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spk00: good morning and thank you for holding my name is peter and i will be your conference operator today welcome to allied's first quarter 2022 earnings conference call at this time all parties are in a recent only mode as a reminder today's call is being recorded and replay of the call will be available on the innovations section of the company's website and now i would like to turn it over to greg fajay head of investor relations at Alight, to introduce today's speakers.
spk03: 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 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 10-K filed with the SEC, as such factors may be updated from time to time in the company's periodic filings with the SEC. The company does not undertake any obligation to update forward-looking statements. Also, throughout this conference call, the company will be presenting non-GAAP financial measures. Reconciliation of the company's historical non-GAAP financial measures to the most directly comparable GAAP financial measures appear in today's earnings press release. On the call for management today are Stephan Scholl, 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 Stephan.
spk07: Thanks, Greg, and good morning, everyone. The last two years, 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 well-being, 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 a light approach the elite work-life platform brings together all aspects of physical mental and financial well-being positioning a 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 the elite 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 their people, their most important asset. This powerful combination is the Alight business process as a service or BPaaS 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 NEC, Genuine Parts Company, Atavinta, 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 employee's needs. but it was overwhelming and people weren't getting the most from the investments the company was making. Now, they're using the Alight Work Life platform, which will drive proactive, personalized communication to increase 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 in BPAS bookings, which is 205% higher than last year's $40 million, and we recognized $114 million in BPAS 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 the Alight Work Life platform development, including our recent rollout to more than 450 clients, and in investments in our go-to-market strategy. As a result of these critical investments, Employer Solutions' gross profit margin declined to 32.7%. We are striking a balance between profits 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 continue 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 all together, 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 in 23. So what is BPAS? 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 BPAS model that I touched on earlier. What we offer for clients is a differentiated approach to human capital management, an approach focused on leveraging data to drive outcomes. Our BPAS 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 our robust cloud-based content layers, 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 BPaaS 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 of 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 a nurse about managing a critical illness, or leveraging a 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. Secondly, because of our core business, we have approximately 200 million interactions from more than 30 million users and their family members, 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 its thousands of employees and offers a wide range of well-being programs to meet employee needs. But few employees are actually using these programs. Our BPAS 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 Life 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. Second, this client did not have high-touch concierge health services, which left the company at a recruitment and retention disadvantage in today's highly competitive market for talent. To address these challenges, we will provide the Alight Work Life platform paired with our HealthCloud 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 Alight 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 healthcare concierge support for all employees from a dedicated Alight Health Pro. The cost of implementing this solution is a fraction of the company's overall healthcare 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 is why the client saw the potential and signed with Alight. Our strategy and our deliberate approach to investment is why we have seen steady progress in our BPAS bookings with a cumulative total of $724 million since the first quarter of 21 And this is why we believe we are well on our way to our goal of 1.3 billion in BPAS bookings by year end, which allows us to reaffirm our 22 commitments and gives us confidence in our path to 10% growth in 23. Katie, over to you.
spk01: Thank you, Stefan, 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 Alight BPAS offerings. On a total contract basis, BPAS bookings for the first quarter grew 205% to $122 million. This bookings growth has translated into revenue growth and higher contracted revenue. Our BPAS 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 22 outlook. Across our consolidated results, we continue to see progress. First quarter total revenue increased 5.2% to $725 million, and total revenue, excluding our legacy hosted business, increased 5% to $713 million. Recurring revenue increased 7%. Adjusted EBITDA increased 6.8% 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 6.1%, which reflects a combination of acquisitions, volumes, and net commercial activity. Recurring revenue increased 6.9%, which was partially offset by a 1.9% decline in project revenue. Gross margin decreased 150 basis points, reflecting the seasonal nature of the fourth quarter 2021 completed acquisitions, and key investments we are making into the business. Adjusted EBITDA increased 4.4% 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 4.8% decline in project revenue, partially offset by 3.4% 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 0%. 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 solution 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 is 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 a significant recurring revenue stream with additional growth potential, marks a key milestone for us and underpins our new WealthCloud infrastructure. Second, in products and technology, we are investing to support the ongoing development of our Alight 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 a project revenue rebound in 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 2022 revenue under contract, which is seasonally weighted towards the fourth quarter, and our known investment timing, we believe EBITDA growth will be more weighted to the fourth quarter. Given this visibility, we are reaffirming our 22 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 participants on how to ask questions?
spk00: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from the line of Kevin McVeigh with Credit Suisse. Please go ahead.
spk02: Great. Thanks so much, and congratulations. Katie or Stefan, I guess maybe Katie, you reaffirmed the EBITDA guidance despite the additional investments. Is that just more leverage in the back half of the year, or were those investments as expected? Maybe just help frame that a little bit for us.
spk01: Yeah, thanks, Kevin. You know, we talked a bit at the end of the year about investments we were making this year, and I think it's just important, you know, these were anticipated investments, but I think being able to quantify and help kind of ensure folks understand the benefit of those investments and the timing of them is really what we're trying to articulate here. So, you know, I think the point is, We have a path forward to hitting our guidance with the investments, and those will become tailwinds as you think about kind of exiting the year into 23.
spk02: That's great. And then just, you know, congratulations because obviously a lot of folks are seeing cost headwinds, things like that. From an internal perspective, is it just the balance of the workforce or, you know, you've really been able to manage through that? So maybe help us understand that a little bit as well.
