Alight, Inc. (NYSE:ALIT) Q1 2024 Earnings Call Transcript May 9, 2024
Alight, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and thank you for holding. My name is Evo and I will be your conference operator today. Welcome to Alight First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded, and a replay of the call will be available on the Investor Relations section of the company’s website. And now, I would like to turn it over to Jeremy Cohen, Head of Investor Relations at Alight to introduce today’s speakers.
Jeremy Cohen: Good morning and thank you for joining us. Earlier today, the company issued a press release with first quarter 2024 results. A copy of the release can be found in the Investor Relations section of the company’s website at investor.alight.com. Before we get started, please note that some of the company’s discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in the company’s filings with the SEC including the company’s most recent Form 10-K, and such factors may be updated from time to time in the company’s periodic filings.
The company does not undertake any obligation to update forward-looking statements. Also, during this conference call, the company will be presenting certain non-GAAP financial measures. Reconciliations of the company’s historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today’s earnings press release. On the call from management today are Stephan Scholl, CEO; Jeremy Heaton, CFO; Greg Goff, President; and Katie Rooney, who has announced earlier today will be stepping down from her CFO position and focusing on the COO role supporting the payroll and professional services divestiture until closure. After the prepared remarks, we will open the call up for questions. I’ll now hand the call over to Stephan.
Stephan Scholl: Thanks, Jeremy, and good morning. It’s an exciting time for Alight with our first quarter, highlighted by the announced sale of our Professional Services segment and HCM & Payroll Outsourcing businesses, which remains on track to close midyear 2024. Executing this transaction is a key priority for the long-term trajectory of Alight, and we have seen tremendous collaboration across both organizations as we prepare our clients and over 8,000 employees for this transformational deal. Based on the great progress we have made to-date and looking ahead to the closing of the transaction, we are reaffirming our midterm outlook on the remaining business with revenue growth of 4% to 6%, BPaaS revenue growth of at least 15% and adjusted EBITDA margin of 28%, which would mark a total of 600 basis points of margin improvement versus 2023.
This will be complemented by a stronger balance sheet, including net leverage below 3x, enhanced cash flow generation and an investor-friendly capital allocation framework supported by $248 million of authorized funding for share buybacks. With this attractive financial profile, we will emerge as a more simplified focused company steadfast in its mission to keep healthy and financially secure. Turning to the quarter and then our view of 2024, we started the year with total company revenues, excluding hosted nearly flat as lower nonrecurring project revenue offset strong growth of 22% from our BPaaS solutions. BPaaS revenues represented more than 1/4 of total company revenue. Profitability remained stable, a testament to our transformational efforts that have delivered productivity savings.
And building off a strong 2023, our operating cash flow conversion was 67% in Q1, up a full 20 points from last year. Given our typical seasonality, we don’t anticipate continuing at this rate all year. However, by completing the restructuring program and continued execution on working capital initiatives, we are well positioned to drive stronger cash flow generation. For the balance of the year, we expect 2024 to be a tale of 2 halves, with the first half adversely impacted by the timing of large deal go-lives, lower nonrecurring project revenue across both segments and the exit from the Hosted business. The second half will benefit from an increase in new deal go-lives for which we have high visibility today as we continue to build the book of revenue under contract, which at quarter end was up to $3.1 billion for 2024 for the total company.
Coupled with sales momentum and operational execution, our growth will ramp this year and quickly return to our midterm revenue growth target before year-end. Our confidence to sustain that growth post close is grounded in the recent history of the benefits business, which since 2020 includes a 10% total revenue CAGR with BPaaS as a driver at over 50% growth and has resulted in a $700 million increase to revenue under contract. Profitability will also improve through multiple levers, including an immediate uplift of margins upon closing the transaction. At the same time, we are on track to complete the back-end cloud migration in the second half, which should be a key inflection point for profitability. With the data center exit, we continue to expect $100 million of annual run rate savings for the total company with Alight retaining approximately $75 million of the annualized benefit.
Commercially, we continue to close meaningful BPaaS deals and our results demonstrate that our strategy is working. This quarter included large expansions with existing clients, where Alight continues to bring a differentiated set of solutions integrated through the Alight Worklife platform. With one of the world’s leading diversified manufacturing companies, our team demonstrated the value and outcomes with a real-life story of healthcare navigation. During the sales process, an executive asked if we could help one of their employees and family who was facing a healthcare crisis. Our team quickly mobilized by leveraging both the technology and our medical experts to bring the right support and care to this family. And through this example, the company immediately saw the value and impact the solution delivers while our value engineering team quantified the definitive ROI for rolling out this solution across the company.
