Q1 2022 Alight Inc Earnings Call
Good morning, and thank you for holding my name is fetal and I'll be your conference operator today.
Welcome to a light first quarter 2022 earnings conference call.
I just think all parties are in a listen only mode.
As a reminder, today's call is being recorded I'm. The VP of the call we'd be able available on the Internet section of the company's website.
And now I would like to turn it over to Greg Fuzzy.
Head of Investor Relations I'd like to introduce today's speakers. Good morning. Thank you for joining US earlier today. The company issued a press release with first quarter 2022 results a copy of the release can be found on the Investor Relations section of the company's web site at Investor Dot of light Dot 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 Companys 10-K filed with the SEC.
As such factors may be updated from time to time in the Companys 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 reconciliation of the Companys historical non-GAAP financial measures to the most directly comparable GAAP financial measures appear in today's earnings press release on the call from management today are Stefan Schulte, CEO and Katie Rooney CFO after their prepared remarks, we will.
Open the call up for questions I will now hand, the call over to Pam.
Thanks, Greg and good morning, everyone, but the last two years a light has been embarking on an important transformation to create a differentiated approach to human capital management that allows companies to change the relationship they have with their people.
As I've said before two of the most important aspects of People's lives are their health and financial wellbeing and the pandemic had a hugely negative impact on both for so many workers.
But we're not in the clear coming out of the pandemic companies continue to struggle with attracting and retaining a more discerning workforce employees want more from their employers and that is not going to change. This is the new normal and this is accelerating the demand for our light approach.
The late work life platform brings together all aspects of physical mental and financial well being positioning of light to be one of just a few enterprise wide platforms that companies can rely on and the platform. We believe is best positioned to drive outcomes for employers and their people.
When we combine the simple and seamless technology experience of your light work life platform with the data and analytics of our content layers and our global delivery capabilities. We can power more confident decisions for employees and provide companies with the information they need to make smarter decisions around there are people there are most important.
Asset.
This powerful combination is the light business process as a service or <unk> model.
That approach is resonating in the market. We've continued to see momentum with major global brands like Navistar shell and sartorius, joining our already enviable client roster and in Q1, we expanded that list further with the addition of any see genuine parts company out of into and rituals in fact, one of our largest.
Fortune 50 clients recently shared something with me that I think really captures the value that we bring.
She told me that previously their strategy was to offer a wide variety of programs to meet every employees needs, but it was overwhelming and people weren't getting the most from the investments the company was making now they're using the light work life platform, which will drive proactive personalized communication to incur.
The engagement with their key programs.
This positive momentum is also carrying over to our business results as seen by our key transformation metrics.
During the first quarter, we signed $122 million and be Paas bookings, which is 205% higher than last years $40 million and we recognized $114 million and be pass revenue up 23% from last year and now accounts for 15, 7% of revenue up from 13, 5% a year.
Earlier, we continued to make significant investments in the business, including in the upcoming go live of the key federal contract.
In technology to drive Dia light work life platform development, including our recent rollout to more than 450 clients.
And in investments in our go to market strategy as.
As a result of these critical investments employer solutions gross profit margin declined to 32, 7%.
We are striking a balance between profit and growth as we self fund investments that allow us to take advantage of secular trends and this unique intersection of a post pandemic environment and a tight labor market at the same time, we continued to generate strong annual cash flow, which reflects the strength of our foundational.
Business and provides us with financial flexibility to do bolt on M&A taken.
Taken altogether 22 is off to a solid start and we believe we are well positioned to deliver on our commitments for the year and are on our way to 10% revenue growth and 23.
So what is the pass.
We've been moving quickly on our transformation journey and for those who are new to our story, let me take a step back and talk more about our B pass model that I touched on earlier, what we offer for clients is a differentiated approach to human capital management and approach focused on leveraging data to drive outcomes.
RB pass model as I shared is a combination of three elements.
It starts with your light work life and enterprise wide employee experience platform.
A light work life is offered in four tiers, starting with the most foundational level that gives users access to a robust cloud based content layers and.
And then moves all the way up to the highest tier that adds even greater analytics capabilities to measure ROI and employee outcomes.
The second part of our <unk> model is our content companies can layer in various content through the addition of our modular cloud based solutions for health wealth payroll wellbeing clinical and retiree health.
These cloud solutions have three to five unique product tiers from a core digital offering all the way to comprehensive benefits administration with fully integrated point solutions. Most importantly, the data within the content layer allows us to deliver a highly personalized experience to meet the specific needs and circumstances.