spk01: Yeah, I think there absolutely are areas of the business where, you know, we see inflationary pressures. And that's what we're managing through. Honestly, our team's 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, you know, we've talked a little bit about the professional services business, about some of the call center activity. But I think also importantly, if you think about kind of our contractual structure and 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, we put in increases if they're above a certain threshold, say call it 3% on an annual basis. And so that helps us offset some of that pressure as well.
spk02: It's great. Thanks so much. Thanks, Kevin. Thanks, Kevin.
spk00: Thank you. Our next question is from Peter Heckman with DA Davidson. Please go ahead.
spk04: Good morning, everyone. Thanks for taking the question. I was curious. It sounds like the thrift savings contract is a little bit ahead of schedule in development implementation, which is great. In terms of how we're thinking about the contribution to 2022, are we expecting that to go live relatively early in the quarter?
spk01: Yeah, thanks, Pete. So, unfortunately, we, you know, just from a contractual perspective, we're not able to disclose specifics around the contract. But I think, you know, given the materiality of it to our business, that's why we wanted to highlight that it is on track. We do expect it to go live in the back half. It's part of our guidance. And, you know, what I'd say is we're on track with kind of the timing we expected.
spk06: Yeah, we've done very well on deliverables. We keep weekly calls on it, Pete, and we feel very confident with where we are today on the program.
spk04: That's great. That's great to hear. And then thinking a little bit about fairly significant offshore facilities and with the dollar strengthening, did that provide any material level of cost benefit during the quarter, or do you have FX hedges that would limit that?
spk01: Yeah, we do. Particularly if you think about our partnership with Wipro, right? That's a contractual agreement with kind of the price inflation locked in. And so that provides a natural hedge, you know, sometimes the upside, sometimes the downside. But FX was not kind of a material driver for us given that contract.
spk04: Okay. All right. That's helpful. And then just lastly, Anything else we should be thinking about in terms of very large contracts in process, in terms of maybe hitting? Are there any things that are – I know that Federal Thrift is uniquely large, but anything else that's relatively large that we should be thinking about the timing of hitting over the next, let's say, eight quarters?
spk01: I don't think there's any – I mean, obviously there's nothing of that significance. 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 contracts live this year and into next year. So, you know, that obviously will help later in the year. We have some big deals in the pipeline. You saw, obviously, great BPAS bookings for the first quarter. But remember last year, right, as you think about some of the seasonality, we had, you know, a bigger Q2. So, again, I'd go back to we're on track for our guidance on BPAS bookings of the 680 to 700. There are some big deals in the pipeline, but I think, you know, that won't be a material driver of kind of changes to our outlook.
spk05: Okay.
spk00: I appreciate it. Thanks. Thanks, Pete. Thank you. Our next question is from Tianxing Wang. with J.P. Morgan. Please go ahead.
spk05: Okay, great. Thanks for taking my question, guys. I wanted to ask on the project revenue line of sight there and some of the rebounds in NPS. Katie, I think you referred to it. Just curious about the visibility there and what's driving your confidence there.
spk01: Yeah, thanks, Kenji. And you mean in the professional services segment? Yes.
spk05: Is that kind of where you're focused?
spk01: Yeah. Yeah, because, I mean, again, overall, I think that was, you know, great news. Seeing close to 7% growth in recurring revenue was obviously, you know, where we've been focused. But if you think about some of the names Stefan mentioned on the call, like the 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 because And so that kind of is translated into our outlook that, you know, we'll see a rebound here towards the back half of the year.
spk07: And I think the big thing on the PS side is, as I said before, you know, while it's a professional services business in the past, largely around implementing Workday, in the last 18 months I've shifted that focus to be more one-on-one focused. which Workday is a piece of that. And that strategy is now working as especially big global companies are now looking to consolidate all these fragmented systems. So the professional services business is going to get some good tailwinds in helping us execute on that broader global integrated strategy.
spk05: Perfect. Thank you both. My quick follow-up, just thinking about this earnings season, we've heard a lot from some of the service or the outsource guys that there seems to be a pickup in demand and enterprises, small businesses, you name it, all looking for help on the servicing side. I'm curious with rates rising and more market uncertainty, given what the stock markets are telling us, do you feel like there's a change in the pipeline and the sense of urgency as you engage with enterprises to, you know, to move forward with projects? How does it feel versus 90 days ago?
spk07: Yeah, listen, you know, it's kind of what I've been saying for some time with which is the people agenda has been a holdout for some time on an integrated approach. 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 hasn't. It's kind of the big holdout where people are now realizing it's fragmented systems, they're geographically based. So 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, 20, 30, 40, 50 sometimes systems into one. So the services agenda, that's why I kind of like when people ask why do we have this services aspect to it. It is largely to drive that program office of integration and enterprise forward. And then for us, it's the platform piece, the 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're 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 and global delivery capability to do that. So people are moving fast because not only is it a cost takeout opportunity for them and consolidation, it's also just a better way to serve their employees better during this last couple of years.
spk05: Thank you for the talk. Thank you.
spk07: Thank you.
spk00: 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 Stefan Scholl for closing remarks.
spk07: Great. Thank you very much. And thanks for joining us today. You know, we're executing on our strategy and delivering for clients and making key investments to fuel our results in 22 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.
spk00: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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