Q2 2022 Alight Inc Earnings Call
[music].
Yes.
Good morning, and thank you for holding my name is Irene and I will be conference operator today.
Welcome to a light second quarter 2022 earnings conference call.
At this time all parties are investing any merit.
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 the call over to Greg for Shay head of Investor Relations at you like to introduce today's speakers.
Good morning, Thank you for joining us earlier today the company issued a press release with second quarter 2022 results call.
Copy of the release can be found on the Investor Relations section of the company's web site at Investor satellite 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 company's most recent Form 10-K filed with the SEC.
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 historical non-GAAP financial measures to their most directly comparable GAAP financial measures will appear in today's earnings press release on.
On the call today are Stefan Schulte, CEO MPD Rooney CFO .
After their prepared remarks, we will open up the call for questions I will now hand, the call over to Japan.
Thanks, Greg and good morning, everyone. When we announced plans to go public in January 2021, we laid out an ambitious plan focused on transforming our light from a custom services led model into a technology led organization that delivers better engagement and outcomes for companies and their workforces.
We are midway through our three year journey, and we can already see the impact of that transformation and have a clear vision for the opportunity ahead.
We've delivered first half year revenue growth of five 8%.
Successfully launched the federal thrift contract and have over 90% of 2022 revenue under contract.
And we've recorded $958 million in cumulative be paas bookings since the first quarter of 2021, putting us well on the path towards $1 3 billion in bookings by year end 2022.
Taken altogether with the revenue visibility we have into the next six months.
We are re affirming our full year revenue growth projections of 6% to 7%.
And adjusted EBITDA guidance of $650 million to $662 million.
Katie will provide more details on the quarterly cadence shortly.
We continue to make progress against our 2023 goal of double digit revenue growth and already have over $2 4 billion of revenue under contract.
Given the confidence we have in our business. We are also announcing a stock repurchase program of up to $100 million.
Our progress is due in large part to our technology focused approach and the investments we have made over.
Over the past five years, we have grown our estimated total addressable market from 33 billion to $73 billion by adding key content and leveraging the buildout of the light work life platform to drive better outcomes for clients and there are people.
This differentiated approach leads to better health wealth, and well being decisions and delivers ROI for our clients through higher engagement and cost savings.
Alight work life provides a unified employee experience that positions of light to be one of just a few enterprise wide platforms that company can rely on like the corporate software landscape that consolidated around a few key players. We believe there's an opportunity for a light to be at the forefront of meeting the HCM needs.
<unk> of organizations by improving engagement and supplying the much needed content.
Let me pause for a minute and provide some context on why our platform approach is central to our transformation.
We have historically supported a highly customized technology experience for each client. While this provides a tailored experience unique to each client. This bespoke approach slowed our ability to innovate quickly and resulted in a much higher cost to serve.
Taking a platform approach changes that we have increased the investment in our platform co innovated with our clients, including on our own new web and mobile experience and outlined a regular cadence of new releases.
While our strategy is still provides a tailored experience. It does so on a single version of the platform, which gives us the ability to dramatically increase the speed of innovation.
Strengthens agility for our clients and allows us to start to lower the cost to serve.
In a short time, we have moved over 500 large market clients onto one single platform.
The light work life App is continuing to gain positive momentum from users.
Most recently achieving four eight stars in the App store and a 19% increase in monthly active users since the first release in early 2022. Additionally.
Additionally in Q2, we issued the second major update of a light work life with a focus on features and functionality that improve the user experience and engagement through chat bot updates more integrated personalized support like clinical guidance and enhanced planned sponsored data and analytics dashboards.
We also added to our content layer by introducing a light digital wallet.
This provides payroll clients with the ability to offer their employees greater flexibility to be paid when they want the earned wage access and.
And pay them in a way that meets their needs with a no fee physical and digital payroll card.
We believe that when employees have less financial stress. They are more productive are less likely to leave their job and have overall better wellbeing.
This innovation is resonating for our clients in Q2 Autozone partnered with a light because we offered a differentiated experience to help better support their overall benefit strategy, while driving health care savings, providing more tailored services and bringing higher levels of engagement through optimized employee experiences.
Using the light work life platform.
In any industry improving employee retention is a key driver that has a direct a measurable impact on performance.
Through providing highly personalized services, which focus on engagement and awareness of well being programs from the moment. The onboarding starts a light can have a significant impact on autozone retention metrics.
Our integrated offering starts with a comprehensive total rewards statement to the job candidates and continues with the use of licensed benefit counselors to help employees make the optimal benefit decisions.
