Alight Inc

NYSE:ALIT

Earnings Call Transcript 2021-Q3

[Operator]

Good morning and thank you for holding. My name is Doug. And I will be your conference operator today. Welcome to Alight’s Third Quarter 2021 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 Hodges, Head of Investor Relations at Alight to introduce today's speakers.

[Greg Hodges, Head of IR]

Thank you. And we appreciate everyone dialing in this morning. Earlier today, the company issued a press release with third quarter 2021 results. A copy of that release can also 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 perspectives filed with the SEC on August 24, 2021 as 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 their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release, which is available on the company's website at investor.alight.com.

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, CEO]

Good morning. Thank you so much for joining us today. Before we get started, I want to say thank you to the Alight colleagues around the world. We have been on an incredible journey over the past 2 years and our colleagues have been at the center of helping us to transform the way companies think about their employee experience.

Through our Alight Worklife platform, we are bringing together a holistic view across health, wealth, wellbeing and payroll to more than 30 million people at the world's most influential companies. We believe this unique capability set is generating positive momentum in the marketplace as company is fully embrace the differentiated experience and return on investment we can provide. Given the strong momentum in our business, we are raising our full year guidance for the second time this year to 5% to 6% revenue growth and adjusted EBITDA to $615 million to $625 million.

Before we dive further into our results, I want to start with a number that shows how critical Alight Solutions are for today and tomorrow. 65%. That's the percentage of American adults who say they are planning to switch jobs in the next year. Think about that 65% Then there are millennial and Gen Z workers who make up more than half of the workforce and are even more likely to be searching for another job. The pandemic has accelerated a tightening of the labor market, it's a great resignation.

I know you've all been reading about it and probably hearing about it as a risk on every earnings call you've been on. On top of this companies are grappling with their return to the workplace strategies, vaccine requirements, and keeping their workplace healthy and prepared. While never simple. The workplace, HR, benefits, regulation, all of it has gotten even more complex.

And yet, companies are spending billions on pay and benefits. But the mass exodus of workers continue. This should lead us to ask are we spending our money on the right things that matter the most to workers, and will that have the biggest impact

In our view, the simple answer is no. Employees are asking for more. When they leave one company for another, employees are saying that they want a different experience and they have higher expectations of their employers. They are voting with their careers. The pressure employers are putting on companies is changing the conversation and it's elevating the conversation.

Things like benefits employee engagement and wellbeing are no longer HR conversations. These are C suite and board level discussions because putting employees at the center has become a business imperative. We believe these very real challenges companies are facing have created tremendous tailwinds for light. We moved early to double down on our investments in technology and commercial given our strong and stable free cash flow profile and are seeing the benefits.

In the third quarter we delivered 20% BPaaS revenue growth with double digit BPaaS TCB bookings growth. We are now ahead of our full year expectations for BPaaS TCB bookings. We are also driving margin expansion on both gross margin and EBITDA margin as we leverage technology to move faster with our clients. And as I mentioned earlier, we are raising our full year revenue guidance to 5% to 6% growth, and adjusted EBITDA to $615 million to $625 million.

So why can Alight turn these headwinds into tailwinds? Because the answer to these challenges lies with the employees. How companies are treating their workers what they're doing to improve employee experience. And their overall wellbeing has never been more important. Alight’s business process as a service solutions BPaaS leverage the light work life engagement platform to provide tools and technologies employees can use to maximize the value of their benefits and improve outcomes, driving increased productivity and helping employers develop high performing cultures.

For some perspective, I recently spoke to the CHRO at a major manufacturing company we work with. Right now they need to hire thousands of engineers, and they need and want employees who are going to stick with them for the long-term, and not switched jobs after a year or two. At the same time, their job candidates are asking for more. They don't just want foosball tables and free lunches, they want to know how their employer is going to care for them and their families throughout their career in life.

