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

Thanks, everybody, for joining. This is -- I'm Tien-Tsin Huang. I've been sitting up here and always grateful to talk to a lot of great companies. And of course, we've got Alight here with us. I don't think you've been at this event in the past with us have, have you? I know you've been at TMC with us before in Boston. So thank you both for being here, Stephan Scholl, CEO; Jeremy Heaton, Operating CFO. We'll do -- We'll go through a list of questions that I filled it with investors. And if we have time at the end, we'll get the audience to ask some questions as well. But thank you both for being here.

Thanks for having us.

Great to be here.

So Alight is a company I've followed for a long time, just for everyone's background, it was Hewitt Associates when I first followed it and Hewitt was such a staple in terms of basically having every large [indiscernible] from a BenAdmin standpoint. And the thesis was simple. It was a privileged position that Hewitt had and now Alight has in terms of working with the best of the best enterprises, not just in the U.S. but globally. So I thought I'd start with that. Given that history and those roots that you have with the enterprise, what does that -- how does that translate? I know you're going through this big transformation here at Alight. So I thought that was a good place to maybe start and lay the groundwork for investors that might be new to the name.

Sure. Maybe I'll start on the foundational part of it, which is like you said, right, there's a rich history in this business. We, every day, drive mission-critical solutions across the human capital space on behalf of some of the largest and most complex companies in the world. So 36 million participants across all of those employers, 5,000 clients, long-term 3- to 5-year contract, sticky business. And what we're doing every day is we're implementing and we're running benefits, both on the wealth and the health side, we're implementing and running payroll globally. And we've got huge partnerships where we implement and run services with both Workday and SAP. And so foundationally, we've got decades of history transactions being the source of record for those 36 million participants, right? which enables us 1 on that sticky business that's recurring revenue, 85% recurring, 98% revenue retention, right? Foundationally, there's a huge opportunity to drive a different level of value in what we're doing, but it's that foundation and that customer base, which has given us the big opportunity around transformation.

I listen to you thought for the last couple of years and I've said this a few years back to you. I said there's going to be a day of reckoning with the HR departments, and we're in it now. The last 4 years, CHROs and HR departments had free spend around employee engagement and providing solutions for well-being anything related during COVID was acceptable to spend money on. Well, fast forward to where we sit today in Q4 with CFOs and CEOs going to boards, everybody I talk to, every CEO I talk to is trying to take cost out of their business and recession-proof themselves in '24, and the CHRO office is in the line of sight for all of that because of the overspend and the lack of value received for that -- or that perceived lack of value for that spend. Corporate America and Global 1000 are still sitting on between 40 and 60 to 70-point solutions around employee engagement. Everybody in this room probably just went through annual enrollment, sees how complicated and complex some of that is around benefits, administration, 401(k) systems, payroll systems, HSA systems, retirement systems, the list goes on and on. And so we're getting a lot of inbounds, and that's why we built a Worklife platform. that says, we need a new front door, a consolidated place to go where all that powerful data sits where I can finally synthesize the complexity into a more meaningful experience to help me stay healthy and financially secure. A $2.2 trillion of activity happens on our platform through those 36 million people across benefits -- across defined benefits and defined contribution. The power of that data consolidating those systems of record into Worklife to make it a more meaningful simple experience and synthesizing that we know who you are as an individual and helping you make better recommendations, that's the thesis of Alight becoming a platform company. That's the 4-year journey that we've been on. So timing is good right now, given we're -- what we see in the markets.

Yes. So I'm glad you said it up that way, thinking about the platform company concept. But we've come off the pandemic where there was this rush to make sure employees were taking care of and this push towards work from home and then of course, you had the big boom with a lot of IPOs and companies coming out and then, of course, higher cost of capital. And now the procurement office is winning, as you said. So you went from a very, very tightly before us to now, okay, what could we see some moderation on the employment side. So how does that inform what you just said there, Stephan, and why you're well positioned? You mentioned Worklife, but can you maybe just give us a little bit more on why this is a good time?

