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

Thank you all for taking some time out. Next up, we've got Alight Solution CFO, Jeremy Heaton. We're thrilled to have Alight here at our kind of technology conference. I think you folks know, I'm Kevin McVeigh, part of the UBS research platform here. Alight's been a terrific story for a long time. We try to keep these as iterative as possible. So if anyone is iterative with Jeremy, so we're going to go through series of Q&A. I think we're live at this point.

Okay. Great. Yes. So terrific. Jeremy, I've got a treasure trove of questions, but maybe to start out, I think I was walking in, I saw a press release hit the wire. Maybe can we just start with that real quick about we'll go right into the Q&A.

No, that's great. And thanks, Kevin, for having. It's great to be here. Yes, we did put out a release today. There was a statement went out. Cannae did sell 12 million shares of Alight's stock overnight, and we had some questions today. So I just wanted to make sure everybody could -- I could point to the release, but also just give you a sense of this is in support of Cannae's liquidity needs and we'll, from time to time, need to sell assets to generate cash for their own strategic needs. Our understanding is that the sale met that objective and the sense is today that they don't see any more sales in the foreseeable future.

Very helpful. I think pretty clear. So thank you for that and I guess, with that said, and I think I've done this with every company, we've had for purpose of the audience as well as who's ever kind of online maybe just a little bit about Alight. You folks have kind of come to the public markets in 2021, and we're fortunate to be part of that process. Maybe talk to the business model, some of the kind of initial strategic overview. And we think you've done a nice job kind of resetting a little bit in terms of selling professional services and the payroll business, but maybe talk to the original like kind of where you are today because we think it's just a critical part. I want to talk about competition, things like that, but maybe we'll start there.

That's great. You're right. So today, Alight is a tech-enabled services company, that delivers mission-critical benefit solutions on behalf of the world's largest, most complex employers across the world. So today, our clients are 50% of the Fortune 500, about 70% of the Fortune 100 and we've been in this business for 4 decades. But you're right, it's been a transformational year for us. We've had 2 key milestones, I would say, that really create the business that we have today. First is, as you mentioned, the payroll and professional services sale back in July, we closed on it, created a simpler and more focused business within the benefit space, which is really back to the history of who this company is. And secondly, we just completed a 2-year back-end technology infrastructure program to move into the cloud, which really completes a 4-year technology journey for us. So we've got the Alight Worklife platform on the front end, which serves as a front door for all of our clients. And now we've got a seamless one version of technology in the cloud on the back end of the company. And so that today for us, allows us to drive a great client experience within the front door, but also sets the stage for margin expansion and cash flow over the foreseeable future for us. So that's really who we are today.

Yes. And I think one of the things -- and we've really been fortunate to cover this sector end-to-end. Maybe help frame the average client size because sometimes I feel like it gets lost on the market that and to probably shift a little bit, but your average client size is about 7,000 employees, right? So to your point, you've been doing this for 4 decades and pretty complex implementations. I think you've been pretty effective in terms of not only transferring the technology, but also some of these larger-scale implementations. And the one I'd point to, it's a couple of years already, but you think about the federal contract at upwards 6 million employees, pretty complex. And I think it just underscores some of the value predictability of the business model. So maybe talk to that a little bit and the 2 verticals you're in today, talk to that a little bit. It's primarily obviously health care and retirement services, but let's talk to that a little bit from the project.

Sure. So we've -- like you said, we've been in both of these businesses, both on the health and the wealth side, dating back to Hewlett Associates decades ago. And you're right, we are a large enterprise employer. We do have a smaller mid-market business as well, but the bread and butter of this business is large enterprise. The Federal Thrift, as you mentioned, 6 million participants. We were able to go live ahead of time on that for defined contributions of 401(k)s for the Federal Thrift. We also have -- in the health business, we've been the market leader for a very long time. We have employee sizes up to hundreds of thousands of employees, some of the largest companies in the world, as I mentioned. And so the technology and everything we've really done over the last few years allows us to implement faster, create a better experience through the enrollment process as well as just the management of those services over a period of time. And this business, in many ways, comes down to relationships and trust. If you've been in this business, you can manage complexity. If you are a Head of HR, if you are a Head of Benefits, that trust is most important when this impacts every employee within a company. And so that's what has differentiated us for a very long time and just modernizing our technology helps us just make that experience even better for those employees.

