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Alight Inc
Earnings Call Analysis
Q4-2023 Analysis
Alight Inc
The company has taken a significant step forward with its aggressive technology and product transformation, resulting in a record $3 billion backlog of revenue under contract. This advancement is underpinned by the launch and success of their integrated HR platform, which in a short span of 18 months has dramatically boosted employee engagement and reduced calls per participant by 20%. The shift from thousands of custom solutions to a unified SaaS platform has tripled mobile usage and driven $500 in average savings per participant, emphasizing the substantial improvement in customer satisfaction.
Over 1,000 AI content modules have been incorporated into the platform, catapulting engagement rates from 10% to over 50%. These powerful investments have propelled the company from modest growth to a more robust mid-single digit expansion, complemented by a surge in profitability. Notably, the firm has realized hundreds of millions in profit and achieved a notable operating cash flow conversion rate of 52% in 2023, a substantial increase from 19% in 2021.
The management has expressed confidence in the company's financial outlook, seeing the potential to evolve into a high-margin business driven by more recurring revenue. With a strategic review led by financial advisers to accelerate this shift, the company aspires to capitalize on its momentum and foster a robust client value proposition.
Despite experiencing specific challenges with a Retiree Health client impacting revenue, the company still managed to close the year with a 9% revenue growth, which falls short of expectations. However, dismissing this isolated incident reveals a stronger underlying annual growth of nearly 11%. Additionally, the company's BPaaS offering continues to be a high-growth aspect, with approximately 30% revenue expansion further cementing the expectation for over 15% BPaaS revenue growth and an 8% to 10% increase in adjusted EBITDA for the upcoming year.
While the immediate growth is forecasted at 4% to 6%, the company remains aligned with its midterm revenue growth guidance of 6% to 8%. This assertive growth strategy not only strengthens the company's standing but aligns with the introduction of their next-generation AI engine, Alight LumenAI, poised to drive product innovation and enhance the client experience across all solutions.
The company continues to leverage its technological advancements to deliver valuable outcomes for clients such as nearly $50 million in verified healthcare savings and significant reductions in new hire turnover. These successes highlight the tangible benefits of their platform strategy, which ensures that clients see substantial improvements in costs, experience, and productivity.
The importance of mobile user engagement is not lost on the company, with an 80% increase in mobile users year-over-year and double the total mobile interactions, signaling a growing end-user trust in the platform. This is a critical factor in driving client outcomes and the overall company value. The cloud migration is expected to complete by midyear, projecting a positive financial impact in the latter half of the year.
Leadership at the company is not just focused on creating a recurring revenue stream but also on yielding a higher gross margin contribution. By emphasizing AI and platform value, the company is on the cusp of transforming the HR industry by helping companies improve employee decision-making in critical areas like healthcare and retirement saving, utilizing trillions of data sets for the purpose.
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Good morning, and thank you for holding. My name is Ryan, and I will be your conference operator today. Welcome to Alight Fourth Quarter and Full Year 2023 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 in the Investor Relations section of the company's website. And now I would like to turn the call over to Jeremy Cohen, Vice President of Investor Relations at Alight. Please go ahead.
Good morning, and thank you for joining us. Earlier today, the company issued a press release with fourth quarter and full year 2023 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, as such factors may be updated from time-to-time in the company's periodic filings. The company does not undertake any obligation to update forward-looking statements.Also, 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; Katie Rooney, Global CFO and COO, , and Jeremy Heaton, Operating CFO. After their prepared remarks, we will open the call up for questions. I will now hand the call over to Stephan.
