Alight Inc

NYSE:ALIT

Earnings Call Transcript 2022-Q2

[Operator]

Good morning and thank you for holding. My name is Irene and I will be your conference operator today. Welcome to Alight's Second 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 the call 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 second 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 most recent Form 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. Reconciliations of the company's historical non-GAAP financial measures to the most directly comparable GAAP financial measures will 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 up the call for questions.

I will now hand the call over to Stephan.

[Stephan Scholl, Chief Executive Officer]

Thanks Greg and good morning everyone. When we announced plans to go public in January 2021, we laid out an ambitious plan focused on transforming Alight from a custom services-led model into a technology-led organization that delivers better engagement and outcomes for companies and their workforces.

We are midway through our three-year journey and we can already see the impact of that transformation and have a clear vision for the opportunity ahead. We've delivered first half year revenue growth of 5.8%, successfully launched the Federal Thrift contract, and have over 90% of 2022 revenue under contract. And we've recorded $958 million in cumulative BPaaS bookings since the first quarter of 2021, putting us well on the path towards $1.3 billion in bookings by year end 2022.

Taken all together with the revenue visibility we have into the next six months, we are reaffirming our full year revenue growth projections of 6% to 7% and adjusted EBITDA guidance of $650 million to $662 million. Katie will provide more details on the quarterly cadence shortly.

We continue to make progress against our 2023 goal of double-digit revenue growth and already have over $2.4 billion of revenue under contract. Given the confidence we have in our business, we are also announcing a stock repurchase program of up to $100 million.

Our progress is due in large part to our technology-focused approach and the investments we have made. Over the past five years, we have grown our estimated total addressable market from $33 billion to $73 billion by adding key content and leveraging the build-out of the Alight Worklife platform to drive better outcomes for clients and their people. This differentiated approach leads to better health, wealth, and well-being decisions and delivers ROI for our clients through higher engagement and cost savings.

Alight Worklife provides a unified employee experience that positions Alight to be one of just a few enterprise-wide platforms that company can rely on. Like the corporate software landscape that consolidated around a few key players, we believe there is an opportunity for Alight to be at the forefront of meeting the HCM needs of organizations by improving engagement and supplying the much-needed content.

Let me pause for a minute and provide some context on why our platform approach is central to our transformation. We have historically supported a highly customized technology experience for each client. While this provides a tailored experience unique to each client, this bespoke approach slowed our ability to innovate quickly and resulted in a much higher cost to serve, taking a platform approach changes that.

We have increased the investment in our platform co-innovated with our clients including on our own new web and mobile experience and outlined a regular cadence of new releases.

While our strategy still provides a tailored experience, it does so on a single version of the platform, which gives us the ability to dramatically increase the speed of innovation, strengthens agility for our clients, and allows us to start to lower the cost-to-serve.

In a short time, we have moved over 500 large market clients onto one single platform. The Alight Worklife app is continuing to gain positive momentum from users, most recently achieving 4.8 stars in the App Store and a 19% increase in monthly active users since the first release in early 2022.

Additionally, in Q2, we issued the second major update of Alight Worklife with a focus on features and functionality that improve the user experience and engagement through chatbot updates, more integrated personalized support like clinical guidance, and enhanced plan sponsor data, and analytic dashboards. We also added to our content layer by introducing Alight Digital Wallet. This provides payroll clients with the ability to offer their employees, greater flexibility to be paid, when they want via earned wage access and pay them in a way that meets their needs, with a no-fee physical and digital payroll card.

We believe that when employees have less financial stress, they are more productive, are less likely to leave their job and have overall better well-being. This innovation is resonating for our clients. In Q2, AutoZone partnered with Alight, because we offered a differentiated experience to help better support their overall benefit strategy, while driving health care savings providing more tailored services, and bringing higher levels of engagement through optimized employee experiences, using the Alight Worklife platform.

In any industry, improving employee retention is a key driver that has a direct measurable impact on performance, through providing highly personalized services, which focus on engagement and awareness of well-being programs from the moment, the onboarding starts. Alight can have a significant impact, on AutoZone's retention metrics.

Our integrated offering starts with a comprehensive total rewards, statement to the job candidates and continues with the use of licensed benefit counselors, to help employees make the optimal benefit decisions. Health pros and medical allies will help employees navigate through complex, medical decisions all delivered through a seamless technology experience. All of this is a true demonstration, of what we can do for our clients. This kind of values, why other major brands like Siemens Energy, Unilever, the Home Depot and Geodis also signed in the second quarter with us.