Health frozen medical allies will help employees navigate through complex medical decisions all delivered through a seamless technology experience.
All of this is a true demonstration of what we can do for our clients.
This kind of values why other major brands like Siemens energy Unilever, the home depot and <unk> also signed in the second quarter with us.
Perhaps the biggest proof point of our lights ongoing transformation is the successful go live of the federal Thrift savings plan in partnership with Accenture Federal services at the end of the second quarter.
This milestone is an incredible achievement for a light and I'm so proud of our organization.
It really is a testament to our ability to deliver for one of the largest employers in the world.
For those of you not familiar with the federal Thrift is their retirement savings program for the federal government.
With this addition of over 6 million participants, we now serve over 36 million people.
A few companies beside a light in any industry could serve such a big and complicated contract and executed according to the challenging government specifications system reliability and scalable operations.
Importantly, our work extends beyond traditional recordkeeping with a greater emphasis on higher value cloud based technology.
The contract also has an important example of a new playbook of expanding our partnership ecosystem with World class companies that brings strong government relationships and a service capability, while we provide unmatched expertise in complex technological core benefits function.
This client momentum is translating into growing be paas bookings and revenue.
As I mentioned earlier, we have sold almost 1 billion in <unk> bookings since the first quarter of 2021, and we are now on track to realize over $500 million in deep has revenue by year end. These.
These results are proof that our transformation from a customized multi platform approach to a personalized yet single platform model is resonating and continuing to gain traction.
Typically in the second quarter, we signed $234 million in BFS bookings, which puts our first half total at $356 million more than halfway to our full year goal of $680 million to $700 million, we recognized $128 million in <unk> revenue up 36% from last year with beef.
<unk> now accounting for 17, 9% of revenue up from 14% a year earlier.
We also continue to self fund our sizable investments in our business to drive long term growth.
As we look ahead to the back half of 2022 and into 2023, our momentum positions us well.
Despite tumultuous equity markets in an uncertain macro environment, we believe our business is well situated to withstand the challenges.
We provide mission critical benefits for companies as demonstrated by our revenue mix, which is 84% recurring.
And as reflected in our 97% average revenue retention.
Furthermore, we see the potential for us to benefit from secular tailwind and our transformation efforts because our ability to demonstrate cost savings to an employer make our services even more valuable during a potential downturn.
Katie over to you.
Thank you Stefan and good morning, everyone and a total contract basis be paas bookings for the second quarter were 234 million and for the first half totaled $356 million, which is tracking ahead of our $688 million to $700 million target for 2022.
Bookings growth has translated into revenue growth and higher contracted revenue <unk> revenue growth was 36, 2% for the second quarter and now comprises 17, 9% of revenue.
With our strong bookings as of June we already had more than 90% of projected 2022 revenue under contract.
Moving to our consolidated results, we continue to make steady headwind on a year over year basis second quarter total revenue increased six 4% to $715 million and total revenue excluding our legacy hosted business increased six 7% to 705 million.
Recurring revenue, which comprises 84% of our total revenue increased seven 7%.
And adjusted EBITDA was $142 million in the quarter, even with our strategic investments.
Next I'm going to discuss performance of our two primary segments.
Employer solutions second quarter revenue grew seven 9%, which reflects a combination of net commercial activity increased volumes acquisitions and project revenue.
<unk> revenue increased eight 3% while project revenue grew three 8%.
Gross profit increased four 7% to 200 million, while gross margin decreased 100 basis points to 32, 6%.
And adjusted EBITDA increased six 5% to 147 million with adjusted EBITDA margins at 23, 9%.
This reflects the seasonality profile of the acquisitions completed late last year and key investments, we're making into the business.
Turning to our professional services segment second quarter revenue decreased slightly by $1 million to $91 million due to a three 3% decline in project revenue due to timing delays on three large projects that we anticipate will start a year and partially offset by stronger than anticipated recurring revenue.
Gross profit declined by 6 million to $20 million and gross margin declined 630 basis points.
Adjusted EBITDA was a loss of $3 million and adjusted EBITDA margin was negative three 3% as we made the strategic decision to retain key accredited talent to support a strong pipeline and book of business to be realized later this year.
Turning to our balance sheet on June 30, our cash and cash equivalents were $272 million and our total debt was $2 8 billion. We believe we are well positioned for rising rate environment, given our interest rate hedging strategy with over 70% of our debt portfolio fixed for 2022, and 2023 and no near term.
Debt maturities of significant size until 2025.
We recently concluded a comprehensive review of our capital allocation framework given market volatility.