Thanks, Jeremy, and good morning. Today marks the end of our initial 3-year plan. Our aggressive technology and product transformation is delivering a first of its kind integrated HR platform capability that supports employees staying healthy and financially secure. We have upgraded all of our clients from over 6,000 custom solutions to a common SaaS-based platform and taken over 200 million interactions a year out of a private data center and into the cloud. Because of this, we were able to deliver a better experience for 10 million people by tripling the mobile usage through annual enrollment. This capability did not exist 18 months ago. Within the platform, we have built over 1,000 AI content modules, which have taken our engagement rates from 10% to over 50%. This means employees are engaging with us, on average, 22 times per year. And because of this, our AI decision support is driving $500 in savings on average per participant. This is the foundation for the future that has allowed us to add millions of people while reducing calls per participant by 20% and still achieving record customer satisfaction, all attributable to our product enhancements and better AI capabilities. It is these investments that have allowed us to enter 2024 with a record backlog of revenue under contract of $3 billion, which is up $900 million from 3 years ago. This is being driven by our high-growth BPaaS solutions that have delivered over $2.2 billion of cumulative bookings and included wins such as NielsenIQ, MasterBrand and Siemens Healthineers to name a few this year; and has also generated a 30% BPaaS revenue CAGR over our 3-year plan. Our strategy has enabled Alight to move from a low single-digit grower to mid-single digits, and we've added hundreds of millions of dollars in profit while increasing our operating cash flow conversion from 19% in 2021 to 52% in 2023. It is this track record that gives us the confidence to reaffirm our midterm financial outlook. In fact, we believe there are opportunities to advance our platform and well-being strategy. We have hired financial advisers who have been conducting a strategic portfolio review to accelerate our midterm financial and strategic objectives of becoming a higher margin and more recurring revenue business. In doing this review, we believe we can move even faster to deliver value for our clients, colleagues and shareholders. As you can see, while we're excited about the long term, we also have to deliver in the short term. In late December, we experienced an isolated impact from a significant Retiree Health client, which resulted in revenue growth of 9% for the year, short of our expectations. Mitigation efforts in this business and renewal activity of Medicare plans did not offset this impact and represented the majority of our revenue shortfall for the quarter and for the year. This is a specific nonrecurring event. Absent the Retiree business, Alight's annual growth was nearly 11%. For the quarter, both adjusted gross margin and adjusted EBITDA margins expanded over 200 basis points with double-digit adjusted EBITDA growth. We also grew BPaaS revenues nearly 30%. Sales momentum continued with BPaaS bookings of $261 million and combined with 3Q, the second half of 2023, finished ahead of the comparable period in 2022, even without the benefit of an extraordinary new win like GE. Turning to our 2024 financial outlook. We expect BPaaS revenue growth of over 15% and adjusted EBITDA growth between 8% and 10%. Revenue growth of 4% to 6% reflects the impact from the timing of our 2023 bookings, the exit of the hosted business and the year-over-year compared to federal thrift. As Katie and Jeremy will discuss with our record backlog and strong pipeline, we are on track to achieve our midterm revenue growth guidance of 6% to 8%. All told, I'm incredibly proud of the way our team has executed on our transformation, not just in 2023, but over the past few years; to become the leader in this space, it took us 40 years to build the infrastructure to support the most complex organizations globally. And in less than 4 years, we have extended our leadership position by building a cloud-based platform with the most comprehensive collection of content to transform the HR function. For clients, the output is a one-stop shop that helps them bend the cost curve and deliver a better employee experience with enhanced productivity. Let me give an example of a client where we're helping solve for costs, experience and productivity. Siemens has been an Alight client since 1996 and is focused on the health and well-being of its employees. Siemens chose Alight to provide high-touch, tech-enabled health navigation services to its employees, helping employees manage and navigate the complexity of the health care ecosystem is an opportunity to not only improve health outcomes, but to improve employee satisfaction. Upon rollout, employees and eligible dependents may choose with confidence, top doctors and facilities or to receive expert medical opinions, surgery decision support and even medical bill review, all while optimizing the value of Siemens benefits program.I've spoken at length about driving outcomes for companies and their people and believe that the only way to get the results that clients seek is through engaging employees at an enterprise platform level. As the central hub, the Alight Worklife® platform is leveraging AI-based technology to drive better engagement and decisions. To that end, I'm excited to introduce our recently launched next-generation AI engine, Alight LumenAI. LumenAI will merge novel and existing AI capabilities into a new unified ecosystem to deliver product innovation and facilitate an interconnected experience for clients across all our solutions. We believe the tools currently being piloted will be a catalyst that drives value for clients by better engaging their employees across their benefits such as personalized HR campaigns, health guidance, virtual assistant interactions and intelligent document processing. This will complement the amazing proof points we see today, including helping a large client realize nearly $50 million in verified health care savings through our insights and automation engines by directing better health care choices. Helping another organization realized 5.4x lower new hire turnover through our personalization engine and the use of financial counselors by creating a personalized digital onboarding experience for all their new hires. And lastly, helping a large retailer reduce overpayment spend in payroll by nearly $200 million. Examples like these are growing every day and represent real measurable outcomes attributable to our platform strategy. And while great for clients, the outcomes are also great for Alight. These outcomes only happen if employees trust our platform to guide them, and that's why we've been focused on the importance of a mobile-based platform. To give some perspective, this quarter, we had nearly 0.5 million monthly average mobile users, an 80% increase from the prior year and 32% sequentially. Total mobile interactions for the entire year nearly doubled to over $19 million. This matters because first, it means more product penetration. And second, it means users are seeing real value when they do engage. That's the foundation to drive these client outcomes, I just laid out and is driving value for our company, developing LumenAI and executing on our product road map would not be possible without our cloud migration, which is on track for completion midyear. We'll start seeing the benefits of this program financially in the second half. Overall, I'm more excited than ever that the work we've done will continue to support our clients in solving the most complex decisions impacting their employees' health and financial security. With that, I'll turn it over to Katie and Jeremy to discuss the financial performance and our outlook. Katie, over to you.
