Alight Solutions (ticker: ALIT), a leading provider of integrated benefits and human resources solutions, held its first quarter 2024 earnings conference call, where CEO Stephan Scholl announced significant business developments and financial results. The company is selling its Professional Services segment and HCM & Payroll Outsourcing businesses, with closure expected in midyear 2024.
Despite nearly flat total revenues, Alight reported a 22% increase in high-growth BPaaS revenue and stable profitability. A $1 billion upfront payment from the sale will be used to reduce debt and improve the balance sheet. Alight anticipates a stronger second half of 2024, expecting a return to its midterm revenue growth target by year-end. Leadership changes were also announced, including the appointment of Jeremy Heaton as CFO and Greg Goff as President.
Key Takeaways
- Professional Services segment and HCM & Payroll Outsourcing businesses to be sold by midyear 2024.
- Midterm outlook reaffirmed, targeting 4-6% revenue growth and at least 15% BPaaS revenue growth.
- Adjusted EBITDA margin expected to be 28%, with a stronger balance sheet and enhanced cash flow.
- Total revenue of $816 million for the quarter, BPaaS revenue up 22%.
- Operating cash flow conversion at 67%, with $286 million in cash and equivalents.
- Leadership changes include Jeremy Heaton as CFO and Greg Goff as President.
- Two new board members added, bringing expertise in product, technology, and industry knowledge.
Company Outlook
- Anticipates a "tale of two halves" in 2024 with a stronger performance in the second half.
- Closure of Professional Services and HCM & Payroll Outsourcing businesses expected to simplify sales process and improve sales conversion.
- Cloud migration to be completed by the second half of 2024, with financial benefits expected in late 2024.
- Share buyback program upsized by $200 million.
Bearish Highlights
- First half of 2024 negatively impacted by timing of large deal go-lives and lower nonrecurring project revenue.
- Exit from the Hosted business expected to affect short-term growth.
Bullish Highlights
- Successful closure of meaningful BPaaS deals and ongoing product innovation, including the latest release of Alight Worklife.
- Strong hiring and recruiting efforts, along with partnerships with AI companies.
- Positive reactions from vendors and clients to the announced divestiture.
Misses
- Total company revenues were nearly flat, with challenges in the first half of the year.
Q&A Highlights
- Executives expect Q2 to mirror Q1 in terms of growth rate and EBITDA margin.
- Ongoing pressure from clients to reduce employee spend and drive engagement.
- The company's dynamic platform is seen as an advantage over competitors like ServiceNow (NYSE:NOW), Microsoft (NASDAQ:MSFT), Oracle (NYSE:ORCL), and Workday (NASDAQ:WDAY).
- Increasing influence of CIOs in the banking industry noted, with a trend towards consolidating solutions.
Additional Insights
- Alight's focus on cost-cutting and employee engagement resonates with clients, contributing to momentum in bookings.
- The company is tackling fragmented solutions in the industry by configuring personalized platforms for clients.
- The board's diverse composition supports Alight's long-term strategy for profitable growth and cash flow improvement.
- The industry trend favors Alight's approach of consolidating point solutions into a comprehensive engagement platform.
Alight Solutions remains confident in achieving its long-term goals and emphasizes the dedication of its employees to serving clients. The company continues to adapt to industry trends and client needs, positioning itself for future growth and profitability.
InvestingPro Insights
Alight Solutions (ticker: ALIT) has shown resilience in its business model, as highlighted in the recent earnings conference call. The company's strategic divestiture and focus on high-growth BPaaS revenue are pivotal steps towards achieving its long-term financial targets. However, a deeper look into the company's financial health and market performance through InvestingPro data reveals a more nuanced picture.
InvestingPro Data indicates that Alight Solutions is currently trading at a Price / Book ratio of 0.94, suggesting that the stock may be undervalued relative to its net asset value as of Q1 2024. This could be a point of interest for value investors looking for potential opportunities. Moreover, the company has managed a Gross Profit Margin of 36.09% over the last twelve months leading up to Q1 2024, highlighting its ability to maintain profitability despite market challenges.
An InvestingPro Tip worth noting is that Alight's stock is considered to be in oversold territory according to the Relative Strength Index (RSI), which could signal a potential rebound if market sentiment shifts. Additionally, the company's liquid assets exceed its short-term obligations, providing a cushion for operational flexibility and financial stability.
