Good morning, and thank you for holding. My name is Kate and I will be your conference operator today. Welcome to Alight's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded, and a replay of the call will be available on the Investor Relations section of the company's website.

And now I would like to turn the call over to Greg Faje, Head of Investor Relations at Alight to introduce today's speakers..

Good morning. Thank you for joining us. Earlier today, the company issued a press release with third quarter 2022 results. A copy of the release can be found on the Investor Relations section of the company's website at investor.alight.com.

Before we get started, please note that some of the company's discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors.

These factors are discussed in more detail in the company's filings with the SEC, including the company's most recent Form 10-K filed with the SEC, as such factors may be updated from time-to-time in the company's periodic filings with the SEC. The company does not undertake any obligation to update forward-looking statements.

Also, throughout this call, the company will be presenting non-GAAP financial measures. Reconciliations of the company's historical non-GAAP financial measures to the most directly comparable GAAP financial measures appear in today's earnings press release. On the call from management today are Stephan Scholl, CEO; and Katie Rooney, CFO.

After their prepared remarks, we will open up the call for questions. I will now hand the call over to Stephan..

culture of wellbeing, social innovation and responsible business practices. Our commitment to social innovation extends through our people, our communities and our clients.

Recently, we announced a collaboration to create a consortium of workplace retirement plan record keepers to accelerate the nationwide adoption of auto portability to help underserved and undersaved workers improve their retirement outcomes.

The consortium will make it easier for workers to move their employer-sponsored retirement savings automatically from job to job, which we believe will help mitigate the cashing out of account balances and preserve trillions of dollars in the U.S. retirement system.

We are proud to have been the first in the industry to offer auto portability as part of our commitment to helping employees be more financially secure. As we look to the macro environment, the mission-critical products we provide and our strong client relationships position us well to withstand economic challenges. A few stats worth keeping in mind.

We have over 83% annual recurring revenue, 97% average annual revenue retention. Our average contract lengths are 3 to 5 years, and we serve a diverse client base including 70% of the Fortune 100. We believe this strong foundation, our consistent results and our view into the balance of the year puts us on the pathway to double-digit growth in 2023.

Katie, over to you..

Thank you, Stephan, and good morning, everyone. We continue to drive our transformation agenda, and I'm pleased to share our third quarter results, which included revenue at the high end of our outlook and adjusted EBITDA that was ahead of our guidance.

As Stephan noted, we continue to deliver and have met or exceeded expectations in our first year as a public company and are on the path to achieving our second year targets outlined in our 3-year road map.

On a year-over-year basis, third quarter total revenue increased 8.7% to $750 million, and total revenue, excluding our legacy hosted business, increased 8.8% to $740 million. Recurring revenue, which comprises over 83% of our total revenue, increased 11%.

Revenue growth has been driven by a combination of increased volumes, new customer additions, including from our BPaaS bookings, and acquisitions, which further supplemented our content offerings on the Alight Worklife platform.

Adjusted EBITDA was $133 million in the quarter, ahead of guidance, even with our strategic investments and previously disclosed seasonal headwinds. This progress is supported by the growth in our BPaaS solutions.

On a total contract basis, BPaaS bookings for the third quarter were $208 million, and for the first 9 months of the year totaled $564 million, which is well on track for our $680 million to $700 million target for 2022. BPaaS bookings growth has translated into revenue growth and higher contracted revenue.

Our BPaaS revenue growth was 55.7% for the third quarter and now comprises over 20% of revenue. With our strong bookings as of September, we have over 98% of projected 2022 revenue under contract. Next, I'm going to discuss performance for our 2 primary segments.

Employer Solutions third quarter revenue grew 9.9%, which reflects a combination of acquisitions, increased volumes and net commercial activity. Recurring revenue increased 11.7%, while project revenue declined 4.6%.

Gross profit was $189 million, while gross margin was 29.3% and adjusted EBITDA was $130 million, while adjusted EBITDA margin was 20.2%.

This anticipated decline reflects a $15 million headwind from higher project demand linked to annual enrollment and the normal seasonality associated with the ramp of our commission business acquired late last year.

In addition, the margins also incorporate the remaining $15 million of our $38 million investment program, focusing on key investments we are making in the business. Turning to our Professional Services segment. Third quarter revenue increased by 2.2% to $95 million, driven by a 3.3% growth in project revenue and recurring revenue was unchanged.

Our Professional Services business is poised for continued project revenue improvement, as we head into 2023. Gross profit declined by $1 million to $23 million, while gross margin was 24.2%. Adjusted EBITDA was $3 million and adjusted EBITDA margin was 3.2%.

We are reaffirming our full year guidance of $3.09 billion to $3.12 billion or 6% to 7% revenue growth. Adjusted EBITDA of $650 million to $662 million and adjusted diluted EPS of $0.54 to $0.60. We have good visibility to the remainder of 2022, given our third quarter results and with over 98% of revenue under contract.