Sure some insight into our thinking our three key priorities are as follows.
First to maintain a strong balance sheet to execute strategic priorities, which include reinvesting in our business and our pursuit of M&A to create value and generate profitable growth.
Second to optimize the capital structure targeting three to four times net debt to EBITDA leverage, which we believe is appropriate.
And third to return capital to stockholders in a disciplined and opportunistic manner, including through stock repurchases.
Now let me provide you some color on our cash flow performance in the quarter and our outlook going forward, we continue to invest in our business with $38 million of capital expenditures in the quarter and $15 million of investment in technology commercial and the threats launch. In addition, we made a payment for the consumer medical transaction totaling 81 million.
As we look out to the full year, we are focused on improving our cash flow from operations through operating leverage on the investments we are making in improving working capital metrics.
We believe that one of the positive attributes of our business is its cash flow generation ability that has been masked by transaction related one time expenses. The assumption of the large book of receivables related to the retiree health exchange acquisition and other items.
For the six months ended in June we generated $118 million in operating cash flow versus $58 million over the same period last year.
Going forward, we believe that our business will generate an operating cash flow conversion ratio of 40% to 50% in 2022, moving to 60% to 80% in the future up significantly from 20% in 2021 as we passed the one year anniversary of some of the earlier stated items.
Given the confidence we have in improving cash flow dynamics are proven ability to invest in our business and our view that the stock represents a compelling investment we are announcing a stock repurchase program of up to $100 million.
We will continue to evaluate stock repurchases against other strategic opportunities as outlined in our capital allocation policy.
Concurrent with this earnings release, we posted a new investor deck on our IR website that addresses some key questions we've been getting.
Specifically investors have asked why be past sales are better than our legacy core benefit administration single point solutions out.
So let me unpack that for a minute our mega deals done over the 'twenty one to 'twenty two year to date timeframe highlight a few reasons why we focus on this book of business first it's higher quality of revenue with the majority of it being recurring second it represents a growing share of our clients' wallet with the number of products being sold to a client doubling first our traditional deals.
And third its more profitable with bundled margins over 500 basis points higher than Standalone benefit administration deals over the life of the contract.
Another question. We've been asked is how we use technology to create a better experience for participants while improving our efficiency and cost to serve let me give you. One example, with our latest delight work life release, we introduced the first phase of our workflow tracker that has the potential to reduce call volumes, while improving the customer experience by providing push notification.
<unk> and integrated case management with over 4 million annual status calls at an average cost per call of approximately $10. This could yield potential savings in the tens of millions of dollars.
Switching over to guidance. We had previously provided a 2022 outlook a three point O nine to $3, one 2 billion or 6% to 7% revenue growth.
Adjusted EBITDA of $650 to $662 million and adjusted diluted EPS at <unk> 54 to 60.
We are reaffirming all elements of our full year guidance and providing quarterly insight into the progression for the balance of the year to provide additional color on the seasonality of our business.
For the third quarter, we anticipate revenue of 735 to 750 million and adjusted EBITDA of $115 million to $125 million.
And for the fourth quarter, we anticipate revenue of $915 million to $930 million and adjusted EBITDA of $245 to $255 million.
Let me dive into the factors that are driving this outlook.
First on revenue, we will benefit from the thrift going live and additional client wins going live along with normal fourth quarter seasonality, which will drive an anticipated 24% sequential improvement.
Remember, we have 90% of 2022 revenue under contract. So we have a high degree of visibility.
Second unadjusted EBITDA, we are continuing to make investments in our business with the remaining $15 million of the 38 million total investment to be completed in the third quarter.
We also have higher demand for project revenue tied to enrollment and the ramp in staffing for retiree business days, which creates an additional $15 million headwind in the third quarter.
In the fourth quarter, we recognize more of that revenue associated with these investments, which drives the improving margin profile.
Looking ahead to 2023, we already have over $2 $4 billion of revenue under contract we are tracking well to our goal of double digit growth in 2023 and margin expansion. Once we complete our budgeting process, we will provide formal 2023 guidance.
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.
Thank you at.
At this time, we will be conducting a question and answer session.
We would like to ask a question. Please press Star then one on your telephone keypad.
A confirmation tone will indicate your line is in the queue.
Yeah, Michael Steinmann Gee, if he would like to remove your question from the queue.
Call participants using speaker equipment, it might be necessary to pick up your handset before pressing the star keys.
One moment please poll for questions.
Yeah.
Our first question is from Kevin Mcveigh of Credit Suisse. Please go ahead.
Great. Thanks, so much and congratulations on the results.