With these insights in mind, investors may find it worthwhile to explore Alight Solutions further on InvestingPro, where there are additional tips available to guide investment decisions. For those interested in a comprehensive analysis, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are currently 11 more InvestingPro Tips available for ALIT, offering a broader perspective on the company's performance and market expectations.
Full transcript - Foley Trasimene Acquisition (ALIT) Q1 2024:
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 (NYSE: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.
Kevin McVeigh: Great. Thanks so much and congratulations to everybody on all the kind of management changes and Katie, best of luck.
Jeremy Heaton: Thanks, Kevin.
Stephan Scholl: Thanks, Kevin.
Kevin McVeigh: For sure. Hey, Jeremy, the context on the guidance was super helpful. Is there any way to think about kind of the total revenue for ‘24 relative to the initial guidance, realizing there’s a lot of moving parts there, but just – any way to think about that? And are you seeing any initial thoughts from the customers on some of the recent changes around the sale of professional services and kind of the payroll business, just any initial thoughts there would be helpful?
Jeremy Heaton: Sure. So maybe I’ll take the first part and then give it to Katie for the second just on the deal and with clients. I’d say, for 2024, as we said, we will come out with the formal guide on the remaining business once we get through the close. I’d say, the one element that we talked about has been the nonrecurring project revenue and as we said before, but we expect growth to ramp. We can see the revenue under contract building today as we have continuing momentum building on the sales – on the bookings side. And so we still see that path and that build and expect to be by the end of this year at a growth rate that was within the mid-term outlook that we’ve laid out. So I think all else equal versus what we talked about several months ago, we’re seeing it line up as we expected. And we just need to continue to focus on the bookings momentum and the sales team and our operational execution.
Katie Rooney: Yes. And Kevin, I think just on the deal, listen, it’s progressing really well. As you can imagine, we’re talking with all of our major clients, and they’re asking really good questions. But I think the great part of this deal is we maintain that level of commercial partnership and partnership in terms of the delivery and execution. And so neither side wins if we don’t navigate and land this for our customers in a kind of thoughtful way. And so, again, we’re working through that and I think customers have been really good partners as we continue to do that and think we’re on track.
Kevin McVeigh: Great. And then just real quick, a hopeful commentary on the buyback. Can you be in the market before the deal closes now that kind of everything has been disclosed? Or is that something because it sounds like you upsized the buyback, which is terrific. Is that something we get after the deal closures? Or could we expect some activity before the transaction closes?
Jeremy Heaton: Good question, Kevin. So as we said, the deal is on track. So our focus right now in terms of getting that to close here middle of this year. That being said, we continue to assess our portfolio composition and the strategic alternatives, just to ensure we’re maximizing shareholder value for the company upon the closing of Axiom. And so with that, we’ll be open in the market as we can, as we go through that process.
Kevin McVeigh: Great. Thank you.
Stephan Scholl: Thanks, Kevin.
Operator: Your next question comes from the line of Scott of KeyBanc. Your line is now open. Please ask your question.
Scott Schoenhaus: Hi, team. Apologies, I’ve had several earnings calls this morning. I believe you mentioned the $15 million impact, revenue impact split evenly between Employer Solutions and Professional Services. Can you guys just provide more color on that, if I missed what – if you provided color earlier on what exactly happened, what that shortfall was if that continues into 2Q? And then a little – I’ll have a follow-up question on that 2Q kind of guidance, Jeremy. Thanks.
Jeremy Heaton: Sure. Sure, Scott. Good morning. So let me provide a little bit more color there. So Employer Solutions revenue was down 1% year-over-year and Professional Services was up 2% year-over-year. Importantly, to your point around project revenues, that was really the driver across both segments as both were impacted on the project side. Project revenue in Employer Solutions was down 11% and project revenue in Professional Services was down 3%. And so that was the driver as it split across both of those segments. The driver in Professional Services is just lower deployments. A little bit of that’s timing. Again, that’s Workday, SAP deployments that we see and drives the project revenue in the Professional Services business. And the project revenue on the Employer Solutions side is really in the Health business, driven by benefit plan changes and lower regulatory changes that drive projects in that business. And so as we look at it today, as you know, it’s a shorter sales cycle as it’s a non-recurring business. We do expect, and it’s what we – as I talked to and gave some color on the second quarter, we don’t expect to see a very different profile in the second quarter, but that starts to ramp as we get into annual enrollment within the health and wealth businesses, that really starts to ramp with project work around the annual enrollment process. And so we do see a better path and are building the revenue under contract in that space later in this year, and that’s really how we think about the ramp.
