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

I think we're ready to go. This is the Alight session for those tuning in. Thanks, everybody, for joining. My name is Tien-Tsin Huang. With us from Alight, we've got Stephan Scholl, CEO; and Jeremy Heaton, CFO. Jeremy is also here from IR perspective. So thanks. We're going to do a fireside chat format. I've taken a lot of good questions from investors over the course of the last couple of weeks. It's been a busy name. So if we can get through and make this productive for sure, it's a fun name to talk about. But welcome. Thank you for being here.

Thank you for having us. I appreciate that.

I know it's a busy time for everyone. So I know we're going to cover a bunch of different things. I want to talk about -- we've been calling it new Alight, post the transaction post the divestiture, and of course, the financial impact and what the company is going to look like and then of course, go through some of the numbers or whatnot. But I think the top question we've been getting on to [ Brendan ] would agree is just with the transaction, what's going to happen with the capital allocation? I know given your leverage below 3x is important, Jeremy. So tell us about why is that at the right level? What can we expect from use of cash from there? And is -- are buybacks part of the equation today? Is there anything preventing you from doing buybacks today versus post transaction?

For sure. Yes. We're super excited about the transaction. It is on track right now, as we've said, for closing middle of this year, and it gives us a tremendous opportunity to accelerate both financially and strategically and the benefits that we're going to see. But I'll start maybe where on your last question, which was on the buybacks. We are open and opportunistic at this point in time right now with the buyback program, we've got close to $250 million of capacity in the program. And so, yes, we're open today. But additionally, when we think about the proceeds of the deal, we'll get $1 billion at the closing of the deal middle of this year. There will be a pay down immediately, very quickly once we close, which will bring us below 3x. And that's been a big element for us in terms of strength of the balance sheet, flexibility for a number of different options for us. But those proceeds will give us a big benefit. Additionally, we also have talked about -- there's a payment that we'll make against our tax receivable agreement. The benefit there is that's not payable until 2026. So in terms from a cash perspective, we also have that as cash availability for the next, call it, 18 months ahead of time where we'll utilize that as well as we think through share buybacks. So tons of opportunity and flexibility for us in getting this transaction closed.

Okay. Anything to add to that, Stephan?

No, I think on the capital side, it's exactly right. I think what it does for us as a business is just simplify us and get us more focused on exactly the task at hand, right, which is building a really strong connection between our platform capability and our powerful transaction engines. And having the opportunity with the H.I.G. group to continue to build a commercial partnership around being able to still have payroll and the ability to have ProServ as a part of our offering. It's kind of best of both worlds, right? I mean to be good at global payroll is a full-time job, right? And so having that be with an organization that is dedicated solely to doing that will also allow us to be better at what we do.

Okay. Good. Now the commercial agreement is important. So thank you for underlining that. So going back to this transformation of the company. I followed the business for quite some time, worked on the original head associates at IPO. I remember the Exalt acquisition that they went through, of course, then they go private, the Aon piece, fast forward. You've been with us for a while to fan and you're going through a lot of digital here transformation. We're going through this transaction. Exalt is now basically burned down. That's really burned off, which is great. So just walk us through what's -- is there a lot more to do from a transformation perspective. Is this what we should expect the company to look like on a go-forward and what you're marching orders from here?

Yes. I would say, and hopefully you agree, we've been very consistent in the story and the opportunity of why I joined. I mean when you think of what you just said, the foundation of who we serve, the most important clients in the world, 70 of the Fortune 100, half the Fortune 500, the foundation, I mean, it's a heart and lung transplant to remove us in that benefit space. So when you think of that strong moat of what we do down here as a foundation that I inherited 4.5 years ago. What we were missing was the connective tissue across all these great components into a platform capability, which is Worklife, as you've all known, we've launched that now 2 years ago. And I just took the history of my last 25 years that I've talked a lot about, which is whether it's an Oracle or Infor which is we've all seen best-of-breed move to enterprise. There isn't one person that doesn't believe at the CEO level in these big companies, which says, why do we make it so complicated for our employees to start a family as an example or to change benefits. How come I can't look at my financial data and my health data? Why do I have to go to multiple places if I want to think about an HSA account versus a 401(k) account. There's lots of trade-offs depending upon how old you are, how much money you have, where you are in terms of health stage of your life, all those questions that were left to our own devices, when I got here 4.5 years ago, I said we can do so much more with the powerful data set that we have. And so we've built this incredible capability that took us up until this year, 4 years to transform 2 years ago, as I just said the front of the house. We're going to finish in Q4. Literally, I think we turned the data centers off last week, right, in terms of our back end. So think about in 4 years, front of house, back of house, modernized in the cloud. I don't know how many people you saw the article just a month ago, the #1 issue our Fortune 500 companies have in the United States is tech debt. Right? Trillions of dollars of tech debt. Nobody wants to go and really do the modernization need to do that because it's so fraught with risk. We took it on 4.5 years ago, thank God we did, because look what we're now left with, which is a modernized beautiful front experience. And then in the back end, again, your technology aren't enough with all the tooling all the capability, if we think about AI, as we don't talk a lot about AI as an example, but when you think about the future of that, you need to have common data sets and ability to aggregate it all into building the models that you have. So that's what's in front of us is this ability to build a personalized front door experience for every employee that's unique to them and give them the personal help they need. In terms of keeping them healthy and financially secure, and it's built on this incredible foundation that's been built over 40 years. So kind of best of both worlds.

