Alight, Inc.

Good afternoon, and thank you for holding. My name is Stacey, and I will be your conference operator today. Welcome to All Light's second quarter 2023 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 relations section of the company's website. And now, I would like to turn the call over to Jeremy Cohen, Vice President of Investor Relations at All Light. Please go ahead.

Good afternoon, and thank you for joining us. Earlier today, the company issued a press release with second quarter 2023 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 most recent Form 10-K, as such factors may be updated from time to time in the company's periodic filings. The company does not undertake any obligation to update forward-looking statements. Also, 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 appear in today's earnings press release. On the call from 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.

Good afternoon, and thank you all for joining us. Earlier today, we released our second quarter results. and are pleased to close out the first half of 2023 with double-digit growth across revenue, adjusted EBITDA, and operating cash flow. We believe these results coupled with a consistent track record and increasing levels of visibility leave us well positioned to achieve our 2023 and midterm growth outlook. During the quarter, we delivered revenue and BPAS growth of nearly 13% and 40% respectively. As a result, recurring revenue represented nearly 85% of total revenue for the quarter. The mix towards tech-enabled revenue coupled with investments to improve our operating model are enhancing returns with adjusted EBITDA up almost 11% for the quarter. As we drive our profitable growth agenda forward, we're also generating stronger operating cash flow, which was up 37% for the first half. Our strong performance is led by the collective components of BPAS, and non-b-pass solutions which have created a resilient book of business and taken together allows us to sit here today with over 90 percent of our 2023 revenue under contract and already an unprecedented amount of backlog of 2.5 billion for 2024. let me briefly explain our recipe and how each component contributes to the totality of our business first Our non-BPAS revenue, led by professional services and standalone core administration, represents nearly 80% of total revenue and is seeing higher than normal growth rates of 8% in the first half. Our recent growth was driven by one-time project work supporting the go-lives of large BPAS deals. It is these mission-critical, standalone solutions that are the foundation for our moat, characterized as highly recurring and with long-term contracts. and they are the feeder enabling us to upgrade our customers into larger platform deals that are driving better outcomes. And the platform, Alight Work Life, is the backbone of BPaaS, which as a reminder, are tech-enabled solutions wrapped with our service capabilities that drive improved engagement and outcomes for our customers. Since 2020, bookings for these solutions have grown over 80% per year resulting in revenue up 45% during the first half of 2023. BPAS bookings were 149 million for the second quarter. And as we have noted previously, there will be lumpiness in our sales cycle. To effectively evaluate our bookings, you need to take a longer term view that isn't captured in a quarter to quarter movement. Cumulatively, we have sold 1.7 billion of BPAS TCV bookings since 2021, well ahead of initial expectations and a key driver of higher sustainable growth. And speaking to the lumpiness, the total bookings exclude a large deal with a Fortune 10 company that we've already closed here in July. Once again, deal timing may fluctuate, but it's the totality of these great deals that drive the long-term performance of the business. The investments we have made and are continuing to make in our platform and products have resulted in a tremendous opportunity in our pipeline with a number of transformational deals. We also continue to monetize our offerings through a modernized pricing model that is being rapidly accepted by customers and provides upside going forward. This gives us confidence in our medium-term guidance of BPAS growth of 15 plus percent coupled with the non-BPAS growth of 2% to 4% with an improving margin profile. So with that important context, let me now turn to the strategic investments that are driving the success of our transformation and overall trajectory. At the center is an ongoing focus of executing on our platform strategy and engaging people in a truly personal way that eliminates complexity, drives better participant outcomes, and yields better ROI for customers. To accomplish this, the Alight Work Life platform has been constructed as a recommendation engine of one by unlocking the value of data within our core administrative services and leveraging AI in a meaningful way. So let me talk more about how we're doing this. Starting with product, early in the quarter, we announced a major upgrade to our smart select MD search engine and launched new behavioral health services, both enhancing our navigation capabilities. In addition, yesterday we announced our second major annual release of Alight Work Life. The latest release leverages Alight's robust proprietary data to deliver AI-driven personalization