Great. Good afternoon, everybody. We're thrilled to start our day two with Alight CFO Jeremy Heaton. We've got some Q&A for the folks in the audience and in the room. I just need to start out with a couple of disclaimers, and then we'll go right into the Q&A. So I apologize, but as a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company in which I express a view at this meeting today. These disclosures are available at www.ubs.com/disclosures. Alternatively, you can reach out to me, and I can provide them after the call or meeting. So with that out of the way, again, we're thrilled to have both Jeremy Heaton and Jeremy Gowan, who's in the audience as part of our technology conference here at the Phoenician.
This is our 29th annual, I think our 8th or 9th. But Jeremy, again, always terrific to have you folks here.
Thanks, Kevin. Great to be here.
Probably the best place to start is probably with the recent CEO change. You know, there's been some change at the CEO. Maybe just what was the impetus of that? Maybe a little bit of background for the benefit of the audience and the folks online.
Sure, sure. So, yeah, Dave Guilmette, who's our current CEO, joined the board in May of 2024, and pretty quickly after that, took the CEO role in August of 2024. And he's done just a tremendous job with the teams, focusing on, you know, this business post-divestiture of payroll, just on the benefits industry, stabilization of this business, and refocusing around the innovation and digitization. And just over the last few months in discussions with the board, just thinking through the long term of the business and the company, the result of that is Dave will step down at the end of December, and we announced that Rohit Verma will take the CEO role on January 1st. And Rohit's been in adjacent industries, driving growth and transformation.
And so, as the board was in discussions, he was just a great fit for what we're doing within the company to continue much of the strategy work underway. And again, we'll benefit from his experience and what we're trying to do long term for the company.
That makes a lot of sense. And then, you know, as you think about that change, how should we think about that through the lens of whether it's macro or a change in direction for Alight? Just any thoughts around that?
Sure. I, you know, much of what we've gotten and what we've laid out earlier this year at Investor Day and going forward is execution around the growth of the top line of the company. I mean, that is for sure number one priority is back to growth. Within that is service delivery at a very high level, retention of the key clients that we have today, 50% of the Fortune 500, and new bookings. So, winning new deals, built bigger pipeline, really in the large and jumbo market is really where, from a positioning standpoint, is where our history is. And so, a real focus there. But I would say 80% execution on our side. There's a, you know, certainly a bit of macro, which we can talk through as well within this business.
But much of what we laid out and feel good about is a lot of the transformation work happening that drives the top line, but also drives the margins of free cash flow in this business.
That makes a lot of sense. And as you know, Jeremy, it's only been a couple of weeks, but any initial early view on it? And, you know, if you were to think about where Rohit's priority will be, you know, maybe top two, three initiatives?
Yeah, I think it'll be, you know, in my discussions with him and with the team and the board, much of what is underway today is continued driving that forward. I think, right, retention of the key clients in a very competitive market, getting back to, again, the market positioning for us in the large market in health benefits administration, wealth benefits administration is going to be key. Innovation and technology, I think, is important. We can talk, you know, certainly around AI, but just automation in our space is important as it drives a better experience. And so that experience, that seamless, you know, infrastructure for employees to be able to navigate the healthcare system and their benefits is going to be important.
So, you know, I'm certainly expecting he's going to want to get in front of investors and the group very quickly after starting in the role. But today I wouldn't see anything that is significantly different than where we are.
It's helpful, and you know, it's amazing a lot has changed in the year, not only from a macro perspective, but just internally, and you opened that up. You talked about the sale of payroll and professional services. Maybe start internally in terms of changes over the last year. You folks have made a lot of progress on a lot of initiatives. Maybe talk to that a little bit and then weave in some of the macro dynamics as well.
Yeah, sure. So, you know, we feel good about many of the, you know, the operating aspects of this business. There's always a lag in the long cycle business. And so the work that we're doing every day doesn't necessarily show today in terms of the financial profile and what that means, you know, going forward. But many of the initiatives for us from the operational side, the operating model and how we're delivering services for clients and the results we're seeing in terms of client satisfaction has been a, you know, a big, you know, positive for us in terms of what we see this year. The usage of automation and technology and AI. We've got, you know, right now we're in the middle of annual enrollment. Just we'll be finishing up, you know, that over the next couple of weeks. We had 97% digital enrollments.
