceeds from gross to net of approximately $250 million will be 90% weighted toward paying down the TRA liability and will be paid in 2026. The remaining 10% will be a tax payment. The additional $200 million seller notes should follow in a similar structure in terms of gross to net. Of that, $50 million is non-contingent and $150 million is performance-based tied to the 2025 adjusted EBITDA of the divested business, serving as downside protection on performance at current levels. Coupled with our commercial agreement, this framework will drive continued focus on the shared success of both companies.

Given the pending transaction, we have transitioned the payroll and professional services business into discontinued operations. Going forward, Alight financials will be presented on a continuing operations basis. However, this quarter, we will also disclose our metrics on a total company basis, so you may more easily compare to our prior results. As you review the split between continuing and discontinued operations, I would note that we believe the continuing operations income statement understates the true earnings power for Alight. For example, the continuing operations financial results are fully burdened from certain shared costs that will move upon separation. Post close, we expect EPS upside from the planned debt reduction, improved margin profile and a more aggressive buyback program.

And now to the quarterly financial performance, I will be speaking largely from a total company basis as it’s more easily compared to history and prior guidance. Total revenue was $816 million, a decline of less than 1% when excluding the impact of the hosted business. Importantly, our high-growth category of BPaaS revenue increased almost 22% and represented more than 1/4 of total revenue for the company. Revenue from our non BPaaS solutions were impacted by several items. First, as I mentioned earlier, we no longer generate revenue from the Hosted business, which delivered $10 million of revenue in the prior year. Second, as Stephan mentioned, our nonrecurring project revenue finished below expectations by approximately $15 million, split evenly between professional services and employer solutions.

Finally, the impact on go-lives from softer bookings in early 2023, we expect a more favorable trend later this year where we have revenue under contract supporting our growth plan. Adjusted gross profit was $278 million, with margins nearly flat at 34.1%, and adjusted EBITDA was $4 million lower at $150 million. Despite the revenue decline, we continue to benefit from our productivity efforts, which helped offset much of the revenue impact from a profitability perspective. In addition, our cash flow continued to expand materially. We generated operating cash flow of $100 million, reflecting growth of 39% or $28 million more than the prior year. This represents a conversion rate of 67% compared with 47% last year and is driven largely by a continued focus on working capital efficiencies.

Capital expenditures in the quarter were also lower by 20% and our free cash flow improved significantly. Spending on our restructuring program resumed in the first quarter following the planned slowdown during annual enrollment last year. We continue to target the second half of 2024 for completing the cloud migration and expect to see financial benefits in late 2024 with full annual run rate savings in 2025. Of the expected $100 million of run rate savings, we expect the majority, approximately $75 million to remain with Alight. Turning to the balance sheet. Our quarter end cash and cash equivalents balance was $286 million which includes $30 million that is in current assets held for sale and total debt was $2.8 billion. As it relates to interest expense, continuing operations carries the full interest cost today.

We expect after paying down debt post transaction to under 3x, annualized interest expense will be a tailwind for profitability while also providing greater balance sheet flexibility. Similar to our fourth quarter, there was no repurchase activity given the strategic portfolio review and subsequent transaction announcement. We upsized our share repurchase authorization by $200 million and now have $248 million of availability, enabling a more consistent and aggressive buyback plan going forward. Turning to our outlook. While we will formally update our 2024 guidance following the close of the transaction, I do want to provide some color on our near-term expectations. We continue to build revenue under contract which for 2024 is now $3.1 billion, for 2025 is $2.2 billion and for 2026 is $1.6 billion.

Our sales momentum continues to provide greater long-term visibility. Directionally, on a total company basis, we view the second quarter similarly to the first quarter from both a revenue and margin perspective. Consistent with what we have said about our performance, we expect it to be second half weighted. We still expect 2024 revenue growth to ramp through the second half of the year with continuing operations revenue growth being in line with its midterm outlook of 4% to 6% before year-end as we benefit from new deals going live. We continue to watch our shorter-term project revenue pipeline and any impact from the macro environment, and we will look to offset potential headwinds with continued growth in new deals. From a profitability perspective, we expect to see benefits from our customer care efficiencies, which comes predominantly in the third and fourth quarter as our teams execute through the annual enrollment process as well as from our restructuring program that I mentioned earlier.