Thank you, Stephan, and good morning, everyone. We finished the third year of our plan with robust bookings and a record backlog of revenue under contract of $3 billion. As Stephan noted, we're starting 2024 with a great foundation with a high-quality and predictable revenue base, meaningful margin expansion potential and improved cash flow that has strengthened our balance sheet flexibility. This has positioned us to reaffirm our midterm outlook. And as discussed, we believe there is great potential to accelerate the achievement of these objectives and the strategic road map of the company. Turning to our Q4 consolidated results. Our high-growth category of BPaaS solutions advanced almost 30%, and we achieved record revenue from our professional services business. As Stephan mentioned, Employer Solutions recurring revenue growth was impacted this quarter by a retiree health clients. For context, the Alight Retiree Health exchange is a solution that supports employers and the retirees in securing Medicare coverage. As we've said, the majority of this revenue occurs in December and this year, a significant client defaulted retirees from the exchange into a group plan, which has a different revenue profile. While retirees can opt out of the group plan, we also undertook a number of mitigation efforts to drive higher Medicare coverage renewal activity, though they fell short of expectations. This is a unique circumstance isolated to 2023, and they remain a significant client. This resulted in total revenue growth for the company of roughly 2%. In parallel, we continued our productivity efforts to drive margin expansion and offset much of the revenue impact from a profitability perspective. Adjusted gross profit was up nearly 9% with significant margin expansion of 260 basis points to 41.9%. Adjusted EBITDA increased nearly 12% to $270 million with a margin of 28.1%. This represents a 240 basis point increase from the prior year. Our increasing level of profitability coupled with working capital improvements are generating stronger cash flow even as we simultaneously execute on our restructuring program. We generated operating cash flow of $386 million in 2023, 35% or $100 million more than the prior year. This represents a conversion rate of 52% compared with 43% last year. Spending on our restructuring program resumed in the first quarter of 2024 following the planned slowdown during annual enrollment last year. We continue to target midyear for completing the cloud migration and expect to start seeing financial benefits in late 2024 with full annual run rate of $100 million of savings in 2025.Turning to our bookings performance. We delivered strong results with BPaaS bookings of $261 million. Together with the third quarter, our second half bookings were $523 million, nearly 2% better than the 2022 results that included an outsized client win. We are experiencing broad-based secular demand for our solutions and have a proven ability to win both large and mid-market clients. We're also continuing to invest in building out a world-class commercial team, which combined with our pipeline, drives increased confidence in our growth plan. With that, let me now turn to our segments, starting with Employer Solutions. Fourth quarter revenue was up roughly 1%, with recurring revenue nearly flat as a result of the Retiree Health impact. Projects were strengthened and grew 9.9%. Our profitability benefited from our productivity initiatives with quarterly adjusted gross profit up nearly 3% and adjusted gross margin 90 basis points higher at 42.2%. Turning to our Professional Services segment. Quarterly revenue growth accelerated sequentially once again and was up 24.2% to a record $118 million. This was driven by a 31% increase in project revenue due in part to the implementation of large new deals and a nearly 12% increase in recurring revenue. On a profitability basis, adjusted gross profit was up 88% from the prior year, with margins growing 13.5 percentage points. Turning to our balance sheet. Our quarter end cash, and cash equivalents balance was $358 million, and total debt was $2.8 billion. We continue to actively manage our debt, which is 84% fixed through 2024 and 60% through 2025. Our interest expense came in near the bottom of our range as a result of our prior hedging activity, our opportunistic repricing of the 2028 term loans and higher interest income. Our net leverage ratio improved to 3.3x, down from 3.6x at the end of the third quarter. We expect to achieve our net leverage ratio target of less than 3x ahead of our midterm outlook. We bought back $40 million of shares in 2023 with no repurchase activity in the fourth quarter, given the strategic portfolio review we discussed earlier. I'll now turn it over to Jeremy to provide a view of Alight's financial outlook.
Thank you, Katie. Good morning. After delivering our transformation over the past 3 years, we begin our next 3 years from a position of strength. We have our highest backlog of revenue under contract at $3 billion with strong commercial momentum. And at the same time, we have expanded both margins and cash flow conversion. This is being driven by our technology-led solutions and infrastructure upgrades that Stephan discussed earlier. And today, we are reaffirming our midterm outlook across all metrics and looking at ways we can accelerate even further through our strategic portfolio review. Now let me share the key factors driving our 2024 outlook. First off, we expect BPaaS will continue to be our high revenue growth category at over 15% and the driver of our overall trajectory as it continues to become a larger proportion of Alight. While total annual revenue growth is expected to be 6% to 8% through the midterm, we expect 2024 to be slightly lower at 4% to 6% that ramps throughout the year, driven by the timing of our 2023 bookings, our exit from the hosted business and our first half compared with the federal thrift. Our initial 3-year plan is now successfully complete, providing an opportune time to relook at our disclosures on revenue growth moving forward. We believe our revenue under contract captures a more complete view of all aspects to our growth model over the midterm versus a BPaaS TCV bookings metric, which created volatility that did not reflect the stability of the overall business, and as such, we will no longer disclose. In addition to our record 2024 revenue under contract, we will now share a longer-term 3-year view and updated quarterly to provide a greater level of transparency to our book of revenue. We will also continue to disclose BPaaS revenue to demonstrate progress on our transformation. As we begin 2024, the business had $3 billion of revenue under contract. For 2025, we have $2.1 billion, and for 2026, we have $1.5 billion. Next, we had a successful first year executing on our restructuring program and are well on our way to a more efficient infrastructure that drives over $100 million of annual run rate savings. We expect to complete the program later this year with some margin benefit in the second half. As this program winds down, there is also a cash flow benefit that is factored into our increased operating cash flow conversion guidance. We expect the seasonality profile in 2024 to be second half weighted as new deals go live, and we see the efficiency benefits from the restructuring program. Our 2024 outlook includes BPaaS revenue of at least $870 million or growth of over 15%, total revenue of $3.55 billion to $3.61 billion or growth of 4% to 6%, adjusted EBITDA of $800 million to $815 million or 8% to 10% growth with an adjusted EBITDA margin expansion of 50 to 100 basis points. Adjusted EPS of $0.72 to $0.77, operating cash flow conversion of 55% to 65%; and finally, as Katie mentioned, we expect to achieve our net leverage ratio target of lower than 3x, well ahead of the midterm outlook. After 3 years, we are confident that our transformation journey has created a strong foundation that will enable us to sustainably deliver value for all of our stakeholders. 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...
