Alight - Q2 2023

Transcript

Operator (participant)

Good afternoon, and thank you for holding. My name is Stacy, and I will be your conference operator today. Welcome to Alight's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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. Now, I would like to turn the call over to Jeremy Cohen, Vice President of Investor Relations at Alight. Please go ahead.

Jeremy Cohen (VP of Investor Relations)

Good afternoon, and thank you for joining us. Earlier today, the company issued a press release with second quarter 2023 results. A copy of the release can be found on 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. Throughout this conference call, the company will be presenting 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, and Katie Rooney, CFO. After their prepared remarks, we will open the call up for questions. I will now hand the call over to Stephan.

Stephan Scholl (CEO)

Good afternoon. Thank you all for joining us. Earlier today, we released our second quarter results and are pleased to close out the first half of 2023 with double-digit growth across revenue, Adjusted EBITDA, and operating cash flow. We believe these results, coupled with a consistent track record and increasing levels of visibility, leave us well positioned to achieve our 2023 and midterm growth outlook. During the quarter, we delivered revenue and BPaaS growth of nearly 13% and 40%, respectively. As a result, recurring revenue represented nearly 85% of total revenue for the quarter.

The mix towards tech-enabled revenue, coupled with investments to improve our operating model, are enhancing returns, with Adjusted EBITDA up almost 11% for the quarter. As we drive our profitable growth agenda forward, we're also generating stronger operating cash flow, which was up 37% for the first half.

Our strong performance is led by the collective components of BPaaS and non-BPaaS solutions, which have created a resilient book of business, taken together, allows us to sit here today with over 90% of our 2023 revenue under contract and already an unprecedented amount of backlog of $2.5 billion for 2024. Let me briefly explain our recipe and how each component contributes to the totality of our business.

First, our non-BPaaS revenue, led by professional services and standalone core administration, represents nearly 80% of total revenue and is seeing higher than normal growth rates, up 8% in the first half. Our recent growth was driven by one-time project work supporting the go-lives of large BPaaS deals. It is these mission-critical, standalone solutions that are the foundation for our moat, characterized as highly recurring and with long-term contracts.

They are the feeder, enabling us to upgrade our customers into larger platform deals that are driving better outcomes. The platform, Alight Worklife, is the backbone of BPaaS, which as a reminder, are tech-enabled solutions wrapped with our service capabilities that drive improved engagement and outcomes for our customers. Since 2020, bookings for these solutions have grown over 80% per year, resulting in revenue up 45% during the first half of 2023. BPaaS bookings were $149 million for the second quarter, and as we have noted previously, there will be lumpiness in our sales cycle.

To effectively evaluate our bookings, you need to take a longer-term view that isn't captured in a quarter-to-quarter movement. Cumulatively, we have sold $1.7 billion of BPaaS TCV bookings since 2021, well ahead of initial expectations and a key driver of higher sustainable growth. Speaking to the lumpiness, the total bookings exclude a large deal with a fortune 10 company that we've already closed here in July. Once again, deal timing may fluctuate, but it's the totality of these great deals that drive the long-term performance of the business.

The investments we have made and are continuing to make in our platform and products have resulted in a tremendous opportunity in our pipeline with a number of transformational deals. We also continue to monetize our offerings through a modernized pricing model that is being rapidly accepted by customers and provides upside going forward.

This gives us confidence in our medium-term guidance of BPaaS growth of 15+%, coupled with the non-BPaaS growth of 2%-4% with an improving margin profile. With that important context, let me now turn to the strategic investments that are driving the success of our transformation and overall trajectory. At the center is an ongoing focus of executing on our platform strategy and engaging people in a truly personal way that eliminates complexity, drives better participant outcomes, and yields better ROI for customers.

To accomplish this, the Alight Worklife platform has been constructed as a recommendation engine of one by unlocking the value of data within our core administrative services and leveraging AI in a meaningful way. Let me talk more about how we're doing this. Starting with product, early in the quarter, we announced a major upgrade to our SmartSelect MD search engine and launched new behavioral health services, both enhancing our navigation capabilities. Yesterday, we announced our second major annual release of Alight Worklife.

The latest release leverages Alight's robust proprietary data to deliver AI-driven personalization and automation capabilities across the Alight Worklife platform, and provides customers with advanced tools to increase the ROI of their benefit programs.

I am particularly excited to share our improved virtual chatbot experience, which will offer users greater access to AI-based personalization and the ability to answer specific inquiries efficiently and in a digital environment. Improving the chatbot experience will allow us to continue reducing the need for participants to use the call center channel, an improvement that drives greater client satisfaction and underscores our long-term margin expansion by driving down our service costs.

Though the advancement in our chatbot is exciting, Alight has been investing in and utilizing AI for years. AI has been core to powering individual benefit decisions and delivery automation. Our experienced models, highly leveraged data sets, and established connections with data sources are driving better engagement and improving ROI for our customers. This is the foundation for our BPaaS growth. Still, we're just scratching the surface of what is possible. We're unlocking concrete generative AI use cases by building internal applications.