Yes. So you've gone through that heavy lift, but through that history, you've got an amazing client list from an enterprise standpoint. So tell us about the discovery, the awareness. How do you make this known to your client base?

Yes. So we've invested a lot of money into our commercial organization. We built out the value engineering teams, right? When somebody calls us in, which is, again, 70-plus percent of the Fortune 100, half the Fortune 500. We have teams of people that do nothing but spend time with our largest clients and saying, where is your spend rate? What value are you getting? We're doing all the Q&A with their employee population to give back to the executives of what's working, what's not working, including JPMorgan, your own organization, where we spent the time to say, why do you have to go to all these different fragmented places. Now it's hard, right, because as you know, the breakthrough Chief Security Officer in terms of mobile capability, communication with employees. So we're working with the different departments. What's been great to see in these large companies, we're getting more of the CIO role and more of the CFO role versus just the HR function that owns some of these pieces. And I think that's been a big driver. I think what I've seen the most is what hasn't abated is this concern around economic uncertainty. And so CFOs, all the CEOs I talk to continue to be aggressive on cost takeout. And so where do you go is the last holdout of technology transformation left is the human capital management space. Everywhere else you look, and I've been part of all of them, supply chain consolidation, ERP consolidation, financials you've seen what happened, right? The digitization of that world over 25 years has barely come to the HCM world. And I include in the world, HCM, the benefits world and all the things that I do in there. So it's just a natural inclination to want CEOs and CIOs who are -- you know the CIOs, they are tough because they have done all the scars over the last 25 years in those segments. So they're now shining like more than ever in this human capital management space. And what you see, fragmentation, lack of consolidation, on-premise systems, custom mainframes and the list goes on, and what should it be consolidated, integrated, modernized and a beautiful platform. That's across the board. So a lot of room left, and we're going to ride that wave given that we all, I think, believe where we are despite what you see in the stock market, I think there is economic uncertainty ahead.

I think what's important there, Tien-Tsin, is a better experience, as Stephan talked about. At the same time, we're driving the efficiencies within the business, right? The EBITDA profile that we've got, the margin expansion, the cash flow expansion is all on the back of that both front-end and back-end experience. And so for us to be able to drive more efficiency, custom doesn't scale. So everything on that back end now in the cloud is standardized. Personalize on the front end, but standardized on the back end. So that gives us the efficiencies within the business to go drive and scale it differently but while actually having a greater employee experience, right, and not having people on the phones and call centers, waiting on hold to try to get an update on the rollover of their 401(k), right? So the ability for us to do both of that at the same time, I think, has been for our clients, a big deal, right? They see our transformation. They want to know how it impacts them and making sure that they're not going to have an impact in terms of their experience. It's actually gotten better. So that's an important part of the transformation.

And everything I said to you to your question was from the voice of client lens, flipping it over to what's in it for Alight. I mean Jeremy said it publicly, this out of -- getting out of our own data centers is $100 million a year of cost takeout for HoldCo. even with the carve-out, we're retaining $75 million of that ourselves. So think about that, right, in terms of just getting to a modernized infrastructure allows us to be that much more efficient. That's not insignificant. We've added millions because you've seen all the deals and the big clients that we've won over the last 3.5 years, our cost base and our hiring of what we need to service those customers has actually gone down while we've added millions of participants. So that's what I've always said, why so much and you know this, you said the word Exalt and others, very labor based in the past to now when you have a platform and you have a beautiful mobile experience, you should see the millions of interactions that we now have on a mobile phone. Again, still early days. There's a lot of runway left to do. The more we drive the interaction and personalization through this, the less we need on labor. So impact on -- you saw our 600 basis points increase on EBITDA. A lot of it is driven by the ability for us to drive our platform engagement capabilities versus somebody calling us up and saying, "Am I covered for this? Am I covered for that"? I mean half our calls. When I looked at it 4.5 years ago, where somebody calling in and saying, "I don't know what I'm covered for, I need some help", basically administrative type services. Think of the cost of that 401(k) look up, remember that example I gave you 2 years ago. It's a $10 call. why do they call us to look at what they have in their 401(k). Why can't we give it to them in a secure environment. We didn't have the technology, the capability or the engagement to do that. Now it's all there. So that's 4 million calls a year that we get. Just on that one question. Now I'm not saying they're all going there tomorrow, but shouldn't it be standard reason that a call like that shouldn't happen anymore. We could save millions of dollars just in that interaction alone.