It's probably for Kt Kt I, just want to make sure in terms of the guidance. The 15 million of headwind that you talked about was that already in the EBITDA or I guess said another way would you have been able to increase the EBITDA, if not for that incremental $15 million in it it sounds like it's more demand driven than anything else.
Yeah, Kevin that's right and some of it again is the miss alignment of cost to revenue right. When you think about the staffing we do for some of that annual enrollment work, where we're hiring for that in the third quarter, but we recognize all the revenue right. Once once those clients are in the enrollment process in the fourth quarter.
It's really kind of the timing of the cost versus revenue.
Great and then just really really nice momentum on the bookings, maybe maybe talk to that a little bit because it seems like from a macro perspective, even though we're hearing about these storm clouds definitely doesn't seem like you're seeing it in our results. So maybe talk to that a little bit. If you could call out you know maybe size or anything like that around the bookings number.
Yeah. Thanks, Kevin you know it.
There's no you know as we've talked about before the <unk>.
People agenda is top of mind with boards and Ceos like never before and and that hasn't changed if anything all the investments we've made into platform into engagement discussions.
And into our value engineering teams have highlighted that this 70% cost bucket for most companies is an area that is really the next opportunity for everybody to go in and look at and see how do we rationalize simplify one.
Clients had its best to me, which is enough of the Christmas tree approach, which is throwing 89 your different offerings at employees getting 1% to 3% engagement rate, they're now looking to us to help consolidate and simplify that into a much more comprehensive enterprise approach to it and so we see big opportunities in taking cost out and taking a bigger share of wallet is.
Katy said earlier.
And by doing that [noise] excuse me, we'll be able to get a bigger piece of the pie ourselves, while I'm still helping them save money.
Thanks, so much and congrats.
Okay.
Our next question is from Peter Heckmann of D. A Davidson. Please go ahead.
I'm wondering if you're one thanks for taking the question. So on the professional services side, you talked about the three large projects what sort of timing delays.
You are retaining the balance sheets of the.
A lower level of utilization dragged down margins.
Do you assume about that same level in the third quarter and the fourth quarter.
Or is it possible that some of those projects could go live before year end.
Yeah. Good question Pete.
Some of those projects are on track to go live in the fourth quarter. So I think you'll see an improvement in the fourth quarter and then a more substantial improvement into 'twenty three.
Again going back to the pipeline and the backlog I mean, it's it's the highest we've seen so we have good visibility into that revenue coming in line later this year and into 'twenty, three and but those delays have obviously hurt us in the first three quarters.
Okay. Okay, and then in terms of some of the other large deals that we've been talking about.
Your calls like that.
Pwc are starred generally are you do you feel like you're on track with.
Those conversions in the hiring needs to support those conversions.
Yeah, Hey piece defend your absolutely and I think the biggest Testament is if you just look at the Thrift program I mean, you know it.
How many companies in the world can deliver on some of that scale you know, they're there on one hand and now we are a part of that so I think that should give everybody cigna.
Significant confidence that in all the strategy, we set out two and a half years ago.
And invested hundreds of millions. Since then are now really in the last several months coming to fruition with the go lives for the Thrift program. The launch of our platform work life live with over 500 clients I can't underscore the importance of that statement that last one which is our ability to execute.
It is super exciting because that sets the foundation for everything else that we're doing so and we're on track on all of these big programs and then don't forget look at the new wins that we just had I mean do you autozone win for US was a dramatic 100000 person employee organization looking to a full enterprise approach and they look to all the other deals.
We had closed and found confidence in those wins in the previous year to really make a big big investment on an enterprise scale with us.
That's great that's great and then if I can I just sneak one more in.
Talk about your ability to pass on wage inflation as it comes like what what you're experiencing in your current employee base and then.
How do you how do you start those conversations with your customers about trying to pass them.
Yeah, Pete actually.
A lot of that is already contractually included in our agreement so we.
We look at the employment cost index, which you know as of June was five 7% in and kind of how the majority of our contracts work is that we cover on average the first 3%, but then above that right we passed that incremental cost.
To the employer for that contract year, so for clients for contracts that have a.
On July one start date right, we'd be passing on that difference between the $5 7 million a three so that that helps offset a portion.
On inflation and then you know obviously, we have to continue to look for ways to gain efficiencies going back to the example around the workflow tracker right in taking cost out of the system. I mean, that's something we're looking at every day to make sure we have kind of those levers to help help with with the environment. We're in.
Okay, great. That's good to hear I'll get back in the queue.
Thanks Pete.
Yeah.