For example, given the many millions of interactions and hard-to-digitize PDF documents that we handle annually, generative AI provides the ability to, at scale, ingest, comprehend, and answer questions about these documents in a faster self-service format. While we were busy this quarter improving our platform, we also were hard at work on the commercial side as our ongoing investments are translating to customer wins and new partnerships.

In the case of Weis Markets, a Mid-Atlantic food retailer with nearly 23,000 employees, our new relationship has grown from an original remit of taking over a complex Workday Deployment led by a competitor to a One Alight engagement that includes benefits, administration, and services work. With Siemens Healthineers, a multinational with nearly 70,000 employees, they were seeking a solution that prioritized employee health and well-being while also driving sustainable engagement.

Through our One Alight solution, Siemens will have the tools to address its objectives and positively impact well-being, retention, and cost. These wins underscore the continued strength in our commercial pipeline and the need for employers to drive better outcomes for their people, and together serve as a powerful foundation for our new Chief Commercial Officer, Greg George.

Greg joined us midway through the quarter, and I'm excited for our organization as his background in driving growth for cloud-based systems and in the HCM space fits with our transformational initiatives and will serve as a catalyst to accelerate our momentum. Another lever for commercial growth is through our numerous partnerships across the globe. This quarter, we announced an expanded partnership with Workday to help companies in various European countries source, manage, and pay their global workforce with a simple, unified offering.

This software partnership is in the early stages of its rollout, with the joint teams focusing on sales enablement, account planning, and our collective go-to-market strategy. Finally, although much of our transformation is growth-oriented, we're also well along the path of improving the efficiency of our back-end infrastructure. Migration of our data centers to the cloud is progressing to plan, with high-priority applications being moved in advance of annual enrollment and final applications migrating in the first half of 2024.

The end result of this program will be significant cost savings, better delivery for our customers, and an accelerated pace of innovation. I also want to take a moment to share more on the leadership changes announced this afternoon. Katie Rooney will be expanding her responsibilities to take on the role of Chief Operating Officer, focused on running Alight's professional services segment and our global payroll capabilities.

Many of you have gotten to know Katie well and can attest to her strong leadership abilities built from her over 14 years with Alight and its predecessors. In addition to her new role, Katie will continue to serve as Global CFO, and Jeremy Heaton will move into the operating CFO role, accountable for many of the day-to-day responsibilities across the finance function. Jeremy was Executive Vice President of FP&A and has been part of Katie's team for over three years. Before Alight, he was a divisional CFO for GE and spent over 20 years there.

Many of you have had the opportunity to spend time with him, and you'll be seeing much more of him in the future. Adding operational experience to Katie's skill set and elevating Jeremy's role will deepen the expertise of our executive leadership team and give our board, colleagues, shareholders, and customers confidence in our long-term success. Additionally, Cesar Jelvez will be leaving Alight. I want to thank him for his contributions in moving the business forward, and I wish him well.

Before I hand it over to Katie, I also want to express my gratitude for our colleagues around the world who, in just two years as a public company, have made tremendous progress transforming Alight, building upon our strong foundation, and setting us up for sustainable long-term success. Katie, over to you.

Katie Rooney (CFO and COO)

Thank you, Stephan, and good afternoon, everyone. Our second quarter performance was highlighted by double-digit growth in total revenue, BPaaS revenue, Adjusted EBITDA, and operating cash flow. In addition, the strength of our foundational non-BPaaS business is also driving increasing levels of long-term visibility, with Stephan noting earlier that we now have over 90% of 2023 revenue under contract and $2.5 billion of 2024 revenue under contract as well. The line of sight we have from our backlog is what enables us to confidently invest to sustain profitable growth.

Let me now turn to our performance. Starting with our consolidated results, during the second quarter, we achieved revenue growth of 12.7%, highlighted by BPaaS revenue growth of nearly 40%, as prior bookings continue to translate into higher contracted revenue. This is resulting in an ongoing shift towards higher quality recurring revenues, which were up 13.6%. Recurring revenue comprised 84.7% of total revenue, a 70 basis point increase from the prior year. Adjusted EBITDA increased 10.6% to $157 million, with an Adjusted EBITDA margin of 19.5%.

With strong growth across the board, we are generating increasing levels of cash flow, which strengthens our balance sheet and funds our transformation. For the first half, we generated operating cash flow of $162 million, with a conversion rate of 52%, up significantly versus prior year as we continue to make improvements in working capital. As a reminder, our second-half cash flow tends to be seasonally stronger, and we would expect the same this year.