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from the line of Scott Schoenhaus with KeyBanc Capital Markets.
Hi team, thanks for the question. Just curious, is it -- are we still expecting sort of a 12-month time frame for one BPaaS booked it converts to revenue a follow-up. What are you seeing from your enterprise clients? Is it taking longer? I know last quarter, we mentioned that's a longs sales process. What are we seeing with large enterprise customer behavior now on closing deals?
Thanks, Scott. I'll take the first one and then maybe Stephane will take the second portion. So I think 12 months is the right timing. As you know, depending on the solution and the size and the complexity of the client, it can be anywhere from 6 to 18 months. You think of the larger deals we talked about last year that in the fourth quarter that don't go fully live until 2025. So there is about a 1-year timing that's the right way to model it. And that is part of, as you think about the forward guide for us and the timing and the good momentum we had in the second half of this past year around bookings and how that impacts revenue coming through the business.
Yes, Scott, good to see you again. I hear from you again. The momentum in the marketplace is clear around what we've talked about for the last couple of quarters, which is clients are trying to find ways to take cost out. And this whole platform approach around employee engagement and one front door is really helping drive the consolidation discussion. And we're leading that charge. And as you saw in the bookings just in the last half year, when you take out GE, one deal last year really helped drive a big book of business for us. This last year, this last 6 months, it was really broad-based across a very broad spectrum of clients all along the same theme. And they're all asking us to help them really drive a better employee experience platform but also take out costs.
Yes. And Scott, it's Katie. The only thing I'd add to Jeremy's point -- your question on the conversion. I mean, that's really why we're giving you greater insight into revenue under contract given the variability of bookings. So I think being able to see that quarter-over-quarter, we'll also give you confidence in the traction we're making in the market.
Yes, exactly. I'll hop back in the queue.
Our next question is from the line of Peter Heckmann with D.A. Davidson.
Busy morning. And so I just wanted to circle back to the fourth quarter issue with Retiree Health. I missed a portion of your explanation there and then how you're able to offset some of that revenue shortfall with lower costs.
Yes. Thanks, Pete, it's Katie. So on -- in terms of the fourth quarter, I think what we articulated was there was a single client in the retiree business that defaulted the retirees back to a group plan, where those retires would then need to opt out to continue with their Medicare coverage. So it results in a different revenue model for us. As you know that business is really December loaded. And so that impacted us in December. What we then we're working on, obviously, was kind of offsetting the potential risk around that client, which fell short of our expectations. So as part of that from a revenue perspective, we were also very conscious on ensuring we had a profitability plan to continue to stay on track. So one, all the efficiencies we've been driving across the business, some coming out of the restructuring program, as we've talked about. And I think, two, making sure we retain accountability for our leadership teams for the miss. That variability in compensation obviously plays a role here. But I think the important piece is when you think about that revenue component, it is onetime in nature. So it provides a baseline kind of now for how to think about growth going forward. We don't see it as a recurring event.. Does that help?
It does. It does. And then just -- and I'm sure it's very difficult for you to comment in any real detail on the strategic review. But just trying to figure out, like, is this an open-ended review that is including potential acquisitions, potential divestitures, potential financing, potential sale of the company? Is it pretty broad? Or should we infer it's maybe more focused on kind of divestitures, profitable pruning of some businesses?
So I think thanks for that. It's doubling down on what's been working for us on our platform strategy. And as you've seen, the last midterm of the last 3 years, we've gotten 30% growth out of our platform approach. And we know it's working. And if you get -- if you look at the next midterm guidance, this is a book of business that's going to be about $1 billion in business for us, and we want to double down on the front door employee engagement experience. And we want to really move towards a recurring revenue base with that higher margin contribution capability. So if you take those ingredients, we're taking a review in that context, we don't have to own all the systems of record potentially. We can look at different areas where we can partner with people around content. But the battleground really for us is really doubling down on the platform piece. And listen, it's no secret. I've said it before. We're not getting credit in the market for the work that we're doing today, right? So when you think about where we sit on our transformation agenda, it's how do we continue to unlock that value?