and automation capabilities across the Alight Work Life platform and provides customers with advanced tools to increase the ROI of their benefit programs. I am particularly excited to share our improved virtual chatbot experience which will offer users greater access to AI-based personalization and the ability to answer specific inquiries efficiently and in a digital environment. Improving the chatbot experience will allow us to continue reducing the need for participants to use the call center channel, an improvement that drives greater client satisfaction and underscores our long-term margin expansion by driving down our service costs. Though the advancement in our chatbot is exciting, Aled has been investing in and utilizing AI for years. AI has been core to powering individual benefit decisions and delivery automation. Our experienced models, highly leveraged data sets, and established connections with data sources are driving better engagement and improving ROI for our customers. And this is the foundation for our BPaaS growth. Still, we're just scratching the surface of what is possible. We're unlocking concrete generative AI use cases by building internal applications. For example, given the many millions of interactions and hard to digitize PDF documents that we handle annually, generative AI provides the ability to, at scale, ingest, comprehend, and answer questions about these documents in a faster self-service format. While we were busy this quarter improving our platform, we also were hard at work on the commercial side as our ongoing investments are translating to customer wins and new partnerships. In the case of Weiss Markets, a mid-Atlantic food retailer with nearly 23,000 employees, our new relationship has grown from an original remit of taking over a complex workday deployment led by a competitor to a one-on-one engagement that includes benefits administration and services work. And with Siemens Healthineers, a multinational with nearly 70,000 employees, they were seeking a solution that prioritized employee health and well-being while also driving sustainable engagement. Through our One Alight solution, Siemens will have the tools to address its objectives and positively impact well-being, retention, and cost. These wins underscore the continued strength in our commercial pipeline and the need for employers to drive better outcomes for their people and together serve as a powerful foundation for our new Chief Commercial Officer, Greg George. Greg joined us midway through the quarter, and I'm excited for our organization as its background in driving growth for cloud-based systems and in the HCM space fits with our transformational initiatives and will serve as a catalyst to accelerate our momentum. Another lever for commercial growth is through our numerous partnerships across the globe. This quarter, we announced an expanded partnership with Workday to help companies in various European countries source, manage, and pay their global workforce with a simple, unified offering. This software partnership is in the early stages of its rollout with the joint teams, focusing on sales enablement, account planning, and our collective go-to-market strategy. And finally, although much of our transformation is growth-oriented, we're also well along the path of improving the efficiency of our backend infrastructure, Migration of our data centers to the cloud is progressing to plan with high priority applications being moved in advance of annual enrollment and final applications migrating in the first half of 2024. The end result of this program will be significant cost savings, better delivery for our customers, and an accelerated pace of innovation. I also want to take a moment to share more on the leadership changes announced this afternoon. Katie Rooney will be expanding her responsibilities to take on the role of Chief Operating Officer, focused on running Alight's professional services segment and our global payroll capabilities. Many of you have gotten to know Katie well and can attest to her strong leadership abilities built from her over 14 years with Alight and its predecessors. In addition to her new role, Katie will continue to serve as Global CFO, and Jeremy Heaton will move into the Operating CFO role, accountable for many of the day-to-day responsibilities across the finance functions. Jeremy was executive vice president of FP&A and has been part of Katie's team for over three years. Before Alight, he was a divisional CFO for GE and spent over 20 years there. Many of you have had the opportunity to spend time with him, and you'll be seeing much more of him in the future. Adding operational experience to Katie's skill set and elevating Jeremy's role will deepen the expertise of our executive leadership team and give our board, colleagues, shareholders, and customers confidence in our long-term success. Additionally, Cesar Helves will be leading Alight. I want to thank him for his contributions in moving the business forward, and I wish him well. Before I hand it over to Katie, I also want to express my gratitude for our colleagues around the world who, in just two years as a public company, have made tremendous progress transforming Alight, building upon our strong foundation, and setting us up for sustainable long-term success. Katie, over to you.