I agree. And I think one of the things that really was a clear demonstration of that over the last year or so as you went through the strategic review, which we'll talk about in a minute, culminate in the sale of the Payroll and Professional Services to H.I.G. you really didn't see any -- it felt like any slowdown in terms of client decisioning around the outsourcing process at all, which I think to your point really underscores the trust factor that the clients have and Alight. But maybe talk to what drove the decision to ultimately sell the Payroll and Professional Services business to H.I.G. And with that, maybe we'll talk a little bit about what the longer-term growth targets are that you frame post that because it's been a nice part to the story.

Sure. I think what we've -- and we did have a strategic review with management and the Board and looking at the different options within this business and how could we accelerate the transformation and really the objectives that we had laid out for the company moving forward. And so where we ended with the sale of Payroll and Professional Services was to create the -- a simpler, more focused company back to really leveraging the technology in the space that this business started in, which is in benefits and managing both health and wealth. And with the Alight Worklife platform, what we were able to do is it's an integrator of all of our services, but also continues with payroll as well. And so in the ecosystem, you can exist as owners or also as partners. And so we felt like the value proposition of being a one-stop shop would stay intact. We could also take all of the proceeds from that sale. We paid down $740 million of debt. We brought our leverage below 3x. We've been able to accelerate on the journey that we've got now to drive efficiency. And I think, again, the profile from a margin and cash flow perspective becomes much more efficient for us in a direct line in the areas that we control today moving forward.

That's super helpful. And then maybe with that sale, maybe talk about some of the growth targets because I think you've got a 4% to 6% growth target over the course of the cycle. And maybe talk about some of the targets and how you're thinking about that relative to margin, things like that.

Sure, sure. So target growth in this business is 4% to 6%. That's what we issued an investor supplemental back in July. You can see the historical rates within that level. And for us, it's really 3 key components. There's 3 drivers of the growth model within this business. The first is how many new -- the new wins. So the bookings that we're driving this year, typically about a year lag between a new deal being signed and then the implementation process and where you start to drive revenue. And so the new wins going live is a big factor. And it's about -- and again, in a 4% to 6% growth model, that's about 6% to 8% of new revenue coming in from those new wins. The second piece is employee counts, what we call volumes. And this business, 90% of this business is recurring. In those long-term recurring contracts, they're based and the pricing is based on a per-employee per-month revenue generation. And so the employee counts matter. And volumes are typically in our space, 1% to 2% per year of an adder to revenue. But that is a dynamic for us to look at. And then finally, it's revenue retention. We historically have about 96% to 98% revenue retention in this business. And so that kind of 2% to 4% kind of in the formula is what drives really us getting to an overall 4% to 6%. And so that's the target of this area. Certainly, the dynamics have been a bit different in 2024, but that's the pathway. And when Dave and I talk about the positive trends we're seeing in the business, it's all the operational dynamics and the activities that we see every day that are driving within those 3 buckets.

And I think one of the things that's been a little bit of a headwind in 2024 is the project revenue, right? And maybe talk to that a little bit and some of the drivers of that because as we think about that into '25, we'll see what happens with the administration, but maybe what are some of the puts and takes on the project, which are -- just frame that for the is about 8% of the revenue...

That's right. Less than 10% of the company, but it's important project work because it's exclusive to our clients, right? So this is not a market share dynamic where the work is going somewhere else. This is the business that we own exclusively that is projects on behalf of our clients, 3 big buckets of project work. The first is benefit plan changes on behalf of our clients. We lead the communications work and the different plan designs along with our clients. The second piece is regulatory change. So when the Affordable Care Act came out as an example, right, we're doing work on behalf of all of our clients to get the benefit plans and the systems enabled to generate and handle the benefits appropriately. And the third piece is M&A. And so if you start to see an increase in the M&A activity, the rate environment opens up, we do that work to either carve out for divestitures or to help with acquisitions and bringing the employees onto the benefit plans and ultimately get the per-employee per-month on top of that as well. So that project work has been lower than we've seen this year. And a few of the dynamics, election year, certainly, you've got a lot of companies that are holding off on making big decisions across their employees until they get a little bit more clarity in terms of what's happening in the space. And then as you know, the last couple of years have been lower on the M&A side. And so I think those are a couple of the factors which have driven, again, just a lower pipeline and lower demand, a bit of cost consciousness on behalf of our clients as we see it today. And so we performed better in the third quarter than we thought. Our teams are working hard here in the fourth quarter to also exceed what we laid out as expectations, but it's been a bit of a headwind for us this year.