In the third quarter, we were able to recognize $5 million in project revenue across Employer Solutions and Professional Services earlier than anticipated, which provides us with more certainty for the full year revenue outlook. Second, we also benefited by $4 million in delayed vendor spend, which we expect to reverse in the fourth quarter.

Turning to our balance sheet. On September 30, our cash and cash equivalents were $304 million, and our total debt was $2.8 billion. Given the rising rate environment, we thought it would be helpful to provide some context.

As Stephan noted earlier, our business has a high degree of stability with its recurring revenue base of over 83% that we believe supports our capital structure.

We believe we are well positioned for a rising rate environment given our interest rate hedging strategy with over 70% of our debt portfolio fixed for 2022 through 2024 and 50% fixed for 2025. In addition, we have no near-term debt maturities of significant size until 2025.

During the quarter, we repurchased 12 million of shares under our $100 million authorization. We will continue to opportunistically evaluate share repurchases, balanced against investing in the business and inorganic opportunities to drive progress on our transformation.

Now let me provide you some color on our cash flow performance in the quarter and our outlook going forward. We continue to invest in our business with $36 million of capital expenditures in the quarter and $15 million of investments in technology, commercial and to support the thrift contract.

We made progress on improving our cash flow from operations by generating operating leverage on the investments we have made and improving working capital metrics. This all occurred against the backdrop of the successful conversion of our international business onto a unified workday finance system in the quarter.

For the 9 months ended in September, we generated $201 million in operating cash flow versus $51 million over the same period last year. We believe that our business will generate an operating cash flow conversion ratio of 40% to 50% in 2022, moving to 60% to 80% in the future.

Looking ahead to 2023, we already have $2.5 billion of 2023 revenue under contract. We are tracking with our goals of double-digit revenue growth and margin expansion in 2023 and look forward to sharing our formal '23 guidance with our fourth quarter results in February.

In addition, we're pleased to announce our intention of hosting an Investor Day in New York City in the second quarter of 2023 and will provide additional details on our fourth quarter call. This concludes our prepared remarks, and we will now move into our Q&A session.

Operator, would you please instruct participants on how to ask questions?.

[Operator Instructions] The first question is from Peter Heckmann of D.A. Davidson..

How are you thinking about inflation on the cost base and any adjustments that you might be looking to do for 2023? Can you remind us how that works?.

Yes, sure. Thanks, Pete. A couple of things. I think it's obviously a key area of focus for us in this environment. I think one thing that helps, as you think about kind of the structure of our contracts, is that kind of on an annual basis, we can increase the fees for majority of our contracts based on the ECI provisions.

And so if you think about what that was here at the end of September, it was 5.2%. In essence, we passed along the difference between that and the 3% that we cover kind of annually. So we'll pass on that 2% here at the start of the year, which will help offset some of the pressures we're facing on inflation.

But -- that being said, obviously, there's still a lot of work we're doing to continue to manage that, obviously, internally.

A big focus for us as we've talked about has been also how do we kind of streamline and standardize the way we're delivering so that we can continue to leverage the platform to drive automation through things like, we talked about last quarter, checking the status of tickets.

Now that we have everyone on a unified kind of front end of our platform, that's something we'll be working towards as well..

Great. That's helpful.

And then any changes in the market for the Aon retirement business that would either be headwinds or tailwinds for the first quarter where that business falls into the organic calculation?.

No. I mean as I think about -- obviously, you're right, the fourth quarter is an important quarter for us with that business. But right now, given where we sit today, we're tracking well in terms of our expectations for delivering on that business..

The next question is from Scott Schoenhaus of KeyBanc..

Congrats on the quarter. So you reiterated your fiscal year guidance, implying a nice fourth quarter ramp on the margin side, suggesting the rollout of the large Federal Thrift contract on track and being executed as we stand here in early November.

Just provide any more color on how things are going with the rollout there and how we should think about the contribution into next year, as we stand here on November 3..

Scott, thanks very much. Yes, we've been live for now over 3 months or so in the last quarter. And so it's part of the revenue profile today, and it's running and going very well for us. So nothing more to add than that..

Yes. And as you think about it, Scott, into next year -- I mean, again, I think we're kind of tracking to our expectations. We've said, obviously, the revenue comes online immediately, and we've had obviously some key investments to get it to kind of a run rate profitability.

But we'll see that -- we'll kind of be in a better place as we head into next year from that perspective..

[Operator Instructions] There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Stephan Scholl for closing remarks..

Thanks, Kate. Thank you, everyone, for joining us today. We're executing on our strategy, expanding relationships with new and current clients and delivering on our commitments. We look forward to meeting with many of you at the upcoming investor conferences in the following weeks. Thanks, everybody..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..