As planned, both investments and restructuring activity are projected to slow compared to the first half, which will impact both profitability and cash flow. Let me now expand on our bookings performance, both for the quarter and more holistically. To start with the results, BPaaS bookings for the quarter were $149 million, and cumulatively, we're pleased to report we have now achieved over $1.7 billion in total bookings since we began our transformation in 2021.

As BPaaS revenue is long-term and recurring in nature, this foundational backlog will continue improving our overall quality of revenue as we leverage the Alight Worklife platform. For 2023, we now expect BPaaS bookings to be in the range of $700 million-$900 million, which implies a strong second half and well over $2 billion of cumulative bookings, more than $500 million ahead of our original three-year plan. As you may recall, we will see lumpiness in our bookings from large deals. For example, the two we closed in the fourth quarter of 2022.

The GE deal is a great example of this dynamic. Our engagement is designed to drive long-term BPaaS revenue starting in 2024 through our Alight Worklife platform and comprehensive payroll and benefit solutions. However, this year, our team is hard at work implementing the core platform and systems across GE's three companies, and this work is driving higher non-BPaaS revenue in 2023.

The closing of One Alight deals such as this are lucrative, but the size and complexity of finalizing these offerings typically means they take longer to close. Another case was for a deal closed in July, as Stephan discussed, and as you evaluate Alight, it remains an important reason to take a longer-term view of bookings. We also continue to have a very strong pipeline across our business, with over $2 billion in opportunity just within our install base. We're making progress with new logos, and we've introduced our new pricing model, which is not yet contemplated in our total backlog.

Our pricing model is being implemented in new deals and will enable us to monetize new products more effectively. Overall, the implications of building our platform and driving value-based pricing will be multifold. We'd expect increased revenue growth, improved margin potential, and faster cash collection as we prove out a better model for our customers. Overall, these levers, taken collectively, are driving growth for our business and position us well to achieve our midterm outlook. With that, let me now turn to our segments, starting with employer solutions.

Second quarter revenue was up 13.5%, with recurring revenue up 14.3% and project revenue up 5.5%. Contributing to our growth was two months of Federal Thrift, as well as increased net commercial activity, volumes, and the impact from the ReedGroup acquisition. Our strong growth, coupled with productivity savings, are driving better profitability, with second quarter adjusted gross profit up 21.3% to $268 million.

Adjusted gross margin increased by 250 basis points to 38.5%. Turning to our professional services segment, second quarter revenue growth accelerated sequentially and was up almost 10% from the prior year to $100 million. This was driven by a 10% increase in project revenue and a 9% increase in recurring revenue, building from a strong backlog. On a profitability basis, adjusted gross profit was slightly off from the prior year, down $1 million. Turning to our balance sheet, our quarter-end cash and cash equivalence balance was $271 million, and our total debt was $2.8 billion.

We continue to actively manage our debt, and our hedge portfolio is 84% fixed through 2024 and 60% through 2025. Our net leverage ratio at the end of the second quarter was 3.7 times, down from 3.8 at the end of the first quarter. As a reminder, we are targeting midterm net leverage of approximately 3 times. Turning to our outlook, our strong first half keeps us on track for another successful year. With more than 90% of our revenue under contract, we are reaffirming our 2023 guidance, with the exception of BPaaS bookings mentioned earlier.

Our outlook includes revenue of $3.47 billion-$3.51 billion, or growth of 11%-12%. Adjusted EBITDA of $735 million-$750 million, or growth of 12%-14%. Adjusted EPS of $0.62-$0.67, or growth of 9%-18%, and an operating cash flow conversion rate of 45%-55%, up from 43% in 2022. From a phasing perspective, we expect second half Adjusted EBITDA to follow historic trends, with higher upfront costs in the third quarter, supporting growth in the fourth quarter.

In closing, I'm so proud of what we have accomplished and continue to achieve with double-digit revenue, Adjusted EBITDA, and operating cash flow growth. These results demonstrate the attractiveness of our long-term strategy as we pivot towards a higher growth and higher margin operating model, positioning us to enhance long-term shareholder value. 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 (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Kyle Peterson with Needham & Company. Please go ahead.

Kyle Peterson (Equity Research Analyst)

Great. Thanks. Good afternoon, guys. Katie and Jeremy, congratulations on the new roles. Just wanted to start off, you know, on the guidance revisions, particularly on the BPaaS bookings. Understanding can, you know, appreciate there's some lumpiness there, but, you know, just wanted to see, is this just, you know, a few large deals shifting around here or there, or is there any, you know, hesitation or signs of slowdown, you know, from clients? You know, maybe wanting to push off some of, you know, these projects a little bit, just given some of the macro uncertainty. Any color would be very helpful.

Stephan Scholl (CEO)

Sure. Thanks, Kyle. Appreciate it. Listen, you know, you got to go back to what we said almost three years ago, right? When our original guidance was, was $1.5 billion, we all felt that was a big, goal to achieve. Look where we sit. We're gonna be, call it, you know, $500 million ahead of that plan. We've had some good success, early days, in the last couple of years on driving that book of business. You've all seen how that bookings performance has translated into, you know, starting 2023 with $2.9 billion of revenue under contract, which was the entire revenue book of business we did in 2022.