And I think the other thing, too, is even from a profitability perspective, it impacts.

Great point. If our team is doing the work and they're already in place. And so you do generate typically 80% to 90% margins and a lot of that work as it come through. So that is also part of the profile as we look at this year.

Terrific. And then I think not necessarily as a result of the strategic review, but there's obviously been a transition of the CEO with Dave Guilmette, and you -- congratulations. You've been in your role, which was a nice outcome for 5 months now. Maybe talk about -- because Dave's obviously -- he was on the Board or part of the Audit Committee, industry veteran. What he really brings to bear because I think he really helps kind of the go-to-market motion of Alight given just a rich history in the industry. But maybe talk to his background a little bit and if there's any thoughts around strategic initiatives that you folks are maybe a little bit more focused on since he's been here. And I appreciate it's 3 months, but I think he's been a really nice addition.

Yes. And I mean -- so it starts -- Dave has been in this industry for 4 decades, -- and so he leads with domain expertise. He has known Alight for a very long time. He understands our client base and the challenges that they face every day and what's important to them. And so he's used this, and I've been a benefit of this as well is a bit of a listening tour over the first couple of months of coming into the role. And that listening tour includes our clients, it includes our employees and colleagues. It includes the third-party evaluators. So TPEs and the broker community who are a big part of the ecosystem of deals and with our key clients and certainly with investors. And so I think that listening tour has been helpful to give Dave a sense of the narrative of the company, who we are, what we do, is that clear for the market, right. I think being a tech-enabled services company is different than just being a technology company. And where we've been very focused and importantly on modernizing our technology, it's not all about technology. It's technology to deliver better services and a better experience. And so all of that's important. And so I think it's reorienting ourselves around that tech-enabled services company is important for an understanding with both our clients and the market. And then for Dave and I, I mean, Dave being on the Board was a real advantage of him having a step up in terms of timing of just understanding the business, but just very focused on executing what's in front of us and making sure the objectives are as clear as possible for investors of what to expect, the timing in which to expect it and the execution plan that's around that, that we're going to drive.

No, I think -- and one thing I would even highlight is the way you framed the growth targets and built them up, we thought that was a really effective presentation that just kind of helps create a compass for where that growth can be. I guess -- and again, I think probably maybe talk to us a little bit about the importance of the broker channel, right? And Dave's relationships there, I think, really help. And I think we start to see some, again, 3 months, right, but it feels like to the extent you could comment that some of the re-enrollment feels like it's kind of moving at pace.

That's right. That's right. So we're in the renewal cycle. We're coming to the end of this renewal cycle. We're seeing levels of renewals back to, I'd say, historicals pre-2023, where they did dip. And that has been part of the impact that we had in 2024. And so exactly that point is Dave being out in the market in front of our largest clients going through renewals in front of all of the TPEs who are supporting those processes and just making sure that we understand the current challenges specific to those clients, where we can deliver the right value. And once again, our focus on delivering a great experience as a tech-enabled services company. And so we have seen a rebound in terms of the rates as we've gone through this cycle. I think it's just important to call out, right, there is a lag in this business in terms of what we see -- we see positive trends across all those 3 dynamics I talked about earlier already. But this is a long-cycle business. It does not snap back overnight necessarily. A lot of the work we're doing does impact 2025, and we do expect to see improvement across the key areas and the key metrics within the company. But a lot of what we're doing today also impacts even 2026 and 2027. And so there is a bit of that lag that I just always want to make sure it's important for everybody to understand. But it's been, I think, a great time for Dave to be embedded with our clients as we go through this renewal cycle to drive a different trend line in that area.