Got it.

And there's hundreds of examples like that.

Yes. No, look, automation is a big theme, self-help makes a lot of sense, especially as you give more tools to the user. Just skipping ahead right then straight to the margin point, you mentioned the 600 basis points. I know it's in the slide deck, but it feels like that first step is really this $100 million or the $75 million in terms of the cutover on the cloud. Can you just refresh us on all of that?

Sure. So think about -- the transaction itself, right, unlocks the value of transformation, which is harder to see when we have payroll and professional services. So at the close of the deal, immediately, there's a 300 basis points uplift just unlocking that value that we see and have driven already in the transformation. And then from there, we start to see the back half of this year, some of the benefits start to come through on the cost benefits that we get from the restructuring program. So let's call it $20 million of the run rate benefit you start to see in the third and into the fourth quarters, and then a $75 million run rate benefit next year on the remaining business. So that's a huge driver. And then as Stephan said so the restructuring program in and of itself is one part. There's two other big pieces here. How we deliver for clients today, client-centric moving to process-centric. I can get COEs. I don't have to have a customer team for every one of my large customers. I now have standards on the back end, tooling that is the same across all our different clients and our delivery teams that are with clients every day can scale now in a very different way and how we structure that. So that's piece one. The second piece is on the call center, right? Stephan talked about the 20% reduction in call volumes. After seeing that last year, right, each year, I can take another step forward in terms of how I resource for annual enrollment, right? That's the big Super Bowl moment every year for our clients. How we resource that. We can bend the cost curve in terms of our own resourcing while driving a better experience. And so those are huge elements. And then obviously, the operating leverage that we just get within this business as we can grow and scale differently. And so that's what we see today. That's the 28% margin in this business which is over 600 basis points up from where we finished last year. So a huge element and a lot of that heavy lifting has already happened. So now it's really just execution from our teams.

And flipping the script a little bit on the revenue side, which drives margin. We were low 80s percent recurring backlog going into a given year, right? And you've seen improvement from us on that. Post the transaction, we're going to be 90%, 91%.

We've said publicly.

So that's just that delta of relying on a recurring revenue base versus this constant volatility of having to go sell what I call sell and perform type business, you know how expensive that is. And the low-margin project type business has been something that I've want to get rid of for a while, but it was important in terms of the storyboard for just helping us with the first couple of years, but that helps our margin profile, stronger recurring revenue, better visibility, 90%. That's the profile of our future. So with that comes a little bit lower growth, and especially in the short term because our BPaaS platform business, you saw last quarter was 21%. We're still believing that, that is the #1 opportunity for growth -- it just needs to become over the next few years, a bigger part of the business. We did sell a piece of that with payroll ProServ, but we also -- if I were a PE firm, we would be celebrating the multiples of invested capital on that transaction because we did quite well with that. So it was worth doing the effort and giving some of that high-growth business along with that. But what's RemainCo is this 90-plus percent recurring revenue going into next year, that's what helps drive a more consistent margin profile.

With higher incremental margins.

That recurring. Capital. I mean you know this from your history, you know how capital-intensive payroll is. I mean as much as I love that business, it takes a tremendous amount of effort to go execute, not only sell it, but then to deliver it, and then the cash flow process of that just takes years to underwrite to.

Okay. No, I think that summarizes well the merits of doing the transaction. I get -- since we're talking about recurring, I know you're giving us that revenue under contract metric. How should we use that and we're building our own waterfall or model?

P Sure, sure. And I think it's -- importantly, every quarter, right? You're going to see that build for the next 3 years. And so versus a more volatile bookings metric, which one is you're looking at it every quarter and then trying to understand is that '24 revenue, '25, '26, right? The implementation time lines can change. And so from a visibility standpoint, I think it's important for us to share the visibility that we see of that revenue under contract build. So importantly, how much do I have today, right, which I think is important, and you can see how much that recurring drives $2.2 billion already for this year, $1.6 billion already for 2025, and then we can pace it quarterly. So from a commercial perspective, you can see what we're driving. Some quarters might be more 2024, some quarters might be more 2026. But it's that visibility for us on that recurring revenue business, which is very important. As Stephan said, that's the core of where our focus is today. And it was important, I think, for this year to really show what the profile, we do have a back-end loaded profile in 2024. So I think it was important to share what do I see in revenue under contract today by quarter for 2024? How does that compare to 2023? What's that inflection point of growth? And in really the back-end loaded nature just given some of the timing of the bookings last year. So I think it's going to continue to be very important just to show that transparency and visibility we have.