Stephan Scholl: And I think to your point, Scott, about looking ahead, this is the big – one of the big reasons why I pushed so hard to have us sell some of these components of the business. That volatility of the people-based business, as you’ve heard me say in a few calls, $10 million here, $15 million there, those are three or four or five projects around the world that just start later. So not having that as part of our portfolio as we head into the back half of the year is going to be really helpful in building a more credible backlog of business with a much higher percentage of recurring revenue as part of the baseline, so much less volatility.
Scott Schoenhaus: Absolutely. Thanks for all that color, guys. And just as a follow-up, Jeremy, on the actual 2Q when you said it’s similar kind of results this first quarter. Do you mean that from like an absolute basis as a trajectory? You don’t mean like flat growth from second quarter like we saw kind of...
Jeremy Heaton: Similar in growth rate and EBITDA margin in the second quarter growth rate.
Scott Schoenhaus: Okay, alright. I will hop back in the queue. Thanks, guys.
Stephan Scholl: Great, Scott.
Operator: Thank you. Your next question comes from the line of Kyle of Needham. Your line is now open. Please ask your question.
Kyle Peterson: Great. Thanks, guys. Appreciate you for taking the questions. Just wanted to kind of drill down again on the first quarter results. I think kind of in the quarter, you guys had said you expected things to be at least on the top line about flat year-over-year. I think that was in March. So I just wanted to see on the delta kind of what drove the shortfall in the last few weeks there? And of that, like kind of what is going to still be part of the Alight after this transaction goes through? And what is more in the discontinued ops?
Jeremy Heaton: Sure. It’s split about half and half between what goes with the deal tile and what stays as part of the benefits RemainCo business is the mix between the two. As we’ve talked about, it’s a shorter-term, in some cases, can be very – we can within a week, build the pipe and execute on the revenue generated around the project business. So there are elements there as we look at when we build the pipeline and execute through it, can be very quick. And so that was the dynamic that was different for us this quarter versus where we had our expectations set in terms of where we were going. The other element that we had already talked about, we knew we had the – compare with the Hosted business going away, we also knew that we had timing softness last year, which drove the ramp that we’re going to see on the growth side coming into 2024. Maybe I don’t know, Greg Goff with us who leads Delivery and Product maybe can give you a flavor for some examples we’re seeing today as we think about commercial execution and progress.
Greg Goff: Yes. Hi, good morning. Just a little bit of commentary on – a little on project and then a little bit broader. I mean, I think on the project side, as Jeremy said, that’s typically driven by regulatory changes, plan changes and M&A activity among our clients. And so we just saw a little bit lower activity there. But we’re bullish on that going into the sort of second half, as we said. I think more broadly, as we look at commercial activity going forward, the strategy that we’ve been on, we see resonating still in the market, right, in terms of cost being top of mind for clients, in terms of the integration and employee experience being very top of mind for clients and that platform strategy resonates, right, coupled with really strong delivery and care. And I think we’re really well positioned to that as we head later into the year.
Kyle Peterson: Okay. Yes, that’s helpful. And then I guess just – it does seem like this year – kind of just a follow-up here. I guess it does seem like this year, the trends will be fairly back end and weighted. But I guess is – could you just remind us on the timing of ramps for some of these deals from last year’s bookings as to what the kind of lag time is on some of these deals before they start contributing to revenue and just how we should think about the progression from here?
Jeremy Heaton: Sure. It’s – I’d say, on an average basis, 12 months is the right way to think about it, Kyle. I mean, smaller, more vanilla, I’d say, deals can be as early as 6 months. And some, as you know, some of the bigger deals we’ve talked about can be 18 months or more. And so as you think about the bookings and the timing as you looked at last year, you start to get to that 12-month point as we get into the second half this year. And then you also start to think about the calendar year, which can be important in parts of the business. And so you start, really the enrollment work happens within the third quarter and the fourth quarter where we start to generate the revenue on those deals, and then certainly fully live in January. And so those are the elements that as we look at the revenue under contract. Today, by quarter, compared to prior years, you start to see where the ramp is and which drives our growth and expectations this year. Again – and we’ll come out, of course, as I said, with more a formal guide on the remaining business as we go forward when we close the deal.