Our next question is from Jason Wang of Jpmorgan. Please go ahead.
Yes.
Hey, Thanks Hope you can hear me I'd have to jump off for a second I just wanted to ask.
On the visibility question.
Katie on the fourth quarter ramp, especially for some of the deals I get this question a lot.
Two with the way the calendar cuts and the timing of projects and with enrollment period is that what drives some of the visibility into.
And to the projects cutting on definitively in the fourth quarter, just trying to better understand the with how that visibility comes together.
Yeah, Thanks, Tien tsin.
It's a couple of things I think first as you said right given the timeline from from sales to revenue right. I mean, we kind of have visibility to just even new deals coming online in the fourth quarter that are on track right. So you first have already kind of visibility from bookings to revenue in terms of kind of that that ramp second obviously with the <unk>.
Rest going live on track that helps our kind of visibility into the air and then to your point on on the project side.
Particularly around the employer solutions business, you know what what we're seeing more of this year is again demand for I think about companies doing plan design changes they need more support actually through the enrollment process not necessarily leading up to it. So a lot of our companies are going through enrollment right in the October November timeframe.
At times, we'll be doing support work for them, leading up to that and in this you know in this year, where we're seeing more demand is actually helping them through changes during enrollment and so that's you know again, so we're already contracted with those clients to provide those capabilities. They know we're ramping now to prepare for that which kind of gives.
It gives us that visibility.
I would add in.
I would add into seasonality piece for our retirement business Katy I wouldn't get into that for a second because I think that's a big piece of it I think that's the other dynamic Tianjin, which is different for us. This year right. We talked about it a little bit late last year, but also with or the retiree health business kind of are the commissions businesses remember how how those work again your staffing now.
For those.
Companies to enroll right in the fourth quarter and really late in the fourth quarter, but again that I almost think of that a little bit it's more recurring right because they're already we're already working with employer, they're just going through a re enrollment process. So again you you have you don't see a lot of volatility around that which which gives us kind of added confidence and in our in the outlook.
Yeah.
Understood Yeah, no. It makes sense, we'll be doing ours unreal moment in a couple of months I think on the.
So first for you just thinking about the pipeline here and I totally hear you comment on like cost savings is a bigger.
The focus for enterprise, it probably and it's still critically important to get the wellness right. So as you turn to 23 and the end of the year here how does the pipeline.
Feel for you and sort of the pathway to get more of your existing clients as well to convert to P. Pause.
Yeah. Thanks.
Our pipeline is is.
The largest we've ever had at this point in time and.
When you look at our win.
Like Autozone.
And they let us speak to it as much as they are just hopefully shows excitement to our investors and frankly to all our employees on the path that we're on.
You know that one was less about cost savings that was one where if you. If you look at the frustration around the fortune 500, especially on the lack of engagement across these 70 to 80 to 100, if you look at our Investor deck Youll see these companies are dealing with so much complexity and the employees are frustrated.
And then we've unraveled and unpack for them the cost that comes with running this Christmas tree type of approach and then have shown them a path of simplification enterprise and the fact that 500 customers adopted work life within on a weekend and we had that happen again another testament to.
People moving away from best of breed moving to enterprise consolidation wanting to drive engagement and Oh by the way Youre going to save some money along the way so kind of the best of both worlds coming together, which we're excited about.
And by the way tension if you will.
Also mentioned I mean, I don't want to you know.
What are those all 100000 people, but look at Siemens energy I mean, Autozone, we took away from one of our largest competitors. It was their second largest client we were we are replacing them.
At Autozone, and adding so much more to what we had before on Siemens energy we competed against.
Our biggest competitors and we beat them in that deal when you think of a Unilever on our global payroll side again, another that's our fourth fortune.
500 win just in the last few months against some of our biggest competitors. So just the brands and names that are big companies betting on US is I think a big Testament to the pipeline into the growth and where we're headed.
Yeah, No I appreciate the case studies, India and besides it really useful so thanks for that.
You bet. Thank you.
Ladies and gentlemen, just a final reminder, if anyone else would like to ask a question Youre welcome to play Star and then one one.
One moment, please WOMAC Poole for any further questions.
Since we have no further questions, ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Stefan for any closing remarks.
Thanks, I really appreciate that thank you everyone really appreciate you all joining us today.
We are executing on our strategy.
We're expanding relationships with new and current clients and we're making key investments to fuel our results not just for the rest of this year, but really into 'twenty three 'twenty four so thank you for the time today and look forward to further discussions. Thank you.
This concludes today's conference. Thank you for joining US you may now disconnect your lines.
[music].