Our users and their family members.
Finally, we add in our vital global delivery capabilities that require a human skill set that can't be automated. Some of these services include one on one help to navigate important life moments like having a baby talking with the nurse about managing our critical illness or leveraging their financial advisor to prepare.
For retirement.
We believe our approach is powerful and when it comes down to it the reason our clients buy from us are threefold.
First we have an incredibly strong core business with a long proven track record of serving some of the largest most complex clients in the world, including over 70% of the Fortune 100, and secondly, because of our core business. We have approximately 200 million interactions from more than 30 million users and their family members.
<unk>, which provides us with an enormous data set that underpins our platform and lastly, this data together with our platform allows us to drive more confident decisions and better outcomes.
Our integrated approach is already delivering tangible results for our clients, let me share some examples.
The multinational fortune 50 client I mentioned earlier already has some more than 4 million interactions yearly across thousands of employees and offers a wide range of wellbeing programs to meet employee needs, but few employees are actually using these programs RB past approach enabled by a light.
Work life will enable us to move the needle on the engagement rate of these programs first a light work like provides one integrated experience that engages the employee in actions that drive physical financial and emotional well being second we can leverage that data to personalize the content.
Delivered through the platform with prompts for the next best action to drive outcomes and motivate employees with the programs most relevant to them third we create an incentive system to reward behaviors with the highest impact combined we believe we will drive a more than 100% increase in engagement for this fortune.
50 client program.
Switching to another client, we had a science and technology client that had two main challenges.
First its employees were having difficulty finding the best benefits resource at the right time, which led to poor health outcomes care avoidance reduced productivity and engagement and increased claims expenses.
This client did not have high touch concierge health services, which left the company at our recruitment and retention disadvantage in today's highly competitive market for talent.
To address these challenges we will provide the light work life platform paired with our health cloud solution and this combination helps us meet these challenges head on for our client.
Specifically using the data and AI, we can personalize the employee experience on the light work life platform and provide employees with a list of available and relevant benefits. This level of personalization will drive higher engagement and utilization of benefits programs. We also will provide real time health care concierge.
Support for all employees from a dedicated a light health probe.
The cost of implementing the solution is a fraction of the company's overall health care costs and has the potential to drive millions of dollars in savings and help partially offset healthcare cost inflation.
Our ability to deliver those results as why the client saw the potential and signed with a light.
Our strategy and our deliberate approach to investment is why we have seen steady progress in our <unk> bookings with a cumulative total of $724 million since the first quarter of 'twenty one and.
And this is why we believe we are well on our way to our goal of $1 3 billion in <unk> bookings by year end, which allows us to reaffirm our 'twenty two commitments and gives us confidence in our path to 10% growth in 'twenty three.
Katie over to you.
Thank you Suzanne and good morning, everyone, we see positive trends across our business as we make progress against our transformation objectives clients are attracted to our tech enabled light be pass offerings on a total contract basis. The paas bookings for the first quarter grew 205% to $122 million.
This bookings growth has translated into revenue growth and higher contracted revenue or <unk> revenue growth was nearly 23% for the first quarter and now comprises 15, 7% of revenue.
With our strong bookings as of March we already had more than 85% of projected 2022 revenue under contract, which gives us confidence in reaffirming our 'twenty two outlook.
Across our consolidated results, we continued to see progress first quarter total revenue increased five 2% to 725 million and total revenue excluding our legacy hosted business increased 5% to 713 million.
Recurring revenue increased 7%.
Adjusted EBITDA increased six 8% to $142 million driven principally by revenue growth.
Next I'm going to discuss performance for our two primary segments.
First for employer solutions first quarter revenue grew six 1%, which reflects a combination of acquisition volumes and that commercial activity.
Recurring revenue increased six 9%, which was partially offset by a one 9% decline in project revenue grew.
Most margin decreased 150 basis points, reflecting the seasonal nature of the fourth quarter 2021 completed acquisitions and key investments, we're making into the business.
Adjusted EBITDA increased four 4% to $142 million and adjusted EBITDA margin decreased 40 basis points to 22, 8% as we continue to invest in our business.
Turning to our professional services segment first quarter revenue decreased slightly to $90 million due to a four 8% decline in project revenue, partially offset by three 4% growth in recurring revenue gross margin declined 60 basis points as we retained key accredited talent to support a strong pipeline in 2022.
Adjusted EBITDA was flat and adjusted EBITDA margin was unchanged at zero percent.
A quick note on our hosted segment as the planned runoff continues we have one remaining client with approximately $40 million in annual revenue whose contract ends in 2023.
We have signed a new contract with them that will transition them to a cloud based solution with our employer solutions segment, allowing us to retain approximately half of the annual revenue stream.
Now, let me briefly review our balance sheet and credit metrics on March 31st our cash and cash equivalents were $326 million and our total debt was $2 9 billion.
We believe we are well positioned for a rising rate environment, given our interest rate hedge strategy, our debt portfolio for the balance of the year, it's over 70% fixed.
We believe we are well situated to invest both externally and in three key areas internally first we're focused on ensuring a successful go live for the federal contract ahead of its targeted launch in the second half of the year.
The addition of 6 million participants along with the significant recurring revenue stream with additional growth potential marks a key milestone for us and underpins, our new wealth cloud infrastructure.
Second in products and technology, we are investing to support the ongoing development of our late work life platform and mobile app as well as the supporting content clouds, and we are integrating the clinical navigation expertise, we bought with consumer medical.
Concurrently in our commercial go to market efforts, we are hiring market makers and solution architects to go after the transformational deals that demonstrate the power of our offerings as well as investing in demand generation and sales talent.
Third we remain cautiously optimistic about our project revenue rebound and professional services.
These investment buckets total approximately $38 million over the first three quarters of 2022 with a greater proportion falling in the second and third quarter.
With over 85% of 'twenty, two revenue under contract, which is seasonally weighted towards the fourth quarter and are known investment timing, we believe EBITDA growth will be more weighted to the fourth quarter.
Given this visibility we are reaffirming our 'twenty two outlook and believe that we are on our way to 10% revenue growth in 2023.
This concludes our prepared remarks, and we will now move into the question and answer session. Operator would you. Please instruct the participants on how to ask questions.
Thank you.
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One woman fees like the floor for questions.
Yeah.
Our first question is from the line of Kevin Mcveigh with Credit Suisse. Please go ahead.
Great. Thanks, so much and congratulations.
Hey, Katy or Stephane.
Maybe Katie.
You reaffirmed EBITDA guidance. Despite the additional investments is that just more leverage in the back half of the year, where those investments as expected maybe just help frame that a little bit force.
Yeah, Thanks, Kevin we talked a bit at the end of the year and.
About investments, we're making this year and I think it's just important.
These were anticipated investments, but I think being able to quantify and help kind of been sure folks understand the benefit of those investments and the timing of them is really what we're trying to articulate here. So.
I think the point is.
We havent path forward to hitting our guidance with the investments and those will become tailwind do you think about kind of exiting the year into 'twenty three.
That's great and then just you know.
Congratulations because obviously, let of folks who are seeing cost headwinds things like that.
From a internal perspective is it just the balance of the work for sure you know you've really been able to manage through that maybe it would help us understand that a little bit as well.
Yeah, I think there absolutely are areas of the business, where we see inflationary pressures.
And that's what we're managing through I must say our team is doing an incredible job trying to manage that every day I'd say two things I think one it's targeted in some key areas. If you think about we've talked a little bit about the professional services business about some call center activity.
But I think also importantly, if you think about kind of our contractual structure.
With most clients kind of on these recurring contracts, we do have provisions in place where when you think about kind of the employer cost index.
Put in increases if they are above a certain threshold say call. It 3% on an annual basis, and so that helps us offset some of that pressure as well.
That's great. Thanks, so much.
Thanks, Kevin Thanks, Kevin.
Thank you. Our next question is from Peter Heckmann with D. A Davidson. Please go ahead.
Good morning, everyone. Thanks for taking the question I was just curious.
It sounds like the.
The thrift savings that contract is a little bit ahead of schedule and development implementation, which is great.
And in terms of how we're thinking about the contribution to 2022, what are we expecting that to go live relatively early in the quarter.
Yes, Thanks Pete.
Unfortunately, we just from a contractual perspective, Fernando and able to disclose specifics around the contract, but I think given the materiality of it to our business. That's why we wanted to to.
To highlight that it is on track we do expect it to go live in the back half, it's part of our guidance.
What I'd say is we're on track with kind of the timing we expected.
Yeah, we've done very well on deliverables, we keep weekly calls on it Pete.
We feel very confident with where we are today on the program.
That's great that's great to hear and then thinking a little bit about fairly.
Fairly significant.
Offshore facilities and with the dollar strengthening does that provide any material level of cost benefit during the quarter or or do you have.
FX hedges that would that would limit that.
Yeah, we do.
Particularly if you think about our partnership with Wipro right, that's a contractual agreement with kind of that.
Price inflation locked in and so that provides a natural hedge you know, sometimes we I've said, sometimes the downside, but FX was not kind of a material driver for us.
Kevin given that contract.
Okay, Alright, that's helpful. And then just lastly, anything else, we should be thinking about in terms of a very large.
Contracts in process in terms of maybe hitting a are there any things that are I know the federal thrift is uniquely large but anything else. That's relatively larger we should be thinking about the timing of hitting over the next let's say eight quarters.
Yeah.
I don't think there's any I mean, obviously theres nothing of that significance and remember we called out some great contract wins last year with Navistar and Pwc I mean, the team is doing a fantastic job, bringing those contract lives this year and into next year, so that obviously.
It will help later in the year, we have some big deals in the pipeline. So obviously, great be paas bookings for the first quarter.
But remember last year right as you think about some of the seasonality we had a bigger Q2. So again I'd go back to we're on track for our guidance on <unk> bookings in the $680 to 700, there are some big deals in the pipeline.
I think you know that that won't be a material driver of kind of changes to our outlook.
Okay I appreciate it.
Thanks Pete.
Thank you.
Our next question is from dancing swung.
The J P. Morgan. Please go ahead.
Hey, great. Thanks for taking my question guys I'm all set on the project revenue.
So line of sight, there and some of the rebound.
N P S.
You referred to I was just curious about the visibility there and what's driving your confidence there.
Yeah, Thanks, engineered and you mean in the professional services segment.
Okay, Yeah, yeah, yeah, because I mean again overall I think that one thing.
Great news seem close to 7% growth in recurring revenue was obviously as you know.
Where we've been focused.
But if you think about some of the names Stfan mentioned on the call like in genuine parts company right that was a nice professional services win that we've been talking about in terms of kind of the pipeline building and so the visibility into that pipeline. Obviously those deals go live faster.
And so that kind of is translating into our outlook that we'll see a rebound here towards the back half of the year and I think the big thing on the PFS side is as I've said before while it's a professional services business in the past largely around implementing workday in the last 18 months I'm sure.
Did that focus to be more one of light focused.
Which workday as a piece of that and that strategy is now working as good, especially big global companies are now looking to consolidate all these fragmented systems. So the professional services business.
He is going to get some good tailwind and helping us execute on that broader global integrated strategy.
Perfect. Thank you both my quick follow up just thinking about.
This earnings season, we've heard a lot from some of the the.
The survey so they outsource guys.
It seems to be a pickup in demand in.
Enterprises, and small businesses you name it all looking for help on the servicing side I am curious with rates rising and more market uncertainty given what the stock markets are telling US you feel like there's a change in the pipeline in the sense of urgency as you engage with enterprises too.
As you move forward with projects, how does it feel versus 90 days ago, Yeah listen.
It's kind of what I've been saying for some time.
Which is.
The people agenda.
It's been a hold out.
For some time on an integrated approach right. If you look at all my top clients I've said this now for two years. Unlike the ERP world and supply chain World, which has had 10 15 years of consolidation the human capital management Arena Hasnt, it's kind of the big hold out where people are now realizing it's fragmented systems. They are geographically based.
They are looking for a consolidated enterprise view of the employee and when we come in you have to consolidate as you know this from your history 2030, 40, 50, sometimes systems into one so the services agenda, that's why I kind of like when people ask why do we have the services aspect to it it is largely to drive that program office.
Integration and enterprise and then for US. It's the platform piece of work life piece, where people are starting to see the consolidation of building the relationship with their employee on our work life platform and then we are the ones responsible as a light to take the content pieces of health and wealth and well being and retirement and payroll and then.
Consolidating that into.
One enterprise approach on the platform you need strong services capability in global delivery capability to do that so people are moving fast because not only is it a cost takeout opportunity for them in consolidation. It's also just a better way to serve their employees better. During this last couple of years.
Thank you for the thoughts.
Thank you.
Yeah.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session.
And I would like to turn the call back to the fund chose <unk> for closing remarks, great. Thank you very much and thanks for joining us today.
We're executing on our strategy and delivering for clients and making key investments to fuel our results in 'twenty, two and beyond as we continue our transformation journey.
We look forward to the chance to meet with many of you at conferences such as the Jpmorgan TMT conference in May the Baird consumer technology and services conference in June and at other investor events in the months ahead, thanks and have a great day.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.