Yes. And Pete, the only thing I'd add is in the context of that too, right, there's an opportunity to enhance value for our clients. So as you think about that review, right, it's how do we double down in certain areas, how do we drive additional investment in certain areas that will all play into this to ensure we're continuing to, again, maintain a leadership position in how we support our clients.
That is helpful. Any time frame there that we should think about?
Not at this point, we're well underway with it. But as soon as kind of we have the outcome of that, obviously, we'll come back to the market with the results.
Our next question is from Kevin McVeigh with UBS.
Great... I just wanted to circle back on the 24 guidance and try to frame the 4% to 6% relative to 6% to 8%. With the hosting business, did that impact -- feel like getting that. I don't know if that was in the go-lives, but that feels like 100 basis points. And then if you don't have $63 million of revenue that you expected in Q4, how does that not impact 24, in -- and it just -- it seems like a really big number, like $63 million in Q4 that I'm just wondering why you didn't have a better sense of that and how it could have been so back half loaded in December?
Kevin, it's Jeremy. I'll start with first part of your question. Just in terms of the guide -- yes, the hosted business is about 1 point of impact on revenue for the year and is included in the 4% to 6%. And so that is a big piece of it. The second big piece is really just the timing of the bookings in the second half last year and the timing of those go-lives and then contribution to revenue for the year. So those are the 2 biggest drivers. We obviously also have a bigger grow over just in terms of the size of what the thrift was in comparison to kind of growth rates coming out to begin the year versus where we were last year. So that's really the larger components in terms of the revenue guide, again, which is why we're, as Katie mentioned, giving the 3 years of a guide around revenue under contract because that's for us what gives us a view into more of the -- out through the midterm in our comfort level in terms of the 6% to 8%. The...
Yes. And I think, Kevin, good question on the Retiree Business. We've said that business is really all driven in December. And what happened with this client is unique in the industry. And so it's very hard to predict, right, in December, how many will opt out or not. So the contingency planning we were doing in the fourth quarter was around right, accelerating renewals of other areas, ensuring kind of we were working to minimize the potential risk of that. But I think when it came through in December in terms of the number of people that chose to default into the group plan that drove the majority of that miss.
And it's thousands of interactions that happened during that month of December, and it's not like it's a bookings to revenue delivery issue or anything like that, Kevin. It's a different book of business that in terms of how it gets executed, really don't have a lot of visibility into some of those dynamics. And it really was one-off. We haven't seen that before in our book of business. And as Katie said earlier, the new baseline is set. So we don't see it happening again.
And in, just so I have it for Katie. I think you said 2% of annual revenue, so that in my math right, that it was a $63 million impact in the fourth quarter.
The -- I just want to be clear. Our point was the miss in -- of the $63 million, the majority of that miss was tied to that client in the retiree business, which drove the total 2% down in revenue versus our 11% guide.
For the full year, right, so Katie 2%
Correct.
and that got to the 60...
Exactly right.
And again, it would have been 5% to 7%, if not as opposed to 4% to 6%, if not for the hosted business, right?
Exactly right. Yes, on 24 growth, we'd be at 5 to 7x the runoff of that hosted business
Our next question is from Kyle Peterson with Needham & Company.
Great. I wanted to touch -- start on how kind of some of your client conversations with both kind of existing and prospective clients are going, Realizing we're only 6, 7 weeks into the year. But just wanted to get a sense as to kind of how some of those conversations are going, how deals are progressing and kind of what the pipeline looks like as we head into '24.
Yes. Thanks, Kyle. Maybe I'll start. I think, one, the pipeline is very strong, right? When you think about how the momentum we generated in the back half of last year, as you saw, right, from a bookings perspective, how that's translating into revenue under contract, we're continuing to see kind of good velocity in the first half of this year. I think a couple -- there's been some learnings along the way, too, right? You saw growth in the professional services segment, right, tied to some of our bigger deals, right, tied to the partnerships with Workday and others. So I think one, we've also learned, right, continuing to build those partnerships is an asset for us while also bringing our total book of business to our clients, we can solve cost, productivity and experience challenges that honestly all of them are facing today that is resonating in the market. And I think with the investments we've made in the commercial teams and really kind of bringing that -- those use cases to our clients, I think that's helping drive the pipeline we see today.