This creates an incredible opportunity for this employer to align their benefits and employee experience strategy to create a differentiated employer value proposition that will attract and retain workers for the long-term. We believe Alight is the only company that can work with this client, and others like it, to support their employees and their families from hire to retire across health, wealth, wellbeing and payroll in one seamless experience.

Of course, this company could choose 22 different programs from numerous providers, but instead, Alight can provide a best in class approach that brings everything together in one common engagement platform to create a differentiated employee experience, drive engagement with HR and benefits programs, and most importantly, improve outcomes.

Let me bring this down even a level further. Considering an employee who is diagnosed with breast cancer. For most people, this is an overwhelming and confusing experience, trying to determine which healthcare providers to entrust your care to navigating treatment options, second opinions, and not to mention the incoming bills.

Now what if that same employee had an entirely different experience that was personalized to their unique situation? This is where Alight changes the game. Using the Alight Worklife platform, this same employee gets bespoke information and messages related to her care, prompting her to an Alight Nurse Pro, who can assist her in finding the right provider suggests support groups to help her cope with the mental and emotional impact of her diagnosis, director her to a second opinion, and essentially guide her through her entire journey.

And the great news of course, is that our existing clients and prospects understand the need to move the needle in a more meaningful way. Rather than sticking with the best in breed approach that has been pervasive in the human capital management space forever companies see the headwinds they're facing and are choosing a different path. They are choosing our best-in-class approach that will help them transform the way they think about benefits, pay, HR and their entire employee experience.

Let me help you think about the shift that Alight is driving in the HCM space in a different way. Decades ago, companies approach their back-office technology in this siloed approach, where they pick the best provider and X and the best provider and Y. But then you had innovators that started pulling all of these services into one seamless, integrated platform. That is what Alight is doing in the HCM space.

We are getting rid of the administrivia of multiple providers. One platform that provides payroll, one for health and so on and replacing them with a single beautiful consumer grade experience that provides data analytics and actionable AI for both employers and their people. Companies like Camping World and PwC, which we signed in the third quarter know the outcomes Alight’s BPaaS solutions can drive. These companies are looking forward to TG [ph] partner to help them transform their employee experience across health and retirement benefits and wellbeing and provide the business with the data they need to make better HR and business decisions.

Pairing Alight’s AI driven engagement and personalization to create an intuitive employee experience with our analytics capabilities to drive frequent, high-quality interactions that help employees make the best use of their benefits provide better care lower cost, and results in improved wellbeing.

And our data analytics allow companies to benchmark existing benefits and total employee experience against their peers. Use AI to prioritize the biggest opportunities and offer recommended actions. Together, this powerful combination can help companies move the needle on their talent strategy, employee wellbeing and healthcare spend.

We're also converting existing clients from siloed solutions to our holistic BPaaS solutions as they look to rethink their strategic approach. In the quarter we expanded our relationships with existing clients, including Aptar, Arconic, C&A, Genworth, Shell and Randstad.

An integral part of our success with our clients is our product strategy. We are continuing to innovate and bring new products to market at a much more rapid pace than ever before. For example, in just 8 weeks, we went from testing the concept to finish the market ready product to launch Alight Verify. Alight Verify helps companies manage vaccine requirements, and leverage data and driving business continuity decisions.

In just a few weeks, we already have more than 20 companies signed up for Alight Verify. And with the new vaccine requirements in the U.S. and elsewhere, we expect to continue to see positive adoption of this product.

As we shared last quarter, we were on track to have 400-plus clients live on the Alight Worklife mobile app in time for annual enrollment. And we're seeing positive adoption by clients and their employees. Alight Worklife is already one of the top 100 business apps in the Apple App Store. For clients that have deployed and communicated about the app to their employees, we're seeing a decrease in call volumes of 33%. Users are coming back again and again, with the average user logging into the app 14 times a month.

With the Alight Worklife platform in place, we are moving to semi-annual releases focused on three core areas, continuing to create a more engaging and positive employee experience driving overall wellbeing and enabling employers. For example, in our next release, we anticipate further enhancing the employee experience through expanded clinical second opinion functionality, which we have been able to accelerate in part as a result of our recent acquisition of ConsumerMedical.

