Alight - Earnings Call - Q3 2021

Transcript

Speaker 0

Good morning, and thank you for holding. My name is Doug, and I will be your conference operator today. Welcome to Alight's Third Quarter twenty twenty one Earnings Conference Call. At this time, all parties 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.

And now I would like to turn it over to Greg Faje, Head of Investor Relations at Alight to introduce today's speakers.

Speaker 1

Thank you, and we appreciate everyone dialing in this morning. Earlier today, the company issued a press release with third quarter twenty twenty one results. A copy of that release can also 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 the company's filings with the SEC, including the company's prospectus filed with the SEC on 08/24/2021, as such factors may be updated from time to time in the company's periodic filings with the SEC. The company does not undertake any obligation to update forward looking statements. Also throughout this conference call, the company will be presenting non GAAP financial measures. Reconciliations of the company's historic non GAAP financial measures to their most directly comparable GAAP financial measures to the extent available without unreasonable effort appear in today's earnings press release, which is available on the company's website at investor.alight.com.

On the call from management today are Stephane Scholl, CEO and Katie Rooney, CFO. After their prepared remarks, we will open up the call for questions. I will now hand the call over to Stephane.

Speaker 2

Good morning. Thank you so much for joining us today. Before we get started, I want to say thank you to the Alight colleagues around the world. We have been on an incredible journey over the past two years, and our colleagues have been at the center of helping us to transform the way companies think about their employee experience. Through our Alight Work Life platform, we are bringing together a holistic view across health, wealth, well-being and payroll to more than 30,000,000 people at the world's most influential companies.

We believe this unique capability set is generating positive momentum in the marketplace as companies fully embrace the differentiated experience and return on investment we can provide. Given the strong momentum in our business, we are raising our full year guidance for the second time this year to 5% to 6% revenue growth and adjusted EBITDA to $615,000,000 to $625,000,000 Before we dive further into our results, I want to start with a number that shows how critical Alight's solutions are for today and tomorrow, 65%. That's the percentage of American adults who say they are planning to switch jobs in the next year. Think about that, 65%. Then there are millennial and Gen Z workers who make up more than half of the workforce and are even more likely to be searching for another job.

The pandemic has accelerated a tightening of the labor market. It's the great resignation. I know you've all been reading about it and probably hearing about it as a risk on every earnings call you've been on. On top of this, companies are grappling with the return to the workplace strategies, vaccine requirements and keeping their workplace healthy and prepared. While never simple, the workplace, HR, benefits, regulation, all of it has gotten even more complex.

And yet companies are spending billions on pay and benefits, but the mass exodus of workers continue. This should lead us to ask, are we spending our money on the right things that matter the most to workers? And will that have the biggest impact? In our view, the simple answer is no. Employees are asking for more.

When they leave one company for another, employees are saying that they want a different experience and they have higher expectations of their employers. They are voting with their careers. The pressure employees are putting on companies is changing the conversation, and it's elevating the conversation. Things like benefits, employee engagement and well-being are no longer HR conversations. These are C suite and Board level discussions because putting employees at the center has become a business imperative.

We believe these very real challenges companies are facing have created tremendous tailwinds for Alight. We moved early to double down on our investments in technology and commercial, given our strong and stable free cash flow profile and are seeing the benefits. In the third quarter, we delivered 20% BPAS revenue growth with double digit BPAS TCV bookings growth. We are now ahead of our full year expectations for BPAS TCV bookings. We are also driving margin expansion on both gross margin and EBITDA margin as we leverage technology to move faster with our clients.

And as I mentioned earlier, we are raising our full year revenue guidance to 5% to 6% growth and adjusted EBITDA to $6.15 to $625,000,000 So why can I like turn these headwinds into tailwinds? Because the answer to these challenges lies with the employees. How companies are treating their workers, what they're doing to improve employee experience and their overall well-being has never been more important. Alight's Business Process as a Service Solutions, BPAS, leverage the Alight Work Life engagement platform to provide tools and technologies employees can use to maximize the value of their benefits and improve outcomes, driving increased productivity and helping employers develop high performing cultures. For some perspective, I recently spoke to the CHRO at a major manufacturing company we work with.

Right now, they need to hire thousands of engineers, and they need and want employees who are going to stick with them for the long term and not switch jobs after a year or two. At the same time, their job candidates are asking for more. They don't just want foosball tables and free lunches. They want to know how their employer is going to care for them and their families throughout their career and life. This creates an incredible opportunity for this employer to align their benefits and employee experience strategy to create a differentiated employer value proposition that will attract and retain workers for the long term.

We believe Alight is the only company that can work with this client and others like it to support their employees and their families from hire to retire across health, wealth, well-being and payroll in one seamless experience. Of course, this company could choose 22 different programs from numerous providers, but instead, alike can provide a best in class approach that brings everything together in one common engagement platform to create a differentiated employee experience, drive engagement with HR and benefits programs and most importantly, improve outcomes. Let me bring this down even a level further. Considering an employee who is diagnosed with breast cancer, for most people, this is an overwhelming and confusing experience, trying to determine which health care providers to entrust your care to, navigating treatment options, second opinions and not to mention the incoming bills. Now what if that same employee had an entirely different experience that was personalized to their unique situation?

This is where Alight changes the game. Using the Alight Worklife platform, this same employee gets bespoke information and messages related to her care, prompting her to an Alight Nurse Pro who can assist her in finding the right provider, suggest support groups to help her cope with the mental and emotional impact of her diagnosis, direct her to a second opinion and essentially guide her through her entire journey. And the great news, of course, is that our existing clients and prospects understand the need to move the needle in a more meaningful way Rather than sticking with the best in breed approach that has been pervasive in the human capital management space forever, companies see the headwinds they are facing and are choosing a different path. They are choosing our best in class approach that will help them transform the way they think about benefits, pay, HR and their entire employee experience. Let me help you think about the shift that Light is driving in the HCM space in a different way.

Decades ago, companies approached their back office technology in this siloed approach, where they picked the best provider in X and the best provider in Y. But then you had innovators that started pulling all of these services into one seamless integrated platform. That is what Alight is doing in the HCM space. We are getting rid of the administrivia of multiple providers, one platform that provides payroll, one for health and so on, and replacing them with a single beautiful consumer grade experience that provides data analytics and actionable AI for both employers and their people. Companies like Camping World and PwC, which we signed in the third quarter, know the outcomes Alight's Speed Pass solutions can drive.

These companies are looking for a strategic partner to help them transform their employee experience across health and retirement benefits and well-being and provide the business with the data they need to make better HR and business decisions. Pairing Alight's AI driven engagement and personalization to create an intuitive employee experience with our analytics capabilities to drive frequent, high quality interactions that help employees make the best use of their benefits, provide better care to lower cost and result in improved well-being. And our data analytics allow companies to benchmark existing benefits and total employee experience against their peers, use AI to prioritize the biggest opportunities and offer recommended actions. Together, this powerful combination can help companies move the needle on their talent strategy, employee well-being and health care spend. We're also converting existing clients from siloed solutions to our holistic BPaaS solutions as they look to rethink their strategic approach.

In the quarter, we expanded our relationships with existing clients, including Aptar, Arconic, CNA, Genworth, Shell and Randstad. An integral part of our success with our clients is our product strategy. We are continuing to innovate and bring new products to market at a much more rapid pace than ever before. For example, in just eight weeks, we went from testing the concept to finished market ready product to launch Alight Verify. Alight Verify helps companies manage vaccine requirements and leverage data in driving business continuity decisions.

In just a few weeks, we already have more than 20 companies signed up for a LiteVerify. And with the new vaccine requirements in The U. S. And elsewhere, we expect to continue to see positive adoption of this product. As we shared last quarter, we were on track to have 400 plus clients live on the Alight Worklife mobile app in time for annual enrollment, and we're seeing positive adoption by clients and their employees.

Alight Work Life is already one of the top 100 business apps in the Apple App Store. For clients that have deployed and communicated about the app to their employees, we're seeing a decrease in call volumes of 33%. Users are coming back again and again with the average user logging into the app 14x a month. With the Alight Worklife platform in place, we are moving to semiannual releases focused on three core areas: continuing to create a more engaging and positive employee experience driving overall well-being and enabling employers. For example, in our next release, we anticipate further enhancing the employee experience through expanded clinical, second opinion functionality, which we have been able to accelerate in part as a result of our recent acquisition of Consumer Medical.

We are also working on some exciting new analytics capabilities to measure the improvements in benefits and program utilization that the Alight Worklife platform drives for our clients. As we continue to innovate and bring new products to market, we are also looking for opportunities to bring more of our solutions directly to consumers. One way we're doing this is through Choice Health, which we acquired last year. Choice Health allows us to tap directly into the post-sixty five individual Medicare market. Combined with our full solution set and the recent acquisition of the Aon retiree health exchange, we will be able to serve employees through the entire life cycle.

No other company has the ability to provide the full end to end solution model through nearly the entire expanse of people's lifetime. This is Alight's true differentiator. As I said in the start of the call, we are moving quickly and investing behind this market opportunity to support our clients. So now let me turn the call over to Katie, who will walk you through the financial momentum in more detail.

Speaker 3

Thank you, Stephane, and good morning, everyone. As Stephane mentioned, we continue to see positive trends across our business as we make progress against our transformation objectives. First, we continue to see strong growth in our tech enabled BPaaS offerings. On a total contract basis, BPaaS bookings increased 42% to $179,000,000 with year to date BPaaS bookings of $459,000,000 now ahead of our original January full year forecast of $395,000,000 Second, the strong bookings growth is leading to revenue growth and higher contracted revenue in the out years. Our BPAS revenue increased 20% with continued progress across our subscription revenue.

With our strong year to date bookings, we now have over 95% of projected 2021 revenue and over 65% of projected 2022 revenue under contract, up from approximately 7565% at the start of the year. Finally, across the light, we continue to see progress. On a year over year basis, total revenue increased 3.3% to $690,000,000 and total revenue excluding our hosted business increased 4.3% to $680,000,000 Adjusted EBITDA increased 16% to $153,000,000 driven by over 140 basis basis points of gross margin expansion in Employer Solutions. We continue to drive profitable growth, which has funded our technology and commercial investments and is also translating to higher free cash flow of $126,000,000 in the quarter, which was up 17%. Looking at our two primary segments, Employer Solutions revenue increased 5% from a year ago to $587,000,000 driven by growth in recurring revenues and higher project revenue.

Employer Solutions gross margin improved 140 basis points driven primarily by operating leverage and lower delivery expenses from our productivity initiatives. Employer Solutions adjusted EBITDA increased 26% and adjusted EBITDA margins improved over 400 basis points to 25.7%. Turning to our Professional Services segment, revenue was flat for the quarter at $93,000,000 driven by growth in recurring revenue as we continue to help clients realize the investment in their cloud technology, offset by softer demand for one time implementation services. Gross profit and adjusted EBITDA declined in the quarter as we continue to invest in key talent to support a strong pipeline heading into 2022. Turning to our balance sheet and credit metrics.

On September 30, our cash and cash equivalents were $769,000,000 and our total debt was $2,900,000,000 In August, we closed on a new $525,000,000 seven year incremental term loan to fund general corporate purposes and our recent acquisitions. Given the company's strong free cash flow profile and significant deleveraging benefit due to the merger with Foley Trasimene, we have even greater ability to invest both organically and inorganically into our business. Touching

Speaker 0

for

Speaker 3

a moment on M and A, we closed two acquisitions subsequent to quarter end. We completed the acquisition of Aon's retiree health exchange business, which gives us additional scale, expertise and capabilities in Medicare enrollment to further expand on our ability to serve employees from hire to retire. We also completed the acquisition of Consumer Medical, which strengthens our existing clinical healthcare navigation capabilities. And in combination with our broader solution set, including Alight Work Life, will allow us to continue to provide a highly personalized and highly effective employee experience. Buying and integrating assets is a core competency for this team and something we will continue to do in a structured and disciplined manner.

Given our momentum coming out of the first March of the year, along with our recent acquisitions, we're raising our full year 2021 revenue growth outlook to 5% to 6% from 3% to 5%. We're also raising our full year 2021 adjusted EBITDA outlook to $615,000,000 to $625,000,000 In closing, we are confident that our transformation strategy will position us well for the long term. We are ahead of our plan and building momentum as we look to 2022 and beyond. 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?

Speaker 0

Thank you. Session. Our first question comes from the line of Kevin McVeigh with Credit Suisse. Please proceed with your question.

Speaker 4

Great. Thanks so much and really congratulations on the results. Fantastic outcome. Hey, you're seeing really, really nice momentum in the BPAS bookings kind of exceeding the full year guidance already. Katie or Stephane, any way to think about where that $395,000,000 ultimately can sit as we think about kind of 2021 overall?

And any thoughts as to how that starts to come in into 'twenty two? I know you talked about percentage of revenue, but if you could help us frame those expectations a little bit.

Speaker 3

Yes. Thanks, Kevin. Great question. I mean, I think as we've talked about, there will be kind of volatility quarter over quarter in some of the bookings numbers as we see some of the larger BPAS deals really coming into the pipeline. So for example, we had $40,000,000 of bookings in Q1, $280,000,000 in Q2 and basically 180,000,000 this quarter.

If you think about that in the context of kind of a more normalized year, historically, we'd see it build quarter over quarter, kind of Q1 through Q4. So we see strong momentum going into the fourth quarter to continue kind of that trajectory following off Q3. So again, we're already at $495,000,000 We'll be well ahead of that number by year end as well. And if you think about what that means for next year, I think importantly, we've been very focused, as you've seen us kind of here in the last couple of quarters, on these higher value dollars, right, and delivering these incremental benefits and outcomes to our client base. That's really where we're seeing the traction.

And so we'll be out kind of at the end of once we get through our Q4 earnings with official 2022 guidance. But what I'd say is, I think the momentum continues. We continue to have kind of good pipeline, good bookings data that enable us to feel good about how we're entering 2022.

Speaker 2

I think from a sorry, go ahead.

Speaker 4

No, no. I was just going to say, Stephane, and just Katie, it sounds like Aon retiree Consumer Medical closed after the quarter, so that wouldn't have been any bookings impact. That was all organic, if you would.

Speaker 3

Correct. That's right.

Speaker 4

Sorry, Stephane, I didn't mean to cut you off.

Speaker 2

No, no, no worries. I was just going to add the customer lens to it. It continues to exceed my expectations how our 1Light approach to these BPaaS offerings is driving excitement in our installed base and in the net new market. So that's what's exciting for us.

Speaker 4

Yes. And then just any thoughts on the new mobile app? It seems like you're trending ahead there. And then any updates on Federal Thrift? And I'll get back in the queue.

I just think those are two things that are super important.

Speaker 2

Yes. I think you heard the stats. I mean we were really aggressively pursuing getting it in place for this annual enrollment and to get hundreds of thousands of people downloading it before annual enrollment and to see the impact we already had with lower call volumes and people logging in as many times as they did. Again, it's early days. We have a long way to go to get it to our installed base, but super exciting to see the first phase of how a lot of clients have adopted it.

And as part of our Work Life platform is a mobile first strategy. When you think about the engagement of Work Life through a mobile phone, it's where clients want to be met. The notion of the whole daily dynamic of health and wellness is something that you want to have on your phone on a daily basis. So just seeing the proof points come through so quickly is exciting for us and gives us excitement for looking ahead.

Speaker 3

Yes. I mean the only thing I'd add, Kevin, we had over 200,000 installations just within the first sixty days. So I think there's also a lot of room for us to continue to build on that momentum, which was good. And then the second piece, just on the federal threat. We are on track.

I just I mean, a huge thanks to our team. It is absolutely been an incredible team effort across the firm to ensure, right, we're in a place by year end to launch our solutions next year. So we are on track and moving well.

Speaker 4

Congrats.

Speaker 2

Thank Our

Speaker 0

next question comes from the line of Peter Heckmann with D. A. Davidson. Please proceed with your question.

Speaker 5

Hey, good morning. Nice results. Thanks for taking the questions. Now, great year to date results in BPAF bookings. Can you provide any commentary on the total bookings number either for the quarter or

Speaker 3

Yes, Pete, thanks for the question. After a number of discussions with you and others, we've realized everyone's trying to kind of take the total bookings and translate it directly to revenue. And that's a really big leap, because as you know, there's a number of factors impacting our business. And so we continue to make progress on total bookings kind of across all of our solutions. But I think what we've realized and kind of working through with all of you guys is a more relevant metric to help you understand kind of our progress into next year.

It's really more of the revenue that's under contract. So you probably heard it in my script, we have over 65% of our revenue under contract for next year, which again, remember that was closer to 60% at Q2. So have made nice progress on bookings both in total and in BPAS to continue to improve that metric.

Speaker 2

And we've been very aggressive on the quality of bookings. That's why I think you hear us focusing on what we are, which is these BPAS deals are driving just a higher quality, higher technology framework for our business, which I think gives us a better sense of where the business is headed into 'twenty two and 'twenty three.

Speaker 5

Got it. Got it. And then just on the two acquisitions, the number in the cash flow statement, I assume that, that is more for the closing of the actual leaseback merger and not related to these transactions. Are we thinking? That's correct.

Okay, that kind of total consideration for these two deals and just thinking about where that might take leverage.

Speaker 3

Yes. Thanks, Pete. So remember, in August, we raised five twenty five million dollars of incremental debt. We said a portion of that would be used to fund the acquisitions and a portion for general corporate purposes. So the acquisitions obviously are kind of are less than that.

You'll see even in our year end financials, we won't have pro formas because they are they're not material to the numbers. So as you think about what that means on a pro form a leverage basis, again, we ended the quarter closer to 3.5 times. That will go up to closer to 3.7 times on a run rate basis. So we still have as you think about capacity and kind of how we think about just the leverage profile, obviously, the great free cash flow we generate, we still have significant financial flexibility for both organic and inorganic investment.

Speaker 5

Okay. That's super. And then let me just squeeze in one more, if I could. Just the investments in professional services, is that primarily around hiring? Did I hear you say that?

Speaker 3

Yes. Yes, that's right. Two areas, I think, the professional services business. One is in just the go to market and kind of commercial teams. And then the second, if you think about that business, again, it's the people business.

And it has been one area where it's highly competitive from a talent perspective. So it has been an area where we've been very focused on kind of retaining key talent as our pipeline continues to build into next year.

Speaker 5

I appreciate it. Thanks so much.

Speaker 3

Thanks, Pete.

Speaker 2

Thanks, Pete.

Speaker 0

Our next question comes from the line of Ramsey El Assal Please proceed with your question.

Speaker 6

Hi, there. Thanks for taking my question this morning. Your guidance implies strong 4Q adjusted EBITDA margins. I'm clocking in around 23% -ish margins. To what extent is that are these margins driven by recent BPOS outperformance that you expect to continue versus other dynamics like, don't know, seasonality?

And I guess is there any reason to think that these levels won't prove sustainable in the full year 2022? Or should we think about you potentially reinvesting in the business to bring those margins down a little bit?

Speaker 3

Yes. Thanks, Ramsey. I'd say a couple of things. I think you're right. The operating leverage we're driving through the BPAS solutions obviously helps.

The other area I'd suggest is, remember we talked honestly back earlier this year about $90,000,000 of productivity savings we're driving over the course of 2021 and 2022. We'll honestly have visibility to two thirds of that by year end. So there is also kind of some nice leverage in Q4 from those initiatives. As you think about what that means going forward, what I'd say is we're going to be disciplined about obviously continuing to drive efficiencies across the business, but also recognizing we're in this incredibly important time where we have to continue to invest both in our go to market and in our technology capabilities to continue to advance the One Alight strategy. As I said, we'll be out with formal guidance in Q4, but I think see opportunities for both driving operating efficiencies while also investing in the business.

Speaker 0

Our next question comes from the line of Please proceed with your question.

Speaker 7

Thanks. Hi, Stephane and Katie. Congrats on the quarter. Wanted to touch base on the impact of labor shortage that's having obviously a positive demand on your product offerings. Can you give us a sense of what you're seeing in terms of existing and new customers are engaging with you?

Is it whether it be across your health benefits, wealth benefits, payroll? And then secondly, does the current environment allow you to continue to accelerate the upsell of your BPAS offering to existing customers? Thanks.

Speaker 2

Sure. Yes, there's a lot there, Scott. Heard As me say on my release, the names of clients, I just love giving the perspective from the voice of clients. So when you hear about Genworth and Randstad and Camping World and Aptar, these are all existing clients that have continued to expand into that whole work life One Alight platform. And it's all because they see the value of moving from a fragmented best of breed approach to a more integrated enterprise platform that drives a better outcome with higher engagements in their employees.

And so I think that lens of uplift to what we've committed in January through our earnings calls through our investor decks, I think, is the proof points that we're seeing in the last couple of quarters of existing clients buying more from us and expanding their footprint with additional products in the name of solving for higher outcomes. So I think that's kind of number one to your middle part of the question. And then on the net new side, back to your demand point, for us to be able to announce PwC as a win is super exciting. That's after we just announced Navistar and Dell in previous quarters. So the trend continues of major, major corporations taking an aggressive look at how do we rethink the engagement with our employees in a broader one on like playbook.

And so that, again, has been continued to be surprising for me across our pipeline just to see the aggressiveness that major corporations are that they're taking an aggressive stance on rethinking how they engage their employees.

Speaker 7

Great. Could I ask just one more follow-up? I know the big focus has been to move from project business to subscriptions and obviously have the percentage of recurring revenue streams increase year over year. I think last quarter, you said you had over 84% already towards recurring revenue from bookings, and that's above your previously committed guidance of around 80% from recurring revenue. So with the strong BPAS bookings that you've had, should we continue to expect this number to continue to accelerate from here?

Thanks.

Speaker 3

Yes, absolutely. I mean, what I'd say is you'll see that particularly on an annual basis, that continued improvement. Remember, Q3 and Q4 for us are higher project revenue quarters just by definition. So like this quarter, recurring revenue was closer to 82%. But again, if you looked at that year over year, obviously, continues to improve.

So on an annual basis, absolutely, you will continue to see improvement in that recurring portion of our business.

Speaker 2

Thanks, guys.

Speaker 3

Thanks, Scott.

Speaker 2

Thanks, Scott.

Speaker 0

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 2

Great. Thank you, everyone, and appreciate you all joining us today. We look forward to continuing to update you on our progress at the year end, and we'll also provide updated 2022 guidance at that time. Thanks, and have a great day.

Speaker 0

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.