Alight, Inc. (ALIT) Earnings Call Transcript & Summary

Well, thanks, everyone, for coming. We're delighted to have our friends from Alight, Stephan Scholl and Katie Rooney, the CEO and CFO of Alight, respectively. My name is Rob Patterson. I help to lead our efforts around HCM for the banking team of Morgan Stanley. I've known this team for a long, long time and have great respect for everything they do.

So let's start out -- and I should also say that Katie is a distinguished alum of Morgan Stanley, so we're actually happy to have her here. This is a story that many have followed closely over the years, but let's start with some basics. Alight is a technology platform focused on benefits, HR, employee well-being, $3 billion plus of revenue, almost $700 million of EBITDA behemoth. Under your leadership, Alight is pushed further into software and BPaaS and accelerated growth. You have clear market leadership, serving some of the largest, most demanding global organizations. Can you summarize for the group how we should think about Alight today?

Sure. And I think -- yes, there's been a new strategy in the last 3 years, but there's a 40-year history of the company providing these mission-critical services around helping employees make the right decisions on benefits and also on 401(k)s and pensions. And that whole crucial part of what keeps us all healthy and financially secure is a 40-year legacy. And I just, when I came here 3 years ago, leveraged that strong, powerful content, strong relationship with 70-plus of the Fortune 100, half the Fortune 500 and turned it into a content plus a platform strategy. And the notion of platform, as we all know, is one where how do you drive better engagement because what we quickly saw 3 years ago with COVID arriving is that it is such a fragmented world for employees. When you think of what an employee has to go through in these life moments, it's just complicated. And it's 20 to 50 to 80 systems in many companies that you have to go in through. It's not one source of data. It's 20, 50, 80 different sources of data. So there's not one place to go for an employee to have a better experience, number one. And number two is for the company themselves, when you start asking questions as a CEO during the pandemic, what are the challenges of my employees? There is no aggregate platform level of data to really help the C-suite make better decisions for their employee population. That whole well-being agenda was highlighted in the -- during the COVID time. And so we've just jumped into that with a very aggressive investment strategy, which we've talked now for about 3 years where we aggregate not only our own data, which is mission-critical data, but third-party data. We're not afraid to take Fidelity's data and ADP's data and others because we know how important those troves of data are to helping employees make better decisions and also helping employers get better visibility into what's actually going on because we've all seen the stats on well-being, how employees around the world, not just in the United States, are struggling mightily with making the right decisions to keep them healthy and financially secure. So platform strategy, very aggressive on that front. And then you've seen the results in the last 3 years. We've been public now 1.5 years, and you've seen not only just the thrift wins, the PwC wins from last year, the shells that we've announced, but you also saw GE in Q4, which was a significant transformational win. I mean, again, nothing is as big as thrift, but not that far behind it are these 2 new wins in Q4 that really highlight that what we're doing is not just a 1 or 2 win opportunity, but there is absolute demand across Fortune 100 and Fortune 1000 for more of a platform approach to well-being.

On this well-being topic -- and maybe just to drill down on this a little bit. You mentioned some of the others around the ecosystem, whether it's an ADP or a Fidelity or even the Accentures of the world who we obviously partner with on the thrift situation. When you think about the ecosystem and this thesis around employee well-being, what are the advantages that Alight has versus some of the others?

