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

I'm Heather Balsky, BofA's business and information services analyst, and I'm pleased to be here with Jeremy Heaton, operating CFO at Alight. Jeremy, it's great to have you here.

Thanks for having me.

So to start, for those who might be new to Alight, can you give us an overview of the company and its value proposition?

Sure. So we deliver mission-critical wellbeing benefits and HCM solutions to the largest, most complex employers around the world. And so what that means is today and every day, we are implementing and delivering benefits administration, so health benefits and wealth benefits. We're implementing and running payroll around the world for some of the largest global companies, and we partner with companies like Workday and SAP to implement their systems. And then on behalf of employers, we will run those systems for large employers. This is a business that has been around for decades. It's a long cycle business, so these are long, 3- to 5-year type contracts. We've grown this business over the last 3 years. Our -- $3 billion is our revenue under contract as we begin this year. That's up $900 million from just a few years ago. And we combine our platform, which is the front door for us, which is Alight Worklife. That platform technology with our world-class service capabilities to deliver for clients a seamless one-stop shop across all those solutions that we do on behalf of those employers, and we do it at scale. So we've got 36 million participants that we support today for over 5,000 clients. We've got 98% revenue retention within this business, highly recurring 84% recurring revenue, and we've invested in growing this business. We've won over 700 new logos since 2021. And we've got very tenured large employers. We've got 50% of the Fortune 500. Our average tenure is about 15 years per client in the benefit space, about 7 to 8 years in the payroll space. And then we've got a mid-market health benefits business, which we are, call it, 6% share in a $6 billion market. So we continue to grow both with our current client base and with new logos. So in this business it's -- foundationally with our platform, we can drive a different outcome. We can drive a better experience, and we can continue to deliver in very complex worlds for these large employers.

That's helpful. I appreciate that. What do you think is the most misunderstood about your business?

I think it's a little bit of what I just talked about, I mean who we are and what we do, right? This is a business that goes back, as I said, decades to Hewitt Associates. It's what we foundationally do. We've been focused on a technology transformation. But I think what doesn't get articulated very clearly is the backdrop of this great client base that we've been supporting on behalf for the last 4 decades, and what we do day-to-day in both technology and the service capabilities. And I think so that is a starting point. And I think the second piece is then how does our platform Alight Worklife sit on top and provide that integrated seamless experience on behalf. And so I think having that foundational who we are and what we do is where we need to be more clear, and I think, we have been in terms of what we do every day and how the differentiator now becomes the platform.

I'm glad you're here to help.

Exactly. Good to be here.

So Alight used to be part of legacy Aon Hewitt, but became a separate business in 2017, and Stephan Scholl joined as CEO in early 2020. Walk us through the transformation the company has taken over the past few years with these changes.

Sure. So on the legacy that we had, right, we've got 36 million participants. We've got decades of transactional data on behalf of these employers. And the history is a very custom, client-centric administrative service where we were a source of record for what we did on behalf of these employers. And Stephan especially has a technology background, but there's not a platform company within this space, right? But there's a ton of rich content and data that you can actually harness and bring back greater value to these employers and help their employees make better decisions and create a better experience. And so the transformation that we've been on is technology-led, again, enabled by this great foundation, this great moat we have of these long -- this recurring business and these long-tenured clients. But how can we bring more value to them? And the timing, of course, going into COVID and then coming out of COVID, was how do I retain -- early days was how do I retain my employees? They're all working from home. How do I create programs or find program for them to keep them engaged? And now it's turned into in the last -- call it, 12 to 18 months, I've got all these programs. Are my employees actually using it? How much money am I spending on it? And what's the real ROI for the values and the outcomes that I can drive? And so both of those scenarios play very well in terms of what we can do with the data, and that's been the element of just how can we with technology harness that data, put it into -- in an easy-to-digest way for employers and how they can drive savings and make it a better experience for employees.

That's really helpful. And how has your go-to-market approach evolves? Do you think you have additional opportunities there also?

We do. So we've invested on the commercial side. This -- again, this industry has operated in a bit of a cycle of long-term contracts that go through an RFP cycle, and it's a bit reactive commercially. We have built a new logos team, which goes out proactively, both in the large enterprise and the mid-market space to drive new client wins, of which we've had, as I mentioned, more than 700 new wins since 2021. But with that new logos team, we also have a solution architects team and a value engineering team. And so those are really the teams that together can go into a client, baseline the services that they have today, baseline the engagement that they've got with their employees and their programs and build a solution set with our products that make it a better experience and can drive an ROI structure and drive savings for that employer. And so us doing that proactively is a very different model than really what existed prior to 3 or 4 years ago.

That's helpful. There's a lot of enthusiasm for management about BPaaS. And it's been a material driver of growth. What is BPaaS? And how is it different from your legacy offering?