Thank you, Stefan, and good afternoon, everyone. Our second quarter performance was highlighted by double-digit growth in total revenue, BPAS revenue, adjusted EBITDA, and operating cash flow. In addition, the strength of our foundational non-BPAS business is also driving increasing levels of long-term visibility, with Stefan noting earlier that we now have over 90% of 2023 revenue under contract and $2.5 billion of 2024 revenue under contract as well. The line of sight we have from our backlog is what enables us to confidently invest to sustain profitable growth. Let me now turn to our performance. Starting with our consolidated results, during the second quarter, we achieved revenue growth of 12.7%, highlighted by BPAS revenue growth of nearly 40%, as prior bookings continue to translate into higher contracted revenue. This is resulting in an ongoing shift towards higher quality recurring revenues, which were up 13.6%. Recurring revenue comprised 84.7% of total revenue, a 70 basis point increase from the prior year. Adjusted EBITDA increased 10.6% to 157 million, with an adjusted EBITDA margin of 19.5%. With strong growth across the board, we are generating increasing levels of cash flow, which strengthens our balance sheet and funds our transformation. For the first half, we generated operating cash flow of 162 million, with a conversion rate of 52%, up significantly versus prior year as we continue to make improvements in working capital. As a reminder, our second half cash flow tends to be seasonally stronger and we would expect the same this year. And as planned, both investments and restructuring activity are projected to slow compared to the first half, which will impact both profitability and cash flow. Let me now expand on our bookings performance, both for the quarter and more holistically. To start with the results, BPAS bookings for the quarter were $149 million, and cumulatively, we're pleased to report we have now achieved over $1.7 billion in total bookings since we began our transformation in 2021. As BPAS revenue is long-term and recurring in nature, this foundational backlog will continue improving our overall quality of revenue as we leverage the Alight Work-Life platform. For 2023, we now expect BPAS bookings to be in the range of $700 to $900 million. which implies a strong second half and well over $2 billion of cumulative bookings, more than $500 million ahead of our original three-year plan. As you may recall, we will see lumpiness in our bookings from large deals. For example, the two we closed in the fourth quarter of 2022. The GE deal is a great example of this dynamic. Our engagement is designed to drive long-term BPAS revenue starting in 2024 through our LightWorkLife platform and comprehensive payroll and benefit solutions. However, this year, our team is hard at work implementing the core platform and systems across GE's three companies, and this work is driving higher non-BPAS revenue in 2023. The closing of one-to-light deals such as this are lucrative, but the size and complexity of finalizing these offerings typically means they take longer to close. Another case was for a deal closed in July, as Stefan discussed, and as you evaluate a light, it remains an important reason to take a longer-term view of bookings. We also continue to have a very strong pipeline across our business with over $2 billion in opportunity just within our install base. We're making progress with new logos and we've introduced our new pricing model, which is not yet contemplated in our total backlog. Our pricing model is being implemented in new deals and will enable us to monetize new products more effectively. Overall, the implications of building our platform and driving value-based pricing will be multifold. We'd expect increased revenue growth, improved margin potential, and faster cash collection as we prove out a better model for our customers. Overall, these levers taken collectively are driving growth for our business and position us well to achieve our midterm outlook. With that, let me now turn to our segments, starting with employer solutions. Second quarter revenue was up 13.5%, with recurring revenue up 14.3% and project revenue up 5.5%. Contributing to our growth was two months of federal thrift, as well as increased net commercial activity, volumes, and the impact from the regroup acquisition. Our strong growth coupled with productivity savings are driving better profitability with second quarter adjusted gross profit of 21.3% to $268 million. Adjusted gross margin increased by 250 basis points to 38.5%. Turning to our professional services segment. Second quarter revenue growth accelerated sequentially and was up almost 10% from the prior year to $100 million. This was driven by a 10% increase in project revenue and a 9% increase in recurring revenue, building from a strong backlog. On a profitability basis, adjusted gross profit was slightly off from the prior year, down $1 million. Turning to our balance sheet, our quarter end cash and cash equivalents balance was $271 million, and our total debt was $2.8 billion. We continue to actively manage our debt and our hedge portfolio is 84% fixed through 2024 and 60% through 2025. Our net leverage ratio at the end of the second quarter was 3.7 times, down from 3.8 at the end of the first quarter. And as a reminder, we are targeting midterm net leverage of approximately three times. Turning to our outlook, our strong first half keeps us on track for another successful year. With more than 90% of our revenue under contract, we are reaffirming our 2023 guidance, with the exception of BPAS bookings mentioned earlier. Our outlook includes revenue of $3.47 to $3.51 billion, or growth of 11 to 12%. Adjusted EBITDA of $735 to $750 million, or growth of 12 to 14%. Adjusted EPS of $0.62 to $0.67, or growth of 9 to 18%. and an operating cash flow conversion rate of 45% to 55%, up from 43% in 2022. From a phasing perspective, we expect second half adjusted EBITDA to follow historic trends, with higher upfront costs in the third quarter, supporting growth in the fourth quarter. In closing, I'm so proud of what we have accomplished and continue to achieve with double-digit revenue, adjusted EBITDA, and operating cash flow growth. These results demonstrate the attractiveness of our long-term strategy as we pivot toward the higher growth and higher margin operating model, positioning us to enhance long-term shareholder value. 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. We will now 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 two 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. Your first question comes from Kyle Peterson with Needham and Company. Please go ahead.

