Alight, Inc

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Alight, Inc. is a leading provider of integrated digital human capital and business solutions, empowering organizations to improve employee health, wealth, and well-being, while reducing complexity.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Revenue Distribution Alight operates in the human capital management (HCM) industry, primarily offering solutions related to employee benefits, payroll, and HR administration. The company’s operations are structured into two primary segments:

Employer Solutions: This segment, the larger of the two, provides integrated benefits administration, HR and payroll, and employee well-being services, mainly for large employers. This segment generated around $2.66 billion in revenue in 2022, representing the bulk of the company’s business.
Professional Services: This segment focuses on customized solutions in areas of Human Capital Management, including process optimization, strategic HR advisory and system integration, mainly for larger companies. This segment earned $750 million in 2022.

Revenues are primarily subscription-based, recurring in nature, and the company generates over 80 percent of it’s revenues this way. The geographical distribution of revenues is focused towards North America, which accounts for 80% of its revenue, and the remaining 20% in the rest of the world.

Industry Trends

Increased Demand for Digitization: Companies are increasingly adopting digital HR and benefits administration solutions. This trend is driven by efforts to improve efficiency, reduce costs, and enhance the employee experience.
Growing Complexity in Benefits and Regulations: Constantly changing regulations and the intricacies of employee benefits packages create a demand for specialized and compliant HR and benefits administration.
Focus on Employee Well-being: Companies increasingly recognize that employee wellbeing is important to attract and retain talent. This has created a market for well-being solutions.
Data-driven Human Resources: There is an increasing emphasis on using data and analytics to track employee performance, enhance productivity, and make talent-related decisions.

Competitive Landscape

The HCM market is highly competitive, with a mix of established players and emerging companies. Competitors can be segmented into following groups:

Large outsourcing players: Such as Fidelity, T-Rowe Price, and Mercer.
HR software providers: such as Workday, Oracle, and SAP.
HR technology and benefits firms: such as Benefitfocus and Paycor.
Traditional consulting firms: such as Deloitte and McKinsey
Payroll focused firms: such as ADP.

Alight’s differentiating factors are:

Integrated Platform: Alight’s main selling point is its highly-integrated benefits, payroll and HR services, which provides a complete human resource solution.
Technology-Driven Solutions: Alight uses AI, machine learning, cloud technology, and other tools to improve its services and deliver insights to their client.
Global Reach: Alight has operations all over the globe.
Large and Established Customer Base: Alight’s long-standing relationships with large clients give it a stable base.

Financial Deep Dive Alight’s recent financial performance shows that the company is seeing a gradual increase in revenue. But this growth was hampered by one-time expenses and some challenges.

The company’s total revenue increased from $2,991 million in 2021 to $3,039 million in 2022 (with a revenue of $2.2 billion from Employer Solutions, $0.7 billion from Professional Services, and $0.1 from Other. ), but net income continues to be negative due to various costs, especially high interest costs (the company registered a loss of $306 million for 2022.)
Adjusted EBITDA grew by 4.5% YoY in the 2022 fiscal year to $629.4 million.
Alight’s total debt is very large, at about $3.86 Billion. As of December 2022, the total debt was around $3.7 Billion, while the equity was only $0.8 Billion.
The company’s free cash flow was -$136 in 2022.
Most of Alight’s revenue is subscription-based, which makes it predictable and provides stability.
The company has some very large debt payments coming up in future years. In 2024, debt maturity is $225 million, and 2025 they must repay an additional $899 million.

Key Points From Latest Earnings Call

Ongoing Transformation: The company is undergoing a multi-year transformation program, aimed at simplifying operations, enhancing client value, and aligning the company more tightly with client needs. This program has been implemented across all levels of the company.
Full Year Revenue: Management is guiding towards $3.0 to $3.1 Billion in revenues, and adjusted EBITDA of $590 to $625 million.
Cost Cutting Initiatives: The company has started many new cost-cutting initiatives to help with profitability and free cashflow.
Improving Win Rates: The win rates for the company are improving in new deals and also in retention of old clients.
Debt Reduction: The company has been working hard to pay down its debt obligations.
Transition Plan: The management indicated they are on track to finish the transformation plan in the next couple of quarters.
Guidance: The company management has increased its guidance for next year and expect to earn higher revenue growth and EBITDA. The management plans for a positive free cashflow going forward.

Risks to the Moat and Business Resilience

While Alight has certain competitive advantages, there are risks that may hurt their future performance. These include:

Intense Competition: Alight has many competitors, and some of them are large and established players.
Technological Obsolescence: There is a constant risk of technologies being displaced or outmoded. So the company has to stay on top of the latest advancements.
Integration Risks: If Alight tries to grow via acquisitions, these may be hard to integrate.
High debt: The high levels of debt and interest payments represent a large drag on profitability.
Client Concentration Risk: Alight relies heavily on a few large clients, and losing a few of them would affect their results significantly.
Macroeconomic Factors: Economic volatility, specifically with labor market, may affect revenues, profits, and the operations of the company, specially because most companies need to cut costs in bad times.

Given these risks, we give Alight a moat rating of 2 / 5.

Understandability Rating: 3/5 The business itself is relatively easy to understand. The company operates in the HR and employee benefits space, offering an integrated suite of products. However, understanding all nuances of Alight’s service offerings as well as its financial information can be tricky, and it requires some effort, making its understandability a 3.

Balance Sheet Health: 3 / 5

High debt: Alight has a very high level of debt that makes it susceptible to any change in economic conditions. It also significantly reduces it’s flexibility.
Low Equity: At less than $0.9 billion, the equity is very small for the company’s size and a highly leveraged capital structure always increases risk
Cash flow: Alight is generating negative free cash flows, so the business is reliant on financing. This makes the business more risky.
Future Maturities: Alight needs to be very careful with how they handle their debt maturity in coming years.
Intangible heavy: A large portion of the assets are intangible assets (goodwill), meaning the book value might be significantly higher than the actual value of the company.

The company’s high debt load is a serious concern and impacts its balance sheet health, which is why we give it a balance sheet health rating of 3 / 5.