Sure. And just I'll give you my perspective on that for [indiscernible] . Part of the reason there's a lag is -- and again, these are my numbers, not yours. But in theory, if you have a client with 200,000, 300,000 employees, the implementation is going to take a lot longer than if you're implementing 20, 30 employees. So when you look at the bookings and how that translates, there's the implementation phase that impacts the patient when the revenue comes in. And it's interesting because not even Alight specific, but whether it's Dayforce, whether it's ADP as opposed to maybe some of the smaller to medium-sized human capital management providers, I feel like sometimes that gets lost in the market. So maybe I think that's an important point to consider. And then just I think the other thing we talked a little bit about was some of the kind of onetime events that kind of occurred that impacted the 2024 revenue a little bit, whether it was some of the runoff of the COBRA or some of the re-enrollment. Maybe talk to that a little bit, some of the puts and takes because I think it's important to kind of frame, not necessarily we're going to talk about '25, but some of the impacts of '24 and why that may not necessarily recur in '25.

Yes. So I'd start, and I'll hit through each of those 3 buckets really, which is the first is we had lower bookings in 2023 as we were reorganizing our go-to-market structure. And so Greg George joined the company. We brought in a new sales leadership team and our sales coverage is very different today. But there's some transition time of bringing new leaders in, building pipeline across the area in the space. And so ultimately, we did have fewer bookings in 2023, which led to less new wins going live in 2024. And when they did, they were later in this year. So you had this ramp seasonally, right, starting with really all your losses start to impact in the first quarter and then your new wins begin to go live as you go throughout the year. And so that was a dynamic of the bookings level in 2023. Importantly, we are expecting and still today double-digit ARR bookings growth in the second half of this year. And so that starts to build a different level of growth as we see new wins as we think about 2025 and 2026. But -- so that's one dynamic. The second you mentioned COBRA. COBRA is -- so if a layoff occurs, an employee typically goes through a notice period and then they go through COBRA. Through the Affordable Care Act and coming post COVID, there was an extension of those COBRA benefits that we as Alight benefited from in generating revenue while still on COBRA. That ended in September of 2023. And so really, we had a headwind from September of '23 through the first 3 quarters of this year of not having that benefit, which was about 2% of revenue. And so now we really look at that today, and it's just a clean view of participant volumes and expectations within the business. And so we don't have that onetime dynamic again moving forward. And then finally, we've had elevated churn. I talked about our retention levels were lower in 2023. We're seeing that back at historical levels. But those losses, similarly to the lag of new wins going live, you also have a lag if a client who's larger is going to leave us, it takes a bit of time for them to implement and go live somewhere else. And so you do have a bit of a lag as well in terms of that revenue profile. And so that's been an impact for us in 2024. And again, we'll have a lag as we start to see the improvements around the renewal rates.

That's helpful. One thing that might just be a helpful reminder, too, even though it wouldn't impact that kind of waterfall, if you would, you had a $1.2 billion disposition of the Payroll and Professional Services business to H.I.G. Maybe talk to use of proceeds on that because obviously, it was opportunistic to delever the balance sheet, which afforded a lot more flexibility to announce a buyback, start to execute that buyback a little bit. So maybe talk to that a little bit and maybe any updates on just capital allocation given what's obviously a lot more flexibility than -- not that it was ever problematic, but sub-3 turns is obviously different than 4 turns and any thoughts around that?

Yes. In this business, owned by private equity even prior to going public in '21. So we've run at much higher leverage, but it was important for us and a big aspect of the deal that we closed in July was paying down the $740 million of debt. We are -- to your point, we had committed to get below 3x by the end of 2026. Through the deal, we were able to do that in the middle of 2024. And so that certainly gave us flexibility and other uses of capital and what we want to do. But certainly, I think just strength of the balance sheet is always going to be the first priority for us from a capital allocation standpoint. But with that, we also have repurchased $155 million worth of our shares this year. And so being more consistent and with larger share buybacks is going to be important for us moving forward and really is kind of the second bucket, along with us initiating a dividend this past quarter. So the first dividend will be here in the fourth quarter, $0.04 per share per quarter. And again, I wanted to make a very strong statement of we're very pleased with the strength of the balance sheet right now. The cash flow generation, we've got a lot of confidence around and wanted to make a stronger statement around returning capital in a consistent way and with our investors. And so those are really the top priorities from a capital allocation standpoint. The last would be on the M&A side or even organic investments. And so I would say on that side, nothing transformational. We've done much of the technology modernization work. From an inorganic standpoint, I would say if there are tuck-ins that make sense for us, and that would really be content like the leaves administration business that we purchased or the retiree health exchange, which is additive to the products and solutions that we can offer to our clients. I think those are opportunities for us, but valuations have stayed relatively high. So we've been pretty disciplined in this space. And we don't have a there's not a burning product or solution that we hear about that we're not winning a deal because we don't have it. So I think we feel really good with the products and solutions we have. We are a peer group of one in terms of what we offer in the benefit space across health, wealth, navigation, leaves, retirement. So we feel really good in what we've got. And obviously, the pipeline is up 60%. So we're seeing the value of that with the market.