We're also working on some exciting new analytics capabilities to measure the improvements in benefits and program utilization that the Alight Worklife platform drives for our clients. As we continue to innovate and bring new products to market, we're also looking for opportunities to bring more of our solutions directly to consumers. One way we're doing this is through Choice Health, which we acquired last year. Choice Health allows us to tap directly into the post 65 individual Medicare market.

Combined with our full solution set and the recent acquisition of the Aon Retiree Health Exchange, we will be able to serve employees through the entire lifecycle. No other company has the ability to provide the full end-to-end solution model through nearly the entire expanse of people's lifetime. This is Alight's true differentiator.

As I said at the start of the call, we're moving quickly and investing behind this market opportunity to support our clients.

So now let me turn the call over to Katie, who will walk you through the financial momentum in more detail.

[Katie Rooney, CFO]

Thank you, Stephan. And good morning, everyone. As Stephan mentioned we continue to see positive trends across our business as we make progress against our transformation objectives.

First, we continue to see strong growth in our tech-enabled BPaaS offerings. On a total contract basis, BPaaS bookings increased 42% to $179 million with year-to-date BPaaS bookings of $459 million now ahead of our original January full year forecast of $395 million

Second, the strong bookings growth is leading to revenue growth and higher contracted revenue in the out years. Our BPaaS revenue increased 20% with continued progress across our subscription revenue. With our strong year-to-date bookings we now have over 95% of projected 2021 revenue of over 65% of projected 2022 revenue under contract, up from approximately 75% and 55% at the start of the year.

Finally across Alight, we continue to see progress. On a year-over-year basis, total revenue increased 3.3% to $690 million and total revenue excluding our hosted business increased 4.3% to $680 million. Adjusted EBITDA increased 16% to $153 million driven by over 140 basis points of gross margin expansion and employer solutions.

We continue to drive profitable growth, which is funded our technology and commercial investments and is also translating to higher free cash flow of $126 million in the quarter which was up 17%.

Looking at our two primary segments, Employer Solutions revenue increased 5% from a year ago to $587 million, driven by growth in recurring revenues and higher project revenue. Employer Solutions’ gross margin improved to 140 basis points driven primarily by operating leverage and lower delivery expenses from our productivity initiatives. Employer Solutions adjusted EBITDA increased 26% and adjusted EBITDA margins improved over 400 basis points to 25.7%.

Turning to our Professional Services segment. Revenue was flat for the quarter at $93 million, driven by growth in recurring revenue as we continue to help clients realize the investment in their cloud technology, offset by softer demand for onetime implementation services. Gross profit and adjusted EBITDA declined in a quarter as we continue to invest in key talent to support a strong pipeline heading into 2022.

Turning to our balance sheet and credit metrics. On September 13, our cash and cash equivalents were $769 million, and our total debt was $2.9 billion. In August, we closed on a new $525 million 7-year incremental term loan to fund general corporate purposes and our recent acquisitions. Given the company's strong free cash flow profile and significant deleveraging benefits due to the merger with Foley Trasimene, we have even greater ability to invest both organically and in organically into our business.

Touching for a moment on M&A. We closed 2 acquisitions subsequent to quarter end. We completed the acquisition of Aon Retiree Health Exchange, which gives us additional scale expertise and capabilities in Medicare enrollment, to further expand on our ability to serve employees from hire to retire.

We also completed the acquisition of ConsumerMedical, which strengthens our existing clinical health care navigation capabilities. And in combination with our broader solution set, including Alight Worklife will allow us to continue to provide a highly personalized and highly effective employee experience. Buying and integrating assets is a core competency for this team and something we will continue to do in a structured and disciplined manner.

