Q3 2022 Alight Inc Earnings Call
Good morning, and thank you for holding my name is Kate and I will be your conference operator today welcome to a light third quarter 2022 earnings conference call. At this time all participants are in a listen only mode. As a reminder, today's call is being recorded and a replay of the call will be available on the investor.
Relation section of the company's website and now I would like to turn the call over to Greg <unk> head of <unk>.
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 third quarter 2022 results.
It can be found on the Investor Relations section of the company's website at Investor Lifelock 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.
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 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 <unk> <unk> CFO .
After their prepared remarks, we will open up the call for questions I will now hand, the call over to Sam.
Thanks, Greg and good morning, everyone. The third quarter marked our one year anniversary of going public on the New York stock exchange and our fifth public quarter of meeting or exceeding expectations on revenue and adjusted EBITDA.
We have also continued to see positive client momentum, securing new wins with United steel and expanding relationships with BMO and Amtrust among others given.
Given this performance we are reaffirming our full year revenue growth projection of 6% to 7% and.
And adjusted EBITDA guidance of $650 million to $662 million, putting us on track to achieve year two of our three year plan.
And our Q3 results demonstrate our ability to consistently deliver in the third quarter. We recorded total revenue growth of eight 7% driven by nine 9% growth in employer solutions and have over 98% of 2022 revenue under contract.
We signed $208 million in <unk> bookings, which puts our first nine months total at $564 million more than 80% of the way to our full year goal of $680 million to $700 million.
Finally, we recognized a $151 million in <unk> revenue up 55, 7% from last year with be passed now accounting for over 20% of revenue up from 14% a year earlier.
This was achieved while we self funded $38 million in investments over the first nine months of 2022 to drive long term growth.
I'm incredibly proud of the way in which our team continues to deliver on our commitments, while making meaningful progress on our transformation.
While we talk a lot about wins it is as important to talk about execution and delivering value for our clients through our <unk> strategy.
Our <unk> solutions are powered by the light work life platform, which brings together all aspects of physical mental and financial well being.
Positioning of light to be one of our few enterprise wide platforms that companies can rely on and the platform that we believe is best positioned to drive outcomes for employers and their people.
Last quarter.
Talking about the go live of the federal Thrift savings plan and as I said them.
<unk> is just one of a few companies in any industry that can deliver on a contract of this scale and level of complexity.
This is a clear example of how we are executing for clients.
We are also seeing the benefit of our platform strategy on the annual enrollment experience of which we are 30% of the way through.
We are serving a larger population than last year, while experiencing lower overall call volume largely driven by a better enrollment experience through a light work life.
More than 95% of enrollments are fully digital and mobile sessions have more than doubled from the same period last year.
From a low base.
And then when it comes to delivering value for our clients through our <unk> strategy, we've generated $50 million in claims savings for five of our biggest clients with outcomes based contracts through our light work life platform and our health care navigation capabilities.
With our full wanted light approach, we are helping becton Dickinson create a culture of health and total wellbeing and they are seeing results.
The company is trending towards over 93% benefits utilization for the year, a marked increase from previous years employee satisfaction of more than 80%.
And average savings of nearly $580 per household that utilize the products.
A third example is bowling.
As an employer focused on helping its employees to have a great life and great career.
Boeing partnered with a light to provide a centralized solution for accessing personalized information for health and wellbeing benefits financial and retirement benefits compensation and incentives for its employees by using technology and AI.
Boeing recently celebrated one year live with bowling total rewards on the light work life platform.
Leveraging the personalized experience of the platform and providing content relevant to their unique situations allows Boeing employees to now have greater visibility to programs that support them and their families.
As you can see we're delivering on our transformation for our clients and their people.
But why is it more important than ever to deliver outcomes for companies and Y as a light uniquely positioned in the market.
As you've heard me talk about before the benefits and wellbeing ecosystem is highly fragmented vendors are often specialized which means employers need to have many different relationships to cobble together, all their benefits and wellbeing needs and often these programs go unused by employees.
Companies are spending significant dollars on these programs and in a recessionary environment all spend will be under even greater scrutiny and this is the opportunity for the light work life platform.
We are helping clients maximize the investments that are making on these benefits by helping them drive utilization reduce costs and increase engagement. This allows clients to realizing roy and make better spending decisions.
So how are we doing this through focus and investment in product development.
With the next release of a light work life coming in early 2023, and our two latest products.
The wellbeing marketplace, and the lights indexing and benchmarking product called program optimization, we are continuing to solve for these challenges.
Our wellbeing marketplace takes the vast array of benefits and wellbeing vendors and kuwait's them into one simple experience on a light work life.
