Alight, Inc. Q2 FY2025 earnings call

• Delivered solid results in a transitional year for Alight, with revenue at $528 million and adjusted EBITDA at $127 million.
• Used natural language interactive voice response to create automation, resulting in a 17% reduction in call volumes in the first half of 2025 vs prior year.
• Made AI advancements and partnered with Microsoft and IBM to scale AI capabilities. Also partnered with Goldman Sachs Asset Management to expand wealth offerings.
• Notable renewals include Target, Johnson & Johnson, etc., with some renewals leading to service expansions.
• Updated revenue outlook for 2025, reaffirmed other guidance, and made changes in the commercial organization, including a search for a new Chief Commercial Officer.
• Hired David Essary as Chief Strategy Officer and Donna Dorsey as Chief Human Resources Officer.

Revenue for the second quarter was $528 million. Adjusted EBITDA was $127 million, representing an 80 basis point margin increase over the prior year. Recurring revenue comprised over 93% of total revenue in the quarter, totaling $492 million. Nonrecurring project revenues were down $9 million or 20%. Adjusted gross profit was $205 million, and adjusted EBITDA was $127 million with an 80 basis point margin expansion. Free cash flow for the first half was up over 30%.

• Updated second half revenue expectations due to longer sales cycles and commercial execution issues. ARR bookings expected flat or slightly down year-over-year. Project revenue pipeline not seeing uptick. Third quarter project revenue expected in line with second quarter.
• Reaffirmed 2025 outlook: adjusted EBITDA $620 million to $645 million, adjusted EPS $0.58 to $0.64, and free cash flow $250 million to $285 million.

• Longer sales cycles impacting the timing of revenue.
• Market environment affecting client expansion opportunities and commercial execution.
• Project revenue pipeline not seeing uptick as clients assess plan design strategies and M&A/regulatory work remains low.

Q: I wanted to start off on the sales cycle. It does sound like things have gotten a little longer and I understand that that's the reason for the drift down in revenue for this year. I wanted to ask a little bit about how those client conversations are going. Do you guys remain confident that you guys are going to be able to still hit on your target specifically for next year? Is it just that maybe these deals take an extra month or 2 here or there and that limits the in-year revenue and next year should be fine? Or is there a potential for like a longer-term or prolonged impact that we should be mindful of?

A: Kyle, it's Dave. Thank you for the question and for joining us this morning. Let me take a stab at that. So I think it's important that we just break down kind of where we think the growth opportunities are going to be. And as I've said it in repeated meetings, we have a lot of opportunity for upsell and cross-sell with our existing client base. That process requires some demand generation as we're talking about problems that need to be solved differently and the solutions that we have that can bring to bear on those problems. And that process and those discussions have been protracted. It's just taking longer to reach those decisions. So we feel good about the opportunities that sit in the pipeline for that. In fact, in my opening remarks, I said that we're up 35% in deals that are in the final stages. So there's some real timing headwind that we've experienced there through the first half of the year. We also, in the new business, new logo pursuit areas, have, in my view, finished second too often, and we have to improve upon our execution there. And there are a number of things that we've done to strengthen that. So we feel good about those changes that have been made as well, and also feel good about the pipeline related to that in the final stages that we're in. So overall, we've made adjustments so that we can be better at commercial execution. And we're going to continue to pursue the opportunities with our existing clients to bring those to close the second half of the year. To your question around the longer-term view, we've got to execute in the second half. We execute in the second half, we're going to feel good about '26 and feel good about the mid-range.

Q: And it's kind of a follow-up from the first question here. But I guess, if we could get more color on this $35 million impact push out in revenue, was it -- if you could give us color around it, was it several large clients that you were looking to close this year and it's getting pushed out? Was it a collection of smaller or midsized clients? Just any more color you can give around the conversations, the types of deals and then the conversations that you had with these potential clients?

A: Scott, it's Dave. I'll take that one. Thank you for the question. As you think about the opportunities that exist in the marketplace, those that we would sell in the year, so the first half of 2025 that would bear revenue in the second half tend to be smaller. So think about that as mid-market administration, think about that as smaller-sized execution relative to leaves or navigation or retiree health solutions, things of that nature. And if those decisions are getting delayed, it's going to push the start dates. And in many cases, the push to the start date pushed us into 1/1/26 or the very, very end of Q4 of '25. So we're going to miss some of that early revenue that would have otherwise been picked up in the second half of the year. And obviously, if the deals didn't close in our favor, then that's not revenue that's coming across. So it was a combination of execution on some of the new business and new logos, and these deals getting protracted on the existing client relationships.

Q: So if I do the math right, you beat the first half to the year by about $10 million, and it looks like you cut the second half by $45 million, so it's about $55 million in total. Is that right? Like is the math right there?

A: A bit less than that in terms of midpoint to midpoint is the math that we gave, Kevin, for the update is about $47 million, I think, is the change. So as we said, really, this is a dynamic largely from the in-year revenue that would come from bookings in the first half of the year. So as you think about the bigger portions of the change in revenue, about $35 million of that update is related to in-year revenue. Of that $35 million, I would say about $25 million to $30 million is from ARR bookings and the remainder is from the project side as we did update that midpoint on project, we had about down 6% for the year in the original guide, and then I look at that today is closer to 9% or 10% down for the year. And then there's a balance of -- again, we had a pretty cautious view already around participant counts and what we've call volumes that we brought down to flat. So that's about a $10 million to $12 million update as well for the second half.

Q: I wanted to start by asking a follow-up on just a focus on the commercial organization. You mentioned that you have capacity. So given those comments, how should we think about sales force hiring plans and what's embedded in the outlook for the second half and into 2026?

A: It's Dave. Andrew, thank you for the question. I would characterize the hiring plans is looking for that specialty expertise. We've already brought on a number of individuals in the second quarter to help in that regard. Navigation sales leadership, for example, beefing up what we're doing on the lease side, beefing up what we're doing in terms of how we tell our AI story. We've got a really impactful one that we're proud of. So we're making those changes as well by bringing in certain experts to really help bring that to life. So all of that, I think, has happened already in addition to our looking to bring in a new Chief Commercial Officer. We feel really good about the talent that has identified themselves to want to come here. So I'm confident we're going to have the right person, the right fit in short order. And I think we're going to be fine as we look at the second half of the year going into 2016 from a sales execution capacity standpoint.