Great. Thanks. Good afternoon, guys. Katie and Jeremy, congratulations on the new roles. I just wanted to start off on the guidance revisions, particularly on the BPAS bookings. I understand and can appreciate there's some lumpiness there, but just wanted to see, is this just a few large deals shifting around here or there, or is there any hesitation or signs of slowdown from clients? Maybe wanted to push off some of these projects a little bit, just given some of the the macro uncertainty, any color would be very helpful.

Sure. Thanks, Kyle. Appreciate it. And listen, you know, you got to go back to what we said almost three years ago, right? When our original guidance was, was 1.5 billion. And we all felt that was a big goal to achieve and look where we sit. We're going to be call it, you know, half a billion dollars ahead of that plan. So we've had some good success early days and, in the last couple of years on driving that book of business, you've all seen how that bookings performance has translated into starting 23 with $2.9 billion of revenue under contract, which was the entire revenue book of business we did in 22. And if you translate the success of our BPAS bookings from the beginning of when we started in 21, we started the year in 23 with almost $800 million in of revenue under contract more than we did in 21. So over two years, almost $800 million of high quality, valuable backlog. And then you heard Katie say $2.5 billion of revenue under contract for next year, which we've never at this point in time had that much as well. So that should give confidence looking into 24 and midterm. And then Katie also said 90% of 23 revenue under contract. In terms of pipeline, You know, we're looking at right now over 20 deals that are over $20 million in value, each one of them, and some of them, of course, significantly more than that as well. So pipeline is strong. We're seeing the same enthusiasm from clients, especially now heading into second half, where CFOs and CEOs are continuing to try and look at how to take costs out of their business. As you all know, during COVID, there was a lot of spend that happened on what I would call, you know, point solutions, right? We've come in with our platform capability and really stitched together an end-to-end, you know, front door kind of capability with our Light Work Life platform. And that has resonated. So we are doing a lot of work around value engineering and process reengineering for a lot of our largest clients, which could, again, as I said, with our pipeline, yield some pretty significant transactions for us moving into the outer quarters as well. But we feel really good about where we are. Again, as I said during my segment, you know, it's very hard to look at this business in a 30, 60, 90 or even, you know, six to 12 month view. You have to take a multi-year long term view. And again, as shareholders, you know, I know the shareholders that I've talked to appreciate the long term view of making sure that we drive a better quality book of business at higher margins and better contribution to the company. So we feel really good about where we are.

Yeah, that makes makes sense. And, you know, it's good. It's good color, you know, maybe just a follow up, you know, on capital allocation, you know, specifically thinking about the back half of the year is, you know, cash flow, you know, seasonally typically tends to be better for you guys. And, you know, in the second half, first, first half, how are you guys thinking about, you know, whether it's kind of amping up the buyback, you know, in the second half of the year or, you know, are there interesting M&A opportunities you guys would, you know, look to pursue, you know, any additional color on, you know, how you're looking to deploy capital in the back half of the year would be great.

Yeah, thanks, Kyle. Great question. You know, our capital allocation priorities have not necessarily changed. I think, you know, if anything, they've kind of been elevated in this environment. You know, first priority is the stability of the balance sheet, feeling good where we are from a hedge position, maturity position. So, you know, we'll continue to naturally de-lever, which I think is important. So then really the priority has been investing in the business organically and inorganically. But we've said, listen, you know, there is still a lot of frothiness in the market from a valuation standpoint. And if, you know, we don't see the right opportunities, then we'll absolutely consider So, you know, I'd say both are on the table, and we're continuing to evaluate them as we go forward.

Next question, Kevin McVey with Credit Suisse.

Please go ahead.