Yes. And so the investments we've made are in the categories of value engineering, solution architecture. And so I had a dinner with the CEO just a couple of weeks ago, along with my partners at Workday, we had a great conversation. And he says, the vendor community at large SAP, Oracle, Workday, us included, there's this -- I spent about $300 million a year in the systems of record. And there's a hold conversation of how do I go from $300 million to $280 million. Who's asking -- who's helping me solve my $2 billion problem. These $300 million of systems transact and can create complexity of $2 billion of spend, who's helping me bend the claims curve that's going up between 8% and 12%? Who's helping me really assess the leads side of things? We're losing a lot of employees in our first year attrition. So the complexity around employee engagement, who's solving that multibillion-dollar problem? To do that, you need a platform approach, the front door. So as I said on the earnings call, we've had a tripling of people in benefits administration using the phone. That is a 15 to 17 to 18-minute process, using their mobile phones for something so complex and powerful. That's a pretty good sign of what the mobile phone and experience can do. If you use the mobile phone, you even have more data and access that's personalized about the individual. So we're going into companies and solving that $2 billion problem and saying, listen, this is where the spend is going. This is the experience they're having on those 70 to 80 systems, they're having between 1% and 6% engagement rate. They're paying PEPM models, right, per employee per month fees. We're coming in and saying, you don't need to have those systems anymore. We took a lot of those systems of record content and built 70% of the capability in Worklife. We built closed-loop reporting, analytics and AI. We've taken all that data and really synthesized it into a recommendation engine of one. I think the biggest challenge we all as employees have said for years, which is why do I get treated like a job code. I'm an individual versus 1 of 1,000 people in my company. I have children, I don't have children. I'm young, I'm old. I have money, I don't have money. I need insurance. I don't need insurance. I prefer HSA versus 401(k). All those variables, we still leave employees largely to their own devices to sort and sift through all that. And you and I have had this conversation. As smart as we all are in this room and yourself, it is complicated to go through understanding what's right in an HSA account versus a 401(k) account. So it's about educating. The only way to do that is through a consolidated front door, which is Worklife, and that's where the investments are paying off. And that's where companies are now looking to us to come in and help drive that consolidation play and simplification.

Yes. So I know this transformation to a platform approach is not easy because when I think about. Again, I'm dating myself, but there was a lot of customization when I thought about the legacy company. So catch us up on where you are in this transformation? What's left to do as you go through this journey?

And maybe I'll start with it. On the technology side. So I think about it front end and back end on the transformation. So on the front end, first on the technology, it is the platform. And that platform is standardization through software technology in the cloud. Everything that we've got that engagement layer, right, that with the platform, that's where 70% of the data now sits versus down into a tooling system or some customized system that may have existed when a client set up years and years ago. So everything sits in the platform and the majority there that the front end, all of our clients being on Worklife standardizes that work. It allows for product releases twice a year to come out within the SKU structure that fits and we can easily monetize and deliver those new solutions to the customers through that same front door quickly. Also on the front end, the investment standpoint was our go-to-market, right? So Stephan mentioned value engineering team, solution architects, having a new logo team, really to drive greater growth to drive through our existing base and through those new logos, just a greater level and acceleration in what we've seen from a revenue and bookings perspective. And then the back end is really where we're focused this year. We've got a transformation program. We've set up it's a 2-year restructuring program, move everything out of the on-prem data centers into the cloud. Today, you would think about it, we're in effect running dual technologies, right? Everything that's now moved into the cloud allows us to then remove ourselves, get out of the on-prem data centers. It's going to take us 2 years to do it, but the standardization that we will have, the ability to manage peaks better when we go through annual enrollment, the ability to resource things differently, the real estate, as we think about the footprint that we have as a business, that standardization drives like a completely different margin profile for us. And so front end, back end, but that's the big components of the transformation for us.

Right. Anything to add Stephan? Does that mean it covers a lot?

