- Adjusted Gross Margin: Increased by 350 basis points to over 40%.
- Adjusted EBITDA Margin: Increased from 21.7% to 25%.
- Debt Reduction: Retired $740 million in debt, reducing net leverage to 2.8 times on last 12 months adjusted EBITDA.
- Share Buybacks: Announced $155 million of share buybacks, retiring over 3% of shares.
- Annual Run Rate Cost Savings: $75 million from cloud migration program.
- ARR Bookings Growth: 9% growth in the first half of 2024.
- Total Revenue: $550 million, a decline of 2% excluding the impact of the exited hosted business.
- BPaaS Revenue: Increased 12.7%, representing 21% of total revenue.
- Adjusted Gross Profit: $219 million with an adjusted gross margin of 39.8%.
- Adjusted EBITDA: $128 million with an adjusted EBITDA margin of 23.3%.
- Operating Cash Flow: $145 million year-to-date, with a conversion rate of 56%.
- Capital Expenditures: $67 million year-to-date, down 14% from a year ago.
- Adjusted EPS: $0.25 year-to-date compared to $0.28.
- Cash and Cash Equivalents: $183 million at quarter end.
- Total Debt: $2.8 billion at quarter end.
- Revenue Under Contract: $1.2 billion for the second half of 2024, $1.7 billion for 2025, and $1.3 billion for 2026.
- Full Year Revenue Outlook: Expected to be down 2% to 3%.
- Full Year Adjusted EBITDA Margin: Expected to be 25% to 26%.
- Operating Cash Flow Conversion: Expected to be in the range of 55% to 65%.
Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Alight Inc (ALIT, Financial) completed its two-year cloud migration program, resulting in $75 million of annual run rate cost savings.
- The company achieved a 9% growth in annual recurring revenue (ARR) bookings in the first half of 2024.
- Alight Inc (ALIT) retired $740 million in debt, reducing net leverage to 2.8 times on the last 12 months adjusted EBITDA.
- The company announced $155 million in share buybacks, which will retire over 3% of its shares.
- Adjusted EBITDA margins increased from 21.7% to 25%, with a mid-term target of 28%.
Negative Points
- Alight Inc (ALIT) experienced a decline in non-recurring project-based revenue, which is expected to be down approximately 20% in the second half of 2024.
- Total revenue for the second quarter was $550 million, a decline of 2% when excluding the impact of the exited hosted business.
- The company expects third-quarter profitability to be slightly lower compared to the previous year due to the decline in project revenue.
- Adjusted EPS for the year-to-date period was $0.25 compared to $0.28, driven by depreciation from the cloud migration.
- There is increased cost consciousness and lower client demand for non-recurring project-based work, impacting revenue outlook.
Q & A Highlights
Q: Can you provide more color on the revenue dynamics in the third quarter versus the fourth quarter?
A: On the recurring revenue side, we still have a slight headwind from the COBRA volumes last year, which subsides at the end of the third quarter. Growth will accelerate through the second half with higher growth in the fourth quarter. On the project side, the fourth quarter typically carries more project revenue, but we expect a greater decline in the fourth quarter due to cost-consciousness.
Q: How should we think about the cadence of margin expansion in the back half from the third quarter to the fourth quarter?
A: The third quarter will have slightly lower profitability than last year due to project revenue decline. In the fourth quarter, we will see the benefits of the cloud migration, expecting slightly higher EBITDA margins than last year. The cloud migration will contribute $75 million in annual cost savings.
Q: What are the opportunities for margin improvement post-cloud migration?
A: The cloud migration benefits will start in the third quarter, with full run-rate savings in the fourth quarter. This will drive $75 million in annual cost savings. Additionally, we are working with Alex Partners to streamline the company and remove dis-synergies from the transaction.
Q: Can you provide more details on the expected double-digit ARR bookings growth in the second half?
A: The compare gets harder in the second half of 2024, but we still expect double-digit growth based on our current pipeline and win rates. Typically, 60% to 65% of bookings happen in the second half. We have a larger and higher-quality pipeline, driven by our realigned go-to-market structure and new product offerings.
Q: Is the decline in project revenue cyclical or structural?
A: The decline is more cyclical, driven by factors like plan design changes, regulatory environment, and M&A activity. We do not see any structural issues. The project-based business tends to have peaks and valleys, and we expect it to rebound with changes in the macro environment.
Q: How are you seeing the renewal season shaping up compared to last year?
A: The dynamics are similar to previous years, with a standard set of contracts up for renewal. We are focused on retention and differentiating ourselves with our clients. Our long-term relationships and high retention levels (95% to 99%) are expected to continue.
Q: What gives you confidence in achieving double-digit ARR growth in the second half?
A: Our confidence is based on a strong pipeline, better market coverage, and higher win rates. The realigned go-to-market team and new product offerings have contributed to building a higher-quality ARR pipeline. The macro environment also supports our value proposition of helping clients consolidate and simplify their benefits administration.
Q: Have you seen any project delays or cancellations?
A: We have not seen significant delays or cancellations. The project work is pipeline-driven and tends to ebb and flow with macro factors like M&A activity and regulatory changes. We expect the project business to rebound as these factors change.
Q: Can you clarify the factors driving gross margin and EBITDA over the next 12 to 18 months?
A: The $75 million in annual run-rate cost savings from the cloud migration will start this year, with full benefits in 2025. This will drive gross margin and EBITDA improvements. Additionally, standardizing our operating model and leveraging technology will help streamline costs and improve service quality.
Q: How are you thinking about pricing as a potential uplift for 2025?
A: We rolled out a new pricing model with annual increases, which offsets inflationary pressures. We do not see pricing as a large driver, either up or down. The focus is on expanding relationships with current clients and driving new logo wins.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