Great. Thanks so much. And let me add my congratulations as well to Katie and Jeremy. Well-deserved for sure. Hey- Thank you. You're very welcome. Hey, Stephan, I just wanted to clarify one thing you said. I just want to make sure I heard it right. You had mentioned the Fortune 10 client. Are they still in that bookings number, or did that relate to the adjustment in the bookings at all? I think you were clear. I just want to make sure that I picked it up right. I know you had mentioned that big Fortune 10 client you won earlier in the year. Was there any context you just could clarify for us around that? Yeah.

Yeah, obviously, it's so fresh still. And as you can imagine with NDAs and all that stuff, it's kind of complicated to be able to announce the actual name. These deals are different. This is a different transaction and different booking than the one that we announced previously. So hopefully that helps it.

And it's not included. Yeah, Kevin, it's not in our Q2 number.

Oh, yes. Thank you. Yeah, it's not in Q2. That's correct. That's why I mentioned the July statement. That's right. Yeah.

But that's it, Katie, it is in the full year, or Stefan, it's in the full year, guys, right? Correct. Great. And then, Katie, it sounds like you're at a responsibilities or international payroll and then professional services. Is that coincidental that, you know, one of the things we really encourage about is a Workday Partnership program? Does that add additional focus on that or, you know, maybe just help us understand what that brings to bear? Because it's obviously a real nice part to the story as well.

Thanks, Kevin. Yeah, I absolutely think that is a part of it. I mean, as you know, we're also a large client, right, as I've deployed Workday Financials across the organization. So, you know, think very highly of the company and the partnership that the team has built. So I do think that is a good opportunity for us. I think also, I mean, we've talked a lot about international in general. When you think about just the position we come at Global Payroll from, you know, from a significant position of strength, there's a huge opportunity across One Alight as we continue to bring, you know, our solutions, the platform strategy to bear for our clients. You know, that is kind of the focus today and continuing to really work across the leadership team to bring those solutions to our clients and, you know, with our platform approach.

Yeah, the only thing I would add to that is, you know, listen, we all know Workday is one of the best software companies in the business. And Anil and Carl and Dave just built something that's absolutely incredible to be a part of as a partner, to have a software partnership partnership. speaks to kind of Kyle's earlier question around what we're seeing in the market, which is HR buying centers were left behind in this massive digital transformation to consolidation and simplification. And so what you see with Workday and this partnership is a view that I share and that they share, which is clients are looking for more consolidated solutions and on a platform kind of an approach. So that gives kind of credence to our kind of, whole BPAS playbook, which is how do you drive One Alight in a lot of these accounts, you know, because a lot of these clients have 30, 40, 50, up to 80 different point solutions. And so we're both seeing the same kind of trends, which is moving to a more integrated enterprise, you know, platform type of an approach.

That makes sense. Thank you.

You're welcome.

Thanks, Kevin. Next question, Tinjin Huang with JP Morgan. Please go ahead.

Hey, thanks, and my congrats to Katie and Jeremy as well. I want to just clarify one more time, forgive me, on the BPAS bookings TCV revision here. Did anything fall out of the pipeline? Is that part of it, or is it just a timing issue into next year? And then separately, I know revenue and all the headline figures didn't change, and I know that the bookings here are very long-term in nature, but are you making it up anywhere else in terms of revenue that you were expecting this year as it relates to the BPAS piece, or is it really just, again, timing?

Yeah, good question, Tenjin. Thank you. A couple of things. I think, yes, it is timing, right? When we talk about some of the lumpiness, you know, Stefan mentioned having over 20 deals, over 20 million. There's a really strong pipeline that the team is working. I think the strategy is resonating, but getting those deals over the line has taken longer. So that's really kind of where that revision comes in. Why we haven't changed the guidance is because that's obviously only one piece of the story. You know, going back to what we've done over the past three years and the impact that has going forward is obviously, you know, the most important driver, coupled with obviously continued strong performance in the non-BPAS areas, the new pricing model, right, all the other components we mentioned around it continues to support the guidance as well.

Very good.

Sorry, go ahead. Go ahead, Stefan. No, I was just going to say we're not wavering at all from the transformation agenda and the BPAS piece is healthy. And as you've seen from the numbers, if you change GE bookings from December 31st to January 1st, it's a different conversation. We've had that in the last quarter. So timing is one thing, but the health of the business, the health of transformation, all that is still very strong. And that's why it shows up in terms of still our, our midterm guidance. But as you can see, we also spent a lot more time because a lot of you as investors and analysts asks that asked us that, which is how, you know, what is the non BPAS book of business? The two together really drive, you know, a resilient book of business for us. And so the GE, I think example, Tenjin is I think a great one, which is there's no BPAS revenue, even though it was a major booking last year at the end of the year, there's no revenue until 24, but there's a lot of non BPAS type revenue. And as you heard us say, You know, there's some impactful growth in the last couple of quarters and moving forward on some of that non-BPAS debt revenue, but all in the name of helping drive more towards our platform book of business in the outer years.