And we're seeing continued, as I said a few minutes ago, Kyle, a continued push to what we've seen in every other industry, best-of-breed to enterprise in terms of consolidation, simplification, all centered around doing better by the employee around driving better employee engagement. There's no secret. I've said it for the last 4 years. Employees need a lot more help. It hasn't changed in terms of the help they need around staying healthy and financially secure. If anything, the pressure now around economics, it was easy 2, 3 years ago, drink over to spend more money on employee engagement. Every CEO approved everything HR executives have said around spend rate on employees. That has changed. I've seen a dramatic shift with a lot of CEOs under a tremendous amount of pressure and not being able to spend what they want to spend. And so what you have to do, you have to look at where the current spend is, what's the value of that spend. Engagement rates are still very, very low in terms of usage of a lot of these powerful systems. And the reason is because you have to go to multiple places to get access to these things, and they're complicated. So we've been on this now into our year 4 of our transformation journey to platform consolidation of a lot of these data sources providing a mobile experience as you've seen some of the data. It's amazing to see how many interactions are happening on a mobile phone, all in the name of providing a better, easier consumer-grade experience like we experienced everything else in our life, right? And I think clients are looking for us to be the supporter in driving that kind of consolidation and simplification. And by the way, here's the other good news, look at the ecosystem at large, whether it's Microsoft or ServiceNow, great companies out there all trying to drive towards integration platform kind of an approach. And so we're right along for the ride actually leading the charge in the specific category around HR. So I think it's an exciting time for us.
We named -- well, you saw Siemens, Opel, so all of those are the proof points of what Stephan just said. One in global payroll, right, one across the benefits landscape, bringing that integrated ecosystem and experience together for clients is helping us win...
Those are big dollars I talked about in the call. And there's other ones that I wish I could talk more about, but it's very sensitive data, unfortunately, but there's some big, big impacts that we're having for a lot of big clients around the world.
That's really helpful. Just as a follow-up, I wanted to touch on kind of your priorities for capital allocation. While the portfolio review is ongoing. If you guys mentioned that you didn't repurchase any stock in the fourth quarter kind of in conjunction. -- with this. But I guess, how should we think about your priorities for what you're going to effectively do with some of the cash you guys generate outside of organic initiatives while this review process is ongoing.
Sure. Let me take that one, Kyle. It is Jeremy. So I think unchanged for us in terms of our capital allocation priorities. I mean certainly, proceeds will give us the benefit and accelerate some of those activities. But it's always going to be strengthening the balance sheet and where the balance sheet is, leverage levels, as Katie talked about and I talked about as well as -- and then looking at both organic and inorganic opportunities for us. A lot of that will be tied into what we're doing with the strategic portfolio review. And then finally, it's capital return to shareholders in looking at the buyback. And yes, as Katie mentioned, tied to the strategic review, we did not have a share repurchase in the fourth quarter, but we'd certainly look to do that
Our next question is from the line of Tien Tsin Huang with JPMorgan.
Just want to clarify on the slate impact on the retiree health. Was there any offsetting revenue that came in on the professional services side because that was quite strong, especially on gross profit. So I just wanted to make sure there wasn't anything unusual there.
No. I mean, the professional services business has really, I think, hit its stride in the second half, particularly in North America. We did still see some softness in Europe. -- that has kind of continued through the year. But again, kudos to the team, I think, one, in terms of the first co-sell partnership with also with Workday, two obviously tied to some of our bigger wins like GE, they saw a benefit and three, I think just continuing to build on the momentum in the market has helped them up that business.
Got it. And just my follow-up on the -- just bridging the 9% growth in EBITDA at the midpoint against the 5% growth at the midpoint for revenue. Can you maybe talk to gross profit versus OpEx outlook for the year in '24? I know that you got the cost conversion piece and that's more savings in fiscal '25. I just want to make sure we get the cadence of all that right.
Sure. I'll take that on Tien, It's Jeremy. So yes, so 50 to 100 basis points on the EBITDA line, it will be greater than 100 basis points on the gross margin line. We -- as you saw, strong performance in the second half for us, the continuation around many of the productivity initiatives that are underway. And then in that really kind of late into the third and the fourth quarter, start to see the benefits of completion of our restructuring program. And again, that helps in the acceleration in terms of what we laid out at Investor Day last year, and we're kind of continuing on that path.
And the only thing I'd add, Tien-Tsin, on OpEx is right, as you saw, right, some of the key investments we've made this year in commercial and product, right, from an OpEx standpoint, wraparound into next year. So you have kind of that run rate first. I think some of the efficiencies were driving hitting risk at first.
And just quickly to clarify is helpful from a view. So OpEx in the second half versus the first half. Anything to underline there...
I mean I think what we -- kind of how Jeremy phrased it is you're going to see a ramp in margin, both gross margin and in EBITDA through the course of the year because you will see more of the benefit in terms of the savings coming in Q3 and Q4.
So just assume a ramp there is the preliminary view
That's right
Our next question is from Pete Christiansen with Citi.
Thanks for the opportunity to ask questions. Katie, I'm just curious on the timing of the strategic review. I mean, just considering you're reiterating your medium-term outlook last quarter seemed to upbeat on a number of aspects. Granted, there's been some top holder rotation in recent weeks. I'm just trying to understand how we got to this point. And then just as a follow-up, hopefully, the last question on the retiree client change. Is there any aspect of the revenue profile for that contract? Is that now more deferred? Is it the timing of revenues, any different? Or is it just the bulk of the miss is really just realized here at this point?