A lot said there, but you think of milestones, last May was a in life, we call it 5-minute increments. So that was a big 1 for us, right? Getting all our clients on the Worklife platform as a foundation. That was front of house to Jeremy's point. The next big one from May to next June, is a big leap, and that's going to be getting our back-end systems off of our own data centers into the cloud. I can't -- I mean that is so exciting for me because that gives us the tooling, the capability to accelerate the revenue from bookings to revenue backlog. It gives us the tooling, right? When you think about ServiceNow and some other great companies that have built these case management capabilities, we have great tooling, but you need to do it on a modern architecture. So now that we have this in the cloud for the back end, starting middle of next year, that will accelerate the ability for our clients who are -- I mean, again, look who we serve, 72 of the Fortune 100. They have great IT departments, and they're looking at us and saying, "Listen, we love what you do, but give us some tooling so that we can do our own configuration and our own templates and our own content work. So we're doing twice a year product releases, but the real home run is going to be when you can take all this complexity and say, "Hey, listen, we're a bank versus Boeing being in that industry or being a retailer taking the tooling and allowing them to go then and do configuration work, that such a home run play to create more stickiness, better content and above all better engagement, right? Because the engagement of these systems is just so woeful. So Worklife is about adopting a better engagement platform, driving better adoption, better decision-making but you need the content engines to support that. So middle of next year will be a next 5-minute increment in the history of our company, where we'll be able to provide all that capability to clients to really do a lot of work themselves. which is, as you've seen with places like ServiceNow, just a huge uptick in terms of opportunity.

Right. No. So it should be revenue and margin lift on -- from both of those, obviously. So --

And you've seen us -- against announced it on the earnings call, millions of more participants, and we have less people in our customer care organization, right? So I always ask, why do we have people in our customer care business? They shouldn't be calling us and saying, "Am I covered for this surgery? my eyeglass prescriptions over, do I have more coverage? " That is all available in Worklife. And now with analytics, as you guys know with AI, you can do with chatGPT, you can do modeling against PDF forms and look at a 1,000-page AT&T document that works through all the rules and sift through what is applicable to the individual, all without needing a customer service agent. So platform allows for that simplicity of capability.

Good. So I know we've gone almost halfway through when we haven't used the BPaaS word yet, so I'll bring it up now. But we get this question a lot, and so I thought I'd ask you, Jeremy and Stephan, to redefine for us. What does BPaaS means specifically as a KPI? Why is it important? I know you've got driven some revenue uplift, you're ahead of your original targets, but redefine it for us.

So BPaaS is a specific set of products and solutions that drive the engagement and the value and the outcomes to our customers in a different way than pre transformation. And so you think about and we've talked about it at Investor Day, when we laid out kind of the 5 layers of both in kind of pricing but how we go to market and how we drive value? The platform itself, which is everybody has it, it is the front door. But there's a set of solutions, engagement solutions that drive well-being, that drive claim savings down, that drive higher retention. Again, specific SKUs, a specific set of products, but their standardized cloud technology larger deals is what we find, right? So in terms of upgrading our existing client base and within new logos, right, driving this through both areas. But this is incremental bookings and incremental revenue at a much higher pace that we've been able to drive because it drives a different conversation with the client, right? It's not just -- it's a pricing model, but I think it's important to talk about -- it's important for us because we can talk through the value that we're going to drive for our clients. It's not just how we price and trying to get different economics for the same product. It's a different set of solutions that drive a different outcome. And so that's what BPaaS is. And that is over 25% growth this year, greater than 15% growth through the midterm for us, that is incremental to the business that we have, which is non-BPaaS. Again, critical long cycle business that we've had for decades, which is closer to a 2% to 4%. It will ebb and flow on the mix of what that growth is year in and year out. But it was very important, and BPaaS has been important for us in terms of showing what the driver of an accelerated growth profile and how we just drive different outcomes for clients.