The wellbeing marketplace provides employers with access to a 150 plus services and experiences in over 50 countries to meet the specific needs of employees.
This allows employers to provide a comprehensive and personalised benefits experience for their employees, while removing the complexity of vendor management.
Program optimization Leverages DLA at work like platform to aggregate our data combined with clients other vendor programs to deliver actionable insights that help employers determined whether they are investing their benefits spend to align with the needs of their employees.
This is a clear differentiator and we have already taken our first major client live on this product.
And our first you as a public company. We have also committed to formalizing R. E. S. G strategy.
We are proud to announce the inaugural republication of our global impact report, which is available on our website.
The report is anchored around three pillars culture of wellbeing.
Social innovation and.
And responsible business practices.
Our commitment to social innovation extends to our people our communities and our clients.
Recently, we announced that collaboration to create a consortium of workplace retirement plan record keepers to accelerate the nationwide adoption of auto portability.
To help underserved and under saved workers improve their retirement outcomes.
The consortium will make it easier for workers to move their employer sponsored retirement savings automatically from job to job, which we believe will help mitigate the cashing out of account balances and preserved trillions of dollars in the U S retirement system.
We are proud to have been the first in the industry to offer auto portability as part of our commitment to helping employees be more financially secure.
As we look to the macro environment. The mission critical products, we provide and our strong client relationships position as well to withstand economic challenges.
A few stats worth keeping in mind.
We have over 83% annual recurring revenue, 97% average annual revenue retention.
Our average contract lengths are three to five years, and we serve a diverse client base, including 70% of the fortune 100.
We believe this strong foundation are consistent results and review into the balance of the year puts us on the pathway to double digit growth in 2000 twenty-three Katy over to you.
Thank you to fan and good morning, everyone. We continued to drive our transformation agenda and I'm pleased to share our third quarter results, which included revenue at the high end of our outlook and adjusted EBITDA that with the head of our guidance.
It's defend noted we continued to deliver and if not are exceeded expectations and our first year as a public company and are on the path to achieving our second year targets outlined in our three a roadmap.
On a year over year basis third quarter total revenue increased 8.7% to $750 million in total revenue, excluding our legacy hosted business increased 8.8% to $749.
Corinne revenue, which comprises over 83% of our total revenue increased 11%.
Revenue growth has been driven by a combination of increased volumes, new customer additions, including from our <unk> bookings and acquisitions, which further supplemented our content offerings undulate work life platform.
Adjusted EBITDA with $133 million in the quarter ahead of guidance, even with our strategic investments and previously disclosed seasonal headwinds.
This progress is supported by the growth intervene path solution.
And a total contract basis.
Looking for the third quarter of $208 million and for the first nine months of the year totalled $564 million, which is well on track for our 680% to $700 million target for 2022.
Deepak bookings growth has translated into revenue growth and higher contracted revenue RB pass revenue growth with 55.7% for the third quarter and now comprises over 20% of revenue.
But our strong bookings as of September we have over 98% of projected 2022 revenue under contract.
Next I'm going to discuss performance for our two primary segments.
Employers solutions third quarter revenue grew 9.9%, which reflects a combination of acquisition increased volumes and that commercial activity.
Recurring revenue increased 11.7% while project revenue declined 4.6%.
Gross profit was $189 million, while gross margin with 29.3% and adjusted EBITDA was $130 million, while adjusted EBITDA margin with 22%.
This anticipated decline reflects a $15 million headwind from higher project demand linked to annual enrollment in the normal seasonality associated with the ramp of our commission business acquired late last year.
In addition, the margins also incorporate the remaining $15 million of our $38 million investment program focusing on key investments, we are making in the business.
Turning to our professional services segment third quarter revenue increased by 2.2% to $95 million driven by a three three per cent growth and project revenue in recurring revenue was unchanged are professional services business is poised for continued project revenue improvement as we head into 2023.
Gross profit declined by $1 million to $23 million gross margin was 24.2% adjusted.
Justin EBITDA was $3 million and adjusted EBITDA margin with 3.2%.
We are reaffirming our full year guidance of three point O nine to $3, one $2 billion or 6% to 7% revenue growth.
Jested EBITDA of 650 to 662 million and adjusted diluted EPS at 54 to 60 cents.
We have good visibility to the remainder of 2022, given our third quarter results and with over 98% of revenue under contract.
And the third quarter, we were able to recognize $5 million in projects revenue across employer solutions and professional services earlier than anticipated, which provides us with more certainty for the full year revenue out later.
We also benefited by $4 million and delayed vendor span, which we expect to reverse in the fourth quarter.