Sure. So rate at where I just talked about is a set -- BPaaS is a defined set of SKUs, so a set of products that enhance and deliver on the data of what we can drive and bring back greater outcomes to both employers and employees. So if you're an employer, it's a one-stop shop, seamless, integrated platform where we can do what no other company can handle today, which is health benefits, wealth benefits, payroll administration, a multitude of programs within the marketplace, things like navigation and well-being programs, all integrated seamlessly on behalf of a customer, drives better engagement, drives a better experience. And once again, those are the types of solutions in the BPaaS space where I can drive a hard-dollar ROI structure, drive down claim savings on healthcare costs, different elements within the different products that we've got. And if you're an employee, that same navigation product that's driving claim savings on behalf of the employer is also driving a much better experience. We have a mobile app now, which didn't exist 18 months ago. 19 million interactions on the mobile app for us in 2023, right, from zero. And what that can drive for an employee in that type of solution is on the app, if you're somewhere and you need medical care for you or your family, get you to the right place, geolocation on your app, find care that's within your network. So you make sure that you've got the lowest cost of care, but also you've got the best care because we can find you the right doctors with the ratings and the scores that are needed to make sure that it's the best possible situation for U.S., the employee and the employer as well. So that's a big element of what BPaaS can do, its value and outcomes in the biggest definition that we have.

That's helpful. And what's most important to your customers in choosing a provider? And what's Alight's reason to win?

Sure. So the first is the complexity that we can manage, right? There's a history in this business with, like, as I said, the largest, most complex customers, we can deliver. It's a balance between the technology and the service capability, right? So one is we have the capability that we've shown, where we took the federal thrift live in the 401(k), 6 million participants. I mean we can, at scale, manage compensatory age. But the difference is also with the technology is platform is a differentiator. I can drive more value for a customer other than being a source of record. And so when we go in, customer -- this is mission-critical work, nobody is going to decide they're not doing benefits anymore for their employees, right? Otherwise, it's a pretty tough message. So they're going to do, it's mission-critical, right? So there's going to be a payment. They're going to want to understand what am I getting for this. And with our technology and what we can do, we can differentiate the value for that spend you're going to have regardless.

That's helpful. And so I feel like you've addressed this, but kind of maybe we can dig a little bit deeper. You've made significant investments in your tech. So put into perspective, what's different today? And how does the Worklife platform fit into all of this?

Sure. So the technology sits really in 2 places. So front-end technology is the Worklife platform, right? That is what you as an employee would see, that's what an employer sees, that's how we integrate the services and the technology that we have in the front end. And that was really the focus initially as we started this transformation. I'd say the second place, we've also invested in and we've got a restructuring program underway right now, is to standardize the technology infrastructure on the back end. What the technology that the employer doesn't necessarily see, but for us, in terms of driving efficiency for the company, moving from custom to standardized, which then allows me any software upgrades I'm making, all are sitting on one type of technology platform, not 5 or 6 different platforms, which I need to kind of integrate, and it might take me a year to do a software update versus now. It's all in one software push. And so that back-end technology allows us to be more standard to take care of our customers in a more standardized process-centric way versus client-centric while still driving the experience in the right way for them in the technology cost on the back. And today, we're running dual technology. I've got cloud technology on Worklife, and it's the newer applications. And I've got on-prem data centers that support the back-end infrastructure. And so we're moving that all to the Cloud. It's been a -- we're near 2 now with a 2-year program. That is the largest part of the margin progression that we laid out. We want margins expanding by 2026, 400 to 500 basis points. That is what we're driving. Some of that is products and the pricing element, but the biggest part of that is really how we deliver for our customers every day in technology. Our call center volumes are down by 20% already. So I can still drive better digital experience for customers, but bringing down the cost of the business. And so that's margin and cash flow, as you would think about it in the financial framing.

That's great. In 2023, new business wins were taking longer to close or at least compared to plan. Walk us through that dynamic. Is it that the deals are getting bigger? Is it the macro to some extent? What's going on there?

I think it's -- so the deals are bigger, right? So an average BPaaS deal is 2.5x larger than a non-BPaaS deal. And it's more solutions. It's just a -- it's a larger check. And so typically, there's more of the teams that I mentioned who are solution architects and value engineers really working across the C-suite in terms of the different components and solutions that we provide and packaging it all together, and getting it to go live, right? And so -- but the check and the sales process and cycle on that can take some time. And we saw -- we've seen in the last 18 months, it's taken longer on those deals than what we saw a bit before that. But that's one part. The macro, demand is strong, but the macro and given the cost consciousness of companies today, CFOs are knocking on the CHRO's door and saying, what am I spending today? What are we getting out of it? And so there is an economic aspect of the macro, which there's scrutiny and there's more approvers on deals that we're looking at. And we saw that a little bit, certainly, last year in terms of the [ quarterization ] of bookings. But overall, yes, I don't think I mentioned. Yes, $2.2 billion of BPaaS bookings in our first 3 years versus a plan of $1.5 billion. So 50% above what the plan was. But if you think about quarter-to-quarter and what that looks like, we had really strong momentum in the second half. But the cycles I would expect are going to continue to take as long as they have been taking.

So then talk about how you feel about your pipeline of business for the midterm. Do you still think 6% to 8% sales growth is the right target growth for your business? And what are you seeing in the business today that gives you confidence in the targets you laid out?