Perhaps the biggest proof point of Alight's ongoing transformation, is the successful go-live of the Federal Thrift Savings Plan, in partnership with Accenture Federal Services at the end of the second quarter. This milestone is an incredible achievement for Alight, and I am so proud, of our organization. It really is a testament to our ability, to deliver for one of the largest employers in the world.

For those of you not familiar with the Federal thrift, it is the retirement savings program for the federal government. With this addition of over 6 million participants, we now serve over 36 million people. Few companies beside Alight, in any industry could serve such a big and complicated contract and executed according to the challenging government specifications, system reliability and scalable operations.

Importantly, our work extends beyond traditional recordkeeping, with a greater emphasis on higher-value, cloud-based technology. The contract also is an important example of a new playbook, of expanding our partnership ecosystem with world-class companies that bring strong government relationships and a service capability, while we provide unmatched expertise in complex, technological core benefits function.

This client momentum, is translating to growing BPaaS bookings and revenue. As I mentioned earlier, we have sold almost $1 billion in BPaaS bookings, since the first quarter of 2021 and we are now on track to realize over $500 million in BPaaS revenue by year-end. These results are proof, that our transformation from a customized multi-platform approach, to a personalized yet single platform model, is resonating and continuing to gain traction.

Specifically in the second quarter, we signed $234 million in BPaaS bookings, which puts our first half total at $356 million, more than halfway to our full year goal of $680 million to $700 million. We recognized $128 million in BPaaS revenue, up 36% from last year with BPaaS now accounting for 17.9% of revenue, up from 14% a year earlier. We also continue to self-fund our sizable investments in our business to drive long-term growth.

As we look ahead to the back half of 2022 and into 2023, our momentum positions us well. Despite tumultuous equity markets and an uncertain macro environment, we believe our business is well situated to withstand the challenges. We provide mission-critical benefits for companies, as demonstrated by our revenue mix, which is 84% recurring and is reflected in our 97% average revenue retention.

Furthermore, we see the potential for us to benefit from secular tailwinds and our transformation efforts, because our ability to demonstrate cost savings to an employer make our services even more valuable during a potential downturn. Katie, over to you.

[Katie Rooney, Chief Financial Officer]

Thank you, Stephan and good morning, everyone. On a total contract basis, BPaaS bookings for the second quarter, were $234 million and for the first half totaled $356 million, which is tracking ahead of our $680 million to $700 million target for 2022. Bookings growth has translated into revenue growth and higher contracted revenue. Our BPaaS revenue growth was 36.2% for the second quarter, and now comprises 17.9% of revenue. With our strong bookings, as of June, we already had more than 90% of projected 2022 revenue under contract.

Moving to our consolidated results. We continue to make steady headway. On a year-over-year basis, second quarter total revenue increased 6.4% to $715 million and total revenue excluding our legacy Hosted business, increased 6.7% to $705 million. Recurring revenue, which comprises 84% of our total revenue, increased 7.7%. And adjusted EBITDA was $142 million in the quarter, even with our strategic investments.

Next, I'm going to discuss performance for our two primary segments. Employer Solutions' second quarter revenue grew 7.9%, which reflects a combination of net commercial activity, increased volumes, acquisitions and project revenue. Recurring revenue increased 8.3%, while project revenue grew 3.8%.

Gross profit increased 4.7% to $200 million, while gross margin decreased 100 basis points to 32.6%. And adjusted EBITDA increased 6.5% to $147 million, with adjusted EBITDA margins at 23.9%. This reflects the seasonality profile of the acquisitions completed late last year and key investments we're making into the business.

Turning to our Professional Services segment. Second quarter revenue decreased slightly by $1 million to $91 million due to a 3.3% decline in project revenue due to timing delays on three large projects that we anticipate will start by year-end, partially offset by stronger-than-anticipated recurring revenue.

Gross profit declined by $6 million to $20 million and gross margin declined 630 basis points. Adjusted EBITDA was a loss of $3 million and adjusted EBITDA margin was negative 3.3%, as we made the strategic decision to retain key accredited talent to support a strong pipeline and book of business to be realized later this year.

Turning to our balance sheet. On June 30, our cash and cash equivalents were $272 million and our total debt was $2.8 billion. We believe we are well positioned for a rising rate environment, given our interest rate hedging strategy, with over 70% of our debt portfolio fixed for 2022 and 2023 and no near-term debt maturities of significant size until 2025.

We recently concluded a comprehensive review of our capital allocation framework given market volatility. To share some insight into our thinking, our three key priorities are as follows: first, to maintain a strong balance sheet to execute strategic priorities which include reinvesting in our business and the pursuit of M&A to create value and generate profitable growth; second, to optimize the capital structure targeting 3 to 4 times net debt-to-EBITDA leverage, which we believe is appropriate; and third, to return capital to stockholders in a disciplined and opportunistic manner including through stock repurchases.