Yes. Thanks, Pete. I'll start with your last question, which is exactly how you ended it, right? It's kind of a onetime reduction in revenue as those participants have moved to a group plan. So we won't see that revenue return next year, but we also won't see an additional decline. That's the new baseline, as I said. From the strategic review portfolio, I think what I said, I kind of said it earlier, which is we do believe in our strategy. And I think we have made progress for our clients, for our colleagues, for our shareholders, but aren't necessarily seeing the return in the market, and I think should always be evaluating other ways to accelerate our strategy, right, in terms of as we look at the next 3 years. So we've executed on what we said for like past 3 and now, it's time to take a look and make sure we're evaluating all options to continue to accelerate our strategy in the best way possible.
Yes. When you look at where we started with this journey just 3 years ago, $300 million now going to $1 billion over this last midterm and this one. That by itself between 30% CAGR, the first midterm going to 50% CAGR in this midterm, that's pretty -- we think it's exciting. And we see the impact of that book of business being a recurring book of business, better profitable book of business. And as we've said now a few times, the impact of that to our clients. I mean at the end of the day, the north star of what Alight is all about is if we have 40 million people looking to Alight to be the front door, we're keeping them healthy and financially secure, the TAM of that opportunity puts us into one of the most important opportunities in the marketplace, period. And I've been doing this for long enough across different segments, and I have never seen an opportunity at this large scale. So it's always -- but it's all wrapped up in this larger company with high growth and low growth in different segments of the business that I've talked about for the last few years. So how do we recast the recipe. And as Katie just said and I said it earlier, we're just -- and we're not getting value as a total company or as an entity within the rest of Alight for what we're doing, as you can see, right? And so we're trying to figure out how to unlock that, how to double down on that, how to get a better capital structure to support the continued investments in driving towards a platform company because whether arrives at that station will become one of the most important companies in this industry because that's the sheer size of the opportunity in front of us. And the other good news is, as crowds the tech world is -- there's no be doing this today effectively at our size and scale, like nobody. And I think that's the opportunity. So we have to move quickly and pace to take advantage of that, and that's the other piece of this, which is how do we actually accelerate the success we've had in that category.
Thank you both. I think there's some fair comments on that.
Thank you -- our next question is from Heather Balsky with Bank of America.
On the strategic review, you talked about moving to a more recurring book of business or your focus on a recurring book of business. And I know we spend a lot of time talking about the BPaaS platform and its growth. But I think the -- I think our understanding of sort of the legacy business and the broader portfolio. I think there's a lot kind of maybe we help analysts or investors don't fully appreciate. And can you just kind of walk us through the portfolio at a high level? How much of your revenues are recurring, what is outside of project revenues? What else is there that's more transactional in your business? Just kind of like a high level of what the portfolio looks like today.
Yes. Thanks, Heather. And I think -- I mean, you see a little bit of it, obviously, in our financials. So we're 83% recurring today, 82% to 83%. 84%. Sorry 84% recurring today, as Jeremy correct me, right, which is great. But I think there's still -- when you think about how we enter the year in terms of revenue under contract, there's still an opportunity to continue to enhance that. And so within -- I mean, within the portfolio, again, we love all our assets. We're not saying there's an asset that doesn't necessarily make sense. It's how do we optimize, how we're utilizing those assets to best serve our clients. And are there other ways to continue to do that in the form of partnerships, right, where there can be additional investment into different parts of the business to accelerate that trajectory. So again, from a portfolio perspective, we've talked about at length. You've got Employer Solutions, you have Professional Services. Within that, there's obviously a number of assets that comprise both. But the recurring revenue nature today is about 84%, if that helps.
And... That's only one set of perspectives, Heather, right? The other piece is not every dollar is created equally, even within the recurring landscape. Some of them have higher profits as you move up the food chain on value around AI and platform. Those are driving higher gross margin contribution. So we're also focused on not just the recurring equation, but the margin contribution equation and the value of what that drives in terms of just giving us capital-light capability to go after other investments. So it's not just recurring, it's also the margin contribution profile of it.
Does that help?
Yes, it does. And as a follow-up, other big picture question. But as you look to 2025, and I realize we are a long way from there. But as you think about the bookings you have to date, especially with the GE contracts coming in, it sounds like later in the year. I guess, what do you need to accomplish this year to be back at that 6% to 8% range as you exit the year? How much visibility do you have to the acceleration, especially when you think of your guidance range, low and high end? Just kind of help us think that through.
Heather, it's Jeremy. I'll take that one. I think that's exactly why we're now showing this 3-year view, right? I mean you can look and see $2.1 billion already under contract in 2025. That does include some of those larger deals, right? And if you talk in a shorter-term period, you don't quite get the visibility into what that looks like. So it's a starting point for us today. If you look at continued commercial momentum that we had in the second half for our teams to deliver on, that -- those are the bigger pieces of what we need to deliver on. So we're on the way already with the momentum that we had in the last 2 quarters and building and continuing to build that revenue under contract. Those are the biggest pieces that we look at today in terms of just the overall execution plan.
