Executive Summary / Key Takeaways

• Alight has completed a significant transformation, divesting its Payroll and Professional Services businesses and finalizing its cloud migration to focus on its higher-margin, technology-enabled Employer Solutions segment.
• The core investment thesis centers on leveraging the integrated Alight Worklife platform and AI/automation to drive operational efficiency, expand margins (targeting 28%+ Adjusted EBITDA midterm), and accelerate Annual Recurring Revenue (ARR) growth.
• Despite a slight revenue decline in Q1 2025 and expected softness in non-recurring project revenue in the first half of the year, the company is reaffirming its full-year 2025 guidance, anticipating a return to recurring revenue growth and overall revenue growth in the second half, supported by strong ARR bookings momentum and improved client retention.
• Operational improvements, including $75 million in annual run rate cloud savings ($55 million incremental in 2025) and ongoing restructuring initiatives, are expected to drive significant Adjusted EBITDA margin expansion (150-180 basis points in 2025) and strong Free Cash Flow generation ($250 million to $285 million target for 2025).
• The company is actively returning capital to shareholders through a quarterly dividend ($0.04 per share) and share repurchases ($261 million authorization remaining as of March 31, 2025), underpinned by its improving financial health and cash flow profile.

A Transformed Foundation for Employee Wellbeing

Alight, Inc. (NYSE: ALIT) stands as a prominent technology-enabled services provider in the human capital management (HCM) space, specializing in delivering comprehensive solutions for employee benefits, health, wealth, and HR administration to many of the world's largest and most complex organizations. The company has recently undergone a significant strategic transformation, culminating in 2024 with the divestiture of its Payroll and Professional Services businesses and the completion of a multi-year cloud migration program. This repositioning has sharpened Alight's focus squarely on its core Employer Solutions segment, aiming to leverage a simplified business model, enhanced technological capabilities, and a higher-margin profile to drive future growth and profitability.

At the heart of Alight's offering is the Alight Worklife platform, an intuitive, cloud-based employee engagement tool designed to provide a unified digital experience for participants managing their health, wealth, and wellbeing goals. This platform is not merely a portal; it is positioned as the engine driving the future of employee benefits delivery, integrating various solutions like benefits administration, healthcare navigation, financial wellbeing, and leave management. A key differentiator lies in the platform's ability to leverage data, analytics, and increasingly, artificial intelligence (AI), to deliver personalized experiences, improve employee outcomes, and provide actionable insights for employers. Management highlights that nearly 80% of their clients were already utilizing AI in some capacity by the end of Q1 2025, underscoring the platform's technological sophistication and the company's commitment to AI enablement. Recent technological advancements include the launch of a self-service leaves administration reporting platform with AI insights and ongoing development of modernized reporting platforms for health and wealth. These initiatives aim to simplify complex processes, enhance user experience, and drive efficiency. The completion of the cloud migration is foundational to these efforts, removing technical debt and enabling greater agility, speed, and stability in service delivery, as evidenced by improved annual enrollment metrics like a 69% increase in mobile enrollments and a 6% decrease in call center volumes in the most recent season.

In the competitive landscape, Alight positions itself as a market leader in the employee benefits delivery space, serving over half of the Fortune 500 with an average client tenure exceeding 15 years. While competitors like Automatic Data Processing (ADP), Workday (WDAY), and Paychex (PAYX) offer various HCM and payroll solutions, Alight emphasizes its unique integrated platform and deep domain expertise in complex benefits administration and employee wellbeing. Compared to ADP, which holds a larger market share (25-30%) primarily driven by payroll scale and efficiency, Alight differentiates through its AI-driven insights for wellbeing programs, aiming for greater efficiency in these niche areas. Against Workday, known for its integrated cloud HR and finance suites, Alight competes in cloud deployment but focuses its technological edge on benefits and employee experience. While Workday's platform may offer lower operating costs per unit due to integration, Alight points to its ability to drive better engagement and utilization of benefit programs, impacting the larger cost of benefits themselves. Compared to Paychex, which excels in cost-efficient payroll for smaller businesses, Alight targets larger enterprises with more advanced, integrated features, although this can sometimes come with higher upfront implementation costs. Alight's strategy is to leverage its integrated platform and AI capabilities to offer a value proposition that transcends basic administration, focusing on driving better outcomes for both employers and employees, thereby strengthening its competitive moat, particularly in complex, large-enterprise benefits.

Financial Performance Reflecting Strategic Shifts

Alight's recent financial performance reflects the ongoing strategic transformation and the current market dynamics. For the first quarter of 2025, the company reported total revenue of $548 million, a decrease of 2% compared to $559 million in the prior year period. This decline was primarily attributed to lower project revenue and a slight dip in recurring revenue from lower Net Commercial Activity. Recurring revenues, which represent the vast majority (nearly 95% in Q1 2025) of the business and are derived from long-term contracts, decreased by a modest 0.2% year-over-year to $520 million. Non-recurring project revenue saw a more significant decrease of 26.3% to $28 million, aligning with management's cautious view on discretionary project spending in the current economic environment.

Despite the slight top-line pressure, Alight demonstrated progress in operational efficiency. Cost of services (exclusive of depreciation and amortization) decreased by 1.4%, driven by lower revenues and savings from productivity initiatives. Selling, general and administrative (SG&A) expenses saw a substantial reduction of 28.8%, primarily due to lower compensation expenses (including non-cash share-based awards), reduced restructuring charges, and decreased professional fees related to the now-completed divestiture. This operational discipline contributed to an improvement in the loss from continuing operations before taxes, narrowing from $148 million in Q1 2024 to $20 million in Q1 2025. Adjusted EBITDA from continuing operations saw a slight increase, rising from $116 million in Q1 2024 to $118 million in Q1 2025, resulting in a margin expansion from 20.8% to 21.5%. This margin improvement, despite the revenue decrease, highlights the initial benefits of the company's focus on streamlining operations and reducing costs following the divestiture and cloud migration.