Sure. And maybe spend a minute on the go-to-market motion, right? Because you sit really in a sweet spot in terms of the enterprise space. But before we get into that, one thing I also wanted to highlight just to folks, there's no float headwind -- tailwind rather, float headwind or tailwind because you don't really participate in float. There's no ERTC. So for folks who know that the employee retained tax credit, you didn't benefit from that. So those are 2 other important considerations just as you think about '24 into '25 and beyond. But when you think about the go-to-market motion, whom often do you see -- and you really had some success winning some new logos, whether it's GE, whether it's Cummins. But one of the things we've always liked about the enterprise space is it's typically best-of-breed point solutions. So maybe talk about some of that recent success and why a client would pivot over to Alight as opposed to -- without being too company specific to your point, there's obviously been a nice increase in the bookings, right, which implies some growth. So maybe talk to that go-to-market motion and who you would see from a competitive perspective.

Yes, of course. So I think start with just from our own organization, how we structure. So we've now got a larger regional structure, which just -- we cover more of the market, I would say. We -- covering the U.S., which is certainly the large majority of our client base and opportunity set, is having a full team out on the West Coast and a full team on the East Coast and how we kind of structure our coverage. I think the awareness is growing in terms of Alight. Even though we've been around for 4 decades, I still think it's important that people understand who we are, what we do post the divestiture earlier this year. So we're getting better coverage. I mean, top of funnel pipeline is up 60%. So that's a starting point of seeing the deals and being in the deals. Second is, as I mentioned, we can bring an integrated solution set that really there's nobody else that we see competitively in the market that can look at the products the way that we do, all integrated into Alight Worklife, all integrated into the app, a better digital user experience that makes it easier for our clients and their employees. And so the focus there has been also on recurring revenue. And we talked about -- we covered it earlier, 92% of our business is recurring revenue. That is where our commercial teams are focused. $1 of ARR is worth so much more than $1 of nonrecurring. And so our teams are highly focused. We've changed the compensation structures to drive that behavior in our sales team in the deals that we see in the market today. And so with that, we see -- if it's a health deal, there's a certain subset of players who have been in the space for quite some time. Some are more down market, but trying to work themselves up into the large enterprise space. And on the wealth side, it's the names that you know, Fidelity and Empower type companies where important in that space, but certainly can't do health and wealth together the way that we can do it in a large, complex large enterprise deal. And so that's really where we play best. That's our value proposition. And sometimes it starts with only one solution, but we can certainly build out. There's, call it, $1.5 billion of white space in our existing client base. So we can meet our growth objectives really just selling our own products that we have today into existing clients that we've got. So that's really the differentiator for us in terms of the market and really what's driving the growth in pipeline and bookings.

Maybe we'll talk -- we talked a little bit, but it's probably worth enhancing a little bit. We've gone through a pretty meaningful technology shift where you kind of re-architected the majority of your infrastructure from on-prem into the cloud. And maybe just remind us, you're starting to see some initial benefit from a cost perspective in the back half of '24, but just the sequencing on that. And it's just -- again, to me, having covered this sector a long time, it's not easy to do, right? I mean these are big complex...

Not for the faint of heart. No.

Without a doubt, right? And I think that was something that just kind of has gotten glossed over. So maybe frame that a little bit because it's important. And again, we kind of experienced it at Credit Suisse, right? To your point earlier, when you're on-prem, it was white label, right? So Alight was nowhere to be found as opposed to the Alight app now. It's just -- so the frequency, the interaction, it really just helps the go-to-market motion. But maybe talk to that a little bit because that was really an important initiative, too, that you're going to start to benefit from and -- that's obviously, back half of '24, but really, you start to see that in '25 and beyond.