If you translate the success of our BPaaS bookings from the beginning of when we started in 2021, you know, we started the year in 2023 with almost $800 million of revenue under contract, more than we did in 2021. Over two years, almost $800 million of high quality, valuable backlog. And then you heard Katie say, $2.5 billion of revenue under contract for next year, which we've never, at this point in time, had that much as well. That should give confidence looking into 2024 and midterm. And then Katie also said 90% of 2023 revenue under contract.

In terms of, of pipeline, you know, we're looking at right now over 20 deals that are over $20 million in value, each one of them, and some of them, of course, significantly more than that as well. Pipeline is strong. We're seeing the same enthusiasm from clients, especially now heading into second half, where CFOs and CEOs are continuing to try and look at how to take costs out of their business.

As you all know, during COVID, there was a lot of spend that happened on what I would call, you know, point solutions. We've come in with our platform, capability and really stitched together an end-to-end, you know, front door kind of capability with our Worklife platform, and that has resonated. We are doing a lot of work around value engineering and process reengineering for a lot of our largest clients, which could, again, as I said, with our pipeline, yield some pretty significant transactions for us moving into the outer quarters as well. We feel really good about where we are.

Again, as I said during my segment, you know, it's very hard to look at this business in a 30, 60, 90, or even, you know, 6-12 month view. You have to take a multi-year, long-term view. Again, as shareholders, you know, I know the, the, the shareholders that I've talked to appreciate the long-term view of making sure that we drive a better quality book of business at higher margins and, and better contribution to the company. We feel really good about where we are.

Kyle Peterson (Equity Research Analyst)

Yeah, that makes, makes sense. You know, it's good, it's good color. You know, maybe just a, a follow-up, you know, on capital allocation, you know, specifically thinking about the back half of the year as, you know, cash flow, you know, seasonally, typically tends to be better for you guys in, you know, in the second half versus the first half.

How are you guys thinking about, you know, whether it's kinda amping up the buyback, you know, in the second half of the year, or, you know, are there interesting M&A opportunities you guys would, you know, look to pursue? You know, any additional color on, you know, how you're looking to deploy capital in the back half of the year would be great.

Katie Rooney (CFO and COO)

Yeah. Thanks, Kyle. Great question. You know, our capital allocation priorities have, have not necessarily changed. I think, you know, if anything, they've kind of been elevated in this environment. You know, first priority is the stability of the balance sheet, feeling good where we are from a hedge position, maturity position. You know, we'll continue to naturally delever, which I think is important. Then, really, the priority has been investing in the business organically and inorganically.

We've said, listen, you know, there is still a lot of frothiness in the market from a valuation standpoint, and if, you know, we don't see the right opportunities, then, then we'll absolutely consider stock buyback. I, you know, I'd say both are on the table, and, and we're continuing to evaluate them as we go forward.

Operator (participant)

Next question, Kevin McVeigh with Credit Suisse. Please go ahead.

Kevin McVeigh (Analyst)

Great. Thanks so much, and let me add my congratulations as well, to Katie and Jeremy. Well deserved for sure. Hey.

Katie Rooney (CFO and COO)

Thank you.

Kevin McVeigh (Analyst)

Stephan, I just want to. You're very welcome. Hey, Stephan, I just wanted to clarify one thing you said. I just want to make sure I heard it right. You'd mentioned the fortune 10 client. Are they still in that bookings number, or did that relate to the adjustment in the bookings at all? I just, I think you were clear. I just want to make sure that I picked it up right. I know you'd mentioned that big fortune 10 client you won earlier in the year. Was there any context you just could clarify for us around that?

Stephan Scholl (CEO)

Yeah. Yeah, you know, obviously, you know, it's so fresh still, and, and, as you can imagine, with NDAs and, and all that stuff, it, it's kind of complicated to be able to, to, announce the actual name. These deals are different. This is a different transaction and a different booking than the one that we announced previously, so hopefully that helps it.

Katie Rooney (CFO and COO)

It's not included.

Kevin McVeigh (Analyst)

Yeah.

Katie Rooney (CFO and COO)

Yeah, Kevin.

Stephan Scholl (CEO)

Oh, sorry, Katie.

Katie Rooney (CFO and COO)

In our Q2 number. Yep.

Stephan Scholl (CEO)

Oh, yes.

Kevin McVeigh (Analyst)

So the.

Stephan Scholl (CEO)

Yeah, thank you. Yeah, it's not in Q2. That's correct. That's why I mentioned the July statement. That's right. Yeah.

Kevin McVeigh (Analyst)

That's it, Katie, it is in the full year, or Stephan, it's in the full year guidance, right?

Katie Rooney (CFO and COO)

Correct.

Kevin McVeigh (Analyst)

Great. Katie, it sounds like your added responsibilities are, are international payroll and then professional services. Is that coincidental that, you know, one of the things we're really encouraged about is a Workday partnership? Does that add additional focus on that? You know, maybe just help us understand what, what that brings to bear because, because it's obviously a real nice part to the story as well.

Katie Rooney (CFO and COO)

Thanks, Kevin. Yeah, I, I absolutely think that is a part of it. I mean, as you know, We're also a, a large client, right? As I've deployed Workday financials across the organization, so, you know, think very highly of, of the company and, and the partnership that the team has built. I, I do think that is a good opportunity for us.

I think also, I mean, as we've talked a lot about international in general, when you think about just the, the position we come at global payroll from, you know, from a significant position of strength, there's a huge opportunity across One Alight as, as we continue to, to bring, you know, our solutions, the platform strategy, to bear for our clients. You know, that is, that is kind of the focus today and, and continuing to really work across the leadership team to, to bring those solutions to our clients and, you know, with, with our platform approach.

Stephan Scholl (CEO)

Yeah, the only thing I would add to that is, is, you know, listen, we all know Workday is one of the best software companies in the business, and, and Anil and Carl and Dave just built something that's absolutely incredible to be a part of as a partner. To have a software partnership speaks to kind of Kyle's earlier question around what we're seeing in the market, which is HR buying centers were left behind in this massive digital transformation to consolidation and simplification.

So what, what you see with Workday and this partnership is a, a view that I share and that they share, which is clients are looking for more consolidated solutions and, and on a, on a platform, kind of an approach. That gives kind of credence to our kind of, you know, whole BPaaS playbook, which is: How do you drive One Alight in a lot of these accounts? You know, because a lot of these clients have 30, 40, 50, up to 80 different point solutions. We're both seeing the same kind of trends, which is moving to a more integrated enterprise, you know, platform type of an approach.

Kevin McVeigh (Analyst)

That makes sense. Thank you.

Stephan Scholl (CEO)

You're welcome.

Katie Rooney (CFO and COO)

Thanks, Kevin.

Operator (participant)

Next question, Tien-tsin Huang with JP Morgan. Please go ahead.

Tien-tsin Huang (Senior Analyst)

Hey, thanks. My congrats to Katie and Jeremy as well. I want to just clarify one more time, forgive me, on the BPaaS bookings, TCB revision here. Did, did anything fall out of the, of the pipeline? Is that part of it, or is it just a timing issue into next year? Then separately, I know revenue and all the headline figures didn't change, and I know that the bookings here are, are very long term in nature, but are you making it up anywhere else in terms of revenue that you were expecting this year as it relates to the BPaaS piece, or is it really just, again, timing?

Katie Rooney (CFO and COO)

Yeah, good question, Tien-tsin. Thank you. A couple of things. I think, yes, it is timing, right? When we talk about some of the lumpiness, you know, Stephan mentioned having over 20 deals, over $20 million. There's, there's a really strong pipeline that the team is, is working. I think the strategy is resonating, but getting those deals over the line has taken longer. That's really kind of where that revision comes in. Why we haven't changed the guidance is because that's obviously only one piece of the story.

You know, going back to what we've done over the past three years and the impact that has going forward is obviously, you know, the most important driver, coupled with obviously continued strong performance in the non-BPaaS areas, the new pricing model, right? All, all the other components we mentioned around it, continues to, to support the, the guidance as well.

Tien-tsin Huang (Senior Analyst)

Very good.

Stephan Scholl (CEO)

Yeah, I mean.

Tien-tsin Huang (Senior Analyst)

just on

Stephan Scholl (CEO)

We're not... Sorry, go ahead.

Tien-tsin Huang (Senior Analyst)

Go ahead, Stephan.

Stephan Scholl (CEO)

No, I was just gonna say, we're not wavering at all from the transformation agenda, and the BPaaS piece is healthy. As you've seen from the numbers, you know, if you change GE bookings from December 31st to January 1st, it's a different conversation. We've had that on last quarter. Timing, you know, is one thing, but the health of the business, the health of transformation, all that is still very strong, and that's why it shows up in terms of still our, our midterm guidance.

As you can see, we also spend a lot more time because a lot of you, as investors and analysts, asked us that, which is how, you know, what is the non-BPaaS book of business? The two together really drive, you know, a resilient book of business for us. The GE, I think, example, Tien-tsin, is I think a great one, which is there's no BPaaS revenue. Even though it was a major booking last year at the end of the year, there's no revenue until 2024, but there's a lot of non-BPaaS type revenue.

As you heard us say, you know, there's some impactful growth in the last couple of quarters and moving forward on some of that non-BPaaS type revenue, but all in the name of helping drive more towards our platform book of business in the outer years.

Tien-tsin Huang (Senior Analyst)

Very good. No, I, I understand. I think just wanted to make sure, make sure, given some of the, the importance-

Stephan Scholl (CEO)

Sure.

Tien-tsin Huang (Senior Analyst)

Maybe too much focus on some of the KPIs, yeah, no, no complaints here. My quick follow-up, just thinking about second half, I know, again, the headline revisions, was just limited to the TCV piece, which you just went through, any other change in thinking? I know there's some questions around employment normalization. Doesn't sound, I'm assuming you're not too influenced by that. Are you seeing anything there amongst same-store growth for your larger clients?

Then same thing on... I know pipeline is strong, just visibility and the conversion timing, that kind of thing. We heard a lot of delays and pushouts with some of the traditional IT services providers. I'm curious if you're seeing any signs of that as well. Thanks for taking my questions.

Katie Rooney (CFO and COO)

Yeah. Thanks, Tien-tsin. We're, we're really not. When it comes to, you know, just the underlying performance, and again, the team is doing an incredible job getting clients live on time, working through that. On a, you know, the kind of employment trends haven't had a, you know, an impact on us. I, you know, I think the only area we continue to monitor, as you know, Q3 and Q4 are higher project quarters for us that we do continue to monitor.

You know, so far, you saw it in the second quarter. We've, you know, we've done well, but that's the one area we have a little bit less visibility to at this point. In terms of kind of the recurring book of business and, and where we sit today, we feel good.

Tien-tsin Huang (Senior Analyst)

Great. Thank you.

Operator (participant)

Next question, Pete Heckmann with D.A. Davidson. Please go ahead.

Pete Heckmann (Analyst)

Hi, good afternoon. I had a few more questions. Thinking about those two large clients, GE was one of them, that were signed in the fourth quarter of 2022. Would we expect those to go live in 2024, first half, second half, midway through? Just thinking about kind of the both of those seem like they're big enough to influence the growth rates a little bit. Just trying to feel like... You just said that you're, you're hitting milestones, the contracted backlog is tracking, your contracted pipeline is tracking towards going live. Any additional thoughts in terms of, you know, going into 2024 about some of those big, big go lives?

Katie Rooney (CFO and COO)

Yeah, thanks. You know what? What I'd say is, they remain on track. Again, the team has just done a fantastic job with those contracts. How it works is, you know, we're not fully live at the start of 2024. We're actually not fully through, kind of like GE, we're not at a full run rate until 2025. You will see a benefit at the start of 2024 that continues to grow through the year. We're at a full run rate, actually, as we enter 2025.

Pete Heckmann (Analyst)

Got it. Okay. Then, any thoughts about ReedGroup and its relative fit and its integration? Any surprises there?

Katie Rooney (CFO and COO)

Yeah, Pete, you know, honestly, what I'd say is, you know, when you think about the, the landscape of what our customers are, are asking for, it just fits really well within the, you know, the One Alight view in terms of their interaction with us. We've seen really good traction in the pipeline there, and the team has performed well. No surprises. I think it's, you know, potentially even a bigger opportunity than, than we'd anticipated, but, you know, we're still, I would say we're still early in the pipeline there.

Stephan Scholl (CEO)

Yeah, I, I'd say it's, it's in the small but mighty category. You know, when you think of what that actually does in terms of, of leaves capability, you know, we've seen some large deals get swayed by a very small component with leaves because it is such a, such a key element to helping employees get them back to work earlier, which is a huge ROI around that. As we unpack, especially in the Fortune 500, the cost base of somebody leaving work on a leaves program and then getting them back, the dollars are just so significant.

So when we attach it to our platform and, you know, integrate it into navigation and into our, you know, benefits administration and the rest of Worklife, you know, it really kind of brings it to a much more cohesive conversation and, and has really helped us, you know, kind of tip the scales in our favor on some really nice deals for us.

Pete Heckmann (Analyst)

Nice. All right. It's good to hear. Thank you.

Stephan Scholl (CEO)

Yeah, thank you.

Katie Rooney (CFO and COO)

Thanks, Pete.

Operator (participant)

Next question, Peter Christiansen with Citi. Please go ahead.

Peter Christiansen (Analyst)

Good evening. Thanks for the question. Glad to be a part of the call.

Stephan Scholl (CEO)

Thanks, Peter.

Peter Christiansen (Analyst)

Next question. Thank you. Stephan Scholl, I was just wondering if you could talk to the enterprise spending environment. I know you mentioned pipeline looks really strong, but it sounds like Alight benefits when enterprises are perhaps a bit more cost-conscious or maybe the inverse. I'm just trying to understand what dynamic you see really driving that pipeline. Is it cost savings, or is it just other kind of aspects? Then just as my follow-up, looks like the gross margin really outperformed this quarter. Just wondering if we could dig into that a little bit, what drove some of the outperformance? Thank you.

Stephan Scholl (CEO)

Yeah, sure. Thanks for the question, you know, I'll try and keep this very concise because I could talk a lot about this. You know, we've been on this multi-year journey in COVID, as you saw, clients just threw everything at, you know, employees around these point solutions. We knew three years ago, three and a half years ago when I got here, that was a band-aid, right? You know, what employees want is more simplicity, more clarity in helping make better decisions.

In fact, all that, you know, most corporations did, is add more complexity to the whole process of making the right decisions around keeping them healthy and financially secure. We've continued to prove out the value of a front door, which is our Alight Worklife platform, you know, integrating not only our data, I think that was a big shift, you know, culturally for us, but even for the market, was we're willing to integrate our own, our own data with our competitors' data in order in the name of, of platform, to give the best set of information for people to make better decisions.

By the way, in my last company, I mean, everybody knows my background, we did exactly the same thing for how to, how to drive digital transformation in the business world. Whether it be Ferrari or Nike or other major corporations, we've all seen how digital disruption has really impacted the, the B2C world in that sense.

None of that happened in the last decade, really, on the employee engagement side of things. We're just taking an old playbook that has worked really, really well, as we've seen with all the SaaS providers, and we didn't put a label of SaaS on it 'cause it's too complex. We, we put a label of BPaaS on it, Business Process as a Service, and that's a strong combination of products and software together with services that really help us drive a platform play.

Every client we talk to in the large scale is looking to now consolidate and simplify that big spend they've had over the last four years, and we're the beneficiary of that, right? The good news is, we're in the decision room in helping clients get rid of point solutions where they're not needed, help them drive more campaigns and capability to get better value for their spend. I mean, when you think of... It's not a mystery.

When you think of the rates of, of engagement in, in the low single-digit percentage points, you don't have to look very far to see how difficult it has been for clients to get value for their investments because employees just aren't using it. Our engagement rates are double, triple, quadruple in many cases, when you integrate the data sets in Alight Worklife. We're right in the middle of, of an exciting chapter by being on the front lines with clients, helping take out some of those costs. Hopefully that helps.

Katie Rooney (CFO and COO)

Yeah, Peter, just on- and Peter, I was just gonna address. First, thanks. Glad to have you on the call. You know, just on the, on the gross margin front, we talked a lot about some of the key investments we made last year, and we continue to make into this year. I think, you know, as we said, we have to see a return on those investments, and they will come through first in, in gross margin, in terms of our go-to-market, in terms of technology investments, right? How we're delivering for our customers, that's really what you're starting to see play through the, the gross margin.

Peter Christiansen (Analyst)

That's great. Very compelling there. Thank you.

Katie Rooney (CFO and COO)

Thank you.

Stephan Scholl (CEO)

Thank you.

Operator (participant)

Next question, Heather Balsky with Bank of America. Please go ahead.

Heather Balsky (Research Analyst)

Hi, thank you so much. I'm gonna ask first another bookings question, so I, I apologize, but we wanna just kick the tires here. You, you talked about that some of the shifts in timing of the bookings just has to do with getting those deals, you know, getting some of the deals over the line. I'm just curious where you might be. You know, what might be causing some of that timing delay? You know, is it internally within the company? Is it just kind of selling the BPaaS strategy to the company? I'm just curious what the feedback you're getting from these customers is.

Stephan Scholl (CEO)

Yeah, I, I, I wouldn't put it as delays or timing. You, you have to put everything into context. The context is, we said it would be a really heroic day if in three years, which we're coming up to the last two quarters of that, if we could, you know, on a new strategy, deliver $1.5 billion of these BPaaS dollars. On its own, we're gonna hit hundreds of millions ahead of that, call it $500 million ahead of that plan, and we've hit our targets early, right? I, I would look at it from that point of view.

You know, our pipelines are strong. I would say the, the demand from clients to, to want us to come in, you know, if anything, what's happening is the deals are getting bigger. When you start doing, you know, process reengineering, not to get too technical here, but it takes a lot of work to go into a major client and say: Here are the 15 steps it takes to get to 20 different applications, and here's the experience an employee has on the left side of the ledger to now, here's what it would look like in a consolidated, integrated dataset, and one place to go for an experience on the right side of the ledger.

Here's the from to. Here's the ROI in savings, which is significant. I mean, we've seen, we've seen some ROIs into the hundreds of millions of dollars of savings for our clients by going from left side to right side. You know, complex, broken, not being used, costly to Integrated Front Door platform.

I would say, if anything, what you have to look at is the conversations we're having are with more senior people. The conversations are broadening from the HR department a lot now into the CFO department and into IT department. We're actually getting into a lot of conversations on, you know, front door, ServiceNow versus Alight. It's great to see that conversation.

We've all seen how well ServiceNow has done with their book of business, but they're very limited as ServiceNow is on their product side of things. We have the administrative data and platform, which I've always said for the last few years, really is a unique combination that nobody else has. That allows us to really be much more dynamic versus static.