So we were very -- listen, in the world of Fortune -- well, in the world of Fortune multi-thousand, it is a heterogeneous technology landscape. I've learned that 25 years ago. You can't in technology at scale be arrogant enough to go to a client and say, for my stuff to work, you got to give me everything. So we were very clear in the architecture work of our platform. While it is a beautiful engagement platform with a much easier-to-use interface, there is deep architecture technology, an API layer, an integration layer, all the closed-loop reporting. So there's a lot of depth in this platform to really help us connect the dots across when you have multiple aspects of our content. So we have a breadth of content that is pretty unique, right? So a lot of companies are aggregating. So PwC, Prudential, a lot of companies last year sent out 4, 5 RFPs for these content layers. We came in and said, listen, let's talk about content, but let's talk about platform first. And what that conversation led was to them giving us all the content layers that were up for bid. But even those 4 or 5 pieces weren't everything. There are other custom-built systems. A lot of other clients still love and appreciate what they have in place with ADP and Fidelity as an example. So the most important aspect of what we provide is AI. So the analytics and the data is what makes us unique. The ability to look at a cross-section of information and help you make better decisions. And again, we've seen the statistics and we've seen the studies that show employees need a lot more help and that it's complicated. And I was at a big event last week in New York City where there's a big banking event where you typically wouldn't see topics like mental illness and well-being being on the agenda. It was 1.5 hours of a 6-hour day, it was all around the responsibility of CEOs and their C-suite of Fortune 100 and 500, really now having to take on the accountability of actually helping employees through a world that they thought they wouldn't have to or they wouldn't -- that employees wouldn't want them to. And that, for me, is the other piece that I think has been super interesting in the last 3 years is to see the Board level and the C-suite organizations and executives standing there saying, we have to step in here, and employees want us to. So what do you need to do that? Platform, platform analytics, information and an engagement strategy that allows to help drive a much better comprehensive approach to the well-being category.

And on this topic of well-being, when you think about platform and what well-being can mean over time, how do you think about adding on new layers, whether it's a new benefits provider or a new solution that you have is the strategy around we have the core technology platform, and we can layer in new things over time as employee well-being, the definition of that continues to evolve?

So to that end, we continue to take what's a really complicated story and try and simplify it. So in our recent deck that we've made public, we used the example of starting a family, which should be such an exciting time in everybody's history. Yet when you look at the deck, and you'll see it takes 18, 20, 25 steps in the company to go through all the different components of what's needed to get support from your company and helping to start a family. We looked at that and said, that shouldn't be the way. So enter platform, enter one strategy, one process flow, one data architecture, but we were missing a key piece of content. So the leaves acquisition we made just in Q4, while a really small piece of our business, tiny, the power of application and getting the help that you need when you take the 3, 6, 9, 12 weeks, whatever it is, in a medical crisis or in starting a family, that piece is so powerful, and connecting that to our platform has really helped create a differentiated approach to an end-to-end process like that.

Your comments around simplifying a very complex ecosystem and what was sort of a complicated story before sort of hits on me. When you think about the TAM of what's available to Alight across health, wealth, HR and other sort of employee well-being, how do you think about that TAM today? And I think about that from a client perspective. You guys obviously have a lot of great Tier 1 Fortune 500 -- that tier. But how do you think about the TAM? Is middle market part of that? How do you think about international as you guys continue to grow the platform?

Do you want to start there?

Yes. It's large. Why don't we start there? I mean there's so much opportunity. If you take a step back, we've said just in the last 5 years, we've expanded our TAM from $33 billion to $73 billion, right? I mean -- and I would say, today, we have a relatively small share in that overall landscape because there is so much you can do to better support the employer and employee. So it's about leveraging kind of the content we have today to expand those relationships within our client base. A big piece of which we said just within our client base today, there's over $1 billion of opportunity before we can get to some of the new content layers we've added. And the middle market will be a key component of that as well. I mean, I think the great thing about this model when you think about where we serve, it's really focused on kind of 1,000 participants and above. That 1,000 to 10,000 kind of space is underpenetrated. There's a ton of opportunity there for the platform strategy. And it's almost easier versus when you think about the size and scale and complexity of some of these larger deals. So I do think there's a strong opportunity for us there. It's just continuing to drive penetration there. And it's been a key area of focus for us from an investment perspective too, just expanding our go-to-market footprint in terms of value engineering and how we can add more and deliver more value to our clients and in terms of targeting that broader market set.