Exactly. So you're right, 4 years of technology work and needed to -- and Dave is a great -- has great perspective on it just because knowing this business and its history, modernizing the technology was very important. It just -- it needed to happen for competitive purposes, but also for scale and the technology and the experience that we can drive as a differentiator. And so the first 2 years was the Alight Worklife platform, the employee experience, what we can do with the app and everything that integrates and the APIs and all the different products and solutions. This last 2 years, yes, was the -- how do you go after the tech stack of on-prem data centers, customize 8 versions of technology that support different clients and really a business that was built on custom technology across our clients. And so while there's still going to be a custom aspect of how we serve the differences and each of our clients differently, there's a back-end technology that everybody is going to benefit from in terms of standardized technology, our teams can scale differently. We can drive a much better experience for our clients. We actually, in October, had the single highest digital customer satisfaction score that we've ever had. So it's just a testament to we're not doing this in the face of just efficiency for Alight. This starts with the experience for our clients and making sure that we're serving them with modern technology. They have the app. They have the self-service tools and the reporting and analytics that they've been asking for and looking for. The other side of that is, yes, on the back-end infrastructure side of moving to the cloud, we're out of the real estate. We're out of the different running dual technologies. And so the benefits of that is about $75 million of annual run rate savings. About $20 million of that will come through this quarter and then the remaining $55 million will come through next year. And so that's a big part of the margin transformation. We've committed to 28% adjusted EBITDA margin in 2026, which is up from where we're about 25% as of last year. And so that's a huge component. It now allows us to look at the operating model and again, how we serve in call centers and our teams to just drive more efficiency. So it is a huge milestone for us this year but really gives us now the opportunity to execute on what we've been talking about.

I think -- and I won't quote it, so keep me honest on the numbers, but I think you downsized your corporate from, what, 300,000 square feet down to 18,000 or something. Something I read -- so you needed more of a cleaner proxy as to what...

That's right. I mean the real estate itself to house much of this, the CapEx that's required to put new cooling units into an on-prem data center. I mean the aspects of much of what we had over the last couple of decades is now behind us.

And just remind us, I know we're up on time, but I think from a Gen AI perspective, I think it's going to be so important to your go-to-market, particularly given the way I try to think about it is for any football fans like the complexity of the NFL schedule going to Gen AI and the timeliness. What can Gen AI do? Because so many of these benefit plans are complex and not only from the adoption of a new client, but also the front and back office, for folks, I think, that maybe aren't as familiar with the sector, health care, retirement tend to be a little bit more complex in terms of not only implementation but also back office support. We think there's a real opportunity for some of the technology, particularly as it becomes more generative to really help you folks on that. So maybe...

Absolutely. Yes. And we -- AI is -- we've been in AI for the last couple of years, built for use of our business model. But you're right, the amount of requirements to implement a new client, that's why we talked about the 12 months it can take or maybe even more in some cases to implement these clients is the amount of labor populations and the requirements and the carriers and the specifics to manage this on behalf of our clients. And so Gen AI simplifies all that, automates much of that. So that's one element. And easing the burden of the implementation process for our clients and for us and how quickly we can implement. Secondly, it's AI in a way that drives better personalization. So for you, Kevin, and your family, when you're in Worklife and understanding who you are, your stage of life, large life events that are happening or maybe a specific situation happening in the journey that we can move you through and helping you through a process, that is all AI generated and recommendations that can just make it a better experience for you and save time and money for both you and your company. And then finally, on the back end, it's -- we've taken down from whether it's natural language IVR and chatbots to get to a spot within our call centers where we're reducing significantly the amount of calls into our call centers. It changes and reduces how we need to resource our call centers every year as we go through. And so there's a cost and efficiency element for us, too. But it starts with the client experience. We're always going to look at that digital customer satisfaction and overall customer satisfaction, just making sure that our clients are on the journey with us.

And I think, again, and I'll end with this, I think it's probably a nice way to end it. You're seeing re-enrollment, right, like in terms of what the technology can bring to bear on it?

That's right. Exactly right.

Anything else? I think it was pretty good.

No, thanks for having us. Great to be here.

Thrilled to have you folks, for sure.

Thank you.