Very good. No, I understand. I think just want to make sure, make sure, given some of the importance, maybe too much focus on some of the KPIs, but yeah, no complaints here. So my quick follow-up, just thinking about second half, I know, again, the headline revisions was just limited to the TCV piece, which you just went through. But any other change in thinking? I know there's some questions around employment, normalization. I'm assuming you're not too influenced by that. Are you seeing anything there amongst same-store growth for your larger clients? And then same thing on – I know pipeline is strong, but just visibility and the conversion – Timing, that kind of thing, we heard a lot of delays and push-outs with some of the traditional IT services providers. I'm curious if you're seeing any signs of that as well. Thanks for taking my questions.

Yeah, thanks, Kinjin. We're really not when it comes to, you know, just the underlying performance. And, again, the team is doing an incredible job getting clients live on time, working through that. You know, the kind of employment trends haven't had, you know, an impact on us. You know, I think the only area we continue to monitor, as you know, Q3 and Q4 are higher project quarters for us that we do continue to monitor. You know, so far you saw it in the second quarter. We've, you know, we've done well. But that's the one area we have a little bit less visibility to at this point. But in terms of kind of the recurring book of business and where we sit today, we feel good.

Great. Thank you.

Next question. Pete Heckman with DA Davidson. Please go ahead.

Hi, good afternoon. I had a few more questions. Thinking about those two large clients, GE was one of them. They were signed in the fourth quarter of 22. Would we expect those to go live in 24, first half, second half, midway through? Just thinking about kind of the, both of those seem like they're big enough to influence the growth rates a little bit. So just trying to feel like You just said that you're hitting milestones. The contracted pipeline is tracking towards going live. But any additional thoughts in terms of, you know, going into 2024 about some of those big go-lives?

Yeah, thanks. You know what? What I'd say is they remain on track. Again, the team has just done a fantastic job with those contracts. So, How it works is, you know, we're not fully live at the start of 24. We're actually not fully through kind of like GE. We're not at a full run rate until 25. So you will see a benefit at the start of 24 that continues to grow through the year. And then we're at a full run rate actually as we enter 25. Got it.

Okay. And then any thoughts about regroup and its relative fit and its integration? Any surprises there?

Yeah, Pete, you know, honestly, what I'd say is, you know, it's when you think about the landscape of what our customers are asking for, it just fits really well within the, you know, the one-a-light view in terms of their interaction with us. So we've seen really good traction in the pipeline there. And the team has performed well. So no surprises. I think it's, you know, potentially even a bigger opportunity than we had anticipated. But, I would say we're still early in the pipeline there.

Yeah, I'd say it's in the small but mighty category. When you think of what that actually does in terms of leaves capability, we've seen some large deals get swayed by a very small component with leaves because it is such a key element to helping employees get them back to work earlier, which is a huge ROI around that. So as we unpack especially in the Fortune 500, the cost base of somebody leaving work on a leaves program and then getting them back, the dollars are just so significant. And so when we attach it to our platform and integrate it into navigation and into our benefits administration and the rest of work life, it really kind of brings it to a much more cohesive conversation and has really helped us kind of tip the scales in our favor on some really nice deals for us.

Nice.

All right. It's good to hear. Thank you.

Thank you.

Next question, Peter Christensen with Citi. Please go ahead.

Good evening. Thanks for the question. Glad to be a part of the call. Next question. Thank you. I was just wondering if you could talk to the enterprise spending environment. I know you mentioned pipeline looks really strong, but it sounds like the life benefits when enterprises are perhaps a bit more cost conscious or maybe the inverse. I'm just trying to understand what dynamic you see really driving that pipeline. Is it cost savings or is it just other kind of aspects? And then just as my follow-up, it looks like the gross margin really outperformed this quarter. Just wondering if we could dig into that a little bit and what drove some of the outperformance. Thank you.