This progress and visibility enables us to reaffirm our midterm outlook. Overall, we’re making significant progress on a day-to-day basis while diligently working to close the transaction. In my new role, I look forward to meeting those of you I have not yet had the pleasure and would like to thank all of our Alight colleagues around the world for what they are doing every day. This concludes our prepared remarks, and we will now move into the question-and-answer session. Operator, would you please instruct participants on how to ask questions?

Operator: [Operator Instructions] Your first question comes from the line of Kevin of UBS. Your line is now open. Please ask your question.

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Q&A Session

Kevin McVeigh: Great. Thanks so much and congratulations to everybody on all the kind of management changes and Katie, best of luck.

Jeremy Heaton: Thanks, Kevin.

Stephan Scholl: Thanks, Kevin.

Kevin McVeigh: For sure. Hey, Jeremy, the context on the guidance was super helpful. Is there any way to think about kind of the total revenue for ‘24 relative to the initial guidance, realizing there’s a lot of moving parts there, but just – any way to think about that? And are you seeing any initial thoughts from the customers on some of the recent changes around the sale of professional services and kind of the payroll business, just any initial thoughts there would be helpful?

Jeremy Heaton: Sure. So maybe I’ll take the first part and then give it to Katie for the second just on the deal and with clients. I’d say, for 2024, as we said, we will come out with the formal guide on the remaining business once we get through the close. I’d say, the one element that we talked about has been the nonrecurring project revenue and as we said before, but we expect growth to ramp. We can see the revenue under contract building today as we have continuing momentum building on the sales – on the bookings side. And so we still see that path and that build and expect to be by the end of this year at a growth rate that was within the mid-term outlook that we’ve laid out. So I think all else equal versus what we talked about several months ago, we’re seeing it line up as we expected. And we just need to continue to focus on the bookings momentum and the sales team and our operational execution.

Katie Rooney: Yes. And Kevin, I think just on the deal, listen, it’s progressing really well. As you can imagine, we’re talking with all of our major clients, and they’re asking really good questions. But I think the great part of this deal is we maintain that level of commercial partnership and partnership in terms of the delivery and execution. And so neither side wins if we don’t navigate and land this for our customers in a kind of thoughtful way. And so, again, we’re working through that and I think customers have been really good partners as we continue to do that and think we’re on track.

Kevin McVeigh: Great. And then just real quick, a hopeful commentary on the buyback. Can you be in the market before the deal closes now that kind of everything has been disclosed? Or is that something because it sounds like you upsized the buyback, which is terrific. Is that something we get after the deal closures? Or could we expect some activity before the transaction closes?

Jeremy Heaton: Good question, Kevin. So as we said, the deal is on track. So our focus right now in terms of getting that to close here middle of this year. That being said, we continue to assess our portfolio composition and the strategic alternatives, just to ensure we’re maximizing shareholder value for the company upon the closing of Axiom. And so with that, we’ll be open in the market as we can, as we go through that process.

Kevin McVeigh: Great. Thank you.

Stephan Scholl: Thanks, Kevin.

Operator: Your next question comes from the line of Scott of KeyBanc. Your line is now open. Please ask your question.

Scott Schoenhaus: Hi, team. Apologies, I’ve had several earnings calls this morning. I believe you mentioned the $15 million impact, revenue impact split evenly between Employer Solutions and Professional Services. Can you guys just provide more color on that, if I missed what – if you provided color earlier on what exactly happened, what that shortfall was if that continues into 2Q? And then a little – I’ll have a follow-up question on that 2Q kind of guidance, Jeremy. Thanks.

Jeremy Heaton: Sure. Sure, Scott. Good morning. So let me provide a little bit more color there. So Employer Solutions revenue was down 1% year-over-year and Professional Services was up 2% year-over-year. Importantly, to your point around project revenues, that was really the driver across both segments as both were impacted on the project side. Project revenue in Employer Solutions was down 11% and project revenue in Professional Services was down 3%. And so that was the driver as it split across both of those segments. The driver in Professional Services is just lower deployments. A little bit of that’s timing. Again, that’s Workday, SAP deployments that we see and drives the project revenue in the Professional Services business.