I mean in 3 years, Heather, in '21, we had $2.1 billion of revenue under contract and the $24 million we have $3 million that $900 million delta is a collection of just the sales momentum, the quality of the book of business. And I think that's pretty powerful in terms of giving visibility into what the future revenue architecture looks like. That's a big swing from 2.1 to 3. And then as Jeremy said, in our midterm, in 2026, we already have $1.5 billion in place 3 years out. That's pretty powerful for us to consider as a baseline 3 years out to have that much already under contract.
Our next question is from the line of Joseph Vafi with Canaccord Genuity.
Just maybe on some of that momentum in the go-to-market and the potential for share gains, new logo wins. I think a lot of large enterprises today clearly have best-of-breed capability in all the services you provide, but they're all siloed a little bit more with different vendors. And so I'm just kind of thinking about almost even from my own personal experience. The cost to deliver for you for in a single holistic approach for employees of large enterprises versus the kind of best-of-breed siloed approach. I'm just trying to get a little bit more understanding on one overall cost to provide for you versus those others? And then a quick follow-up.
Yes. It's the -- I thought about that just on this call a couple of times, right, around -- I'm not lucky to have been part of probably the biggest technology transformation wave with best-of-breed enterprise across ERP and supply chains. We've all lived it, right? When there were hundreds and hundreds of vendors across GLA, PPO and financials, and that world largely collapsed with Oracle and SAP and a few handful of vendors in for where I was as well, owning that move from best-of-breed enterprise. That never happened over the last 20 years in HCM, right, and in the space that we're in. So 4 years ago, when I came here, I saw exactly the point you just said, which is there's got to be a better way. Employees engage today with between 20 and 50 different systems, the engagement rates I mean, are between 1% and 5%, the fact that the company is going to wait with that for their employees is staggering. You would never have those kind of statistics in the world of ERP or supply chain or revenue-type systems. You would never survive that. So I always have to ask myself, why do companies survive that today? And it's just lack of focus, lack of the fact that there is somebody out there who has built this end-to-end platform. So that's what we started 4 years ago because the ROI, the cost takeout, you talked to a CIO in Fortune 500 and the world how they've changed their world in the last couple of years, they were 90% focused all around driving ERP revenue systems, client consolidation work. They've all flipped over now to the HR side and saying, wow, what a mess and what an opportunity at the same time. And that's the void we've been trying to fill -- and we've given some great use cases. Katie, why don't you talk about the Siemens one as an example.
Yes, Joe, I mean even we discussed Siemens on the call today, right? I mean, part of the reason because we own the underlying administration, right, then you can -- you add some of the guidance of those capabilities as Stephan said, you increase engagement, you can guarantee an improved outcome for not only the client, but their people. And so I think that's really powerful. So when your question on underlying cost, I'd almost turn it around a little bit. It's almost more like underlying outcomes that reduce costs, right, and improve the experience. That's the power of what we do.
And the reason why I'm here just to be super blunt about it, is not because I want to drive consolidation on ERP and revenue systems. There's a higher calling opportunity that I've talked about for 4 years. it makes me so frustrated how many people make the wrong decisions on back surgery, knee surgery, clinical decisions. How many people can't save enough for retirement because they just make the wrong decisions. Half of the employees make wrong decisions around benefits. I mean, it's staggering to see the mistakes that happen across our employee population. And these are the biggest, most important companies in the world. So I sit here and say, we can do better. And how do we help our clients do better by their employees. You've got to use systems of record powerful data sets like we have access to, trillions of data sets, not billions. We have trillions of data sets that we have access to across people's money and people's health decisions. And if we use that the right way through a consolidated mobile experience and work life, I know and we have shown it, we can make a big impact in how employees make better decisions in the most important area of life, I mean, there's nothing more important than being healthy first and then having enough money to retire when you want.
Sure. That's great. That's great commentary. It's a busy morning, so I apologize if this was asked. But on the strategic review, should we be looking for kind of different data points or different pieces of news coming out of the strategic review? Or do you think it would be kind of an all-at-once outcome there?
Yes, I think what I'd say, Joe, is we're well underway, as I've said, with the review. So our intent is, as we have kind of outcomes to share, we will obviously bring it to the market. So tough to say given where we are in the process. But I think the key in that piece is the idea is to accelerate our strategy from where we are today, and we'll be back with as soon as we have an update on next steps.
Thanks, Joe. Appreciate it.
Thank you. As there are no further questions, I would now hand the conference over to Stephan Scholl for closing comments.
Thank you, everyone, for joining us. I really appreciate the time you took with us today. We look forward to seeing many of you with the upcoming conferences in the next few weeks and months. Thanks for the time.
Thank you. The conference of Alight has now concluded. Thank you for your participation. You may now disconnect your lines.