Our call volumes have been down double digits over the last couple of years, so again, that's more efficiency on our side, but it's a greater experience for, you know, great clients like UBS who, you know, leverage Alight from, you know, from the services that we provide, and so we feel really good in terms of those being the big drivers that we laid out and one, you know, being, you know, best in market in terms of that experience and then the margins and cash flow profile of what this looks like from the business going forward. I think on the macro side, historically this business has benefited 1%-2% growth based on just employee counts. So what we call volumes in this business year- to- year, that's been flat this year, but it's not what you read in the headlines either.
I mean, we have not seen material impacts from our clients. We're in discussions every day because think of us as kind of the right arm of the HR operations teams of some of the largest companies in the world. So I wouldn't expect that that's a driver of growth for us in the next year or two years, you know, depending on where things are. But I also don't see it today from any of our client conversations that it's materially different on the downside. But certainly we're watching the macro. And for us, the either upside from a revenue standpoint or the hedge on any of that as a headwind is really in the partnership space where we've now announced Goldman Sachs a couple of quarters ago. Last quarter we announced both MetLife and Sword Health.
And so we've got great distribution capabilities in our platform that we're going to allow these great companies to have access to that distribution. And we're going to share in their growth and value creation as they're on our platform.
That makes a lot of sense. And one of the things we've always modeled out with Alight in particular is the scale of your clients. I mean, you serve, you know, the best of the best in the enterprise space. And you're right, it's even in a flat environment on a relative basis, that's a pretty good place to be just given a lot of the uncertainty mid- to down-market. And you folks really aren't impacted by that. So maybe talk to, I guess, just a little bit about directionally some of the larger, not specific clients, but just the benefit of having that scale. And to your point earlier, it's relatively predictable in terms of when you win a client, there's a certain amount of implementation work that's done upfront and go-lives and so on and so forth.
I think a lot of that is tethered to the scale of your clients.
That's right. That's right. And so, yes, in this business, like I said, we've got 50% of the Fortune 500, very diverse across, you know, both white collar, blue collar, you know, companies, industries. So we love the diversification in this business, but it also gives us a great view into what's happening in the market and kind of the macro across these different companies. And the visibility is, you know, 92% of our business is recurring revenue tied to three- to five-year contracts that are a per employee, per month, you know, type of fee structure in large part. And there's nothing that happens overnight typically in that large market. It's if we win a new client, it can typically take from six- to 18 months to get that client live. If a client is leaving us, it similarly will take them likely six to 18 months.
And so you do get visibility in terms of where, you know, where we're at with clients, the visibility on the revenues under contract over a pretty long term. And like you said, you know, within the mid-market space, down market, that's a smaller part of this business. It can churn, it can change more quickly than certainly the large market. But we do benefit from nice visibility here.
To your point, even the alliances, when you have that type of scale across that channel, and then even things like leaves, right, it can be a really, really important value creator for you.
Absolutely. I mean, you think we love the opportunity in the leaves business. One is because you just look at the white space in the current clients that we've got today and the value to integrate leaves with financial wellness, health, and welfare while somebody's, you know, if you're dealing with something where you need leave and connected to your healthcare and the leaves process, it's just, you know, and what we hear from the market is, listen, you get this right from, you know, the integration within the app and within the technology that you have. These are very big deals on the leave side, arguably more sticky than even the benefits administration space. And so these can be larger deals. We look at on average, they're about 30% of the revenue, you know, uplift of what we'd have on the revenue coming from benefits administration.
Large deals, large white space, great pipeline. That's a big opportunity for us.
No, it is. And I think it's an area where you've really been able to differentiate yourself. And then, just, you know, switching back to, obviously, there's been a lot of uncertainty in the market overall over the last year. As you think about Alight specifically, what do you think has been going well? Areas of focus as you kind of think about puts and takes over the last year.