Given our momentum coming out of the first 3 quarters of the year, along with our recent acquisitions, we're raising our full year 2021 revenue growth outlook to 5% to 6% from 3% to 5%. We're also raising our full year 2021 adjusted EBITDA outlook to $615 million to $625 million. In closing, we are confident that our transformation strategy will position us well for the long-term. We are ahead of our plan and building momentum as we look to 2022 and beyond.

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. Ladies and gentlemen at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Kevin McVeigh with Credit Suisse. Please proceed with your question.

[Kevin McVeigh, Credit Suisse]

Great, thanks so much. And really congratulations on the results. Fantastic outcome. Hey, you've seen really, really nice momentum in the BPaaS bookings kind of exceeding the full year guidance already. Katie, or Stephan any way to think about where that 395 will ultimately considered as we think about kind of 2021 overall? And any thoughts as to how that starts to come in into ’22? And you talked about the percentage of revenue, but if you could help us frame those expectations a little bit.

[Katie Rooney, CFO]

Yeah, thanks, Kevin. Great question. I mean as we've talked about, there will be kind of volatility quarter-over-quarter in some of the bookings numbers as we see some of the larger BPaaS deals really coming into the pipeline. So, for example, we had $40 million in bookings in Q1, 280 in Q2, and basically 180 this quarter.

If you think about that, in the context of kind of a more normalized year, historically we've seen it build quarter-over-quarter kind of Q1 through Q4. So we see strong momentum going into the fourth quarter to continue kind of that trajectory following off Q3. So, again, we're already at 495, we'll be well ahead of that number by year end as well.

And if you think about what that means for next year, I think importantly, we've been very focused, as you've seen us kind of here in the last couple of quarters on these higher value dollars and delivering these incremental benefits and outcomes to our client base. That's really where we're seeing the traction.

And so we'll be out kind of at the end of -- once we get through our Q4 earnings with official 2022 guidance. But what I'd say is, I think the momentum continues. We continue to have kind of good pipeline, good bookings data that enable us to feel good about how we're entering 2022.

[Stephan Scholl, CEO]

I think from a -- sorry, go ahead.

[Kevin McVeigh, Credit Suisse]

No. I was just going to say Stephan and just Katie, it sounds like the Aon Retiree Health Medical closed after the quarter. So that wouldn't have been any bookings it back that was all organic, if you would.

[Katie Rooney, CFO]

Correct. That's right.

[Kevin McVeigh, Credit Suisse]

Sorry, Stephan, I'm going to cut you off.

[Stephan Scholl, CEO]

No. No worries, I was just going to add the customer lens to it. It continues to exceed my expectations how our one Alight approach to these BPaaS offerings is driving excitement in our install base and in the net new market. So that's what's exciting for us.

[Kevin McVeigh, Credit Suisse]

And then just any thoughts on the new mobile app? It seems like you're trending ahead there. And then any updates on Federal Thrift. And I'll get back in the queue. I just think those are 2 things that are super important.

[Stephan Scholl, CEO]

Yeah. I think you heard the stats. I mean, we were really aggressively pursuing getting it in place for this annual enrollment. And to get hundreds of thousands of people downloading it before annual enrollment and to see the impact we already had with lower call volumes. And people logging in as many times as they did. Again, it's early days. We have a long way to go to get it to install base, but super exciting to see the first phase of how a lot of clients have adopted it.

And as part of our Worklife platform is a mobile first strategy. When you think about the engagement of Worklife through a mobile phone, it's where clients want to be met the notion of the whole daily dynamic of, of health and wellness is something that you want to have on your phone on a daily basis. So just seeing the proof points come through so quickly is exciting for us and gives us excitement for looking ahead.

[Katie Rooney, CFO]

Yeah. I mean, the only thing I'd add, Kevin, we had over 200,000 installations just within the first 60 days. So I think there's also a lot of room for us to continue to build on that momentum, which was good.

And then the second piece just on the Federal Thrift. We are on track. I just mean a huge thanks to our team. It is absolutely been an incredible team effort across the firm to ensure we're in a place by year end to launch our solutions next year. So we are on track and moving well.