Stephan Scholl: And I said this on the last call too, Kyle, right? And when I said the words, tale of two halves, with deals like Thrift fully online in the first half of this year, a lot of big deals were brought online last year. So the compare in the first half, as you know, it’s a 10% CAGR over the last couple of years. On the revenue side, we added $700 million of backlog. As I said, I wish in a perfect world, the minute Thrift ends, you get GE online. Another one of those massive deals that we announced, not only even last year, but in the prior year. So that’s going to be coming online in the second half. So you start seeing some of the bigger deals that we’ve closed, but it’s not a – it’s a volatile dynamic, right? But – so it’s hard to see it within a quarter. You just have to take a step back sometimes and let history be its guide, right? As I said, if you look at the last 3 years, it’s a 10% CAGR on an average basis and almost $700 million more in backlog.
Kyle Peterson: Makes sense. Appreciate the color. Thank you.
Stephan Scholl: Thanks, Kyle.
Operator: Your next question comes from the line of Peter of D.A. Davidson. Your line is now open. Please ask your question.
Peter Heckmann: Hey, good morning, everyone. I wanted to follow-up and just see how the story – the Alight story is being received by clients as we get a little further away from Great Resignation and wage inflation. Has there been a shift in terms of what benefits Alight can bring to a company? Has there been a shift in terms of what companies value or what they’re attracted to in terms of why they would make a change?
Stephan Scholl: Yes. Great question, Pete. We talked a lot about this on the calls in the last few earnings, right? The sentiment across our Fortune 100 or Fortune 500 clients, as you know, we serve 70 plus of them and half the Fortune 500. So we’re very deeply entrenched in every single client meeting. Now I’ll ask Greg to jump in, in a minute because he’s done – he just had a big 30-day tour with lots of big clients. The sentiment is the same, which is the CHROs, CFOs and CIOs, those three departments are banding together more than ever before. And when you think about what I said over the years, the space of ERP, supply chain, financial systems and controls, those evolved for the last 20 years, gone from best of breed to enterprise. And I’ve said this for over 4 years, this employee population in terms of how we engage with them across these systems is a multi-trillion dollar cost base when it comes to health, that hasn’t been consolidated, right? So the engagement capability still is 30, 40, 50 different systems. So the pressure of employers to cut costs is at an all-time high and hasn’t abated at all. So we’re going in with a much more sophisticated model around value engineering and ROI. Greg can talk to a couple of key deals.
Greg Goff: Just to give you an example, I was with a big client a couple of weeks ago. And the – Stephan said that the CHRO side and the CIO side are now working together more than I’ve ever seen at these large clients as cost becomes a pressure, right? And the IT side of the world is typically very good at managing cost. And so the story of platform, the idea of consolidating spend, the idea of doing that while still delivering a more compelling employee experience resonates, right? But that’s also departments within clients working together that typically haven’t worked together on that. And so, we provide a lot of that kind of stitching together of how to bridge the IT world, how to bridge the HR world and the employee world back together. And I’ve seen that as Stephan said, with a lot of clients over the last couple of months, and I see that as a very consistent theme certainly among our largest.
Jeremy Heaton: And we’re continuing to still see these big deals. And maybe the last piece on this because it’s kind of a long answer, but it’s an important topic, is a lot of our biggest clients looked to Microsoft or ServiceNow as that integration platform. I said this on a few calls before, right? And what’s come back from those departments is they’re good companies, they’re amazing places to integrate on, but they’re static platforms, they’re not dynamic platforms. So they find that when people log into these front doors of ServiceNow, it’s just more informational than it is transactional because we own the sources of data. So remember, our approach is the best of both worlds. We own the most important set of data, over $3 trillion of information across health and wealth comes through our transaction engines, populating that through Worklife and then engaging the employee. Before they actually make the decision is how you take cost out, is how you take complexity out. And Microsoft, ServiceNow, Oracle, all the ones that have been trying to become these front doors, even Workday on some of the cases, we have more content than some of them do. That’s our secret sauce, is the connection of those two components, and that’s what’s giving us an advantage still today.
Peter Heckmann: Great. Thanks. That’s helpful. And any surprises in terms of the market reaction to the announcement of divestiture, either from current clients prospects or even software partners? Do you think there’ll be any indigestion there as you separate those units?