Sure. So operationally, you know, much more stabilized, I think in just the market narrative of who we are, right? Post the payroll and professional services sale last year, focus in through four years of technology transformation, both on the front and the back end. Just to be very clear, we are an employee benefit services company enabled by great technology. So not to be confused with a technology company. And so I think getting that narrative clear is important for the market and importantly for our clients. And so with that and the service stabilization that we focused on and the innovation on the technology side, what we feel good about is that service delivery needs to continue. Retention levels within the large market, you know, increased 800 basis points from the 2023 cycle to the 2024 cycle.
And that has stabilized and continued will be about in line with last year's cycle as we finish 2025. So and there's upside there. We need to continue to work through the retention aspects of this business, but that's really important because that has been a drag on growth for us. Certainly this year, much of which came from the 2023 cycle. So it starts there. Commercially, we brought in Steve Rush. We have had bookings much lower than our plan was for this year. And so commercially, to reinvigorate the go-to-market structure, bring in more domain expertise, we brought Steve Rush back in as our Chief Commercial Officer back in October. He has a long, you know, two decades with Alight and its predecessor companies, a ton of domain expertise. He is the sales leader.
When we talked about deals like the GEs, the Fortune 10s, the, you know, big logos we had talked about over the past two to three years, Steve was on most of those deals. And so he knows how to, when I talk about the large market, the jumbo market, he's aligning the teams to, one, close the deals that are in late stage of the pipeline right now for us, but drive an inflection in what we're seeing around the ARR bookings in 2026. And so those are the big pieces, I think, from a top line that are important that have not, you know, really landed where they needed to in 2025. And so a big focus for next year.
Sure. And I want to reiterate because I think it's important that improvement and retention takes time to season, right? Because again, with the enterprise nature of your clients, if you win or lose, right, it takes time to work through the channel and it's, you know, not one quarter. And again, that's very consistent across the industry when you've got these big complex enterprise implementations, they take time, right? I think about it as, you know, the kind of the aircraft carrier relative to the battleship. It takes time to turn that aircraft carrier.
That's right. That's what's always, you know, and that is an important dynamic here. It is six to 18 months of a lag on what's happening that's good in the business, what's happening that's maybe not as good in the business, but it's just the flow through on the financial expression of those day-to-day results that we see takes time. And so I think the recovery, the transition and recovery for us here and the inflection back to growth takes more time than, you know, in terms of the day-to-day what we see versus when those results will come through in terms of revenue inflection.
And despite that, the revenue continues to do a terrific job on the margin and free cash flow. It's really been. There's a lot of understated part to the story right now, but that's a huge part to the story that we don't think is being properly calibrated by the market.
I agree with you. The team's been tremendous in the execution around the operating model. So we've built COEs from a delivery standpoint, right? So we're delivering with COEs across multi-solutions on behalf of clients. So again, it's a more frictionless experience for the client, but there's more efficiencies that we drive when we do that. The automation and self-service nature of what we can do there is really important. The technology, whether it's LLM or AI technology, and then in the call centers with the call volumes being down, you're right. I mean, it's, you know, you're battling a bit against the top line pressure, but what we really laid out at investor day, the team has, you know, more than delivered on in the short term.
We view that as really important in terms of where we're at, both from, you know, the margins and the cash flow side.
No, it's important. And, you know, as we try to navigate the GenAI landscape, you know, one of the things I think it's underappreciated for Alight relative to other benefit providers is your offerings are complex. It's healthcare, it's retirement, not things that can be kind of competed away very easily. There's a lot of complexity and nuances to it. And I think you folks have also been able to leverage a lot of the technology in terms of implementation. So maybe talk to that a little bit as well because I think, you know, you're in a sweet spot from a perspective of relative complexity of what you're delivering, but then also get some leverage on the implementation side.