In another example, our team closed a $50 million public sector contract, where we will provide the technology, administration and domain expertise across 60,000 active members. We won because our decades of experience in this space working with the largest organizations have solidified Alight as a tested and trusted partner. These wins are a microcosm of what we’re seeing broadly. Large enterprises are continuing to invest in their people and solutions that drive engagement, better outcomes and cost savings for the employer. While competitive, we believe the market continues to validate that the winning formula is grounded in a platform-based approach that simplifies the end user experience. And so as we continue building and closing deals in our pipeline, we’re also simultaneously advancing our technology road map and building upon our platform advantages.
Ongoing product innovation is core to the platform strategy, and we recently announced the latest release of Alight Worklife. This biannual release focused on 3 key areas: strengthening our AI-driven support, deepening the integration of leaves and health navigation, and delivering tools that empower greater financial wellbeing. Taken together, these updates will enhance the employee experience with greater self-service and personalization features and deliver improved employer ROI with greater functionality and improved cost savings. I’m also excited to discuss the leadership announcement this morning, which is the result of thoughtful long-term planning publicly demonstrated by Katie’s promotion into the COO seat last summer. By extension of her promotion, Jeremy partnered closely with Katie for a natural succession into the CFO role with the global finance team reporting into him for the past 9 months.
I am thrilled to have Jeremy officially in the CFO role as he leverages his in-depth knowledge of our business, finance function and investor base to advance our strategic initiatives. And with this transaction as a turning point, after 15 years with Aon and Alight, Katie will now focus on the COO role supporting the closure of Payroll and Professional Services divestiture, after which she will step down. Katie, as many of you know, has been instrumental to the foundation of Alight and our public listing. Personally, she has been a tremendous partner to me and a visionary for what Alight has become. Though we will miss her, she has built an outstanding team that we are confident will continue to execute on our transformation moving forward.
I’m also pleased to announce Greg Goff’s promotion to President of Alight, which includes this continued oversight of product, technology and delivery. Greg and his team have moved mountains with their infrastructure planning and post-transaction his voice and expertise with AI, analytics and platform will be even more important. Overseeing product and delivery, Greg is best positioned to lead our teams in integrating our platform technology with our world-class services on a day-to-day basis for clients, and we look forward to him taking on a more public-facing role as you may have seen through recent investor meetings, including today’s call. We’re excited about what he’ll accomplish in his new position as President. My congratulations to Katie, Jeremy and Greg on their next chapters and my heartfelt thanks to each of them.
And as announced on Monday, we are also pleased to have reached a constructive settlement with Starboard who sees the value in where we are headed, and we look forward to their continued engagement and support. We’ve added 2 new Board members, Dave Guilmette and Coretha Rushing and welcome their deep domain expertise and diverse perspectives as we collectively push Alight forward. Over the past 2 years, we have now refreshed half of our Board. Overall, we’re moving fast, and as I stated, executing the transaction is a key priority to achieve our long-term goals. None of this is possible without the hard work of our colleagues who continue to serve our clients with excellence. Their dedication to our clients and to each other is how we will continue to succeed and is why we recently had the honor of being named a Top 100 Places to Work by Fortune Magazine.
With that, I’ll turn it over to Jeremy to walk us through the financials.
Jeremy Heaton: Thank you, Stephan, and good morning, everyone. I want to add my personal thanks to Katie, who has been a tremendous mentor and surrounded me with a winning team. Alight’s opportunity ahead is a testament to her hard work, team building and vision. I’m honored and excited to lead the team forward, continue driving the transformation of our company and to spend more time with many of our key stakeholders. As Stephan said, closing the transaction is front and center across our organization and is on track to close midyear, which will accelerate many of our strategic and financial objectives. Upon closing, we estimate an immediate 300 basis point increase in our pro forma adjusted EBITDA margin to approximately 25%, which includes an estimated $20 million of dis-synergies that are temporary and will be managed out within one year post closing.
Shortly after the closing, we expect to use net proceeds from the upfront $1 billion payment for debt pay down as we delever to below 3x. And importantly, the difference in proceeds from gross to net of approximately $250 million will be 90% weighted toward paying down the TRA liability and will be paid in 2026. The remaining 10% will be a tax payment. The additional $200 million seller notes should follow in a similar structure in terms of gross to net. Of that, $50 million is non-contingent and $150 million is performance-based tied to the 2025 adjusted EBITDA of the divested business, serving as downside protection on performance at current levels. Coupled with our commercial agreement, this framework will drive continued focus on the shared success of both companies.