Katie Rooney: Yes, Pete, it’s Katie. Listen, I actually would say it’s been really positive overall. I mean, even with the vendors, the idea of having that, one, that integration of Professional Services with Payroll, right, and a global platform with focus and investment really resonates. And I think, two, with clients, again, remember, we’re trying to deliver the best of both worlds here. So you’ll have the focus and investment for the Payroll and Professional Services business along with the remaining Alight businesses with that continued integration. And I think that’s really what’s important so that when you think about the experience for the client, it won’t change. The integration behind the scenes will be slightly different. But that partnership, that experience, that interaction model will still be valid, which I think has really resonated with folks.
Stephan Scholl: Listen, Pete, I said this on the last call, people get it that when we – Payroll – processing Payroll and running a Professional Services business around SAP or Workday, those are full-time jobs, right? And those were divisions within Alight. And that’s why I keep saying being in that heavy labor-based or heavy capital-intensive Payroll business, that takes a 100% effort to do right. And we did well with it. Don’t get me wrong. I loved it. It was a great contributor. But now having somebody completely solely focused on that, and then as Katie said, with a strong partnership because they still want to come through Worklife as a platform to drive the engagement processes, that’s kind of the best of both worlds. So we’re pretty excited about it.
Peter Heckmann: Okay, that’s great to hear. I will get back in the queue and continue to monitor.
Stephan Scholl: Thanks, Pete.
Operator: Your next question comes from the line of Peter of Citi. Your line is now open. Please ask your question.
Peter Christiansen: Thank you. Good morning. Thanks for the question. Also, congrats to all and best of luck to Katie.
Katie Rooney: Thank you.
Peter Christiansen: Sorry, multiple calls going on right now. I’m just curious on the bookings front. It sounds like there’s been a little bit of momentum there. Just curious since the divestiture, it’s just a simpler sale. And you think perhaps maybe sale conversion, do you think that improves now with post divestiture? And then I have a quick follow-up.
Jeremy Heaton: Thanks, Pete. So listen, as we talked about the revenue under contract, which I think is important now that we disclosed the 3 years, you could see growth in both – in ‘24, ‘25 and ‘26 as we’re building the book. So we are seeing the results of continued momentum in what we’re doing. I think with that focus, you do – you see more pipeline, you see better conversion. And I don’t – from a deal perspective, it’s maybe harder to say on the simplified view of what the business is going forward and what we’re driving. But that today includes all parts of the business. So again, as I think through the commercial agreement that we have with the business being divested to HIG, the shared success that we will both see from what we’re doing, and we’re building the book of revenue on the contract that’s going to benefit both of the businesses and supports our ramp in growth. And we’re really excited – again, getting this deal closed for the Alight business and what it means going forward is we’ve got a great track record here of history in growing this business. We can see the ramp in the revenue under contract and it’s profitable growth, right? We are really excited that we come out of getting the deal closed, we get the immediate margin uplift, we’re higher recurring. So we have less of this volatility on the project revenue side. Better cash flow, lower leverage and flexibility for us to operate the business in a simplified way. So I think all of that works, but you’re right, we are seeing the momentum on the commercial side, and it’s important for us to just drive that greater visibility for ourselves, but importantly for you and investors as they see the revenue under contract build.
Stephan Scholl: The only thing I would add to that, Pete, is on the people front, as you know, in the last year, with Greg and George coming on, the new Vice Presidents we’ve hired, the professionalism, the scalability, the capability of driving these larger enterprise deals on one end, yet still going after the smaller best-of-breed deals. We’ve really gotten much better at that. And so I’ve been really pleased with the progress around the hiring and recruiting. And we have top talent from – I mean, we’ve hired probably some of the best reps from most of our competitors that are here, right? So, as I always say, it’s great when clients vote with their wallets, but it’s even better when people vote with their careers. And so we have been able to recruit some incredible talent in commercial.
Peter Christiansen: Thanks. That’s helpful. And then post-divestiture, I would imagine the picture or the potential for Alight to form some solid go-to-market partnerships perhaps with other payroll providers, there is an opportunity there, just curious if you have any comments on that and if you see any windows there to partner with another player? Thank you.
Stephan Scholl: Yes. Listen, absolutely – I mean the topic we don’t talk a lot about is the AI topic. I guess I have just said, trillions of dollars – of not dollars, but trillions of data sets run through our platform on the wealth and health side. And every client is asking us continuously to leverage this consolidated platform to do what, leverage analytics AI to give a recommendation engine down to the individual level. As you know, in the health and the wealth world, everything is based on job codes. It’s never down to the individual level. That’s never been done at the level of specificity that we want to get to. So, our partnerships are with some great AI companies. And maybe, Greg, do you want to jump in?