That's right, so that same timeline of the six to 18 months, you know, the ability to compress that timeline, that's always a drag for us on working capital because we bear the cost and the cash flow to implement those large clients and get them live. Now again, that's an investment you'd make all day long because you get that recurring revenue. But to the extent that we're more efficient in that process and it's a shorter time to revenue, we will benefit from that, and it's been a big focus for us, so like I said, four years of real work on the front end of what the experience is on the technology, but also moving into the cloud, getting out of the data centers, moving fully into the cloud and the technologies that we have now. We've announced the partnership with IBM.
So we benefit from the WatsonX AI technology. And it's really for use. It's for what matters most in terms of the infrastructure to support our clients and the experience that we can drive for them. We benefit significantly from them. The complexity in what we do is immense. It's mission-critical work on behalf of some of the largest companies in the world. And there's not someone sitting in a garage somewhere coming up with a technology that's going to disrupt and take over and start running benefits programs on behalf of the largest companies in the world. It's just not, right? But there are technologies that can make it a better experience and make it more efficient. And so that's where we're going to capitalize. We've been on that journey for a couple of years now. And with our new partnerships, we'll continue to do so.
It's going to be very important for us.
One thing I think is important too that sometimes gets lost is, you know, when you're in the enterprise sector, right? Enterprise tends to lean best of breed point solution. So you're not going to, to your point, you're not going to see these startups, you know, from a just from a risk perspective in terms of delivery and concentration. And there's a lot more moat around the business than I think, and it's not Alight specific. We're seeing that across just the entire sector right now. And I think we're starting to see, you know, quite frankly, that bottom and start to see rerate some of that. But it's an important point.
This business, trust is so important. If you are the head of total rewards, the CHRO of a company, and you're managing the benefits across hundreds of thousands of employees, that trust is more than anything else. And so if you're moving to another provider or if you're staying and the incumbent is making large scale changes on the technology, it's very important that your technology journeys are tied together as partners through this. So that's what our client management team spends a ton of time focusing on our technology teams and doing demos of where our technology is going and how it integrates with where that company is going. But that trust element is more than anything else, just, you know, the disruption that it causes, right?
You go through a change or you go through an annual enrollment, if it goes well, it just means it's quiet and everybody's fine. If it doesn't go well, you've got massive disruption across your entire employee base and tons of productivity loss across your company. And so that's an element to your point. There's a reason there's stickiness here. The long-term revenue retention of this business is 96%-98%. And it's just if you're delivering services and executing to the commitments that you've made and the partnerships aligned, we see, you know, very high stickiness in this business.
Great. And it's just critical offerings too, right? I mean, healthcare and retirement is just critical to people's sustainability. And just on that, you know, we talked a little bit after the quarter, but with the benefit of the enterprise, you know, you have a pretty good advantage on white-collar workers more broadly. And there's, you know, one of the things we've obviously been struggling with along with the market is, does this GenAI create mass unemployment? Our view is it doesn't. But maybe talk a little bit about just what you're seeing across your clients from an employment perspective. I know you talked about kind of flattish, but just anything to call out in terms of behavior from an employment perspective, particularly through the white-collar lens.
Sure. I would agree with you. I mean, we just have not, even across the board, seen material changes or planning for material changes in a large part of our base. I mean, there's always a level of change. I mean, we have retail clients who certainly move with the markets and what they're looking to do. And, you know, some markets that might be either in consolidation or everybody that's, you know, navigating just market changes with liberation day and tariffs and AI. But like I said, flattish this year, even in markets where, you know, we see growth in spaces where the headlines say a completely different story. And so, you know, I would say that we wouldn't expect employee counts to be a driver of growth for us over the next year plus.
So I certainly wouldn't be bullish on it, but at the same point, I'm not seeing it go away in a way that is materially different than what we've seen this year. And so we'll be right there with clients and partnering with them. And once again, just everybody has it, you know, we get paid on a per-employee per-month basis in large part for our recurring business. It's not one-for-one either. We have. There's different structures contractually in place with large increases in headcount and decreases. And so it's not a one-for-one for us on a revenue, but it certainly has an impact. And so we watch it.
We've got teams that, like I said, are on the ground day-to-day with clients and working through it, but just have not seen in large part maybe as much of what might be in the headlines that we see going through the earnings cycle.
