Alight, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods. Alight provides cloud-based employee benefits, HR, payroll, and related consulting services. Results are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $813 | $750 | $2,450 | $2,190 |
| Gross profit | $257 | $212 | $771 | $654 |
| Operating income (loss) | $(4) | $(50) | $(38) | $(75) |
| Net income (loss) | $(46) | $(45) | $(192) | $(6) |
| Net income (loss) attributable to Alight | $(48) | $(37) | $(183) | $3 |
| Adjusted EBITDA, non-GAAP | $158 | $133 | $469 | $417 |
| Adjusted EBITDA margin, non-GAAP | 19.4% | 17.7% | 19.1% | 19.0% |
| Cash provided by operating activities | Not separately presented for Q3 | $251 | $201 |
Q3 revenue rose 8.4% year over year; nine-month revenue increased 11.9%. Gross margin was approximately 31.6% in Q3 and 31.5% for the nine-month period, compared with 28.3% and 29.9%, respectively, in 2022. Adjusted EBITDA and adjusted margin are non-GAAP measures; the filing cautions they do not replace GAAP results or reflect debt service, taxes, or capital requirements.
Segments and operating indicators
- Employer Solutions: Q3 revenue of $701, up from $645; gross profit of $231 versus $189. Nine-month revenue was $2,121 versus $1,882; gross profit was $709 versus $593. The company attributed growth to recurring business, net commercial activity, higher volumes, project revenue, and its 2022 acquisition, with productivity initiatives supporting margins.
- Professional Services: Q3 revenue of $105 versus $95 and gross profit of $26 versus $23. Nine-month revenue was $303 versus $276, while gross profit was $64 versus $62.
- BPaaS: Q3 revenue was $184, up 21.9%; Q3 bookings were $262, up 26.0%. Nine-month revenue was $534, up 35.9%, while bookings of $486 declined 13.8%. Since 2021, cumulative BPaaS contract bookings were nearly $2.0 billion, above the company’s stated $1.5 billion goal by year-end 2023.
Cash, debt, and liquidity
- Cash and cash equivalents were $276 at September 30, 2023, up from $250 at December 31, 2022. Fiduciary assets of $1,319 are matched by fiduciary liabilities and are not available for general corporate use.
- For the first nine months, operating cash flow was $251; capital expenditures were $127. Financing used $289, including a $190 decline in fiduciary liabilities, $40 of share repurchases, $19 of debt repayments, and $7 of TRA payments. Cash, cash equivalents, and restricted cash totaled $1,595 at period-end, including fiduciary balances.
- Debt, net of issuance costs, totaled $2,801, including $25 current and $2,776 long-term. The $300 revolving facility had no borrowings and approximately $3 of letters of credit outstanding. The company repriced its term loans in September, reducing the applicable spread from SOFR + 3.00% to SOFR + 2.75%; a portion of floating-rate exposure is hedged through swaps.
- Debt interest expense reported in the income statement was $34 for Q3 and $100 for nine months. A debt note separately reports total interest expense related to debt instruments of $57 and $163, respectively, including the effect of swap gains; investors should review the filing’s reconciliation and presentation.
- Management said cash, operating cash flow, and revolver availability should cover foreseeable needs, including debt service, capital spending, working capital, and TRA payments. It expects approximately $50 of TRA payments in 2024; no further TRA payments were expected for the remainder of 2023.
Material changes, outlook, and risks
- Q3 operating loss narrowed to $4 from $50, but Alight still recorded a net loss attributable to the company of $48. For nine months, the company shifted from $3 of attributable income to a $183 loss. Q3 and nine-month results include significant fair-value and tax effects; nine-month interest expense also increased to $100 from $89.
- Fair-value remeasurement produced a Q3 gain of $36 on financial instruments, versus a $10 loss in 2022; the TRA remeasurement was an $11 loss versus a $20 gain. For nine months, the financial-instrument gain was $11 versus $53, while the TRA remeasurement was a $30 loss versus a $63 gain. The filing describes these as non-operating, non-cash remeasurements subject to changing assumptions.
- The company’s two-year Transformation Program targets approximately $140 of pre-tax restructuring costs and annual savings exceeding $100 once completed. It had incurred $73 through September 30, 2023, including $55 in the first nine months; substantial completion is expected over an estimated two-year period. These savings are targets, not a guarantee.
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management cited macroeconomic uncertainty and interest-rate volatility and said it would monitor liquidity. Key disclosed risks include cybersecurity and data privacy, service delivery and client retention, competition, acquisition integration, personnel, regulatory changes, litigation, and interest-rate exposure.
- The company reported that disclosure controls were not effective at September 30, 2023 because of a material weakness in income-tax accounting controls. Management said remediation was substantially implemented, but the weakness remains until operating effectiveness is validated through testing.
- Legal claims arise in the ordinary course; recorded reserves were not significant, and management did not expect proceedings to materially affect results or financial condition. Wipro service commitments are substantial, and termination for convenience could require a fee that includes certain unamortized costs plus 25% of remaining minimum service commitments.
Most important facts for investors to verify
- Whether BPaaS bookings stabilize or recover after the nine-month year-over-year decline, and whether bookings convert to revenue as expected.
- Progress, remaining costs, and realized savings from the Transformation Program, including whether the targeted annual savings exceed $100.
- Debt service and refinancing needs, especially the $307 secured senior notes due in 2025, floating-rate exposure, and the assumptions behind liquidity forecasts.
- Future TRA payments and the realization and timing of tax benefits; the reported TRA liability was $684 in total, including $50 current.
- Whether tax-control remediation is validated and the material weakness is resolved; also assess the unusual effective tax rates and tax benefits recorded.
- Cash available for corporate use versus client fiduciary funds, and the effects of share repurchases, secondary offerings, and potential equity dilution.