[Kevin McVeigh, Credit Suisse]

Congrats.

[Katie Rooney, CFO]

Thank you.

[Operator]

Our next question comes from the line of Peter Heckmann with D.A. Davidson. Please proceed with your question.

[Peter Heckmann, D.A. Davidson]

Hey, good morning. Nice results. Thanks for taking the questions. Now. Yeah, great year-to-date results in BPaaS bookings. Can you provide any commentary on the total bookings number either for the quarter or year-to-date?

[Katie Rooney, CFO]

Yeah. Pete, thanks for the question. After a number of discussions with you and others, we've realized -- everyone's trying to kind of take the total bookings and translate it directly to revenue. And that's a really big leap. Because as you know, there's a number of factors impacting our business.

And so we continue to make progress on total bookings, kind of across all of our solutions. But I think what we've realized and kind of working through with all of you guys is a more relevant metric to help you understand kind of our progress into next year. It's really more of the revenue that's under contract.

So you probably heard it in my script, we have over 65% of our revenue under contract for next year, which again -- remember that was that was closer to 60% at Q2. So have made nice progress on bookings both in total and in BPaaS to continue to improve that metric.

[Stephan Scholl, CEO]

And we've been very aggressive on the quality of bookings. That's why I think you hear us focusing on what we are, which is these BPaaS deals are driving just a high -- higher quality, higher technology framework for our business, which I think gives us a better sense of where the business is headed into ‘22 and ‘23.

[Peter Heckmann, D.A. Davidson]

Got it. And then just on the 2 acquisitions, the number in the cash flow statement, I assume that that is more for the closing up the actual DSPAC [ph] merger and not related to these transactions. What do we think --

[Katie Rooney, CFO]

That’s correct.

[Peter Heckmann, D.A. Davidson]

Okay. It's that kind of total consideration for these 2 deals and just think about where that might take leverage?

[Katie Rooney, CFO]

Yeah, thanks Pete. So remember in August, we’ve raised $525 million of incremental debt we said a portion of that would be used to fund the acquisitions and a portion for general corporate purposes.

So, acquisitions obviously are kind of our less than that. You'll see even in our year end financials, we won't have pro formas because they’re not material to, to the numbers. So as you think about what that means on a pro forma leverage basis, again we ended the quarter, closer to 3.5 times, that will go up to closer to 3.7 on a run-rate basis. So we still have -- as you think about capacity and kind of how we think about just the leverage profile, obviously, the great free cash flow we generate. We still have significant financial flexibility for both organic and inorganic investments.

[Peter Heckmann, D.A. Davidson]

Okay, that's super. And then let me squeeze in one more if I could, just the Investments in Professional Services. Is that primarily around hiring? Did I hear you say that?

[Katie Rooney, CFO]

Yes. Yeah, that's right. 2 areas, I think in the Professional Services business. One is in just the go to market and kind of commercial teams. And then the second, if you think about that business, again it's the people business. And it has been one area where it’s highly competitive from a talent perspective. So it has been an area where we've been very focused on kind of retaining key talent as our pipeline continues to build into next year.

[Peter Heckmann, D.A. Davidson]

I appreciate it. Thanks so much.

[Katie Rooney, CFO]

Thanks, Pete.

[Stephan Scholl, CEO]

Thanks, Pete.

[Operator]

Our next question comes from the line of Ramsey El Assal with Barclays. Please proceed with your question.

[Ramsey El Assal, Barclays]

Hi, there. Thanks for taking my question this morning. Your guidance implies strong 4Q adjusted EBITDA margins. I’m clocking in around or 23%-ish margins. To what extent is that -- are these margins driven by recent BPaaS outperformance that you expect to continue versus other dynamics like I don't know, seasonality?

And I guess, is there any reason to think that these levels won't prove sustainable in the full year ‘22? Or should we think about you potentially reinvesting in the business to bring those margins down a little bit?

