Alight at the End of the Tunnel

By: subSPAC

EXECUTIVE SUMMARY

• Two years ago, when SPACs were the talk of the town, Alight, a firm specializing in cloud-based HR and benefits services, took the plunge.
• With a $7.3 billion merger supported by Bill Foley, they went public right in the midst of the SPAC craze.
• Fast forward to today, the business climate is quite different.

DETAIL

Two years ago, when SPACs were the talk of the town, Alight, a firm specializing in cloud-based HR and benefits services, took the plunge. With a $7.3 billion merger supported by Bill Foley, they went public right in the midst of the SPAC craze. Fast forward to today, the business climate is quite different. Economic challenges are everywhere, and there are rumblings of more layoffs on the horizon.

This is concerning for Alight, which champions itself as a solution to keep employees around and loyal, especially when many companies are having to let go of their staff. So, during these shaky times, can Alight pull in new clients and boost its earnings?

Making Light Work of HR

Alight offers a comprehensive suite of cloud-based human resources and benefits administration services. The company’s offerings span from payroll, well-being, wealth, and retirement benefits to integrated health and a myriad of HR management solutions. Alight’s service portfolio is diverse and encompasses everything modern businesses require to manage their HR operations seamlessly. Alight derives its income from three primary streams: Employer Solutions, Professional Services, and Hosted Business.

Employer Solutions is their dominant source of revenue, offering services in benefits administration, payroll, and HR management. They generally bill on a per-employee basis for each period, with contracts typically spanning 3-5 years. The Professional Services segment focuses on aiding with SaaS deployment, integration, testing, and data conversion. 

The company’s presence reaches across 100 countries, serving a clientele of over 5,000, and touching the lives of 36+ million employees and their families. The clientele is extensive, with over 70% of Fortune 100 companies and 50% of Fortune 500 companies being Alight’s customers. Alight’s services also have incredible client retention rates.

The company has a 98% revenue retention, with 84% of the company’s revenues being recurring revenues. Most of the clients have an average tenure of 15 years with Alight. 

Balancing Act 

Alight, despite being a major player in its market, is feeling the pinch from broader economic issues just like other businesses. Companies aren’t growing as they did in 2021, and many are cutting jobs to save money. This is bad news for Alight since a good chunk of its customer base comes from the tech sector, which alone has let go of over 167,000 people in the US this year.

And with whispers of more layoffs in other industries, it’s getting tougher for Alight to secure new deals. The company’s sales cycles are spanning longer, and they are not clinching as many contracts. 

This is evidenced by the company’s BPaaS (Business Process as a Service) earnings. While the company initially hoped to make between $900 million and $1 billion this year, it seems they might only pull in about $700 million. That’s a worry because BPaaS is crucial for Alight, given its recurring, high-margin nature.

Alight’s balance sheet is shaky since the company had only $271 million in cash but had debt of $2.8 billion. Even if the company hits its 2023 earnings target, its net debt will still be 3.5x earnings, a challenging position to be in, especially in these tough economic times. 

Financials and Valuation 

In the second quarter of 2023, Alight showcased positive financial momentum, reporting an increase in revenues by 12.7%, culminating in $806 million. Notably, a significant 84.7% of this was consistent, recurring revenue. The company reported an EBITDA margin of 19.7%, translating to $157 million. This figure represents a 10.6% growth compared to the same period in the previous year.

Projecting its performance further, Alight expects to close in 2023 with revenues ranging from $3.47 billion to $3.51 billion, signifying an anticipated year-on-year growth of 11-12%. In terms of EBITDA, estimates land between $735 million and $750 million. Furthermore, the company has stated that it has already secured contracted revenue of $2.5 billion for the upcoming 2024.

Alight has set its sights on a significant technological shift. The company aims to transition its data center-hosted applications to cloud platforms by the first half of 2024. This strategic move is not just a nod to contemporary tech trends but also a fiscal decision. Migrating to the cloud is expected to reduce Alight’s capital demands, potentially boosting its margins by a hefty 300-400 basis points (bps). With these maneuvers, the company is on track to achieve its medium-term EBITDA guidance of 25%.

Achieving this benchmark will undoubtedly aid Alight in its efforts to reduce its significant debt and enhance its cash flow. Alight is currently trading around $7.6 per share, giving the company a market cap close to $4.3 billion. This valuation suggests that the company will trade at approximately 12x forward earnings. At face value, this seems like a reasonable metric. However, investors should remain wary about the company’s substantial debt load, and how the company manages its cashflows in the medium term.

Bottom Line 

Alight is at an interesting crossroads. On one hand, their extensive suite of services, impressive client base, and strong revenue retention rates underscore their resilience and market credibility. On the other hand, broader macroeconomic challenges and significant layoffs in their key customer sectors spell uncertainty. Their sales have slackened, and the optimistic projections for their BPaaS earnings have been revised downwards. While Alight’s foundation appears robust and its strategies forward-thinking, external economic pressures and internal financial challenges present complex challenges that investors will need to monitor in the coming quarters. 

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Originally Posted August 27, 2023 – Alight at the End of the Tunnel