Alight, Inc. (NYSE:ALIT) Q3 2023 Earnings Call Transcript

Alight, Inc. (NYSE:ALIT) Q3 2023 Earnings Call Transcript November 1, 2023

Alight, Inc. beats earnings expectations. Reported EPS is $0.14, expectations were $0.13.

Operator: Good morning, and thank you for holding. My name is Judith and I’ll be your conference operator today. Welcome to Alight, Third Quarter of 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 on the Investor Relations section of the company’s website. I would now like to turn it over to Jeremy Cohen, Head of Investor Relations at Alight, to introduce today’s speakers.

Jeremy Cohen: Good morning, and thank you for joining us. Earlier today the company issued a press release with third quarter 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 guaranteed to 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, who will provide a business and strategy update; Katie Rooney, Global CFO and COO, who will discuss our financial performance and guidance, and Jeremy Heaton, Operating CFO, who will participate in our question-and-answer session. After their prepared remarks, we will open the call up for questions. I will now hand the call over to Stephan.

Stephan Scholl : Thanks, Jeremy. Good morning, everyone, and thank you for joining us. Nearly three years into our transformation journey, we’re delivering consistent and durable financial results, reflecting the mission-critical nature of our products, the resilience of our end markets, and more importantly, the success of our transformation into a platform company. This quarter we drove high single-digit revenue growth, double-digit adjusted-EBITDA growth, operating cash flow expansion, and achieved our second largest quarter ever of BPaaS bookings. At the same time, we are investing in our platform strategy, delivering on our restructuring program, and executed our largest quarterly stock buyback to-date. According to the results, our third quarter included revenue growth of 8.4%, and another outstanding quarter from the high growth category of our business, led by BPaaS Solutions, which had revenues increased by 22%.

Over the past three years we have prioritized our long-term strategy, shifting the focus from one-time projects into higher quality, recurring revenue on our Alight Worklife platform. This is reflected in our $262 million of Q3 BPaaS bookings, representing an increase of 26% year-over-year. In aggregate, we have now booked nearly 2 billion of BPaaS total contract value since 2021, $0.5 billion or over 30% ahead of plan. Standardization through our platform strategy also enabled us to drive down our cost of service. For the quarter, adjusted EBITDA was up nearly 19% to $158 million, and year-to-date, operating cash flow increased 25% from the prior year to a record level for our Alight since going public. While we delivered great results for the quarter, timing related to project-based revenue, as well as the in-year impact from new wins, closing later than expected, impacted the quarter.

However, we have over 95% of revenue under contract for 2023, $2.7 billion of revenue under contract for 2024, and are $500 million ahead on our three-year BPaaS bookings target, which enables us to reaffirm our 2023 and midterm guidance. In addition, we are raising our 2023 adjusted EPS guidance range. Turning to product and technology, our investments are driving a simpler and more effective way to navigate the annual enrollment experience. As of October 25, we are nearly 50% of the way through the process and have seen a tripling in mobile enrollments year-over-year. This is translating into reduced call volumes, which are down 11% over the same period last year. The reduction in call volume is a key element driving long-term profitability, as digital care will continue to drive more efficiency and a better experience for our clients.

Additionally, we’ve made great strides integrating Leave’s management more deeply within the Alight Worklife platform and have added new features to drive better content and decision support. Our research and client conversations continue to validate that there are gaps in the market around a consumer-grade experience integrated into HR platforms. We have several active client engagements where we’re showcasing the powerful combination of Leave’s with our other administration and engagement offerings and how that can drive significant savings for an employer. We’re also excited for how AI is advancing our business, including a number of Generative AI use cases underway this year alone. As an example, Alight’s AI features are actively driving better outcomes for clients and their employees, with personalization emerging as a pivotal tool for enhancing engagement and cost optimization.

One Fortune 50 client seeking to boost HSA participation leveraged a highly efficient AI driven campaign, which resulted in 95% engagement of the eligible population and close to $1 million in employer tax savings. Our product enhancements are differentiating Alight and translating into new wins and expanded relationships that support our future growth. These wins represent a healthy mix of new logo and client expansions across many industries, and our pipeline remains robust. Significant wins this quarter include FedEx, NielsenIQ, BMW, and several Fortune 100 clients. Clients want a digital platform that can be the connective tissue between benefits, payroll and engagement offerings, and we accomplish that by leveraging AI and data analytics to help employees make better decisions.