And how do you think about the international opportunity relative to the U.S.?

It's a huge advantage to us winning. We announced, again, not allowed to let us say their names because there's a lot going on in the decision for them. But IKEA last year, if you remember that one, Shell, GE, I mean, some of these huge global companies used to be okay just a few years ago for each -- Asia, Europe and the U.S. -- to make their own decisions and to go with that because it is just a different landscape. And then they all realized that at the C-suite and Board level, we need an aggregated view of our employee population, even though benefits in the U.S. compared to Europe is different. But the category of well-being, keeping somebody healthy and mental illness and well-being -- just because you're living in the United States, well-being or mental illness is the same whether you're in Holland or not. And I think that's the realization a lot of these companies have come to. And when they ask the question, how do we get one global platform, there's only one answer. And I think that's been super-centric. So these 2 huge wins in Q4, really, we were kind of on our own in terms of as a category of one in terms of helping drive some of those decisions because we can really support a global platform, not just a very U.S.-centric one. And that's important for, again, Global 1000 for sure.

Yes. For sure. You're answering, Stephan, as you said, year 3 of your transformation you guys laid out back in '21 at the onset of the public IPO process. What are your key areas of focus for '23? And what might you focus on differently establish the next 3-year plan?

It's more of the same. Like anything with leadership, it's consistency. I think the good news is we have a very clear vision. And what I think is also exciting, we've been able to recruit thousands of employees across the company for a higher-calling opportunity. And that's why I'm here. When you think about -- just even -- like as I said last week, I had the privilege of being at 2 events with the Fortune 100 -- most of the Fortune executives in the room. And the topic of well-being versus how do I sell more to customers and how do I get better revenue, everybody in that room, it gave me excitement to see -- every one of them in that room realize that the path to growth and success long term is through their own employees and that we're not doing anywhere near enough. So for us, it's articulating more what I would call the B2C side. What makes our story a little complicated is when we talk to you as an audience, as investors, it's kind of -- the B2B pays a lot of the bills. So you tend to focus on what do the employers want. Well, a lot of employers don't actually know what their employees want. So we're very B2C-oriented. So when you think about our well-being strategy and communicating at the employee level -- we have access to 36 million participants, and we just last week launched the ability for that platform of work life to now be able to be accessed by the participant's family members. Why is that important? Again, when you think about teenagers today, we want to provide the content layer for teenagers to get mental illness and well-being type support that's unique to their world rather than coming through a parent. How do you support -- because they're all -- I mean I have 3 children. I mean they can't change the lightbulb, but they certainly log on to all the apps that they have on their phones and do an amazing amount of activity and learn so much about what's out there. So how do you provide that content is a goal of ours. So that higher-calling opportunity allows us to really think of that B2C orientation. And if you do that right, if you change it back to B2B, what's the #1 issue you talk to any CEO or Board or CHRO, they would tell you, we have some great products, nobody is using it, and it's all about engagement. So that's what we're coming at is driving it. I mean we added the call map to our platform, right? It's driving a lot of engagement. The more sources of data, the easier make it for somebody to get a personalized view, and I think that's the final key thing, which is everybody in this room, everybody that's listening to this gets a whole bunch of brochures in the mail every single year, months in advance. It's not personalized to you as an individual. You have no idea based on income level, based on age, based on who you are and the status of your health and your well-being. You don't get a personalized attesting, here are the 3 things we want you to do. Here are the 30 things you have options. Pick which one you think is best. Everybody has said, that is not working. We've proven that time and time again. So work-life, about engagement is a personalized engagement platform to the individual. So the work to be done is building -- you're never done with analytics and the algorithms and the integrations and the closed-loop reporting and the content. That's a journey that will take us forever to get right. We have a lot of work left to do to get there. But the fact we're starting with the largest platform of its kind, nobody else has that footprint of opportunity of 36 million participants to start with.

I can tell you, I logged on and did my employee or my benefits enrollment on my -- on the app. So thank you.

That's great. And that's a pretty heavy power user type use case. And again, in our deck, I think we said it was almost 200% increase in people using that for benefits enrollment. I didn't think that was going to be the use case as large as it was, right? So if you think about us as a company, we're a little bit like a utility where you have to -- for the Super Bowl moment of annual enrollment, you build up all this capability and infrastructure for a very little peak moment in time. Well, if you bend the curve on that, think of the ability for us to, again, now B2B comments here, drive better performance, get to our gross margin contribution and cash flow that we've talked about. So I think early days, it's a 1.25 million downloads that we've had of the app since May when we launched work-life to our customers. I think it's -- so absolute dollars. People, it's a lot, but we still have 30-plus million to go in that regard. So early days is good.

Yes. It's great. Can we just talk quickly just about the term of our content as it relates to employee wellness? How do you guys think about content, proprietary content, content through your technology platform? How does the -- how do you think about content and investment in content over time?

High builder partner, right? I mean I think at the end of the day, where you've seen us be -- move quickly on acquisitions is because we think we can do a better in an integrated framework where we own the data. There are scenarios where it makes perfect sense to partner and drive that integration. It starts with the premise of helping people stay financially secure and healthy, right? I mean you're right, the HCM landscape is massive. You could go in a ton of different directions, but we think that is the area where we can really thrive and continue to add on content to build out those use cases. I think the most important piece is, right, when you take a step back and you go through your journey through the platform, we're looking and we're learning from all those use cases from our employees, from our clients, right, helping them as we have those discussions with where they see the power of more integration, that's where we'll move faster on. So I think, again, the great news is we can do all 3. We built the capital structure, we can buy. We know how to build. We've got great resources, and we continue to do that. Our last release of work-life we rolled out, what, a week or 2 ago. I mean it has family access. Like nobody has done that actually in this space. Right now, your family members can actually log on and have that same experience. Talk about driving engagement, right? So I think that's powerful, and we can also partner, as we said.

Yes, yes. All right. Pivoting to the cost side of the business. Obviously, you guys have been pretty stable growers of margins. You announced a 2-year restructuring program. How is it different than prior programs? And what is in this program that's driving like 400 to 500 basis points of margin expansion moving forward?

I mean, Stephan had the perfect setup when he talked about bending the cost curve through kind of the infrastructure of how we support our clients today. And so, so much of where we focus the last couple of years has been on the front end, right? The actual -- the platform engagement layer, how everyone interacts with us, getting everyone to one common framework, that was huge, took a ton of investment. Now this next phase is on the back end, right? We're getting out of our own data centers. We're actually, right, providing more of that variable cost structure. And that will help us move faster on the investment road map and on how we serve our clients. So that's really where we're focused in this next phase from a restructuring standpoint. And what that will do, to your point, is that will enable us to standardize the way in which we deliver. It will enable us to standardize the infrastructure layers, right, of how we staff for those peak periods. So we've been very clear. We said even through this restructuring program, we will continue to improve margin and cash flow. We think that's really important because you have to be able to see the return on what we're seeing given some of these big client wins, right? We know kind of the model is working, so we need to accelerate that to support those clients and show that progress. So we said 50 to 100 basis points of our Employer Solutions gross margin expansion this year, 100 to 150 next year, with our operating cash flow conversion metrics improving along the way.

I said last year -- you always look back over time and say, what were those 5-minute increments? You can talk about 100 things, but there's always moments and milestones that you look back and go, wow, those were defining moments last year getting work-life adopted by our largest clients. 99.9%, 100% now was just -- nobody thought we could do that last time, number one. Number two is everybody said, wow, you won thrift. Good luck with that, right? And we got it up and running live. How many companies in the world have the scale and horsepower to do that? So now you translate that to our ability to get off of 35 to 40 years of history. So by the end of this year, going into next year, it will mark 4 years that on front of house and back of house, we're on a modern technology platform, and we're not a small building little company. We -- what we do is process hundreds and billions of transactions at the end of the day across a plethora of different things. So think of the -- we're one of the most complicated architectures in history. So in 4 years to get off of that and be modernized in front of house and back of house, it's a pretty exciting moment coming out next year.