Now let me provide you some color on our cash flow performance in the quarter and our outlook going forward. We continue to invest in our business with $38 million of capital expenditures in the quarter and $15 million of investments in technology, commercial and the Thrift launch. In addition, we made a payment for the ConsumerMedical transaction totaling $81 million.

As we look out to the full year, we are focused on improving our cash flow from operations through operating leverage on the investments we are making and improving working capital metrics.

We believe that one of the positive attributes of our business is its cash flow generation ability that has been masked to date by transaction-related onetime expenses, the assumption of the large book of receivables related to the Retiree Health Exchange acquisition and other items. For the six months ended in June, we generated $118 million in operating cash flow, versus $58 million over the same period last year.

Going forward, we believe that our business will generate an operating cash flow conversion ratio of 40% to 50% in 2022, moving to 60% to 80% in the future, up significantly from 20% in 2021 as we pass the one-year anniversary of some of the earlier cited items.

Given the confidence we have in the improving cash flow dynamics, our proven ability to invest in our business and our view that the stock represents a compelling investment, we are announcing a stock repurchase program of up to $100 million. We will continue to evaluate stock repurchases against other strategic opportunities, as outlined in our capital allocation policy.

Concurrent with this earnings release, we posted a new investor deck on our IR website that addresses some key questions we have been getting. Specifically, investors have asked why BPaaS sales are better than our legacy core benefit administration single-point solution sales. So let me unpack that for a minute.

Our mega deals done over the 2021 to 2022 year-to-date time frame highlight a few reasons why we focus on this book of business. First, it's higher quality of revenue with the majority of it being recurring. Second, it represents a growing share of a client's wallet, with the number of products being sold to a client doubling versus our traditional deals. And third, it's more profitable, with bundled margins over 500 basis points higher than stand-alone benefit administration deals over the life of the contract.

Another question we have been asked is, how we use technology to create a better experience for participants while improving our efficiency and cost to serve. Let me give you one example. With our latest Alight Worklife release, we introduced the first phase of our workflow tracker that has the potential to reduce call volumes, while improving the customer experience, by providing push notifications and integrated case management. With over four million annual status calls at an average cost per call of approximately $10, this could yield potential savings in the tens of millions of dollars.

Switching over to guidance. We had previously provided a 2022 outlook of $3.09 billion to $3.12 billion or 6% to 7% revenue growth, adjusted EBITDA of $650 million to $662 million and adjusted diluted EPS of $0.54 to $0.60. We are reaffirming all elements of full year guidance and providing quarterly insight into the progression for the balance of the year, to provide additional color on the seasonality of our business.

For the third quarter, we anticipate revenue of $735 million to $750 million and adjusted EBITDA of $115 million to $125 million. And for the fourth quarter, we anticipate revenue of $915 million to $930 million and adjusted EBITDA of $245 million to $255 million. Let me dive into the factors that are driving this outlook.

First, on revenue, we will benefit from the Thrift going live and additional client wins going live, along with normal fourth quarter seasonality which will drive an anticipated 24% sequential improvement. Remember we have 90% of 2022 revenue under contract, so we have a high degree of visibility.

Second, on adjusted EBITDA we are continuing to make investments in our business with the remaining $15 million of the $38 million total investment to be completed in the third quarter.

We also have higher demand for project revenue tied to enrollments and the ramp in staffing for our retiree businesses which creates an additional $15 million headwind in the third quarter.

In the fourth quarter, we recognized more of the revenue associated with these investments which drives the improving margin profile. Looking ahead to 2023, we already have over $2.4 billion of revenue under contract.

We're tracking well to our goal of double-digit growth in 2023 and margin expansion. Once we complete our budgeting process we will provide formal 2023 guidance. This concludes our prepared remarks. And we will now move into the question-and-answer section.

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

[Operator]

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

[Kevin McVeigh, Credit Suisse]

Great. Thanks so much and congratulations on the results. Hey, it's probably for Katie. Katie I just want to make sure in terms of the guidance the $15 million of headwind that you talked about was that already in the EBITDA?

Or I guess said another way would you have been able to increase the EBITDA if not for that incremental $15 million? And it sounds like, it's more demand driven than anything else.

[Katie Rooney, Chief Financial Officer]

Yeah, Kevin that's right. And some of it again is the misalignment of cost to revenue, right? When you think about the staffing we do for some of that annual enrollment work we're hiring for that in the third quarter, but we recognize all the revenue right once those clients are in the enrollment process in the fourth quarter. So it's really kind of the timing of the cost versus the revenue.