Given the pending transaction, we have transitioned the payroll and professional services business into discontinued operations. Going forward, Alight financials will be presented on a continuing operations basis. However, this quarter, we will also disclose our metrics on a total company basis, so you may more easily compare to our prior results. As you review the split between continuing and discontinued operations, I would note that we believe the continuing operations income statement understates the true earnings power for Alight. For example, the continuing operations financial results are fully burdened from certain shared costs that will move upon separation. Post close, we expect EPS upside from the planned debt reduction, improved margin profile and a more aggressive buyback program.
And now to the quarterly financial performance, I will be speaking largely from a total company basis as it’s more easily compared to history and prior guidance. Total revenue was $816 million, a decline of less than 1% when excluding the impact of the hosted business. Importantly, our high-growth category of BPaaS revenue increased almost 22% and represented more than 1/4 of total revenue for the company. Revenue from our non BPaaS solutions were impacted by several items. First, as I mentioned earlier, we no longer generate revenue from the Hosted business, which delivered $10 million of revenue in the prior year. Second, as Stephan mentioned, our nonrecurring project revenue finished below expectations by approximately $15 million, split evenly between professional services and employer solutions.
Finally, the impact on go-lives from softer bookings in early 2023, we expect a more favorable trend later this year where we have revenue under contract supporting our growth plan. Adjusted gross profit was $278 million, with margins nearly flat at 34.1%, and adjusted EBITDA was $4 million lower at $150 million. Despite the revenue decline, we continue to benefit from our productivity efforts, which helped offset much of the revenue impact from a profitability perspective. In addition, our cash flow continued to expand materially. We generated operating cash flow of $100 million, reflecting growth of 39% or $28 million more than the prior year. This represents a conversion rate of 67% compared with 47% last year and is driven largely by a continued focus on working capital efficiencies.
Capital expenditures in the quarter were also lower by 20% and our free cash flow improved significantly. Spending on our restructuring program resumed in the first quarter following the planned slowdown during annual enrollment last year. We continue to target the second half of 2024 for completing the cloud migration and expect to see financial benefits in late 2024 with full annual run rate savings in 2025. Of the expected $100 million of run rate savings, we expect the majority, approximately $75 million to remain with Alight. Turning to the balance sheet. Our quarter end cash and cash equivalents balance was $286 million which includes $30 million that is in current assets held for sale and total debt was $2.8 billion. As it relates to interest expense, continuing operations carries the full interest cost today.
We expect after paying down debt post transaction to under 3x, annualized interest expense will be a tailwind for profitability while also providing greater balance sheet flexibility. Similar to our fourth quarter, there was no repurchase activity given the strategic portfolio review and subsequent transaction announcement. We upsized our share repurchase authorization by $200 million and now have $248 million of availability, enabling a more consistent and aggressive buyback plan going forward. Turning to our outlook. While we will formally update our 2024 guidance following the close of the transaction, I do want to provide some color on our near-term expectations. We continue to build revenue under contract which for 2024 is now $3.1 billion, for 2025 is $2.2 billion and for 2026 is $1.6 billion.
Our sales momentum continues to provide greater long-term visibility. Directionally, on a total company basis, we view the second quarter similarly to the first quarter from both a revenue and margin perspective. Consistent with what we have said about our performance, we expect it to be second half weighted. We still expect 2024 revenue growth to ramp through the second half of the year with continuing operations revenue growth being in line with its midterm outlook of 4% to 6% before year-end as we benefit from new deals going live. We continue to watch our shorter-term project revenue pipeline and any impact from the macro environment, and we will look to offset potential headwinds with continued growth in new deals. From a profitability perspective, we expect to see benefits from our customer care efficiencies, which comes predominantly in the third and fourth quarter as our teams execute through the annual enrollment process as well as from our restructuring program that I mentioned earlier.
This progress and visibility enables us to reaffirm our midterm outlook. Overall, we’re making significant progress on a day-to-day basis while diligently working to close the transaction. In my new role, I look forward to meeting those of you I have not yet had the pleasure and would like to thank all of our Alight colleagues around the world for what they are doing every day. This concludes our prepared remarks, and we will now move into the question-and-answer session. Operator, would you please instruct participants on how to ask questions?
Operator: [Operator Instructions] Your first question comes from the line of Kevin of UBS. Your line is now open. Please ask your question.
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