We've had a lot of workshops with a lot of the largest banks and a lot of the largest companies in the United States, specifically. It's great where we're winning the front door discussion when it pertains to how to keep employees healthy and financially secure, because they see the value of platform and administrative data. Super exciting. The pipeline is stronger than ever. The deal sizes are great. But, you know, as I said just a few minutes ago, getting through these more complex sales cycles, which will benefit us in the longer term, just takes a bit more time.

Heather Balsky (Research Analyst)

Okay, that's, that's really helpful. You know, you talked about the, you know, launched your, your, your next sort of platform. I'm curious if there's any pricing that you're taking on, on the back of it, and, and how to think about, you know, your pricing efforts going forward.

Katie Rooney (CFO and COO)

Yeah, Heather, maybe I'll take that one. You're right. We, we have our semi-annual releases now of the Alight Worklife platform, which is great 'cause it's, you know, a clear product roadmap driven with our clients that really continues to add value. What I'd say is how to think about it is actually more how we're pricing new deals now, such that we get value for platform. Remember, we used to face price pressure. Right now, we're looking at how do you build price into the contract going forward to account for those investments we're making in platform that clients can see by being rolled out twice a year.

It, it, it is kind of, in essence, baked in. I think it's a key element of, of the strategy, given the, the investments we're making. you know, we've, we've been able to demonstrate to clients that there is value in those releases.

Heather Balsky (Research Analyst)

Thank you. Appreciate the color.

Steve Enders (Research Analyst)

Thanks, Heather.

Stephan Scholl (CEO)

Thank you.

Operator (participant)

Next question, Steve Enders with KeyBanc. Please go ahead.

Steve Enders (Research Analyst)

Hey, just want to know, have, have there been any updates you can provide on phase two of your migration to the cloud? Has there been any feedback on your latest release of Worklife? Thank you.

Stephan Scholl (CEO)

Sure. Yeah. Thank you.

Katie Rooney (CFO and COO)

Yeah. Go, go ahead, Stephan.

Stephan Scholl (CEO)

No, go ahead, Katie, please.

Katie Rooney (CFO and COO)

I was just gonna start with just on the, the, rollout, and then Stephan, I'll let you talk about the release, which we just rolled out yesterday, so I would say it's early. Just on, on the cloud migration, you know, that is obviously a really important project for us. The team has done an incredible job. We are really through kind of almost the first two phases of, of, the, the rollout.

The next kind of final piece will be completed in the first half of 2024. Again, the team has, has really done that in the right way with our clients, and now obviously, we're kind of on a pause as we enter a really important time with, with annual enrollment here this fall.

Stephan Scholl (CEO)

And on the product side, again, you know, while AI and generative AI are the topic of the day, we've been, that's been our strategy for years. When you look at the hundreds of millions of interactions that we already undertake with 40, you know, almost 40 million employees around the world, that data is powerful, and that's what, you know, is important for us to integrate into moments that matter. That's the work we've been under in this last release, is really building out capability in our software to be able to recognize PDF files, for example.

When somebody calls in and says, "Is a procedure covered, you know, under my health plan?" You know, those documents usually are, are static, you know, PDF-type documents. With generative AI, you can really, you know, build the capability to be able to look at the PDF formats and really, you know, sync the two you know, the question together with the answer without having to call our call centers. Those are hundreds of thousands of calls that we get every single year. So we're building out a really strong API library, integration points.

We're building a very robust, you know, Ask Lisa-type capability, which is the AI piece, to really helping people navigate the complexity of making better decisions across health and wealth and wellbeing in general. So we're just continuing to double down on the Front Door platform and then the look and feel, just making it look easier, simpler, you know, kind of the iceberg phenomena.

As we all know, these DB, DC navigation, retirement, payroll, you know, benefit systems are just so complicated. The, the, the world of bringing that into a much more simplified front door capability in an integrated fashion. Maybe the last piece I'll say is the value of our platform is about really making it personalized to the individual.

I went back to numerous examples on the digital side. For us, you know, we're all B2C focused people in terms of how we live every day, and many of us feel like we're the only client at, you know, a Nike or the Ferrari example I gave earlier, and we want people to feel the same way here when it comes to their wellbeing plans.

Why should I be stuck with a wellbeing plan or a benefits plan or a retirement plan that's stuck to a job code or to a salary band or to an age or to something? Why isn't it specific to my individual needs based on health and family situation and financial situation? The platform approach really is a, a, a big difference maker for us in terms of impact, and that's what's gonna help continue to drive the BPaaS transformation for us.

Operator (participant)

Thank you. I would like to turn the floor over to Stephan for closing remarks.

Stephan Scholl (CEO)

Great, thank you all for joining us today. I really appreciate all the time and the questions, and I look forward to, with Katie and Jeremy, to meet all of you at many of the upcoming investor events. Thank you very much, and have a great afternoon.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.