Greg Goff: Yes. I mean I think to your question, certainly, it opens up more possibilities, but that’s something we pursue even today, right. In terms of – I think we have a very unique asset in terms of the data that we have. We also have unique assets in the AI and intelligence that we provide among and on top of those data sets. And it’s in the domain, as Stephan said earlier, of health, wealth, wellbeing, which is very unique to us as opposed to a more sort of general software players, and so we are additive to those. Any data sets that we can get, whether that be payroll, as you mentioned, that could be financial data set, that can be social data sets, that can be anything health and wealth related, those are all accretive to the outcome that we can provide ultimately on behalf of an employee. And maybe the last piece, it’s not a secret. I said ServiceNow and Microsoft rather than debating who is a better front door for our topics, we realize there is room for both. What ServiceNow does is amazing on a lot of case management capabilities around Help Desk and providing a lot of skill sets there. But what we provide is really around that central nervous system around employee engagement, we are that better front door. So, it doesn’t have to be either or. Same with Microsoft, they both realize that there is a strong partnership between the two of us rather than competing with each other like we have in some cases, years back. So, I think that’s also exciting realization. That will all help our clients.
Peter Christiansen: Great. Thank you. Good color.
Stephan Scholl: Thanks Peter.
Greg Goff: Thanks Peter.
Operator: Your next question comes from the line of Joseph of Canaccord. Your line is now open. Please ask your question.
Joseph Vafi: Hey everyone. Good morning and congrats on everybody’s new roles. So – and to Katie, best of luck after the close on the deal.
Katie Rooney: Thank you.
Joseph Vafi: Maybe just a lot of questions have already been asked, but maybe we could get a little update on where you see the macro, what clients are saying, how that may be affecting the cadence of discussions on new BPaaS deals? And then I have a quick follow-up.
Greg Goff: Yes. Listen, as I have said kind of earlier, what we see is the continued dynamic of pressure in our installed base, especially who we serve, right. We serve the largest companies in the world. And every single CFO, when I have talked to, CIO and CHRO are collectively trying to figure out how to get employee spend down, how to drive engagement across these disparate systems. So, that theme is as loud as ever. There is no abatement of the activity. So, our investments in value engineering, our investments in driving outcome-based deals versus transaction-based deals, I think is the most exciting chapter ahead because we are the only ones. When you go to our client base and consolidate the data set, we are underwriting to cost takeouts, but by driving better process engineering, and I think that’s the holy grail that so few companies ever achieve, right. So, most companies get stuck at the transaction level. And as we all know, the most powerful companies in the world truly are platform companies, right. I mean that’s – there is no debate about that. And so that’s been our journey for the last 4.5 years, 5 years. On that path, we have also had to modernize our technology over the last 4 years. So, in 4 years, we are undoing 40 years of history. And as everybody else on the call knows, so few companies at scale tackle that problem, right, most of them are band-aid solutions. So, we have done the heavy lifting. So, at the end of this year, by being out of our data centers will also then allow us to be even more flexible in tooling and capability in being able to configure truly personalized platform for a retail client, that’s going to be very different than a banking client, that’s going to be very different than a manufacturing client. So, we continue to evolve our platform and technology to the needs of our clients in really helping bring together an end-to-end true employee engagement platform, which up until today has not existed by any company to truly drive an effective outcome for clients.
Jeremy Heaton: And maybe, Joe, what I would add is, I mean you can see in the results, right, the BPaaS revenues being up over 20% for both the total company and the continuing operations business. So, you are seeing demand across the board in that space. And I think you look at those results in the totality of the company. But then you also, in the prepared remarks, Stephan talked about the example of the client, right, where you had a critical medical need for somebody within the HR organization and really saw the value on a personal basis of the combination of the technology that we have, but also the medical expertise and the services that we bring together with that to drive a solution for a family in need. And that’s really the – as a singular point as you think about how we drive the value and outcomes and how we showed that to that particular company. So, as Stephan said, demand in that space, right, we are in a differentiated space and the value proposition that we have and what we are able to do, and I think the results show that. And then finally, as in the macro, we will always watch the non-recurring part of the business, right. We are pleased that part of that goes away with the deal and some of that volatility. But in the benefit space on the project side, it’s a little bit of you are always watching what that pipeline is, the shorter term sales cycle, M&A and regulatory as Greg talked about are areas that drive project revenue. So, we watch that. But again, as we go to a business that is greater than 90% recurring revenue, that becomes less of what we need to be able to – what we have to watch from a macro perspective.