Turning to our balance sheet on September 30th or cash and cash equivalents were $304 million and our total debt with $2.8 billion.
Given the rising rate environment, we thought it would be helpful to provide some context is defend noted early earlier our business has a high degree of stability with its recurring revenue base of over 83% that we believe supports our capital structure.
Believe we are well positioned for a rising rate environment, given our interest rate hedging strategy with over 70% of our debt portfolio fixed for 2022 through 2024 and 50% fixed for 2025.
In addition, we have no near term debt maturities of significant size until 2025.
During the quarter, we repurchased $12 million of shares under our 100 million dollar authorization, we will continue to opportunistically evaluate share repurchases balanced against investing in the business and inorganic opportunities to drive progress on our transformation.
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 $36 million of capital expenditures in the quarter and $15 million of investments in technology commercial and to support the thrift contract.
We made progress on improving our cash flow from operations by generating operating leverage on the investments we have made in improving working capital matrix. It's.
This all occurred against the backdrop of the successful conversion of our international business onto a unified Workday finance system in the quarter.
For the nine months ended in September we generated $201 million in operating cash flow first $51 million over the same period last year.
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.
Looking ahead to 2023, we already have $2.5 billion of 2023 revenue under contract we are tracking with our goals of double digit revenue growth and margin expansion in 2023 and look forward to sharing our formal twenty-three guidance with our fourth quarter results in February .
In addition, we are pleased to announce our intention of hosting an investor day in New York City in the second quarter of 2023 and will provide additional details on our fourth quarter call.
This concludes our prepared remarks, and we will now move into our Q&A session. Operator would you. Please instruct participants on how to ask questions.
We will now begin the question and answer session.
Question, you May plus five on one on your Touchtone phone, if you're using a speaker phone. Please pick up your handset before pressing a key to.
To withdraw from the queue. Please press Star then too.
The first question is from Peter Heckman Davidson. Please go ahead.
Good morning, Thanks for taking my questions. How are you thinking about inflation.
Inflation on the cost base in any adjustments that you might be looking to do four of 2023, you might've how that works.
Yeah sure. Thanks <unk>.
Couple of things I think it's obviously a key area of focus for us in this environment I think the.
One thing that helps is do you think about the structure of our contract.
Is that kind of on an annual basis, we can increase the fees for the majority of our contracts.
Based on the provisions and so if you think about what that was here at the end of September It was 5.2% in essence, we pass along the difference.
Between that and the 3% that we covered.
Kind of annually. So we will pass on that that 2% I'm here at the start of the year, which will help offset some of the pressures we're facing an inflation, but that being said obviously, there's still a lot of work we're doing to continue to to manage that obviously internally and being a big focus for us as we've talked about.
Has been also how do we kind of streamline and standardize the way we are delivering so that we can continue to leverage the platform.
Drive automation through things like you know, we talked about last quarter checking the status of tickets now.
That we have everyone on a unified front end of our platform.
That's something we'll be working towards as well.
Great that's helpful and any changes in the.
In the market for a unretire.
Retirement business that.
Would either be headwinds or tailwinds for the first quarter, where that business falls into the organic calculation.
No I mean as I think about obviously, you're right. The fourth quarter is is a an important quarter for us with that business, but right now given given where we said today, we're tracking well in terms of our expectations for for delivering on on that business.
Alright, thanks, Okay bedroom here.
Thanks.
The next question is from Scott Schonhaus Keybanc. Please go ahead.
Hygiene congrats on the quarter. So your unit reiterated your fiscal year guidance, implying a nice fourthquarter ramp on the margins side.
I'm, suggesting the rollout of.
The large federal thrift.
Rack and being executed as we stand here in early November please provide any more color on how things are going with the rollout there and how we should think about the contribution into next year as we stand here on November Sir Thanks.
Yeah. He's got thanks very much.
In life.
For now over three months or so in the last quarter and so it's.
It's part of the revenue profile today, and it's running in and going very well for us so nothing more to it than that.
Yeah, and if you think about it it's got into next year I mean, again, I think we're kind of tracking to our expectations.
We've said obviously the revenue comes online immediately and we've had obviously some key investments to get it to kind of run rate profitability.
But we'll see that what kind of be in a better place as we head into next year from from that perspective.
Again, if you have a question. Please press Star then one.
There are no other questions at this time. This concludes that question and answer session I would like to turn the conference back over to substantial for closing remarks.
Thanks, Kate Thank you everyone for joining us today, we're executing on our strategy.
Expanding relationships with new and current clients and delivering on our on our commitments.
We look forward to meeting with many of you at the upcoming Investor conferences in the following weeks thanks everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.