At its core, that is what our platform strategy is producing, a simplified, yet comprehensive enterprise offering that can demonstrably improve employee engagement and generate cost savings. During the quarter, we also made progress simplifying our backend infrastructure and are on track to deliver on our restructuring program as planned. This includes migrating high-priority applications, including our data lake, which should better enable us to leverage analytics and the latest developments in AI, and deliver $100 million of annual run rate savings when the program is complete in 2024. Finally, let me put into context what our transformational initiatives and investments have meant for the long-term trajectory of Alight. In just a few months, we will have successfully concluded our original three-year plan.

The success of BPaaS and our many operational initiatives have laid the groundwork for delivering even more value in the midterm, including higher growth through a compelling client value proposition as a result of building our Alight Worklife platform. Next, margin expansion. As we move from customization to standardization and simplified decades of Tech Stack, while still offering the all-important personal touch when needed. And finally, enhanced free cash flow generation to reinvest in the business, strengthen our balance sheet, and return capital to shareholders. We see the market undergoing a paradigm shift where corporations are looking for a partner to be on the front lines with them to help take costs out, while simultaneously providing a better employee experience.

As a result of our transformation, we are well positioned to be that partner of choice. With that, Katie, over to you.

Katie Rooney: Thank you, Stephan, and good morning everyone. We showed strength across the board with our third-quarter performance, including robust total revenue, BPaaS revenue, adjusted EBITDA, and operating cash flow growth, all while continuing to invest in the business. In addition, we delivered one of our best BPaaS booking quarters in company history. Starting with our consolidated results, we achieved revenue growth of 8.4%, highlighted by our high-growth category of BPaaS solutions, which advanced 22%. Timing related to project-based revenue, as well as the in-year impact from new wins closing later than expected, impacted this quarter’s revenue growth. Recurring revenue grew 8.3% and comprised over 83% of total revenue.

Adjusted growth profit was up 20%, with significant margin expansion of 340 basis points to 35.3%, driven by productivity savings and higher revenue. Adjusted EBITDA increased 18.8% to $158 million, with a margin of 19.4%. This represents a 170-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. Year-to-date we generated operating cash flow of $251 million, which is $50 million more than the prior year and represents a conversion rate of 54%, compared with 48% last year. And as a reminder, spending on our restructuring program will temporarily slow in Q4 as planned during annual enrollment, and we expect to resume activities in the New Year, with target program completion scheduled during 2024.

We expect to start seeing financial benefits in late 2024, with full annual run rate achieved in 2025. Turning to our bookings performance, we delivered record third-quarter BPaaS bookings of $262 million, representing growth of 26% year-over-year. Our value proposition of driving better outcomes is resonating with employers, and the intensity of conversations remains elevated. We continue to see strong demand for our solutions, particularly in an environment where employers are more acutely looking to reduce cost and achieve better ROI for their HR spend. As I spend more time with clients in my expanded role, this dynamic is becoming more obvious. The C-Suite is more engaged this budget season in addressing macro pressures, but doing so in a way that doesn’t sacrifice the employee experience.

This is enabling us to build our pipeline with new logo and upgrade opportunities. With that, let me now turn to our segments, starting with employer solutions. Third quarter revenue was up 8.7%, with recurring revenue up 8.7% as well. Key drivers of growth include overall net commercial activity from upgrades and new wins, volumes and the impact from the regroup acquisition, which closed in December of 2022. There was no incremental impact from Thrift this quarter. While we typically see higher upfront costs in Q3, supporting Q4 growth, we drove better profitability due to our productivity initiatives. As a result, third quarter adjusted gross profit was up 21.5% to $260 million, and adjusted gross margin increased 390 basis points to 37.1%.

Turning to our professional services segment, third quarter revenue growth accelerated sequentially and was up 10.5% to a record $105 million. This was driven by a nearly 10% increase in project revenue, due in part to the implementation of our GE deal, and a nearly 13% increase in recurring revenue. On a profitability basis, adjusted gross profit was up 8% from the prior year, with margins impacted slightly by higher personnel costs to support the growth. Turning to the balance sheet, our quarter end cash and cash equivalents balance was $276 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. During the quarter, we completed an opportunistic repricing of our 2028 term loan.