Incredible. Incredible. Capital structure, and when you think about capital structure, how do you think about just your use of cash over time? And what your strategy is around the leverage side?

Yes. The great thing about this business, 84% subscription base, great visibility. We have $2.9 billion of revenue under contract for '23. So we have great visibility and stability in kind of that base, which helps us from a cash flow perspective. So in terms of capital allocation, what we've said is first priority is health of the balance sheet, right? Having the profile to give us and afford us that flexibility I mentioned. So we said we'll stay within 3x to 4x leverage. That's kind of our target, again, given the strong visibility we have. And outside of that, we're, listen, going to be focused intently on continuing to invest in the business organically and inorganically. And if we don't see those opportunities, I would say valuations are still high in a number of areas. We're pretty disciplined about that. If we don't find the right opportunity, then we'll look at buyback in other forms. But I think the good news is we have and we are always looking at the return of capital of where we're spending. And right now, we have been focused on driving the investment into the business.

And on that topic of inorganic M&A, how should the investors of the Street think about your overall M&A strategy?

And more of the same what we've been doing. As you've seen, something as small as the leaves acquisition has little impact it has on our financial performance today, it has a lot of impact on our sales performance as you look ahead. So that family planning dynamic, that's a great lead generator to help sell new clients. Rather than just leaves being sold by itself, it's now part of a larger business process. So you'll see us continue to look at content. Katie said it right earlier, which is buy, build or partner. And so that's always going to be for us, the dynamic of what is some of that killer content at that layer. And at the platform layer, as I said earlier, you're never done with the analytics and closed-loop reporting and AI. So there's a lot of small, little, really high-powered companies that have a really good leap on some of those things. So we'll continue at the platform level to look as well and, of course, as I said also earlier, international. This is a global phenomena around well-being. And so we're going to continue to create a huge advantage for all our competitors. I think there's only one that can provide any international capability. And most of our clients, even in mid-market, a lot of them have operations in China and so on. And so we provide services in these far-flung countries, which is just, again, another competitive moat for us to help take advantage of that dynamic. So those would be kind of the 3 pillars of strategy.

My last question -- and we can go to the floor for questions. What do you think the investment community under-appreciates about the Alight story?

How much time do we have?

So I'll start. So we came public via SPAC. I think there was a lot of overhang around that. I think we've navigated through that. We've delivered every quarter, met or beat expectations since we went public. And so I think we've proven kind of the underlying execution capability of the team. I think there remains an overhang as we think about the public float, and that's an area we have been diligently focused on. We did a secondary last week. We participated in it to continue to drive that. And then I think the third piece is, so once we kind of clear that, I think the fundamentals of the business are starting to really shine. If you think about even in a challenging macro environment, the stability of this business, I'm not sure that's been fully appreciated. At the same time, even with that, there's significant upside when you think about the power of what we can serve for our clients and for their people, taking this platform approach, nobody is doing it.

It's not an easy model. Everybody asks us, help me build my model. It's a complicated one when you move in transition from what we've been -- Katie said, $2.9 billion of revenue under contract. Our entire revenue in '21 was $2.9 billion. So we've added $800 million of high-value ARR business in 2 years to the business. That's the strategy of the company, building a backlog of revenue under contract that's more subscription, more technology, higher focused while getting away from the onetime service is part of our business. . That's a journey that -- we still have a ways to go. Services and onetime projects are still a large part of our overall revenue stream. But that's the hard part. People are trying to model that. And it's the old strategy when I was at Infor, nobody gave us credit for this perpetual to SaaS migration. What are you guys doing? Giving up 90% instant revenue, gross margins for this SaaS thing in the future. Well, we all saw what happened there in '14, '15. Nobody understood it because revenues were going down at the time, EBITDA was coming down. Fast forward to '16, '17, everybody jumped on the SaaS bandwagon. Today, it's like, wow, that was an easy conversation. It wasn't. This is the same scenario where what we're doing is a little bit unique. There's not many companies who've done what we're trying to do here. So to underwrite to that sometimes takes a bit of courage and complexity to underwrite to in terms of the model.

Your performance is proving out the thesis. So congrats. Why don't we go to the floor for questions?

Jeremy, you can't ask any questions.

Can you talk a little bit about the go-to-market motion within mid-market relative to, like, the larger clients? I have to imagine that the revenue opportunity is not going to be the same, but the complexity may be. So sort of the economics between those 2, sort of go-to-market motions.

Yes. Thank you for that. You said the word, everybody assumes that the word mid-market -- you never meet a CEO says, I'm actually really easy to run. Can you just give me a mid-market solution? You always get, hey, I'm really complex, but I am a smaller company. I don't have the economics of my large peer group. But 1 day, I'm going to become that. And so I think we've really focused on more of an industry type of an approach in that case where we do -- you can't go in a mid-market and say, what would you like? You have to go in and say, here's the prepackaged offering that your peer groups in Tier 1 have done, and here's the configurations and here's the setups and here's the installation and all that work. That we've gotten a lot better at. We've created a sales motion dedicated to the mid-market team. Didn't have that 3 years ago. And as you also know, the sales motion around brokers and channels is very different versus a direct model. Again, a very different muscle that Alight didn't have 3-plus years ago. So we've added thousands of brokers to our network. We have much better partnerships. And then finally, on technology, we said this all along, our goal is to take the high-value technology dollars. We didn't make that easy before. The notion of configuring to do a custom -- to do a configuration change on our platform, we had to do that and charge you $1,500 every time you called us. Mid-market doesn't want that. We want the tooling. We want -- or the broker wants to be able to take that on. So we're creating this segmentation between software technology product and services. That's going to help us give that next bump because the brokers want the few $30,000, $40,000 a year of run and maintain. We don't want that business anymore.

Any other questions?

You mentioned partnerships and obviously use Accenture with the thrift sort of contract. Can you talk through sort of the depth of that partnership and maybe expand on some of the other partnerships that may be in the pipeline?

Yes. I mean you think of government, the complexity of government. Accenture is the best in the industry at not only federal, but state and local. When you think of their history -- when I was at PeopleSoft in Oracle, they were our #1 partner by a mile. They understand the complexity. They understand how to deliver in GovCloud and all the FedRAMP certification that's needed. It is a different language. It's a different sales motion. It's a different contracting motion. They have all the relationships. So we want to take the federal partnership, and state and local have the same requirements. And if you actually add up all the states, it's equal to the size of the federal opportunity. Now that's going to take years of presales activity, sales motion. So who better than to have an Accenture side by side. That recipe back in the mid-market example, it holds true there as well. The retail industry -- so there are some partners -- that's why we're moving -- when people say, why are you spending -- why are you so aggressive on getting off the front of house and back of house? You have to get on to the tooling and the infrastructure that's more common in the cloud so that a partner like Deloitte and Accenture and somebody can pick up your technology and actually do the implementation work, like you would with a Workday or an SAP or an Oracle. That's where we're headed. That's why we're so moving so quickly. So we're going to see that expand. And then financially, you have to create segmentation, all the rev rec rules and all the complexity that comes with that. You need the systems and technology to come along with that. So by the end of this year moving into next year, we'll have a much better platform capability to really double down more on the segmentation and create a larger ecosystem.

Any other questions? Great. Time's up.

Thank you, everybody. Appreciate it.

Thank you.

Thank you, Stephan.