[Katie Rooney, CFO]

Yeah. Thanks, Ramsey. I’d say a couple of things. I think you're right. The operating leverage, we're driving through the BPaaS solutions obviously helps. The other areas I'd suggest is remember, we talked honestly, back earlier this year about $90 million of productivity savings we're driving over the course of ’21 and ’22. We’ll honestly have visibility to two thirds of that by year end. So there is also kind of some nice leverage in Q4 from those initiatives.

As you think about what that means going forward, what I'd say is, we're going to be disciplined about obviously continuing to drive efficiencies across the business, but also recognizing we're in this incredibly important time where we have to continue to invest both in our go-to-market and in our technology capabilities to continue to advance the one Alight strategy.

So, as I said, we'll be out with formal guidance in Q4. But I think see opportunities for both driving operating efficiencies while also investing in the business.

[Operator]

Our next question comes from the line of Scott Schoenhaus with Stephens. Please proceed with your questions.

[Scott Schoenhaus, Stephens Inc.]

Thanks. Hi, Stephan and Katie, congrats on the quarter. I wanted to touch based on the impact of labor shortage that's having, obviously a positive demand on your product offerings. Can you give us a sense of what you're seeing in terms of existing and new customers are engaging with you? Is it -- whether it’d be across your health benefits, wealth benefits, payroll?

And then secondly, does the current environmental Alight continue to accelerate the upsell of your BPaaS offering to existing customers? Thanks.

[Stephan Scholl, CEO]

Sure. Yeah. There's a lot there, Scott. As you heard me say on my release, the names of clients. I just love giving the perspective from the voice of clients. So when you hear about, , Genworth and Randstad and Camping World and an Avatar these are all existing clients that have continued to expand into that whole Worklife One Alight platform. And it's all because they see the value of moving from a fragmented best of breed approach to a more integrated enterprise platform that drives a better outcome with higher engagements in their employees.

And so I think that lens of uplift to what we've committed in January through our earnings calls -- through our Investor decks, I think is the proof points that we're seeing in the last couple of quarters of existing clients buying more from us and expanding their footprint with additional products in the name of solving for higher outcomes. So I think that's kind of number one to your middle part of the question.

And then on the net new side, that's your demand point. For us to be able to announce PwC as a win is super exciting. That's after we just announced Navistar and Dell in previous quarters. So that trend continues of major corporations taking an aggressive look at how do we rethink the engagement with our employees in a broader one Alight playbook. And so that again, has been continued to be surprising for me across our pipeline, just to see the aggressiveness that major corporations are -- that they're taking an aggressive stance on rethinking how they engage their employees.

[Scott Schoenhaus, Stephens Inc.]

Great. Can I ask just one more follow up? I know, the big focus has been to move from project business to subscriptions, and obviously have the percentage of recurring revenue streams increase year-over-year. I think last quarter, you said you had over 84%, already towards recurring revenue from bookings. And that's above your previously committed guidance around 80% from recurring revenue.

So with the strong the BPaaS bookings that you've had, should we continue to expect this number to continue to accelerate from here? Thanks.

[Katie Rooney, CFO]

Yeah, absolutely. I mean, what I'd say is as you'll see that particularly on an annual basis, that continued improvement. Remember Q3 and Q4 for us are higher project revenue quarters, just by definition. So like this quarter recurring revenue was closer to 82%. But again, if you look at that year-over-year, obviously that continues to improve. So on an annual basis, absolutely, you will continue to see improvement in that recurring portion of our business.

[Scott Schoenhaus, Stephens Inc.]

Thanks, guys.

[Katie Rooney, CFO]

Thanks, Scott.

[Stephan Scholl, CEO]

Thanks, Scott.

[Operator]

There are no further questions in the queue? I'd like to hand the call back to management for closing remarks.

[Stephan Scholl, CEO]

Great. Thank you, everyone. And appreciate you all joining us today. We look forward to continuing to update you on our progress at the year end. And we'll also provide updated ‘22 guidance at that time. Thanks. Have a great day.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.