Yeah, sure. Thanks for the question. And, you know, I'll try and keep this very concise because I could talk a lot about this. You know, we've been on this multi-year journey and COVID as you saw clients just through everything at, you know, employees around these point solutions. And we knew three years ago, three and a half years ago, when I got here, that was a bandaid, right? You know, what employees want is more simplicity, more clarity in helping make better decisions. And in fact, all that most corporations did is add more complexity to the whole process of making the right decisions around keeping them healthy and financially secure. And so we've continued to prove out the value of a front door, which is our light work-life platform, integrating not only our data. I think that was a big shift culturally for us, but even for the market was we're willing to integrate our own data with our competitors' data in order in the name of of platform to give the best set of information for people to make better decisions. And by the way, in my last company, I mean, everybody knows my background, we did exactly the same thing for how to drive digital transformation in the business world, whether it be Ferrari or Nike or other major corporations, we've all seen how digital disruption has really impacted the B2C world in that sense. None of that happened in the last decade, really, on the employee engagement side of things. So we're just taking an old playbook that has worked really, really well, as we've seen with all the SaaS providers. And we didn't put a label of SaaS on it because it's too complex. We put a label of BPaaS on it, business process as a service, And that's a strong combination of products and software together with services that really help us drive a platform play. And so every client we talk to in the large scale is looking to now consolidate and simplify that big spend they've had over the last four years. And we're the beneficiary of that, right? So the good news is we're in the decision room. in helping clients get rid of point solutions where they're not needed, help them drive more campaigns and capability to get better value for their spend. I mean, when you think of, it's not a mystery, when you think of the rates of engagement in the low single digit percentage points, you don't have to look very far to see how difficult it has been for clients to get value for their investments because employees just aren't using it. So our engagement rates are double, triple, quadruple in many cases when you integrate the data sets into Lightwork Life. So we're right in the middle of an exciting chapter by being on the front lines with clients helping take out some of those costs. Go for that, Alex.

Yeah, Peter, just on – And, Peter, I was just going to address, first, thanks. Glad to have you on the call. And, you know, just on the gross margin front, we talked a lot about some of the key investments we made last year, and we continue to make into this year. But I think, you know, as we said, we have to see a return on those investments, and they will come through first in gross margin in terms of our go-to-market, in terms of technology investments, right, how we're delivering for our customers. And so that's really what you're starting to see play through the gross margin.

That's great. Pretty compelling there.

Thank you.

Thank you.

Thank you.

Next question, Heather Belsky with Bank of America. Please go ahead.

Hi, thank you so much. I'm going to ask first another bookings question. So I apologize, but we want to just kick the tires here. You talked about that some of the shifts in timing of the bookings just has to do with getting those deals, you know, getting some of the deals over the line. I'm just curious where You might be, you know, what might be causing some of that timing delay? You know, is it internally within the company? Is it just kind of selling the BPAS strategy to the company? I'm just curious what the feedback you're getting from these customers is.

Yeah, I wouldn't put it as delays or timing. You have to put everything into context. And the context is we said, It would be a really heroic day if in three years, which we're coming up to the last two quarters of that, if we could, you know, on a new strategy, deliver a billion and a half dollars of these BPAS dollars. And so on its own, we're going to hit hundreds of millions ahead of that. Call it half a billion ahead of that plan. And we've hit our targets early, right? So I would look at it from that point of view. You know, our pipelines are strong. I would say the demand from clients to want us to come in, you know, if anything, what's happening is the deals are getting bigger. And when you start doing, you know, process reengineering, not to get too technical here, but it takes a lot of work to go into a major client and say, here are the 15 steps it takes to get to 20 different applications. And here's the experience an employee has on the left side of the ledger to to now here's what it would look like in a consolidated, integrated data set and one place to go for an experience on the right side of the ledger. Here's the from to, here's the ROI and savings, which is significant. I mean, we've seen some ROIs into the hundreds of millions of dollars of savings for our clients by going from left side to right side. Again, you know, complex, broken, not being used, costly to integrated front door platform. So I would say, if anything, what you have to look at is the conversations we're having are with more senior people. The conversations are broadening from the HR department a lot now into the CFO department and into IT department. we're actually getting into a lot of conversations on, you know, front door service now versus a light. It's great to see that conversation. We've all seen how well service now has done with their book of business, but they're very limited as service now is on their product side of things. We have the administrative data and platform, which I've always said for the last few years is, really is a unique combination that nobody else has and so that allows us to really be much more dynamic versus static and so we've had a lot of workshops with a lot of the largest banks and a lot of the largest companies in the united states specifically and it's great where we're winning the front door discussion when it when it pertains to how to keep employees healthy and financially secure because they see the value of platform and administrative data so super exciting. The pipeline is, is, is, is stronger than ever. The deal sizes are, are great. Uh, but you know, as I said, just a few minutes ago, getting through these more complex sales cycles, which will benefit us in the longer term, just takes a bit more time.