And we agree. And again, I think as we think about how we position the group, you want to be more enterprise-centric, just given the relative volatility where employment sits. You know, you tend to have a little bit more duration in the enterprise relative to mid-to-down market across the industry. Maybe switching gears because again, you mentioned it earlier, but I think it's a critical point. Maybe talk about the retention a little bit. You've seen some improvements there, and I know you have some specific initiatives in place. Maybe talk to that a little bit, kind of where we are and kind of in that journey and where you hope to be.
Sure. So yeah, so we made the organizational change earlier this year. Rob Sturrus is head of client management for us, which was really important. We did not, you know, client management was sat really with the delivery and the commercial teams in a bit of a, I'll call it a matrix structure historically for the last few years. Rob's team has a set of client executives. They manage, you know, roughly the top 200 clients and really just sitting with those clients, where are we at from a delivery standpoint? Where are the clients focused? What's their strategy? How do we understand their strategy? How we're delivering today? What are the solutions that we can provide to continue to provide great partnership? What do we need to do differently? And then enabling really the growth within the white space that exists within those clients.
It's difficult to just sell into those clients without having the basis of where we're sitting and how we're delivering today. And I think that was important. As I said, the narrative around who we are, what we do, what's important to us was a little bit, you know, geared towards the technology side. And clients, you know, understandably had questions. Are you still focused on services of the business and what we rely on you for? And so I'd say that stabilized many of the conversations that we had. There is naturally still a flow through because of the long-cycle nature of this business of where, you know, again, you're getting back in with clients and going through that process. And it's been a very busy market.
I mean, we have probably cycled through two-thirds or more of our book over the last two years from a cycle of either RFPs or renewals. And so when you think about this business, on average, you might expect that, hey, 25% of this business is up for renewal every year. That can ebb and flow. So we've actually had the last couple of years a higher level of renewal activity, which, you know, when that denominator is bigger, it's certainly going to drive more impact as you think about the top line. But so we expect next year 30% less activity than we've had the last couple of years. So it'll be a lower year in terms of dollars up for renewals.
As I said, the 2025 cycle was really good in the large market, in line with what we saw in 2024, which was not, you know, really the low point. The low point was 2023. We were about 77%-78% in the large market renewal in 2023. That was up from the mid-80% last year, and it's holding at that level this year, so no regression back, very good. And we still think that gets, you know, that has historically been closer to 90% in the large market, so there's still room for us to improve as part of the, you know, the revenue and the target growth model in this business. The, you know, smaller part of the business, the smaller point solutions, smaller clients, that can churn a little bit more. We saw a little bit of that in the third quarter.
That's a watch item for us here in the fourth quarter as we talked about through the earnings, you know, so nothing new from what we said at earnings, but we'll always watch that a little bit, but it's not the material drivers really that large market and where we're at from the renewal space.
It's helpful. And one other thing I think it's worth mentioning to the audience too is it's not really a quarter of the business, but you don't have float, right? So a lot of your competitors in the space had terrific benefit from, you know, float on interest income between 21 and 25. The downside of that is you're going to be comping that. You folks didn't have the benefit of that. So it's, you know, whereas some of your competitors on a relevant basis, so it'll be comping that. It's something you're not impacted by.
That's right. That's right. Yeah. You know, the dynamics are different, but it's certainly less volatility for us as we think about that part of the business.
And maybe switching gears a little bit because it's 92% recurring, and then you've got the 8% that's project. Maybe talk to that a little bit this year. And you know, because I think there's been some puts and takes around that, but I think one thing that's worth mentioning is it's one of the more profitable parts of your business, right? And again, going back to the delivery on the margin and cash flow, despite maybe that not coming in as expected, really underscores some of the execution. But maybe talk about, you know, where, you know, puts and takes were relative to maybe expectations coming into the year.
