Earnings Call Transcript - ALIT Q2 2024

Operator, Operator

Good morning and thank you for holding. My name is Ryan and I will be your conference operator today. Welcome to Alight Second Quarter 2024 Earnings Conference Call. At this time, all parties are in a listen-only mode. 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 it over to Jeremy Cohen, Head of Investor Relations at Alight to introduce today's speakers. Please go ahead, sir.

Jeremy Cohen, Head of Investor Relations

Good morning and thank you for joining us. Earlier today, the company issued a press release with second quarter 2024 results. A copy of the release can be found in 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 and Form 10-Q as such factors may be updated from time-to-time in the company's periodic filings. The company does not undertake any obligation to update forward-looking statements. Also, during this conference call, the company will be presenting certain non-GAAP financial measures. Reconciliations of the company's historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's earnings press release. On today's call, when we refer to ARR, we are speaking of annual recurring revenue, which is derived from long-term contracts with high retention. We see ARR as a key metric in understanding our top line growth and will provide transparency to ARR bookings and ARR revenue. ARR revenue may vary based on overall client headcount as our pricing includes revenue per employee. On the call from management today are Stephan Scholl, CEO; Jeremy Heaton, CFO; and Greg Goff, President. Dave Guilmette, Alight Vice Chair, is also with us today. After the prepared remarks, we will open the call up for questions. I will now hand the call over to Stephan.

Stephan Scholl, CEO

Thanks Jeremy and good morning. Alight had a transformational quarter where we delivered on key strategic milestones. We continue to accelerate our go-to-market momentum, completed our two-year cloud migration program, and now begin a new chapter as a simplified company with higher margins, greater capital efficiency, and a stronger balance sheet. With the sale of our payroll and professional services business, we gain a new commercial partner and retain a superior financial model. Our adjusted gross margins are 350 basis points higher at over 40% and adjusted EBITDA margins have increased from 21.7% to 25%. Our singular focus is on our differentiated, technology-rich benefit services business with long-term annual recurring revenue, higher margins, and improved cash flow. We are an industry leader with four decades of experience serving 70% of the Fortune 100 and half of the Fortune 500, and we have created a better experience for our clients and their employees with the Alight Worklife platform, creating a more valuable and durable enterprise. Deal proceeds were better than planned and we retired $740 million in debt, reducing our net leverage to 2.8 times on the last 12 months adjusted EBITDA. We also announced $155 million of share buybacks, which will retire over 3% of our shares. Completing our cloud migration program has removed decades of tech debt and will generate $75 million of annual run rate cost savings, which is a key component of our additional gross margin and adjusted EBITDA margin expansion to 28%. We continue to win in the market with our transformed go-to-market strategy. We delivered 9% growth in ARR bookings in the first half of this year, including great wins this quarter from UPS, Wayfair, American Honda Motor Company, and the Adecco Group. We see strong demand for our high-value solutions and expect double-digit ARR bookings growth in the second half of 2024 and continued growth thereafter. Our second quarter results were in line with the expectations we laid out last quarter. And for our core ARR business, we expect sequential growth through the second half of 2024. We see increased cost consciousness and lower client demand for our non-recurring project-based work, which, as a reminder, is less than 10% of our revenue. This influences how we think about 2024 and have updated our revenue outlook accordingly. Within Alight's core ARR business, we expect sequential revenue improvements quarterly through to the end of 2024 and ARR is over 90% of our revenue and comes from long-term contracts with relationships that span decades with some of the world's largest and most complex companies. As Jimmy will outline in more detail, we have billions of revenue under contract through 2026 and beyond. We are intensely focused on accelerating ARR with our transform go-to-market model and by ensuring our clients and their employees have an extraordinary service experience. Our revenue under contract, focus on client retention, and high-quality ARR bookings growth will yield revenue growth of 4% to 6% annually over time. Our transform business will generate adjusted EBITDA margin expansion from 21.7% in 2023 to 25% to 26% in 2024. We also reaffirm our mid-term adjusted EBITDA target of 28%, over 600 basis points of margin improvement. And we are also reaffirming our midterm guidance on operating cash flow conversion of 65% to 80% and maintaining net leverage of less than 3 times. We are confident in this guidance independent of top line growth. In line with the closing of the divestiture and after almost five years in my role, it's the right time for a new leader to take the company forward in this exciting next chapter. I'm very proud of what we've accomplished during my time, including taking the company public, our cloud transformation with the Alight Worklife platform, and now with the sale Alight is a new company simplified and focused with a tremendous opportunity ahead. The Board and I have been succession planning for months and we've announced today that I will step down when a new leader has been named. In the meantime, I will continue to lead the company alongside our highly experienced management team, Dave Guilmette, Vice Chairman of Alight's Board of Directors, who will work closely with me to support an organized transition. I want to thank all of our colleagues around the world for their tireless efforts to deliver on these key milestones and delivering for our clients each and every day. Jeremy, over to you.

Jeremy Heaton, CFO

Thank you, Stephan. Good morning. Before I get into the quarter, I have a few notes on presentation. First, the payroll and professional services business is included in discontinued operations. As you review the split between continuing and discontinued operations, I would note that we believe the continuing operations income statement understates the true earnings power of Alight. In the presentation filed this quarter, we highlight the accounting view of continuing and discontinued operations and also includes certain pro forma supplemental financial information, which aligns with the normalized view of historic information we provided investors on July 18th. We believe this normalized view better reflects our go-forward well-being and benefits business, and that is what I will speak to today. Second, when we refer to ARR, we are speaking of annual recurring revenue, which is derived from long-term contracts with high retention. We see ARR as a key metric in understanding our top line growth and we'll provide transparency to ARR bookings and ARR revenue. ARR revenue may vary based on overall client headcount as our pricing includes revenue per employee. First, I will cover our commercial progress. Last year, we realigned our go-to-market structure to drive more sales intensity and greater demand generation. Our teams are incentivized to sell high-quality ARR, which flows into our long-term revenue under contract and we are now seeing the results. Our ARR bookings were up 9% in the first half versus prior year. We also see a stronger ARR pipeline and an 8% increase in our win rates in the first half. Based on our current pipeline, we expect double-digit ARR bookings growth in the second half of 2024 and continued momentum thereafter. Now, let me turn to our second quarter performance on a pro forma adjusted basis. Total revenue was $550 million, a decline of 2% when excluding the impact of the exited hosted business, which represents a 100 basis point improvement versus the first quarter. BPaaS revenue increased 12.7% and represented 21% of total revenue for the company. Adjusted gross profit was $219 million with adjusted gross margin of 39.8%. Adjusted EBITDA was $128 million with an adjusted EBITDA margin of 23.3%, 20 basis points ahead of first quarter profitability. Our year-to-date operating cash flow was $145 million, which represents a conversion rate of 56%. Excluding separation costs, operating cash flow was $181 million or a conversion of 70%. Capital expenditures year-to-date were $67 million, down $11 million or 14% from a year ago as we begin to benefit from lower spend on our cloud transformation. Adjusted EPS for the year-to-date period was $0.25 compared to $0.28, driven by depreciation from the cloud migration. We will benefit from the share repurchases moving forward. Turning to the balance sheet. Our quarter end cash and cash equivalents balance was $183 million and total debt was $2.8 billion. After quarter end, we used transaction proceeds to repay $740 million of debt. As a result, we reduced our net leverage to 2.8 times, below 3 times as committed and our remaining debt is 100% fixed for 2024 and 70% fixed for 2025. From a capital return perspective, we have been more active since May with announced share repurchases of $155 million. Today, we have $93 million remaining share buyback authorization, and we will continue to make share repurchases a priority. Next, I'll cover our 2024 outlook, starting with revenue. We expect that our core ARR business, which represents over 90% of total revenue, will improve sequentially through the remainder of 2024. This is the core long-term contract base of our business that is stable and resilient. From a bookings perspective, we expect the momentum will continue. Now, turning to our non-recurring project revenue which represents less than 10% of our total business. Revenue was down 7.8% through the first half of 2024 and we are seeing even less demand today, driven by increasingly cost-conscious customers for this project work and is limiting large-scale projects related to benefit plan rollouts, regulatory changes, and M&A. For the second half, we expect non-recurring project revenues to be down approximately 20%. This project work will return as it has before and with more clients in ARR, so we will have an even larger base to drive project growth in the future. Given this context, we outlined an impact on non-recurring project revenue, we expect second half revenue down 1% to 3%, with total year revenue down 2% to 3%. Revenue under contract for the second half of 2024 is $1.2 billion, or 97% of our expected 2024 total revenue. For full year 2025, revenue under contract is now $1.7 billion and for 2026 is $1.3 billion. We expect total year adjusted EBITDA margin of 25% to 26%, which includes the start of run rate savings from the cloud migration. On a quarterly basis, third quarter profitability will likely be lower compared to 2023, given our lower project revenue. In the fourth quarter, we will begin seeing the benefits of the cloud migration and expect stronger profitability versus the prior year. From a cash flow perspective, we expect our operating cash flow conversion in the range of 55% to 65%. We believe our revenue model of 4% to 6% annual growth is supported by our long-term revenue under contract, historic revenue retention of 95% to 99%, continued go-to-market progress that will increase ARR, and our history of growth, as you saw from the supplemental investor deck we shared last month. Also, we reaffirmed our midterm targets related to operating cash flow of 65% to 80%, maintaining net leverage below 3 times; and finally, an adjusted EBITDA margin of 28%, and we're not stopping there. We have a value creation program underway with Alex Partners to leverage our technology to drive better quality and experience for our clients and to streamline the company. This is a new chapter for Alight and we are energized by the opportunity in front of us to continue building the go-to-market momentum and ARR growth. We will be holding an Investor Day before the end of this year, where we look forward to sharing more detail on our strategic and financial objectives. With that, let's open it up for Q&A.

Operator, Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question is from Scott Schoenhaus with KeyBanc Capital Markets. Please go ahead.

Scott Schoenhaus, Analyst

Hi team, first, Stephan, it was really a pleasure working with you over the last several years. You're really leaving the next CEO a really, really great asset.

Stephan Scholl, CEO

Thank you, Scott.

Scott Schoenhaus, Analyst

I guess this is a question for both Stephan and Jeremy. I mean, Jeremy, you gave a lot of color there on the back half guidance, project revenue being down, I think you said 20%. But you noted that you should see sequential improvement in ARR. And I think you noted about double-digit booking growth. I just kind of want to break down the back half, if you could. Can you provide more color on the revenue dynamics in the third quarter versus fourth quarter? Because I think that's important for investors to understand the moving dynamics between those two quarters?

Jeremy Heaton, CFO

Sure. Thanks Scott. Good morning. So, on the recurring revenue side, we still have a slight headwind from the COBRA volumes last year. So, on a comparable basis, that subsides at the end of the third quarter. And so the growth will accelerate through the second half with higher growth in the fourth quarter. And so we would expect the third quarter to be better growth than the second quarter and then the fourth quarter to be the highest growth for the year as we continue on. On the project side, we'd expect to see almost the inverse, which is the fourth quarter typically carries even more project revenue. And so as we see that impact of the project revenue and more cost consciousness, that will impact the fourth quarter more. So, you'll still on an absolute basis, you'll still have a fourth quarter that's larger in revenue sizing. But I would say you have more improvement in the fourth quarter on the recurring side from the ARR and less so. So, it's a greater decline in the fourth quarter. Is that helpful?

Scott Schoenhaus, Analyst

Yes, that's helpful. My next question is about the margins. There's clearly a nice acceleration in the second half outlook due to the divestiture. How should we think about the pace of margin expansion from the third quarter to the fourth quarter? Additionally, what opportunities are you looking for in the near and longer term? Thanks.

Jeremy Heaton, CFO

Sure. The profitability in the third quarter is expected to be slightly lower than last year due to a decline in project revenue. Margins will be a bit lower compared to last year. In the fourth quarter, we will see the full benefit of the savings from the cloud migration, which should positively impact our margins. Last year, we achieved over 30% EBITDA margins on a 25% margin business, and we anticipate a slight increase in fourth quarter margins this year compared to last year. The typical ramp in margins will be enhanced by the benefits of the cloud migration, resulting in $75 million in annual cost savings now that the migration is complete. This is a significant step for us as we plan for the next few years. We are also working with Alex Partners to eliminate any dis-synergies from the transaction and to streamline operations across the company.

Scott Schoenhaus, Analyst

Thank you very much.

Operator, Operator

Thank you. Our next question is from the line of Kevin McVeigh with UBS. Please go ahead.

Kevin McVeigh, Analyst

Great. Thanks so much.

Jeremy Heaton, CFO

Morning Kevin.

Stephan Scholl, CEO

Morning Kevin.

Kevin McVeigh, Analyst

Good morning. Stephan, best of luck. It's a pleasure working with you.

Stephan Scholl, CEO

Thank you.

Kevin McVeigh, Analyst

I wanted to discuss the guidance for the second half a bit because I may be misunderstanding this, but I always thought that professional services typically had lower margins. However, if you examine the EBITDA in relation to revenue, it appears that the EBITDA is not performing as well as the revenue in the second half. Is that accurate? Or is there something else affecting that? Also, regarding the dollar amount for cloud migration in the fourth quarter out of the $75 million, how much will come in during the fourth quarter? I would like to start with that.

Jeremy Heaton, CFO

Sure. Thanks Kevin. So, it's about, I would say, $20 million for this year. You start to get some of the benefits in the third quarter on the cloud migration. And then I'd call it, we were at run rate in the fourth quarter on that. So, just think about that as, call it, $18 million to $19 million of benefit in the fourth quarter as we're a run rate on the cloud migration. On the first part of your question as it relates to project revenue, I think about it differently. So, the professional service of the divested professional services business can carry a lower margin on that revenue. But the project revenue that we're talking about now in the second half with the go-forward benefits business can carry a higher margin. So, that can be upwards of, call it, 50%-ish margin because it's our client delivery teams that are working and already on-site with our clients driving that project revenue. So, that's what you see there, and that's the impact as we think about the third quarter. Again, that gets more than offset from the cloud migration benefits in the fourth quarter.

Kevin McVeigh, Analyst

That's helpful. So, it sounds like, Jeremy, that maybe the core business is outperforming on the margin, just given some of the pressure from the professional side?

Jeremy Heaton, CFO

Correct. That's right.

Stephan Scholl, CEO

That's right.

Kevin McVeigh, Analyst

Which is great. Do you have any insight on the timing and pacing of the incremental buyback? I’ll leave it at that. Thanks.

Jeremy Heaton, CFO

Sure Kevin. So, on the $75 million, we executed the accelerated share repurchase program on July 15th. That will run through likely the end of August, beginning of September timeframe. So, that's when that $75 million will fully become executed and bought back. And then as I said, we've got the $93 million of remaining authorization. So, we will look to be opportunistic in terms of that as we move forward through the remainder of the year.

Kevin McVeigh, Analyst

Thank you very much.

Jeremy Heaton, CFO

Yes, thanks Kevin.

Operator, Operator

Thank you. Our next question is from the line of Joseph Vafi with Canaccord Genuity. Please go ahead.

Joseph Vafi, Analyst

Good morning, everyone. I want to extend my best wishes to Stephan as you begin your next chapter. Let's start with the ARR discussion. I know you're expecting some strong growth in ARR bookings in the second half. Can you remind us how the comparison looks for the second half compared to last year? Is it a tougher or easier comparison? Additionally, could you provide some insights into ARR bookings from a dollar perspective for the first and second halves? Are we seeing an increase in dollar volume in the second half? I have a quick follow-up after that.

Jeremy Heaton, CFO

Thanks, Joe. As you recall, in 2023, we initially had a slow start in our bookings, but we experienced an acceleration in the second half. This makes comparisons more challenging for the latter part of 2024; however, we still anticipate double-digit growth based on our current field observations, pipeline, and win rates. Typically, around 60% to 65% of our total bookings occur in the second half of the year, which makes dollar comparisons tougher. The buying season is still ongoing, and we have a solid pipeline of deals with notable wins recently announced, particularly in the benefits administration and navigation sectors. Thus, while the comparison from last year is more difficult, we reorganized our go-to-market strategy last year, resulting in improved coverage for both strategic and enterprise accounts, as well as new logo acquisition. This has significantly contributed to building a larger and higher quality pipeline focused on ARR, along with increased win rates and successful execution.

Stephan Scholl, CEO

Yes, Joe, we are definitely noticing that in this cost-conscious environment, it's beneficial for us on the ARR side. We see UPS shifting from a best-of-breed model to a more enterprise approach, and we have a lot more deals like that in our pipeline. We are excited about what lies ahead. While the comparison is tougher, the pipeline is larger than it has been in a while.

Joseph Vafi, Analyst

Great, that's great color. And then I know you're obviously not providing 2025 guidance, but just on the project-based business. Is there some normalization you see kind of looking out, given where the macro is, given kind of what the ebb and flow of kind of different projects are in kind of a historical backdrop to get a feel for when or what should we be looking for, for normalization in that business, not looking for real growth, but just what would be some of the big macro factors that could help us from our seat? Thanks a lot.

Jeremy Heaton, CFO

Thanks, Joe. Over the next six months, we will focus on executing our plans regarding ARR bookings and project timelines. While the current environment is not overly sensitive to macroeconomic factors, we do notice increased cost awareness, as previously mentioned. Our project-based business accounts for less than 10% of our overall revenues, and we have experienced fluctuations in this area over time. We do not anticipate these trends to persist long-term, but the upcoming months will provide more clarity on our pipeline and upcoming opportunities as we approach early 2025. This period will be crucial for us, especially with our Investor Day scheduled later this year, where we will assess our ARR bookings and the market conditions heading into 2025. However, I do not expect these trends to continue for an extended duration, though they are dependent on specific projects. Additionally, M&A activity plays a significant role in our larger projects, along with the regulatory context. As we are in an election year, it is common to see shifts in public policy afterwards, which may lead to an increase in project work.

Stephan Scholl, CEO

I mean our go get, Joe, is a lot less going into next year in the outer years. As you know, our revenue under contract and backlog used to be in the 80s. Now, we're going to be in the 90s, but that doesn't give us a lot of room to drive a lot of additional revenue, right? So, the ARR bookings is going to be, to your point, key metric to look at, and we're going to continue to support that data set with what we just gave today, and you'll see over the next six months that, that will help drive a good quality book of business in terms of helping sustain a better profitable growth orientation for the company.

Joseph Vafi, Analyst

Great guys. Thank you very much.

Jeremy Heaton, CFO

Thanks Joe.

Operator, Operator

Our next question is from the line of Tien-Tsin Huang with JPMorgan. Please go ahead.

Tien-Tsin Huang, Analyst

Thank you, and best wishes to you, Stephan. I'm curious about your extensive tech and software background at Alight. What insights can you share regarding what the Board is seeking in a successor and the next steps for Alight?

Stephan Scholl, CEO

I appreciate your comment, