Alight Inc

NYSE:ALIT

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. And thank you for holding. My name is Peter, and I will be your conference operator today. Welcome to Alight's First Quarter 2022 Earnings Conference Call. At this time, all parties are in listen-only mode. 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 Greg Faje, Head of Investor Relations at Alight to introduce today's speakers.

[Greg Faje, Head-Investor Relations]

Good morning. Thank you for joining us. Earlier today, the company issued a press release with first quarter 2022 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 10-K filed with the SEC. As such factors may be updated from time to time in the company's periodic filings with the SEC. 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. Reconciliation 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, Chief Executive Officer]

Thanks, Greg, and good morning everyone.

The last two years Alight has been embarking on an important transformation to create a differentiated approach to human capital management that allows companies to change the relationship they have with their people. As I've said before, two of the most important aspects of people's lives are their health and financial wellbeing, and the pandemic had a hugely negative impact on both for so many workers. But we're not in the clear coming out of the pandemic companies continue to struggle with attracting and retaining a more discerning workforce. Employees want more from their employers, and that is not going to change. This is the new normal, and this is accelerating the demand for Alight’s approach.

The Alight Worklife platform brings together all aspects of physical, mental, and financial wellbeing, positioning Alight to be one of just a few enterprise-wide platforms that companies can rely on. And the platform we believe is best positioned to drive outcomes for employers and their people.

When we combine the simple and seamless technology experience of the Alight Worklife platform, with the data and analytics of our content layers and our global delivery capabilities, we can power more confident decisions for employees and provide companies with the information they need to make smarter decisions around their people, their most important asset. This powerful combination is the Alight business process as a service or BPaaS model. That approach is resonating in the market and continuing to see momentum with major global brands like Navistar, Shell and Sartorius, joining our enviable client roster. And in Q1, we expanded that list further with the addition of NEC, Genuine Parts Company, Adevinta and Rituals.

In fact, one of our largest fortune 50 clients recently shared something with me that, I think, really captures the value that we bring. She told me that previously their strategy was to offer a wide variety of programs to meet every employee's needs, but it was overwhelming and people weren't getting the most from the investments the company was making. Now, they are using the Alight Worklife platform, which will drive proactive, personalized communication to increase the engagement with their key programs. This positive momentum is also carrying over to our business results as seen by our key transformation metrics.

During the first quarter, we signed $122 million in BPaaS bookings, which is 205% higher than last year's $40 million. And we recognized $114 million in BPaaS revenue, up 23% from last year and now accounts for 15.7% of revenue, up from 13.5% a year earlier. We continued to make significant investments in the business, including in the upcoming go life of the key federal contract.

In technology, to drive the Alight Worklife platform development, including our recent rollout to more than 450 clients. And in investments in our go-to-market strategy.

As a result of these critical investments, employer solutions, gross profit margin declined to 32.7%. We are striking a balance between profits and growth as we self-fund investments that allow us to take advantage of secular trends and this unique intersection of a post pandemic environment and a tight labor market. At the same time, we continue to generate strong annual cash flow, which reflects the strength of our foundational business and provides us with financial flexibility to do bolt on M&A.

Taken all together, 2022 is off to a solid start, and we believe we are well positioned to deliver on our commitments for the year and are on our way to 10% revenue growth in 2023.

So what is BPaaS? We've been moving quickly on our transformation journey. And for those who are new to our story, let me take a step back and talk more about our BPaaS model that I touched on earlier. What we offer for clients is a differentiated approach to human capital management, an approach focused on leveraging data to drive outcomes. Our BPaaS model, as I shared is a combination of three elements. It starts with the Alight Worklife and enterprise-wide employee experience platform. An Alight Worklife is offered in four tiers, starting with the most foundational level that gives users access to our robust cloud-based content layers, and then moves all the way up to the highest tier that adds even greater analytics capabilities to measure ROI and employee outcomes.

The second part of our BPaaS model is our content. Companies can layer in various content through the addition of our modular, cloud-based solutions for health, wealth, payroll, wellbeing, clinical, and retiree health. These cloud solutions have three to five unique product tiers from a core digital offering all the way to comprehensive benefits administration with fully integrated point solutions. Most importantly, the data within the content layer allows us to deliver a highly personalized experience to meet the specific needs and circumstances of our users and their family members.

Finally, we add in our vital global delivery capabilities that require a human skillset that can't be automated. Some of these services include one-on-one help to navigate important life moments, like having a baby, talking with a nurse about managing a critical illness, or leveraging a financial advisor to prepare for retirement.

We believe our approach is powerful, and when it comes down to it, the reason our clients buy from us are threefold. First, we have an incredibly strong core business with a long proven track record of serving some of the largest, most complex clients in the world, including over 70% of the Fortune 100. Secondly, because of our core business, we have approximately 200 million interactions from more than 30 million users and their family members, which provides us with an enormous data set that underpins our platform. And lastly, this data together with our platform, allows us to drive more confident decisions and better outcomes.

Our integrated approach is already delivering tangible results for our clients. Let me share some examples. The multinational Fortune 50 client, I mentioned earlier already has some more than 4 million interactions yearly across its thousands of employees and offers a wide range of wellbeing programs to meet employee needs but few employees are actually using these programs. Our BPaaS approach enabled Alight Worklife will enable us to move the needle on the engagement rate of these programs. First, Alight Worklife provides one integrated experience that engages the employee in actions that drive physical, financial and emotional wellbeing.

Second, we can leverage that data to personalize the content delivered through the platform with prompt's for the next best action to drive outcomes and motivate employees with the programs most relevant to them. Third, we create an incentive system to reward behaviours with the highest impact. Combined we believe we will drive a more than a 100% increase in engagement for this Fortune 50 client program.

Switching to another client, we had a science and technology client that had two main challenges. First, its employees were having difficulty defining the best benefits resource at the right time, which led to poor health outcomes, care avoidance, reduced productivity and engagement and increased claims expenses. Second, this client did not have high-touch concierge health services, which left the company at a recruitment and retention disadvantage in today's highly competitive market for talent.

To address these challenges, we will provide the Alight Worklife platform paired with our health cloud solution and this combination helps us meet these challenges head on for our client. Specifically using the data and AI we can personalize the employee experience on the Alight Worklife platform and provide employees with a list of available and relevant benefits. This level of personalization will drive higher engagement and utilization of benefits programs.

We also will provide real-time healthcare concierge support for all employees from a dedicated Alight health probe. The cost of implementing this solution is a fraction of the company's overall healthcare costs and has the potential to drive millions of dollars in savings and help partially offset healthcare cost inflation. Our ability to deliver those results is why the client saw the potential and signed with Alight. Our strategy and our deliberate approach to investment is why we have seen steady progress in our BPaaS bookings with a cumulative total of $724 million since the first quarter of 2021. And this is why we believe we are well on our way to our goal of 1.3 billion in BPaaS bookings by year end, which allows us to reaffirm our 22 commitments and gives us, confidence in our path to 10% growth in 2023.

Katie, over to you.

[Katie Rooney, Chief Financial Officer]

Thank you, Stephan, and good morning, everyone.

We see positive trends across our business as we make progress against our transformation objectives. Clients are attracted to our tech enabled Alight BPaaS offerings. On a total contract basis BPaaS bookings for the first quarter grew 205% to $122 million. This bookings growth has translated into revenue growth and higher contracted revenue. Our BPaaS revenue growth was nearly 23% for the first quarter and now comprises 15.7% of revenue.

With our strong bookings as of March, we already had more than 85% of projected 2022 revenue under contract, which gives us confidence in reaffirming our 2022 outlook. Across our consolidated results we continue to see progress. First quarter total revenue increased 5.2% to $725 million and total revenue excluding our legacy Hosted Business increased 5% to $713 million. Recurring revenue increased 7%. Adjusted EBITDA increased 6.8% to $142 million driven principally by revenue growth.

Next I'm going to discuss performance for our two primary segments. First for employer solutions first quarter revenue grew 6.1%, which reflects a combination of acquisitions, volumes and net commercial activity. Recurring revenue increased 6.9%, which was partially upset by a 1.9% decline in project revenue. Gross margin decreased 150 basis points reflecting the seasonal nature of the fourth quarter 2021 completed acquisitions and key investments we are making into the business. Adjusted EBITDA increased 4.4% to $142 million, and adjusted EBITDA margin decreased 40 basis points to 22.8% as we continue to invest in our business.

Turning to our professional services segment, first quarter revenue decreased slightly to $90 million due to a 4.8% decline in project revenue, partially offset by 3.4% growth in recurring revenue. Gross margin declined 60 basis points as we retain key accredited talent to support a strong pipeline in 2022. Adjusted EBITDA was flat, and adjusted EBITDA margin was unchanged at zero percent.

A quick note on our Hosted segment, as the plan runoff continues we have one remaining client with approximately $40 million in annual revenue whose contract ends in 2023. We have signed a new contract with them that will transition them to a cloud-based solution with our Employer Solutions segment allowing us to retain approximately half of the annual revenue stream.

Now, let me briefly review our balance sheet and credit metrics. On March 31st, our cash and cash equivalents were $326 million and our total debt was $2.9 billion. We believe we are well positioned for a rising rate environment given our interest rate hedge strategy. Our debt portfolio for the balance of the year is over 70% fixed. We believe we are well situated to invest both externally and in three key areas internally.

First, we're focused on ensuring a successful go-live for the federal contract ahead of its targeted launch in the second half of the year. The addition of 6 million participants along with the significant recurring revenue stream with additional growth potential marks a key milestone for us and underpins our new wealth cloud infrastructure.

Second, in products and technology, we are investing to support the ongoing development of our Alight Worklife platform and mobile app as well as the supporting content clouds and we are integrating the clinical navigation expertise we bought with consumer medical. Concurrently in our commercial go-to market efforts we are hiring market makers and solution architects to go after the transformational deals that demonstrate the power of our offerings, as well as investing in demand generation and sales talent.

Third, we remain cautiously optimistic about a project revenue rebound in professional services. These investment buckets total approximately $38 million over the first three quarters of 2022 with a greater proportion falling in the second and third quarter. With over 85% of 2022 revenue under contract, which is seasonally weighted towards the fourth quarter and our known investment timing we believe EBITDA growth will be more weighted to the fourth quarter. Given this visibility, we are reaffirming our 2022 outlook and believe that we are on our way to 10% revenue growth in 2023.

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]

Thank you. [Operator Instructions] Our first question is from the line of Kevin McVeigh with Credit Suisse. Please go ahead.

[Kevin McVeigh, Credit Suisse]

Great. Thanks so much and congratulations. Katie or Stephan, I guess maybe Katie you reaffirm the EBITDA guidance despite the additional investments. Is that just more leverage in the back half of the year or were those investments as expected maybe just to help frame that a little bit for us?

[Katie Rooney, Chief Financial Officer]

Yes. Thanks, Kevin. We talked a bit at the end of the year about investments we were making this year, and I think it's just important these were anticipated investments, but I think being able to quantify and help kind of ensure folks understand the benefit of those investments and the timing of them is really what we're trying to articulate here. So I think the – the point is we have a path forward to hitting our guidance with the investments, and those will become tailwinds as you think about kind of exiting the year into 2023.

[Kevin McVeigh, Credit Suisse]

That's great. And then just, congratulations because obviously a lot of folks are seeing cost headwinds, things like that. From an internal perspective, is it just the balance of the workforce or you've really been able to manage through that? So maybe help us understand that a little bit as well.

[Katie Rooney, Chief Financial Officer]

Yes. I think there are absolutely are areas of the business where we see inflationary pressures and that's what we're managing through. Honestly, our team's doing an incredible job trying to manage that every day. I'd say two things. I think one it's targeted in some key areas. If you think about, we've talked a little bit about the Professional Services business about some of the call centre activity. But I think also importantly if you think about kind of our contractual structure with most clients kind of on these recurring contracts. We do have provisions in place where when you think about kind of the employer cost index, we put in increases if they're above a certain threshold say we call it 3% on an annual basis, and so that helps us offset some of that pressure as well.

[Kevin McVeigh, Credit Suisse]

It's great. Thanks so much.

[Katie Rooney, Chief Financial Officer]

Thanks Kevin.

[Stephan Scholl, Chief Executive Officer]

Thanks, Kevin.

[Operator]

Thank you. Our next question is from Peter Heckmann with D.A. Davidson. Please go ahead.

[Peter Heckmann, D.A. Davidson]

Good morning, everyone. Thanks for taking the question. I was curious, it sounds like the Thrift Savings contract is a little bit ahead of schedule in development implementation, which is great. In terms of how we're thinking about the contribution to 2022 with – are we expecting that to go live relatively early in the quarter?

[Katie Rooney, Chief Financial Officer]

Yes. Thanks Pete. So unfortunately we just from a contractual perspective we're not able to disclose specifics around the contract. But I think given the materiality of it to our business that's why we wanted to highlight that it is on track. We do expect it to go live in the back half. Its part of our guidance and what I'd say is we're on track with kind of the timing we expected.

[Stephan Scholl, Chief Executive Officer]

Yes. And we've done very well on deliverables. We keep weekly calls on it, Pete, and we feel very confident with where we are today on the program.

[Peter Heckmann, D.A. Davidson]

That's great. That's great to hear. And then thinking a little bit about fairly significant offshore facilities and with the dollar strengthening, did that provide any material level of cost benefit during the quarter or do you have FX hedges that would – that would limit that?

[Katie Rooney, Chief Financial Officer]

Yes. We do. Particularly if you think about our partnership with Wipro, right, that's a contractual agreement with kind of that – the price inflation locked in. And so that provides a natural hedge, sometimes the upside, sometimes the downside but FX was not kind of a material driver for us given that contract.

[Peter Heckmann, D.A. Davidson]

Okay. All right. That's helpful. And then just lastly, anything else we should be thinking about in terms of very large contracts and process in terms of maybe hitting – are there any things that are – I know the federal threat is uniquely large, but anything else that's relatively larger we should be thinking about the timing of hitting over the next let's say eight quarters?

[Katie Rooney, Chief Financial Officer]

I don't think there is any – I mean, obviously there's nothing of that significance. Remember we called out some great contract wins last year with Navistar, PWC, I mean, the team is doing a fantastic job, bringing those contracts live this year and into next year. So, that obviously will help later in the year. We have some big deals in the pipeline, you saw obviously great BPaaS bookings for the first quarter. But remember last year, right, as you think about some of the seasonality, we had, a bigger Q2. So, again, I'd go back to we're on track for our guidance on BPAs bookings of the $680 million to $700 million. There are some big deals in the pipeline. But I think that won't be a material driver of kind of changes to our outlook.

[Peter Heckmann, D.A. Davidson]

Okay. I appreciate it. Thanks.

[Stephan Scholl, Chief Executive Officer]

Thanks, Pete.

[Operator]

Thank you. Our next question is from Tien-Tsin Huang with JP Morgan. Please go ahead.

[Tien-Tsin Huang, JP Morgan]

Okay, great. Thanks for taking my question guys. I want ask on the project revenue some line of site there in terms the rebound in NPS, Katie, I think, you referred to. Just curious about the visibility there and what's driving your confidence there?

[Katie Rooney, Chief Financial Officer]

Yes, thanks. And you mean in the Professional Services segment?

[Tien-Tsin Huang, JP Morgan]

Yes.

[Katie Rooney, Chief Financial Officer]

Is that kind of where you're focused? Yes.

[Tien-Tsin Huang, JP Morgan]

Yes.

[Katie Rooney, Chief Financial Officer]

Yes, because I mean, again, overall, I think, that was a great news seeing close to 7% growth and recurring revenue was obviously where we've been focused. But if you think about some of the names Stephan mentioned on the call, like the Genuine Parts Company, right, that was a nice Professional Services win that we've been talking about in terms of kind of the pipeline building. And so the visibility into that pipeline, obviously those deals go live faster. And so that kind of is translating into our outlook that we'll see a rebound here towards the back half of the year.

[Stephan Scholl, Chief Executive Officer]

And, I think, the thing on the PS side is, as I said before, while it's a Professional Services business in the past, largely around implementing Workday, in the last 18 months, I've shifted that focus to be more one, a light focused which Workday is a piece of that. And that strategy is now working as especially big global companies are now looking to consolidate all these fragmented systems. So the Professional Services business is going to get some good tailwinds and helping us execute on that broader, global, integrated strategy.

[Tien-Tsin Huang, JP Morgan]

Perfect. No, thank you both. My quick follow-up, just thinking about this earnings season, we've heard a lot from some of the service or the outsource guys that there seems to be a pickup in demand in enterprises, small businesses, you name it all looking for help on the servicing side. I'm curious with rates rising and more market uncertainty, given what the stock markets are telling us, do you feel like there is a change in the pipeline in the sense of urgency as you engage with enterprises to move forward with projects? How, how does it feel versus 90 days ago?

[Stephan Scholl, Chief Executive Officer]

Yes, listen. It's kind of what I have been saying for some time, which is the people agenda has been a holdout for some time on an integrated approach, right? If you look at all my top clients, I've said this now for two years, unlike the ERP world, and supply chain world, which has had 10, 15 years of consolidation, the human capital management arena, hasn't. It's kind of the big holdout where people are now realizing its fragmented systems, they're geographically based.

So they are looking for a consolidated enterprise view of the employee. And when we come in, you have to consolidate as you know, this from your history 20, 30, 40, 50 sometimes systems into one. So the services agenda, that's why I kind of like when people ask, why do we have the services aspect to it? It is largely to drive that program office of integration and enterprise.

And then for us, it's the platform piece, the Worklife piece, where people are starting to see the consolidation of building the relationship with their employee on our Worklife platform. And then we're the ones responsible as Alight to take the content pieces of health, and wealth, and wellbeing, and retirement and payroll and then consolidating that into one enterprise approach on the platform. You need strong services, capability, and global delivery capability to do that.

So people are moving fast, because not only is it a cost takeout opportunity for them in consolidation, it's also just a better way to serve their employees better during this last couple of years.

[Tien-Tsin Huang, JP Morgan]

Thank you for that.

[Stephan Scholl, Chief Executive Officer]

Thank you.

[Operator]

Thank you, ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Stephan Scholl for closing remarks.

[Stephan Scholl, Chief Executive Officer]

Great. Thank you very much. And thanks for joining us today. We're executing on our strategy and delivering for clients and making key investments to fuel our results in 2022 and beyond as we continue our transformation journey. We look forward to the chance to meet with many of you at conferences, such as the JP Morgan TMT Conference in May, the Baird Consumer, Technology & Services Conference in June and at other investor events in the months ahead. Thanks and have a great day.

[Operator]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.