And the project revenue on the Employer Solutions side is really in the Health business, driven by benefit plan changes and lower regulatory changes that drive projects in that business. And so as we look at it today, as you know, it’s a shorter sales cycle as it’s a non-recurring business. We do expect, and it’s what we – as I talked to and gave some color on the second quarter, we don’t expect to see a very different profile in the second quarter, but that starts to ramp as we get into annual enrollment within the health and wealth businesses, that really starts to ramp with project work around the annual enrollment process. And so we do see a better path and are building the revenue under contract in that space later in this year, and that’s really how we think about the ramp.

Stephan Scholl: And I think to your point, Scott, about looking ahead, this is the big – one of the big reasons why I pushed so hard to have us sell some of these components of the business. That volatility of the people-based business, as you’ve heard me say in a few calls, $10 million here, $15 million there, those are three or four or five projects around the world that just start later. So not having that as part of our portfolio as we head into the back half of the year is going to be really helpful in building a more credible backlog of business with a much higher percentage of recurring revenue as part of the baseline, so much less volatility.

Scott Schoenhaus: Absolutely. Thanks for all that color, guys. And just as a follow-up, Jeremy, on the actual 2Q when you said it’s similar kind of results this first quarter. Do you mean that from like an absolute basis as a trajectory? You don’t mean like flat growth from second quarter like we saw kind of…

Jeremy Heaton: Similar in growth rate and EBITDA margin in the second quarter growth rate.

Scott Schoenhaus: Okay, alright. I will hop back in the queue. Thanks, guys.

Stephan Scholl: Great, Scott.

Operator: Thank you. Your next question comes from the line of Kyle of Needham. Your line is now open. Please ask your question.

Kyle Peterson: Great. Thanks, guys. Appreciate you for taking the questions. Just wanted to kind of drill down again on the first quarter results. I think kind of in the quarter, you guys had said you expected things to be at least on the top line about flat year-over-year. I think that was in March. So I just wanted to see on the delta kind of what drove the shortfall in the last few weeks there? And of that, like kind of what is going to still be part of the Alight after this transaction goes through? And what is more in the discontinued ops?

Jeremy Heaton: Sure. It’s split about half and half between what goes with the deal tile and what stays as part of the benefits RemainCo business is the mix between the two. As we’ve talked about, it’s a shorter-term, in some cases, can be very – we can within a week, build the pipe and execute on the revenue generated around the project business. So there are elements there as we look at when we build the pipeline and execute through it, can be very quick. And so that was the dynamic that was different for us this quarter versus where we had our expectations set in terms of where we were going. The other element that we had already talked about, we knew we had the – compare with the Hosted business going away, we also knew that we had timing softness last year, which drove the ramp that we’re going to see on the growth side coming into 2024.

Maybe I don’t know, Greg Goff with us who leads Delivery and Product maybe can give you a flavor for some examples we’re seeing today as we think about commercial execution and progress.

Greg Goff: Yes. Hi, good morning. Just a little bit of commentary on – a little on project and then a little bit broader. I mean, I think on the project side, as Jeremy said, that’s typically driven by regulatory changes, plan changes and M&A activity among our clients. And so we just saw a little bit lower activity there. But we’re bullish on that going into the sort of second half, as we said. I think more broadly, as we look at commercial activity going forward, the strategy that we’ve been on, we see resonating still in the market, right, in terms of cost being top of mind for clients, in terms of the integration and employee experience being very top of mind for clients and that platform strategy resonates, right, coupled with really strong delivery and care. And I think we’re really well positioned to that as we head later into the year.

Kyle Peterson: Okay. Yes, that’s helpful. And then I guess just – it does seem like this year – kind of just a follow-up here. I guess it does seem like this year, the trends will be fairly back end and weighted. But I guess is – could you just remind us on the timing of ramps for some of these deals from last year’s bookings as to what the kind of lag time is on some of these deals before they start contributing to revenue and just how we should think about the progression from here?

Jeremy Heaton: Sure. It’s – I’d say, on an average basis, 12 months is the right way to think about it, Kyle. I mean, smaller, more vanilla, I’d say, deals can be as early as 6 months. And some, as you know, some of the bigger deals we’ve talked about can be 18 months or more. And so as you think about the bookings and the timing as you looked at last year, you start to get to that 12-month point as we get into the second half this year. And then you also start to think about the calendar year, which can be important in parts of the business. And so you start, really the enrollment work happens within the third quarter and the fourth quarter where we start to generate the revenue on those deals, and then certainly fully live in January.

And so those are the elements that as we look at the revenue under contract. Today, by quarter, compared to prior years, you start to see where the ramp is and which drives our growth and expectations this year. Again – and we’ll come out, of course, as I said, with more a formal guide on the remaining business as we go forward when we close the deal.

Stephan Scholl: And I said this on the last call too, Kyle, right? And when I said the words, tale of two halves, with deals like Thrift fully online in the first half of this year, a lot of big deals were brought online last year. So the compare in the first half, as you know, it’s a 10% CAGR over the last couple of years. On the revenue side, we added $700 million of backlog. As I said, I wish in a perfect world, the minute Thrift ends, you get GE online. Another one of those massive deals that we announced, not only even last year, but in the prior year. So that’s going to be coming online in the second half. So you start seeing some of the bigger deals that we’ve closed, but it’s not a – it’s a volatile dynamic, right?

But – so it’s hard to see it within a quarter. You just have to take a step back sometimes and let history be its guide, right? As I said, if you look at the last 3 years, it’s a 10% CAGR on an average basis and almost $700 million more in backlog.

Kyle Peterson: Makes sense. Appreciate the color. Thank you.

Stephan Scholl: Thanks, Kyle.

Operator: Your next question comes from the line of Peter of D.A. Davidson. Your line is now open. Please ask your question.

Peter Heckmann: Hey, good morning, everyone. I wanted to follow-up and just see how the story – the Alight story is being received by clients as we get a little further away from Great Resignation and wage inflation. Has there been a shift in terms of what benefits Alight can bring to a company? Has there been a shift in terms of what companies value or what they’re attracted to in terms of why they would make a change?

Stephan Scholl: Yes. Great question, Pete. We talked a lot about this on the calls in the last few earnings, right? The sentiment across our Fortune 100 or Fortune 500 clients, as you know, we serve 70 plus of them and half the Fortune 500. So we’re very deeply entrenched in every single client meeting. Now I’ll ask Greg to jump in, in a minute because he’s done – he just had a big 30-day tour with lots of big clients. The sentiment is the same, which is the CHROs, CFOs and CIOs, those three departments are banding together more than ever before. And when you think about what I said over the years, the space of ERP, supply chain, financial systems and controls, those evolved for the last 20 years, gone from best of breed to enterprise.

And I’ve said this for over 4 years, this employee population in terms of how we engage with them across these systems is a multi-trillion dollar cost base when it comes to health, that hasn’t been consolidated, right? So the engagement capability still is 30, 40, 50 different systems. So the pressure of employers to cut costs is at an all-time high and hasn’t abated at all. So we’re going in with a much more sophisticated model around value engineering and ROI. Greg can talk to a couple of key deals.

Greg Goff: Just to give you an example, I was with a big client a couple of weeks ago. And the – Stephan said that the CHRO side and the CIO side are now working together more than I’ve ever seen at these large clients as cost becomes a pressure, right? And the IT side of the world is typically very good at managing cost. And so the story of platform, the idea of consolidating spend, the idea of doing that while still delivering a more compelling employee experience resonates, right? But that’s also departments within clients working together that typically haven’t worked together on that. And so, we provide a lot of that kind of stitching together of how to bridge the IT world, how to bridge the HR world and the employee world back together. And I’ve seen that as Stephan said, with a lot of clients over the last couple of months, and I see that as a very consistent theme certainly among our largest.