Alight, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Alight provides cloud-based human capital and business solutions, principally through Employer Solutions and Professional Services. Amounts are in millions except per-share data and percentages.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $806 | $715 | $1,637 | $1,440 |
| Gross profit / margin | $257 / 31.9% | $219 / 30.6% | $514 / 31.4% | $442 / 30.7% |
| Operating income (loss) | $(21) | $(23) | $(34) | $(25) |
| Net income (loss) attributable to Alight | $(67) | $51 | $(135) | $40 |
| GAAP diluted EPS | $(0.14) | $0.10 | $(0.28) | $0.07 |
| Adjusted EBITDA / margin | $157 / 19.5% | $142 / 19.9% | $311 / 19.0% | $284 / 19.7% |
| Adjusted diluted EPS | $0.14 | $0.12 | $0.27 | $0.24 |
- Revenue and segments: Q2 revenue rose 12.7%; Employer Solutions revenue increased 13.5% and Professional Services 9.9%. For the six months, revenue increased 13.7%, with Employer Solutions up 14.8% and Professional Services up 9.4%. Recurring revenue grew 13.6% in Q2 and 15.1% year to date.
- Profitability: Gross profit increased, but Q2 adjusted EBITDA margin declined 0.4 percentage points and six-month margin declined 0.7 points. SG&A rose $36 million in Q2 and $81 million for the six months, primarily reflecting restructuring costs and the 2022 acquisition.
- Cash flow: Operating cash flow was $162 million for the six months, versus $118 million; capital expenditures were $89 million versus $79 million. Financing used $275 million, principally including a $218 million decrease in fiduciary liabilities, $14 million of share repurchases, and $13 million of debt repayments. Cash, cash equivalents and restricted cash totaled $1.562 billion at period-end, including fiduciary funds; fiduciary cash is not available for corporate use.
- Cash and liquidity: Balance-sheet cash and cash equivalents were $271 million, up from $250 million at year-end. The $300 million revolver had no borrowings; approximately $3 million of letters of credit were outstanding. Management stated it expects cash, operating cash flow and revolver availability to cover foreseeable needs.
- Debt: Debt, net, was $2.809 billion, including $25 million current and $2.784 billion long-term, compared with $2.823 billion at December 31, 2022. The B-1 term loan bears interest at SOFR plus 300 basis points; the company reported higher interest costs amid market-rate movements. Debt-instrument interest expense was $55 million in Q2 and $106 million for the six months, while the income statement reports interest expense of $33 million and $66 million, respectively.
Material changes and notable items
- GAAP results swung from net income to net loss, largely reflecting fair-value remeasurement differences. Q2 included an $11 million TRA remeasurement loss versus a $38 million gain in Q2 2022; six-month TRA and financial-instrument remeasurements also differed materially from the prior year.
- BPaaS revenue grew 39.8% in Q2 to $179 million and 44.6% for the six months to $350 million. BPaaS bookings, however, fell 36.3% in Q2 and 37.1% for the six months year over year. Cumulative bookings since 2021 were $1.7 billion, ahead of the company’s stated $1.5 billion goal by year-end 2023.
- A two-year transformation program is expected to incur approximately $140 million in pretax charges and generate annual savings of more than $100 million after completion. The company had incurred $56 million through June 30, 2023.
- The company repurchased 1.63 million shares for $14 million during the six months; $74 million remained under the authorization. It received no proceeds from a March secondary offering by selling stockholders.
- Effective January 1, 2023, Hosted business results were moved to “Other,” and segment profit measurement changed to gross profit; prior-period segment information was reclassified to conform.
Outlook, risks and contingencies
- The filing provides no specific company-wide revenue or earnings guidance. Management cited ongoing investment in growth, productivity initiatives, and the transformation program.
- The company expects substantial payments under its tax receivable agreement (TRA), which generally entitles certain former owners to 85% of specified realized tax benefits. It paid $7 million in the first half, expected no further payment in the remainder of 2023, and estimated approximately $50 million of payments in 2024. The reported TRA liability was $653 million, including a $50 million current portion.
- Disclosure controls and procedures were deemed ineffective at June 30, 2023 because of an unremediated material weakness in income-tax accounting controls. Remediation was underway but not yet fully implemented and validated; management said the financial statements fairly present results in all material respects.
- Risks highlighted include variable-rate debt and interest-rate exposure, cybersecurity and data protection, execution and integration risks, client retention and competition, and the ability to realize transformation savings. Legal proceedings arise in the ordinary course; recorded legal reserves were not significant, and management did not expect the proceedings to have a material adverse effect.
- After quarter-end, the Chief Professional Services and Global Payroll Officer departed, and the CFO assumed those duties and became CFO and COO.
Most important facts for investors to verify
- Whether BPaaS bookings recover after the reported year-over-year declines and support continued revenue growth.
- Whether the transformation program achieves its expected savings, and how remaining charges affect reported and adjusted margins.
- Cash generation and debt-servicing capacity, including exposure to SOFR and the distinction between corporate cash and fiduciary funds.
- The timing and amount of TRA payments and their effect on liquidity.
- Progress in remediating and testing the income-tax accounting material weakness.