Looking at the balance sheet and liquidity, Alight ended Q1 2025 with $223 million in cash and cash equivalents. Total debt stood at $2 billion, resulting in a net leverage ratio of 3.1x. Management expects this ratio to normalize below 3x as cash builds seasonally and profitability ramps through the year. The company actively manages its debt, having repriced its term loan in January 2025 to lower interest costs by an estimated $10 million annually and maintaining a significant portion of debt fixed through 2025 (70%) and 2026 (40%).

Cash flow from operations for continuing operations was $73 million in Q1 2025, down from $92 million in the prior year, primarily due to increased net working capital requirements. Free cash flow (operating cash flow less capital expenditures) was $44 million in Q1 2025, compared to $61 million in Q1 2024. Capital expenditures decreased slightly to $29 million, reflecting reduced spending following the cloud migration. The company also made a $100 million payment related to its Tax Receivable Agreement (TRA) in Q1 2025, with no further TRA payments expected in the remainder of 2025, but approximately $188 million anticipated in 2026. Alight is committed to returning capital to shareholders, having paid a $21 million quarterly dividend in Q1 2025 and repurchased $20 million in shares under its expanded authorization, which stood at $261 million remaining as of March 31, 2025.

Outlook and Path Forward

Alight is reaffirming its financial outlook for the full year 2025, signaling confidence in its strategic trajectory despite the cautious macro view. The company projects full-year revenue between $2.32 billion and $2.39 billion, representing a growth range of negative 1.5% to positive 1.5%. This outlook incorporates the expected impact of historical client losses from the 2023 renewal cycle, which management estimates will make the 2025 growth rate over 2 points lower than it would otherwise be. It also factors in the anticipated softness in non-recurring project revenue, which is expected to decline by approximately 25% in each of the first two quarters of 2025, with a potential return to mid-single-digit growth in the second half off of lower prior-year comparisons. Participant volumes are expected to contribute modestly, in the range of 0% to 1% incremental revenue.

The reaffirmation is underpinned by expected continued momentum in ARR bookings, with a target of $130 million to $145 million for 2025, building on the 18% growth achieved in 2024. The sales pipeline remains robust, reported up approximately 30% in Q1 2025, and client retention rates have significantly improved (up 8 points in the 2024 renewal cycle), nearing historical levels. These factors are expected to drive a return to recurring revenue growth and overall revenue growth in the second half of 2025, following expected declines in the first half.

Profitability is a key focus, with management guiding for full-year Adjusted EBITDA between $620 million and $645 million, implying margin expansion of 150 to 180 basis points. This expansion is expected to be largely independent of top-line growth and is driven by operational efficiencies stemming from the completed cloud migration, which is anticipated to provide $55 million in incremental run rate savings in 2025, and ongoing productivity initiatives. The company also recently approved a 15-month restructuring program (PSP) expected to incur approximately $65 million in costs but yield over $75 million in estimated annual savings upon completion, with all associated cash flows included in the 2025 guidance.

Alight is targeting strong Free Cash Flow generation of $250 million to $285 million in 2025, representing growth of 13% to 29%. This reflects the anticipated benefits of improved profitability and lower capital expenditures post-cloud migration. The company's midterm targets, introduced at its Investor Day, include achieving 4% to 6% annual revenue growth, 28%+ Adjusted EBITDA margins, 65% to 80% operating cash flow conversion, and maintaining net leverage below 3 times. The 2025 outlook is presented as a transitional year, taking positive steps towards these longer-term objectives.

Risks and Considerations

While Alight's strategic transformation and focus on its core benefits business present a compelling narrative, several risks warrant investor attention. The macroeconomic environment remains a key variable, with increasing market volatility potentially elongating client decision-making processes for both project and ARR deals. The cautious view on non-recurring project revenue for the first half of 2025 highlights this sensitivity. Changes in employment levels could also impact participant counts, which influence recurring revenue, although historical data suggests a potential lag effect. A protracted downturn in financial markets could pressure fees generated by financial advisors within the wealth business, although this is noted as a small portion of overall revenue.

Execution risk is also present as the company continues to implement operational changes, including the new delivery model and the recently approved restructuring program. While these initiatives are designed to drive efficiency and margin expansion, their successful implementation is crucial. Furthermore, potential post-closing adjustments related to the Divested Business sale could impact financial results. Changes in tax law or assumptions used in valuing the TRA and other financial instruments could also lead to volatility in reported earnings and liabilities.

Conclusion

Alight has fundamentally reshaped its business, emerging from a period of significant transformation as a more focused, technology-enabled leader in the employee benefits delivery space. By divesting non-core assets and completing its cloud migration, the company has established a foundation for higher margins and improved capital efficiency. The core investment thesis rests on the successful execution of its strategy to leverage the integrated Alight Worklife platform and AI capabilities to drive operational excellence, accelerate ARR growth, and expand profitability.

While near-term headwinds in non-recurring project revenue and the lag effect of historical client losses present challenges, the reaffirmation of the 2025 outlook underscores management's confidence in the underlying momentum. Expected double-digit ARR bookings growth, improved client retention, significant cost savings from cloud migration, and ongoing restructuring initiatives are poised to drive margin expansion and strong free cash flow generation, paving the path towards the company's midterm financial targets. For investors, Alight's story is one of a company transitioning from complexity to focus, betting on technology and operational discipline to unlock value and deliver sustainable profitable growth in the dynamic world of employee wellbeing. The ability to consistently execute on its strategic initiatives and navigate macroeconomic uncertainties will be key determinants of its success in realizing this potential.