Joseph Vafi: Sure. That’s helpful. And then I know you mentioned the Board composition has changed, I think at about a 50% clip over maybe the last year or so and maybe that’s reflective here of some of the changes going on in the organization, but does that change in the Board composition effect strategy or any other interesting points or salient points relative to the Board driving strategy here? Thanks a lot.
Stephan Scholl: Yes. Thanks for that. And as you know, we have been very thoughtful since a major sponsor, as you know, has left the Board. We have been able to fill that with great content and voice of client capability. And so for us, we always look for ability to speak to product and technology, speak to industry, the notion of what it means to be in the wealth business, the retiree business, the benefits business in its entirety. So, voice of client around that in terms of CHRO position, voice of industry, technology and product. And then, of course, good stewards of cost and financial horsepower, right. So, I think we have a really good cross-section of capability. And then we also have really strong – where is the pub going as – I am a Canadian, so I can say that, right, where is the pub going to where – to versus where it is. And so our Board is very thoughtful on while we are always in this 90-day cycle, it’s – as you have heard us say, we are willing to sacrifice a 90-day or even a six-month window for the longer term strategy of this company, right. Because many have asked, you are selling some pretty good growth assets here and – but you have seen the history of this business, which is its very volatile. And so we are making some big bets on better profitability and Jeremy used the word profitable growth 2x or 3x. So, the orientation of the Board around thinking long-term, more profitable growth orientation, even though it may mean some, as we said, tale of two halves this year, it’s worth it, right. It’s worth it for the long-term game, so, strong, strong Board support towards that objective.
Joseph Vafi: Great. Thank you, Stephan.
Stephan Scholl: Yes. You bet.
Operator: Your next question comes from the line of Heather from Bank of America (NYSE:BAC). Your line is now open. Please ask your question.
Emily Marzo: Hi. This is Emily Marzo on for Heather Balsky. I am wondering if we could look at the go-forward business, how did 1Q sales perform versus your internal plan, and are there any areas of upside or opportunity that you are seeing?
Jeremy Heaton: Hi Emily. Good morning. Sure. So, I would say, the drivers of – if you think about the remaining business in growth, it is a ramp this year, as we have said, and we expect it all along, given the timing of the bookings from last year and of course, the hosted business today, that comparison sits within the continuing operations. So, that’s a couple of points of a driver of the headwind from a growth perspective. The one piece, as we have said already is that was different in our – from our early expectations was the non-recurring project revenue, which is split between both the continuing operations and discontinued. But we continue to build the revenue under contract. The BPaaS revenue growth within the continuing operations was over 20%. The revenue under contract is growing and we continue to see the build of – from commercial execution and on the operational side. So, I would say the only thing was just that non-recurring project revenue, but otherwise, we feel good and we will come out with formal guidance on this business when we close the deal.
Emily Marzo: Thank you. And as a follow-up, the revenue under contract, that’s for the total business. Do you have it broken out for the continuing this?
Jeremy Heaton: We have not. So, that will be part of the guidance that we give in disclosure when we close the transaction. But you can think about it relative to the size of revenue. They are slightly higher on the revenue under contract on the remaining business just given the profile of that business.
Emily Marzo: Okay. Thank you.
Operator: Your next question comes from the line of Tien-tsin from JPMorgan Chase (NYSE:JPM). Your line is now open. Please ask your question.
Tien-tsin Huang: Hey. Thanks so much. I know a lot of moving pieces, but just on the free cash flow side, the operating cash flow conversion. Can you give us some directional views here in the coming quarters on that?
Jeremy Heaton: Sure. Good morning Tien-tsin. Yes, so as we said, Op cash flow was $100 million in the quarter, so up almost 40% versus last year, so which was the conversion of 67%. We guided this year at 55% to 65%. I would say, that’s still the frame we are in. There is – obviously, seasonality plays a part in terms of what we are seeing. But generally speaking, 20 points up year-over-year, we are driving – we have got a big focus around DSOs, working capital efficiencies, how we are generating revenue earlier into transactions that we are doing in deals. And so we are seeing the benefits of that as we come through. So, the cash flow element on an operating basis, we were really pleased with in the quarter. And as I have said, with capital expenditures also down 20% drove a pretty significant – more than doubled the free cash flow for the business in the quarter.