We're getting better at taking -- it's a few hundred million dollars that's gone close to almost $800 million growth rate of 20s going down to the next midterm 15%, 500 points of gross margin improvement. If that were a stand-alone company, it would be worth a lot more than what it is in totality today. And so when we look at that segment of the business, that's our focus, right? Yet it's bundled within the company that is obviously a much larger business that has Workday services and a lot of complexity to it. It's bundled in it on purpose because it's the system of record. It's all that historical element that gives us the permission to go to a big client and say, make us your front door. We all know the studies, and I've said that for years. It's still -- and here's the worst part after 4 years, it's still true today, which is half the employees are still making the wrong decisions in their totality around well-being, half. So how do you change? How do you bend the curve on that? You have to engage them differently. And that's the conversation we're having with clients just make us the front door through Alight Worklife because we own these powerful systems of record. And what we've seen now in many, many deals is that we're going from an on-premise custom dollar to an ARR uplift of 2x plus in our installed base. And as you all know, as investors, mining our installed base is the #1 investment thesis that I've been working on for the last 4 years. And you've seen us now take it from the 40s to the 70s in terms of TAM. Now you add the financial pressure from corporations. Look at claims. Claims are up between 8% and 12% for Fortune 500. That is hundreds of millions of dollars of EBITDA hit for most companies when you think about, massive cost takeout. So how do you bend the claims curve? It's engaging employees in a better way. So the whole thesis of this BPaaS question is I started -- if you remember, literally the first weekend in February or a couple of weeks in February when COVID started. So I had the privilege of talking to 30 of my clients within 30 days. And one of the CEOs says, I just had my CHRO and here, this COVID is happening. I'm hearing. My employees are really unhappy with me, and that half of them have made the wrong decisions on benefits and all these categories. So Stephan, do you only have my money back, right? I said, "Well, no, you're just hiring us to record the decision they made. Doesn't seem awful to say that? We're recording a good and a bad decision, and half of them are bad, and thank you for paying me a lot of money. That just seems like the wrong way to run this business in the long term. How do you drive better engagement to make better decisions is a whole different experience, platform approach than it is just us running a system of record for BenAdmin or DB or DC or retirement. Makes sense?

It does. Now I like the way you -- you talked about that from a systems of record standpoint. So is it a completely different way of thinking about the base business. So given that and the way you described it, just to follow through with the next question that a lot of people want to -- have always asked us, which is new logos. We have a big -- share of big names already. What's the pitch to get a new logo on board with Alight today? Is it a lot of what you just described there? And is that really going to move the needle for them to finally join?

Yes. So just even in the last 6 months, we're getting to the CFO's office more and more. We're getting into the CIO's office, which I love. And the CIO is coming out...

As opposed to the HR officer.

I'm sorry, as opposed to the traditional CHRO function at the VP, director level or the CHRO level. CIOs, if you ask CEOs of Fortune 500 that I've had a chance to spend a lot of time since September, they have mandated the CIO to say, listen, thank you, CIO, for having done great job on revenue systems, ERP, supply chains, all that stuff for 25 years. I need you to go shun the light in the dark places over on the HR side because it looks like a throw back to 20 years ago. System disaggregation, data everywhere, and we all know AI is a hot topic. The #1 foundational rule about AI is your data has to sit in one place. Otherwise, AI doesn't work. It's full end of story right there. HR doesn't exist that way. You, as a client, whether you're the bank, all your data sits in one place, not true as an employee. Isn't that fascinating? It sits all over the place. So data aggregation is the #1 thesis. And so for us, we've been so focused at the CIO level. And what comes up in conversation is different than what I said earlier, which is, well, how do you fit in with ServiceNow and Microsoft? Love that conversation because that is a front-door conversation. We've all seen ServiceNow becoming a frontdoor conversation. We're having good discussions with both of those companies because we both see -- or all 3 of us see the -- I'll use Workday in that category, too. They all see us in the category of we own the systems of record. ServiceNow does not, Microsoft does not. But CIOs are looking at that as a front door capability. So what is the ServiceNow front door vis-a-vis Alight front door? And how does that coexist. And that's where we're seeing a lot of synergy and support from IT going over to the HR side. And that's the beginnings of taking really complex systems and creating a more simplified front door. So that's been fantastic to see on the CIO front. CFO, money trail, ROI outcomes, these -- all these 80 systems I'm spending hundreds of millions claims curve, all those ROI metrics also support the platform conversation.

So given the demand environment now when we're hearing about delayed decision-making and potentially some pricing pressure for some of the systems integrators that we'll hear from this afternoon. What kind of impact does that have for you on the pipeline and your feelings around conversion?