Sure. Sure. Yeah. So project revenue has, you know, this is, we're at a level now that we certainly didn't expect. I mean, this is the lowest level of project revenue we've seen in years. So that's been part of the update, you know, that we've had on performance for the year. Project revenue, there's three big areas that drive project revenue in our business. The first is benefit plan designs, the communications work we do around those benefit plan designs as you go through annual enrollment. Second piece is around regulatory changes. So anything that needs to happen within the systems and how the record keeping and the reporting that's required around that. And the third piece is M&A. So if our clients are acquiring or divesting and carving out employees, that's project work.
To your point on margins, it's the teams that are already with the clients doing that work. So it tends to carry a much higher margin profile on that work as we see. And over time, you think about that business as an attachment rate of ARR. So think about it about 10% attachment rate on the ARR that you have in that business. And so it's not competitive work. It doesn't go to somebody else. We're the only ones that can do the work that's in the system. And so it's just a matter of the cycles of where that activity is. Within our client base, M&A remains, you know, relatively low. While there's been volatility on the administration side, we haven't really been regulatory changes and law changes in our space, which has required much work.
And benefit design changes, you know, that's something that each company can kind of look at and say, well, where are we? Do we want to undertake it this year? Are there other competing priorities for the companies? And so what we've seen is the last couple of years, that work has been pretty low. It will cycle back. When, I think, is the challenge on how you think about that. And so I think we'll remain really cautious and conservative as we think about that business today, just based on what we've seen. But you're right. I mean, it's much of the work that we've done on the margin and cash flow has offset a lot of the headwinds from the top line. And so that you would think about is, you know, certainly upside at whatever point it comes back.
Sure. And one thing, and you mentioned it a couple of times, it's important, right? Those clients that churn, there's the attachment rate on the project too that creates some of that pressure too. So as that churn starts to.
More ARR bookings, we'll bring more opportunity. That's right.
Aircraft carrier, it takes a lot. But it's important. I mean, it's important.
Exactly right.
That doesn't get lost. I mean, it's, I think across the sector, people don't have enough understanding of the relative dynamics, enterprise relative mid-down market. I guess, and listen, we've weaved AI in a couple of times, but it's probably a good place to close some of the specific initiatives you folks have in place, not only on the expense side of the equation, but also on the revenue. Maybe talk about the view philosophically on, you know, that margin benefit, how much of that, and without getting too, too specific, just how much of that goes back into the business as opposed to the market. Just, you know, I think we could spend a day on AI, but it's an important.
For sure. You know, it's been, like I said, we announced the partnership with IBM, who's been a big partner for us over a long period of time. And so they, you know, the infrastructure in many ways is supported by them. And so now you're really putting what from Watsonx and the product suite that they have around AI can drive the, you know, the latest experience we have in the platform. So clients of Alight who have the Alight WorkLife platform, as we go through the next 12 months, there's going to be a completely different annual enrollment, you know, experience to go through. We're taking three of our top clients through this year as kind of the first phase, and that'll be a full rollout next year.
And so this is a very different experience from an enrollment standpoint, conversational AI, GenAI-backed, really bringing in the transactions and the, you know, the data that, you know, really personalized, you know, for every individual around who they are, where they sit in the world, what their healthcare and employment experience has been over the last few years, and really getting to an efficient and modernized capability around AI. And I think that experience is going to be really important. I mean, it's where the market is going. It's the opportunity for us to continue to drive a personalized impact. And we provide more solutions in this space than any of our other competitors.
And so, being able to integrate all that together seamlessly, your health benefits, your wealth benefits, anything that you've got within the platform and AI through GenAI using all the data that we have, it's our proprietary information. So it's really our benefit back to the 35 million participants that we have. And so from a new client that's coming in and looking at demos and a competitive, you know, kind of space within the market of what that experience looks like, to current clients and the evolution of that, the revenue and experience aspect is, you know, over time is a much more important space than even the efficiencies that we drive in how we deliver those services.
But we think about that in, you know, some of that benefit is the reinvestment in the technology and reinvestment in the business to continue on that path of innovation, which is really important. And then there's other elements of competitiveness of how you look at that and the expectations in the market.
Terrific. I think just good place as any to end. So appreciate your time.
Thanks for having us.
Yep.
Thank you.