The result is an improved interest rate of 25 basis points, equating to $6 million of expected annualized interest expense savings. We are updating our expected 2023 interest expense to a range of $130 million to $135 million, down from $140 million to $150 million, given market rates and the repricing. Meanwhile, our net leverage ratio continues to improve, and at the end of the quarter was 3.6x, keeping us on track to achieve our midterm net leverage target of approximately 3x. And lastly, we were also active buyers of our stock, repurchasing $26 million worth of shares during the quarter. Our remaining authorization was $48 million at quarter end. Overall, we continue to be disciplined in our capital allocation priorities and on achieving success across our three key pillars, preserving a strong balance sheet, reinvesting in growth opportunities, and returning capital to shareholders.

Turning to our outlook, as we look to finish out the year, we are closely monitoring the macro environment and sales activity of our non-recurring solutions. As in prior years, Q4 revenue carried the larger contribution from short-term projects, commissions within our retiree health business, and professional services, all of which have a shorter sales cycle through the enrollment season. However, with more than 95% of revenue under contract, we are reaffirming our 2023 revenue, adjusted EBITDA, and cash flow conversion guidance. We’re also raising our adjusted EPS guidance range. Our adjusted EPS is now in the range of $0.65 to $0.69, compared to the prior range of $0.62 to $0.67 or growth of 14% to 21%, and primarily reflects the expected decrease in interest expense.

Overall, our third quarter results, which included strong growth, great bookings and even better profitability, are a reflection of why our transformation has been so important. By developing the Alight Worklife platform, we have set a course to continue winning in the market and delivering sustainable and profitable growth. We look forward to building upon the momentum as we deliver a better experience for our clients and their employees. 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, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Scott Schoenhaus of KeyBanc Capital Markets.

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Q&A Session

Scott Schoenhaus: Hi, team. Apologies for the nasally voice. I’m a little under the weather, but congrats on the results. I first wanted to talk about the BPaaS bookings, a nice re-acceleration. And Stephan, clearly you talked about kind of it being lumpy with being pushed out from 2Q into 3Q. I’m just kind of wondering if you could give more commentary. And this is also for, I guess, for Katie as well, since Katie did talk about the strengthening demand for the product offering given the macro conditions. But what are you seeing in terms of the pipeline? Is it more accelerated interest on the international side with global enterprises and sort of kind of delayed in signing the deals or just kind of give us more color on what you’re seeing in your pipeline currently? I know you mentioned it’s broad-based in the press release, but just kind of looking for more color here as we approach year-end on the BPaaS bookings. Thanks.

Stephan Scholl : Sure thing. Hi Scott, and hope you feel better. And listen, we’ve talked about this now for the last few years, which is this best of breed to enterprise or to platform is really resonating with our clients, and it has to do with the macro environment. Every client, every CEO I talk to is looking for ways to consolidate and simplify and take costs out. And as you all know, the HR realm is the last holdout of that big transformation that so many companies have lived through for the last 20 years, around how to deal with clients and their customers. That never happened in the employee landscape. So when you see some of our biggest deals, it’s where they’re coming to us and saying, listen, we’re coming out to RFP for some of these niche products or what I would call transactions.

But we want to take a broad review. And that broad review is a platform approach. So how do you consolidate benefits with navigation, global payroll into one overarching approach? So some of our biggest deals last quarter were exactly in that vein, so that’s what’s exciting for us. And we’re seeing a lot more activity from CEOs and especially CFOs and the CIO ranks that are now spending a lot more time with their client, with their HR constituents to really spend the effort to help drive that enterprise consolidated type of an approach. So that’s right in our wheelhouse for us.

Katie Rooney : Yeah. And Scott, I think the only thing I’d add is you’re right. Like we named NielsenIQ in the quarter, which was a fantastic opportunity that the team really did an excellent job landing in terms of – Nielsen was going through a merger obviously with kind of a big acquisition. And they needed a kind of a global view into the payroll landscape, how that all comes together, right, how they have a better experience drive down cost. And so I do think there’s great demand in that space.

Stephan Scholl: And I think maybe one more piece is we’ve beaten our largest competitors on some of these big competes, because we’ve been able to change the narrative from a best-of-breed rather than just a global payroll against global payroll decision or Ben Admin for Ben Admins. It’s because the two come together and we’re the only ones who have the two that has really been a strategic advantage in our win rates coming up as well.

Scott Schoenhaus: Thanks. And then my follow-up is on margins, clearly a great margin quarter. And Stephan, I thought it was interesting you mentioned about the open enrollment season, navigating people towards doing it on their mobile phone rather than a call center and saving money. Is that included in these productivity initiatives? Just curious on the breakdown, because that obviously should continue in the fourth quarter for the open enrollment. And just kind of wanted to think about how to frame all these cost initiatives into next year, but great margin performance this quarter.