Listen, I mean, it's -- I'm allowed to speak to this one, which is great, GE. Look at last year. Saw what was coming. GE, 2 doors, Classic system integrator approach, take my PeopleSoft 8 system and pay 9 figures a year to run and maintain old 30-year-old systems, easy answer, right? We came in and said, "That's not what your employees want. You have to modernize." Let's take PeopleSoft 8, go to Workday. Let's work with ServiceNow, front door, Alight front door with Worklife, we'll consolidate global payroll, U.S. payroll, BenAdmin, the list goes on, complete end-to-end front door transformation, completely 2 different options. And you've seen the big SIs, all talk about their AMS business, that's old world a little bit, right? They're trying to create a modernized label around it, but there's fatigue in the Global 1000 around just taking all these old systems. There are still -- I still can't believe how many of the Fortune 1000 are still sitting on PeopleSoft 8. Think about that. I mean, that's -- when I was at PeopleSoft, that's dating myself here 20 something years ago, right? That is not the future of being a modernized platform, a; b, the cost of maintaining those systems are a massive cost base. So our approach is to kind of bring both worlds together, which is spend the same amount of money and you'll get to a better place. Because we bring a different mindset to the table. And I think this gets lost a little bit in the conversation who Alight is. And that word BPaaS, business process as a service, we were very conscious 4 years ago, not to use the word SaaS. Every 1 of the software companies that I was part of kind of looks back and says, "Geez, I wish I didn't give all my IP of my clients to the SIs. The SIs don't know how to run -- how many sites have tried to become software companies, right, and have failed. So you have these 2 camps software companies and you have SIs, both playing with clients on, well, don't move an upgrade, Don't do this. The software companies are saying, migrate to new software. We're right in the middle. We bring Accenture mindset and culture and Workday mindset and culture into this BPaaS. That's that new, if you think of the next 5 years of simplification and consolidation, software is not the answer to come to JPMorgan and consolidate 50 different systems in HR. You need delivery expertise. But if all you do is taken managed services AMS mindset, then you lose the forest from the trees on modernizing technology and platform. So we have software, thousands of engineers, great delivery capability. It's those 2 forces together that drive our platform capability with our strong systems of record.

What I might add just with that is back to the -- in the current macro, it's a total cost of ownership conversation. And so with everything as Stephan just talked about, when you combine those 2 together, if I can bend the cost curve on claim savings, which are going up 8% to 12%, if I can help you with retention levels, so you're hiring, right, how much does it turnover cost the company? It's billions of dollars. And so it's a different selling motion with the combination of the products and solutions we have now where you can go in and say, listen, I'm going to give you a better experience. I'm going to drive higher engagement with the programs that we have. But I can bend the cost curve as well because your overall total cost of ownership, you may pick through an ROI structure, you may pay for the incremental fees that you're going to have with the new products and solutions that you're buying. And net-net, your total cost of ownership is down. And that is -- it was a strength before, certainly in the current macro is -- and it is different than what we saw 3 years ago. So I think that's played very well for us. And we saw the results in the third quarter, just around the bookings number, and we still see good demand.

All right. Good stuff. Already it's a 5-minute mark. Let's take some questions if there are any. Happy to take them. We have a mic going around. Anyone?

So tons to dig into on the technology transformation, and it's a huge lift. Obviously, we have some like experienced services conference. A lot of people talk about services today, and there's -- it's very complicated to move things to the cloud. So could you share kind of the biggest barriers, biggest hurdles that the company is going to try to overcome over the next 2 years as it relates to reducing this double spending and how you're going to overcome them?

Yes. And I think it's letting history be its guide. We've seen software companies say, you're no longer supported on this release, you got to migrate and upgrade to this new one. And that takes years of effort and complexity. What we've built into our capability is at the platform level, we've taken from the systems of record, 70%, call it that, of what's needed to do a transaction, whether it's in benefits or in defined benefits or contributions and built it into the Worklife platform. So it's a little bit of the culture of Middleware platform, ServiceNow, Oracle, if you think about all those days when I was there when we built the Middleware platform, it's the same mindset. The minute you touch the systems of record, you create a tremendous level of complexity and configuration and migration. And then just even testing is like 6 to 8 months. We thought about that and built in the cloud, the platform. So the good news is our Worklife platform is not just a front door. It is a strong capable content engine around being able to help you make decisions and recommendations. And then we built the connective tissue around ETLs and capability so that the rules engine that sits down below and the system of record, still applies. But pulling a rule or a capability down here into the platform is a lot easier to do than actually doing configuration and migration change down here. So because we built intelligence up here, it's very easy or easier, I should say, never easy, easier to implement a platform kind of configuration and work than it is to do a system of record. ServiceNow started that, right? As a concept. Now they don't take it down to the transaction level, they kind of stay at the case management level with their case management tools. So that's the work we're doing is the intelligence around that one. Two, is, we've been very conscious of that's a heterogeneous environment. You can't go to a Fortune 500 or Global 1000 company and say, give me all your systems of record for employees, and I'll consolidate it on to Worklife and I'll do it all in 6 months. It's a crawl, walk, run approach. So we were very smart in building the configuration tooling that you can coexist. I can coexist with an old on-premise custom system and a new cloud-based infrastructure and had the 2 connect. That's the great modernized capability within AWS, for example. All that connect, all that integration work can be done. So we're addressing the heterogeneous environment of going to a big company and saying, let's do this journey over the next 5 years. Nobody is doing Big Bang transformation. We've all seen the disasters of that in the ERP days and supply chain days, right? So those would be kind of the 2 pieces I would say, are in our favor to driving transformation at a good pace.

We have time for one more, maybe anyone?

Is there a way to kind of characterize how many of your clients are in this kind of environment, that's more modular, flexible and more platform approach?

So if you remember what I said just a few minutes ago, well, last May, it was a long discussion. Do we want to monetize just getting them to Worklife? And we said, no, because we don't want that to be on the critical path. So we said all our clients have to adopt Worklife who want to work with us. That was that big milestone for us last made that happen. So now they all have the modernized platform. Now you also have to -- again, this is a visual more than it is a fact, but it's -- you see the screen, you don't have everything turned on, right? So the next step is, oh, you want to have defined benefits or you want to have a pension, you want to have HSA, you want to have this functionality. It's all kind of grade out but you have BenAdmin today. This is the piece that comes through Worklife. The next step is then turning on all that new functionality and capability and charging for that and making money by upgrading them or migrating those features and functions. Does that make sense? But it's not great. I'm just giving a visual on that, right? It's not how it is. But, Yes.

I don't think I can let you guys go without asking maybe for you, Jeremy. Just one final question on margins and just the importance of margin expansion and also around free cash flow conversion. We get that question a bit.

Sure. So as we laid out at Investor Day, it's 400 to 500 basis points of EBITDA margin expansion through the midterm. It is what Stephan just talked about, right? On the back end of the technology set, right? So now we support -- how we drive delivery for our customers every day? How we manage going through the annual enrollment process using mobile, using digital technology, right? Allows us to bend our own cost curve in delivering a greater experience for our customers, but to do that on a much lower cost to serve. And so that element is already in place now. The restructuring program where it's underway and tracking very well, is a huge component of what that is and how we deliver every day through standard technology. No more customized, no more client teams that only know that one particular client, you can't scale that. And so our standardization there, which started with the technology, but then drives throughout the entire business, drives that lower cost to serve plus the operating leverage. It's a huge part. And then finally, as the new products get monetized as we release them twice per year is the other big component of new revenue streams and larger share of wallet. And so that drives margin expansion. And then the cash flow, once we're through this restructuring program, and that's 12 points of operating cash flow today this year, right, $90 million of our investment in the restructuring program that goes to half of it next year and then we're done with it. And so that, along with working capital, how we drive a quicker implementation and more standard implementation for our clients, we continue to get better from a working capital perspective. So we laid out greater than $2 billion of operating cash through the midterm as well. And we're well on our way, and some of those results came through in the previous quarter.

All right. Great. We'll end it there. Thank you for being here, enjoyed the conversation. Thank you all.

Great to be here.

Thank you, everybody. Thank you.