Alight, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Alight provides cloud-based human capital solutions, including benefits, health, wealth, payroll and HR administration, and cloud deployment and consulting services. Its reportable segments are Employer Solutions and Professional Services.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $831 million | $725 million |
| Gross profit / margin | $257 million / 30.9% | $223 million / 30.8% |
| Operating income (loss) | $(13) million | $(2) million |
| Net income (loss) | $(74) million | $(13) million |
| Net loss attributable to Alight | $(68) million; $(0.14) per share | $(11) million; $(0.02) per share |
| Cash from operations | $72 million | $19 million |
| Capital expenditures | $45 million | $41 million |
| Adjusted EBITDA (non-GAAP) / margin | $154 million / 18.5% | $142 million / 19.6% |
Revenue grew 14.6%. Recurring revenue rose 16.3% to $712 million. BPaaS revenue was $171 million, up 50%, while BPaaS bookings fell 38.5% to $75 million. Employer Solutions revenue increased to $723 million from $623 million; Professional Services revenue increased to $98 million from $90 million. Employer Solutions gross margin was 32.9%, versus 32.7%; Professional Services gross margin declined to 19.4% from 21.1%.
At March 31, cash and cash equivalents were $239 million, down from $250 million at year-end. Reported cash, cash equivalents and restricted cash totaled $1.626 billion, including $1.387 billion of fiduciary assets that are matched by fiduciary liabilities and unavailable for general corporate use. Total debt, net, was $2.816 billion, compared with $2.823 billion at December 31, 2022. The amended revolving facility is $300 million, with no borrowings and $3 million of letters of credit outstanding. Operating cash flow improved mainly because of lower net working capital requirements. Financing activities used $160 million, including a $121 million net decrease in fiduciary liabilities.
Material changes and unusual items
- GAAP net loss widened to $74 million from $13 million. Selling, general and administrative expense rose $45 million, primarily reflecting restructuring costs and the 2022 acquisition; interest costs also increased.
- Fair-value remeasurement produced a $25 million loss on financial instruments and an $8 million loss on the tax receivable agreement (TRA), versus gains of $13 million and $5 million, respectively, in Q1 2022. These items contributed to the greater pretax loss.
- In March, Alight refinanced its remaining $65 million term loan by increasing its B-1 term loan and amended and upsized its revolver to $300 million. The B-1 loan bears interest at SOFR plus 300 basis points; interest-rate swaps hedge a portion of floating-rate exposure.
- In March, selling stockholders completed a secondary offering of 46 million shares, with an additional 6.9 million shares sold through the underwriters’ option. Alight received no proceeds and paid certain offering costs. The company repurchased approximately 1.15 million shares for $10 million during the quarter; $78 million remained under its $100 million authorization.
- Class A unit exchanges increased Alight’s ownership of Alight Holdings and generated an additional $67 million of TRA liability. The total TRA liability was $643 million, including $49 million classified as current.
- The company changed its segment profit measure to gross profit and moved its former Hosted business into “Other”; prior-period segment data was recast.
Outlook, risks and contingencies
- A two-year transformation program targets cloud-based back-office infrastructure and operating-model changes. Alight expects approximately $140 million in pretax charges, including $20–$30 million of severance and $100–$120 million of other costs, and estimates annual savings of more than $100 million after completion. It recorded $26 million of charges through March 31, 2023.
- Management stated that cash, operating cash flow and revolver availability should meet foreseeable liquidity needs. It expected approximately $50 million of TRA payments in 2024 and no further TRA payments during the remainder of 2023.
- Disclosure controls and procedures were deemed ineffective because of a material weakness in income-tax accounting controls, attributed to insufficient tax-department resources relative to the complexity of the process. Remediation is underway but not complete; the weakness remains until implementation and testing demonstrate effectiveness.
- Key disclosed risks include macroeconomic weakness and higher rates, cybersecurity and handling sensitive data, client retention and service delivery, competition, personnel, acquisitions, litigation, and obligations under the TRA. The company also cites variable-rate debt exposure and substantial long-term service commitments to Wipro, including potential termination fees.
- Alight reported ordinary-course legal proceedings, but said reserves were not significant and it did not expect the proceedings to materially adversely affect results or financial condition. It said client service guarantees were not expected to result in material payments. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the $33 million interest expense in the income statement with the debt note’s stated $51 million of total interest expense related to debt instruments; the filing text does not clearly explain the difference.
- Track BPaaS bookings against BPaaS revenue growth, and assess whether the bookings decline affects future growth.
- Monitor delivery of the transformation program’s expected savings against its $140 million cost estimate and two-year timetable.
- Follow remediation and testing of the tax-accounting material weakness, and evaluate the assumptions, timing and cash impact of the $643 million TRA liability.
- Assess liquidity using corporate cash separately from fiduciary funds, alongside debt maturities, floating-rate exposure, and Wipro and other contractual commitments.