Okay. That's, that's really helpful. Um, and you know, you talked about the, um, the, that you just launched your, your, your next sort of platform, um, I'm curious if there's any pricing that you're taking on the back of it and how to think about your pricing efforts going forward.

Yeah, Heather, maybe I'll take that one. So you're right. We have our semi-annual releases now of the Alight Work-Life platform, which is great because it's a clear product roadmap. driven with our clients that really continues to add value. What I'd say is how to think about it is actually more how we're pricing new deals now such that we get value for platform. So remember, we used to face price pressure. Right now we're looking at how do you build price into the contract going forward to account for those investments we're making in platform that clients can see being rolled out twice a year. It is kind of, in essence, baked in. I think it's a key element of the strategy, given the investments we're making. And, you know, we've been able to demonstrate to clients that there is value in those releases.

Thank you.

Appreciate the color.

Thanks, Heather. Thank you.

Next question, Steve Deckert with KeyBank. Please go ahead.

Hey, just want to know, have there been any updates you can provide on phase two of your migration to the cloud? And then has there been any feedback on your latest release of WorkWise? Thank you.

Sure, yeah, thank you.

Yeah, go ahead, Stefan.

Go ahead, Katie, please.

I was just going to start with just on the the rollout and then Stefan, I'll let you talk about the release, which we just rolled out yesterday. So I would say it's early, but just on the cloud migration, that is obviously a really important project for us. The team has done an incredible job. So we are really through kind of almost the first two phases of the rollout. The next kind of final piece will be completed in the first half of 2024. But again, the team has really done that in the right way with our clients. And now, obviously, we're kind of on a pause as we enter a really important time with annual enrollment here this fall.

Yeah, and on the product side, again, you know, while AI and generative AI are the topic of the day, that's been our strategy for years. When you look at the hundreds of millions of interactions that we already undertake with almost 40 million employees around the world, that data is powerful. And that's what is important for us to integrate into moments that matter. So that's the work we've been under in this last release is really building out capability in our software to be able to recognize PDF files, for example, when somebody calls in and says, is a procedure covered, you know, under my health plan, you know, those documents usually are, are static, you know, PDF type documents with generative AI, you can really, you know, build the capability to, to be able to, to, to look at the, the PDF formats and really, you know, sync the two, you know, the question together with the answer without having to call our call centers. Those are hundreds of thousands of calls that we get every single year. So we're building out a really strong API library integration points. We're building a very robust, you know, ask Lisa type capability, which is the AI piece to really helping people navigate the complexity of making better decisions across health and wealth and wellbeing in general. And so we're just continuing to, to, to double down on the front door platform and then the look and feel, just making it look easier, simpler, you know, kind of the iceberg phenomenon. As we all know, these DBDC navigation, retirement payroll, You know, benefit systems are just so complicated. And so the world of bringing that into a much more simplified front door capability in an integrated fashion. And then maybe the last piece I'll say is the value of our platform is about really making it personalized to the individual. I went back to numerous examples on the digital side for us. You know, we're all B2C focused people in terms of how we live every day. And many of us feel like we're the only client at a Nike or the Ferrari example I gave earlier. And we want people to feel the same way here when it comes to their well-being plans. Why should I be stuck with a well-being plan or a benefits plan or a retirement plan that's stuck to a job code or to a salary band or to an age or to something? Why is this specific to my individual needs based on health and family situation and financial situation? So the platform approach really is a big difference maker for us in terms of impact.

And that's what's going to help continue to drive the BPAS transformation for us.

Thank you. I would like to turn the floor over to Stefan for closing remarks.

Great. And thank you all for joining us today. I really appreciate all the time and the questions. And I look forward to with Katie and Jeremy to meet all of you at many of the upcoming investor events. So thank you very much and have a great afternoon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.