Yes, just really strong momentum. We had -- our bookings, BPaaS TCV bookings, which we reported on last year, were up in the second half versus the year prior. Without a deal, we had talked about GE was an outsized deal in 2022. Without a deal of that size, we still outpaced bookings in the second half last year. So really strong momentum for us. The demand remains strong, great conversations, volume of conversations, intensity of those conversations with customers. The pipeline is robust. It always comes -- every deal stands on its own in terms of timing and execution and -- but our value proposition is as strong as ever. As I said, more of those conversations today are probably around productivity and how I can drive savings versus maybe new programs or investments that companies want to make in our spaces. But the demand remains strong. It's that $2.2 billion of backlog, right, of that bookings in the last 3 years has built a stronger backlog than we've ever had, the $3 billion, which gives us -- I can see that $3 billion is $2.1 billion of revenue under contract for '25, there is $1.5 billion of revenue under contract for '26. I've got great visibility, 3 years out, which is a key component in us looking at what does that midterm growth look like. So it feels good.

That's helpful. So in the past few years, you've made significant investments, and now, you've started to see some solid margin expansion. You talked about restructuring before, but kind of put it all together, walk us through what's happening on the cost side and the opportunity to grow margins over the midterm. And I think you already answered this, but I'll ask again, are you on track for 25% plus margins by 2026?

We're on track. And so the beauty of that is most of that is in our own -- the margin profile, there's a higher margin on the new tech-led products that we have. There's a pricing model that we've put in place that helps us monetize the products that we have. But the bulk of that 400 to 500 basis points, which we laid out at Investor Day, is our own work that we're doing on the technology back end. So how do we deliver every day for our clients, once again, moving from client-centric delivery teams to process-based COEs, the technology that exists all on a standard platform? The call center work that we're digitizing and taking to the cloud is reducing our calls by 20%. So just continuation of more participants that we're supporting and less actual physical calls are coming in, you'll see that reduction specifically in the third and fourth quarters each year as we're going through. So the day-to-day technology changes that we're making are what drives that margin expansion. And then on top of that sit's the restructuring program, which really looks at the infrastructure and says, okay, how can I put that into the cloud, reduce the dual technologies that we've got. So we're well on our way. This is year 2 of the restructuring program. We're really into the decommissioning phase. So we will start to see some of the benefits in the second half of this year, and then, its full run rate in 2025 of over $100 million of annual run rate savings.

That's exciting. So you mentioned there that BPaaS revenues are higher margin compared to kind of your core business. Why is that? Walk us through that.

They're technology led. So it's more -- in the software world, you look at gross margins on from a product set. So we've got a set of services that we provide, and with services come people and can be more capital-intensive, but many of the solutions now that we're rolling out through BPaaS in our engagement platform are technology-led. So it is less people to service those. It is AI-driven, technology-driven, in your hands with the app. And so brings a ton of value to a client. So you -- there's value that is monetized, but it is less people intensive.

That's helpful. And you announced a strategic review with the last quarter. What catalyzed that decision? And what are your priorities there?

Sure. So we were coming into the last part of our third year. We think about the world in 3-year chapters. We came public with a midterm outlook through 2023. And now we've got a midterm that goes '24 to '26. And so it was the right time for the Board and management to look at our strategy and say, what are the elements as we look at the portfolio that could help us accelerate the strategy and the transformation. So I wouldn't think about it as a change. I would think about it as an acceleration. How can you look at the ecosystem that we work in and operate in today? Can we accelerate parts of the strategy for wellbeing and our platform strategy? Are there elements that we can look at, where as an example, you could partner instead of own assets? Are there elements of -- from a financial profile that would be more efficient, and we can think about it from a capital allocation standpoint. And so it's looking at the entire portfolio. We haven't set a timeline in terms of what the outcome is and what the timing will be. But that's the element for us of after 3 years and looking at the next 3 years ahead that we've laid out, is there an element here that we can accelerate on.

That's helpful. And you talked about capital allocation. So we'll close off with a capital allocation balance sheet question. You've been buying back stock and focusing on delevering the balance sheet. What are your priorities for 2024 with regards to capital allocation? And how quickly can you deliver?

Sure. So last year was a -- from a delevering standpoint, we naturally delevered down to 3.3x from about 3.9, so -- and we've laid out a target, and we want to be less than 3x, and now again, this is a business that was 6.5x when we went public, delevered initially through the SPAC down to 4x and now want to get to below 3x. So the strength of that balance sheet upfront is it remains a priority for us, and that's the first piece. Secondly, we'll manage the investment profile of the business, both organically and inorganically, as we look at opportunities in -- for us from an opportunistic standpoint, M&A-wise, would be on high-value content to once again integrate and drive the value proposition for the company. And finally, it's capital return to shareholders. And so we do have a share repurchase program. We have about $48 million remaining on that program, and we're going to be very opportunistic there.

So it sounds like tuck-in M&A does fall into your priority list?

It's for the right. Again, where multiples have not been in a play, we've been very disciplined. We did -- had no acquisitions last year. So I think we'll be very disciplined there. But opportunistic if it's the right content for the right value.

Well, thank you. Thank you, Jeremy, for your time. We appreciate it.

Great to be here. Thank you.

Thanks, everyone.