Katie Rooney: Yes. I think the only thing I would add, Tien-tsin, is there will potentially be some additional transaction expenses in the second quarter. But then obviously, those go away in Q3 and Q4. So, you will see kind of as you think about the seasonality of it, just down a bit in the second quarter and then back up in Q3 and Q4.
Tien-tsin Huang: Okay. That’s good. That’s helpful. So, my follow-up, maybe just a bigger picture one for you, Stephan. Just with the cloud conversion underway almost there, been going to a lot of these different user conferences and investor days, it feels like there is a theme again towards, not surprisingly, componentization, modularization, amplifying everything. And so this whole best-of-breed versus best-of-suite conversation comes up a lot. What does that mean for Alight as you guys have been going down this monetization journey yourself? I mean do you see more threat as you are going through this from point solution providers, I am just curious what the latest thinking is there. Thanks.
Stephan Scholl: Yes. It’s been the one we have talked quite a bit about before, right. And if you look at – you know my history, right. And I have been on the forefront of best-of-breed to enterprise. And there is not many places left where that battle still exists, and this is the one that I am in right now. And what I will tell you is the minute we send the value engineering team into some of the big banks or big utilities or telcos or manufacturings, and we ask some basic questions, how many point solutions do you have across navigation and retiree and benefits. I mean if you ask those questions, the answer gets between 30-point and 50-point solutions. Then you say, how much are you spending on that, and it’s – you start – if you add the category of claims, it begins with a B, right. You are talking about billions of dollars of expense. And then you ask the real home run question, which is, what engagement and success are you seeing, and you are seeing still – I mean it’s still – despite how smart we have all gotten past-COVID, Tien-tsin, it is shocking to see how many big smart companies are getting between 1% and maybe 7% to 8% engagement on some of these key components. So, very quickly, the ROI when you get the CFO in the room is why are we wasting all this money for so little output, how come we can’t bend the claims curve, which is still going up between 7% and 12% on average. I mean that’s pure bottom-line EBITDA, right. Then you get the CIO in the room, which has become for us, a much, much larger client, especially in the banking world, Tien-tsin, you know this. The CIOs are very powerful individuals now seizing the day a little bit more in that department of saying, why do we do it this way, why do we have all these point solutions. So, the challenge has been there has been nobody. I mean you see all my competitors in these point solution areas in their talk tracks talking about the importance of engagement and platform, yet they just don’t have the capability like we do. So, our advantage still is that engagement platform level, consolidation of all these point solutions into one place. And then the final piece is, we have the financial horsepower and the technology and capability. And to your point, we have been doing a lot of deals even though we have been in the midst of this massive technology transformation. When Greg – that’s why I wanted Greg, his promotion and his visibility to clients, is going to be super helpful is when we are done this, the tooling and the capability to take data and do a lot more with it to drive a truly individual level experience will be here by the end of this year. So, that will really help us in the next chapter.
Greg Goff: The one thing I would add is, I think just like in other areas dominated by platforms, the ERP world, etcetera, in this space, the slicing up the sort of amplifying of all the individual pieces, that sub-optimizes the decision process and the outcome you can create for an individual, right. If I am having to go transact might leave in one place, and that’s an individual thing. I am going to go ahead and transact my benefits in an area and that’s one thing. I am going to have you to transact my 401(k) in a different app, and that’s a different thing. That sort of – that hampers my ability to create the best outcome for the individual and the best outcome for the employer in terms of what they can utilize. And so we see this, right. We see companies choosing best-of-breed. We have to be great at the individual solutions, right. But the overarching opportunities, we talk about AI, we talk about intelligence, we talk about ROI is to bring those things together under an umbrella. That’s really the benefit at the end of the day.
Tien-tsin Huang: Okay. Thanks. Greg, congrats on the promotion, same to Jeremy, and of course, Katie, thank you to you and all the best.
Jeremy Heaton: Thanks Tien-tsin.
Greg Goff: Thanks Tien-tsin.
Operator: That is the end of our question-and-answer session. I will now turn it over to management for closing remarks.
Stephan Scholl: I really appreciate everybody’s time early this morning and I appreciate the questions, and look forward to seeing so many of you at upcoming conferences. Have a great day.
Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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