[Kevin McVeigh, Credit Suisse]

Great. And then just really, really nice momentum on the bookings, maybe talk to that a little bit because it seems like from a macro perspective even though we're hearing about the storm clouds definitely doesn't seem like you're seeing it in the results. So maybe talk to that a little bit if you could call out maybe size or anything like that around the bookings number.

[Stephan Scholl, Chief Executive Officer]

Yeah. Thanks Kevin. It's -- as we've talked about before the people agenda is top of mind with Boards and CEOs like never before.

And that hasn't changed. If anything all the investments we've made into platform, into engagement discussions and into our value engineering teams have highlighted that this 70% cost bucket for most companies is an area that is really the next opportunity for everybody to go in and look at.

And see how do we rationalize simplify one client is at best to me which is enough of the Christmas tree approach which is throwing 80, 90 different offerings at employees getting 1% to 3% engagement rate, they're all looking to us to help consolidate and simplify that into a much more comprehensive enterprise approach to it.

And so, we see big opportunities in taking cost out and taking a bigger share of wallet as Katie said earlier. And by doing that, -- excuse me we'll be able to get a bigger piece of the pie ourselves while still having them save money.

[Kevin McVeigh, Credit Suisse]

Thanks so much and congrats.

[Operator]

Our next question is from Peter Heckmann of D.A. Davidson. Please go ahead.

[Peter Heckmann, D.A. Davidson]

Good morning everyone. Thanks for taking my questions. So, on the Professional Services side you talked about three large projects that saw timing delays but you retain the bench.

And so the lower level of utilization dragged on margins. Do you assume about that same level in the third quarter in the fourth quarter, or is it possible that some of those projects could go live before year-end?

[Katie Rooney, Chief Financial Officer]

Yeah. Good question, Pete. Some of those projects are on track to go live in the fourth quarter. So I think you'll see an improvement in the fourth quarter and then, a more substantial improvement into 2023, because again going back to the pipeline and the backlog. I mean, it's the highest we've seen. So we have good visibility into that revenue coming in line later this year and into 2023. But those delays have obviously hurt us in the first three quarters.

[Peter Heckmann, D.A. Davidson]

Okay. Okay. And then, in terms of some of the other large deals that we've been talking about on prior calls like PwC or Navistar, generally do you feel like you're on track with those conversions and the hiring need to support those conversions?

[Stephan Scholl, Chief Executive Officer]

Yeah. Hey Pete, it's Stephan here, absolutely. And I think the biggest testament is, if you just look at the Thrift program I mean, how many companies in the world can deliver on some of that scale. They're on one hand and now we're a part of that. So, I think that should give everybody significant confidence that in all the strategy, we set out two and half years ago, and invested hundreds of millions, since then are now really in the last several months coming to fruition with the go-lives for the Thrift program.

The launch of our platform Worklife live with over 500 clients, I can't underscore the importance of that statement that last one, which is our ability to execute is super exciting because that sets the foundation for everything else that we're doing. So, and we're on track on all these big programs. And don't forget look at the new wins that we just had. I mean, the AutoZone win for us was a dramatic 100,000 person employee organization looking to a full enterprise approach. And they look to all the other deals that we had closed and found confidence in those wins in the previous year to really make a big, big investment on an enterprise scale with us.

[Peter Heckmann, D.A. Davidson]

That's great. That's great. And then if I just sneak one more in. Talk about your ability to pass on wage inflation as it comes. Like, what are you experiencing in your current employee base? And then, how do you start those conversations with your customers about trying to pass some of that on?

[Katie Rooney, Chief Financial Officer]

Yeah, Pete, actually a lot of that is already contractually included in our agreement. So we look at the employment cost index, which as of June was 5.7%, and kind of how the majority of our contracts work is that, we cover on average the first 3%. But then above that right we passed that incremental cost on to the employer for that contract year. So for contracts that have a July one start date right we'd be passing on that difference between the 5%, 7% and the 3%.

So that helps offset a portion of inflation. And then obviously, we have to continue to look for ways to gain efficiencies going back to the example around the workflow tracker right, and taking calls out of the system. I mean, that's something we're looking at every day to make sure we have kind of those levers to help with the environment we're in.

[Peter Heckmann, D.A. Davidson]

Okay. Great. That's good to hear. I'll get back in the queue.

[Stephan Scholl, Chief Executive Officer]

Thanks, Pete.

[Operator]

Our next question is from Tien-Tsin Huang of JPMorgan. Please go ahead.

[Tien-Tsin Huang, JPMorgan]

Thanks. You hear me, I had to jump off for a second. I just wanted to ask on the visibility question Katie on the fourth quarter ramp, especially for some of the deals. I get this question a lot. To – with the way the calendar cuts and the timing of projects and with enrollment period is that what drives some of the visibility into the projects cutting on definitively in the fourth quarter? Just trying to better understand how that visibility comes together.

[Katie Rooney, Chief Financial Officer]

Yes. Thanks Tien-Tsin. It's a couple of things. I think first as you said right, given the time line from sales to revenue, right? I mean, we kind of have visibility to just even new deals coming online in the fourth quarter that are on track, right? So you first have already kind of visibility from bookings to revenue in terms of kind of that ramp. Second, obviously, with the Thrift going live on track that helps our kind of visibility into the year. And then to your point on the project side, particularly around the Employer Solutions business, what we're seeing more of this year is again demand for – like think about companies doing plan design changes they need more support actually through the enrollment process not necessarily leading up to it. So a lot of our companies are going through enrollment right in the October November time frame.

At times, we'll be doing support work for them leading up to that. And in this year, where we're seeing more demand is actually helping them through changes during enrollment. And so that's – again, so we're already contracted with those clients to provide those capabilities right? They know we're ramping now to prepare for that, which kind of gives us that visibility.

[Stephan Scholl, Chief Executive Officer]

Yeah, I would add in the seasonality piece for our retirement business, Katie. I'll get into that for a second, because I think that's a big piece of.

[Katie Rooney, Chief Financial Officer]

Yeah. I think that's the other dynamic Tien-Tsin, which is different for us this year, right? We talked about it a little bit late last year, but also with our – the retiree health business kind of our – the commissions businesses remember how those work again you're staffing now for those companies to enroll right in the fourth quarter and really late in the fourth quarter. But again that – I almost think of that a little bit as more recurring, right, because they're already working with the employer. They're just going through a re-enrollment process. So again, you have – you don't see a lot of volatility around that which gives us kind of the added confidence in the outlook.

[Tien-Tsin Huang, JPMorgan]

Understood. Yeah. No, it makes sense. We'll be doing ours in real moment in a couple of months. I think on the – Stephan for you just thinking about the pipeline here. And I totally hear your comment on right cost savings is a bigger focus for enterprises probably and still critically important to get the wellness right. So as we turn to 2023, and the end of the year here how does the pipeline feel for you and sort of the pathway to get more of your existing clients as well to convert to BPaaS?

[Stephan Scholl, Chief Executive Officer]

Yeah. Thanks. Listen, our pipeline is the largest we've ever had at this point in time. And when you look at a win like AutoZone, and they let us speak to it as much as they are just hopefully shows excitement to our investors, and frankly to all our employees on the path that we're on. That one was less about cost savings, that was one where if you look at the frustration around the Fortune 500 especially on the lack of engagement across these 70 to 80 to 100. If you look at our investor deck, you'll see these companies are dealing with so much complexity and the employees are frustrated.

And then, we've unraveled and unpacked for them the cost that comes with running this Christmas tree-type approach and then have shown them the path of simplification enterprise. And the fact that 500 customers adopted worklife within -- on a weekend and we had that happen again another testament to people moving away from best-of-breed, moving to enterprise, consolidation, wanting to drive engagement. And by the way, you're going to save some money along the way. So kind of the best of both worlds coming together, which we're excited about.

And by the way Tien-Tsin, we also mentioned -- I mean I don't want to -- I talk about AutoZone 100,000 people, but look at Siemens Energy. I mean AutoZone, we took away from one of our largest competitors, it was their second largest client. We are replacing them at AutoZone and adding so much more to what we had before. On Siemens Energy, we competed against our biggest competitors and we beat them in that deal. When you think of the Unilever on the global payroll side again another -- that's our fourth Fortune 500 win just in the last few months again some of our biggest competitors. So just the brands and names of big companies betting on us is I think a big testament to the pipeline and to the growth and where we're headed.

[Tien-Tsin Huang, JPMorgan]

Yeah. No, I appreciate the case studies. And the slides are really useful. So thanks for that.

[Stephan Scholl, Chief Executive Officer]

You bet. Thank you.

[Operator]

[Operator Instructions] Since we have no further questions, 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 for any closing remarks.

[Stephan Scholl, Chief Executive Officer]

Thanks, Irene. Appreciate that. Thank you everyone. I really appreciate you all joining us today. We are executing on our strategy. We're expanding relationships with new and current clients. And we're making key investments to fuel our results, not just for the rest of this year, but really into 2023 and 2024. So thank you for the time today and look forward to further discussions. Thank you.

[Operator]

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.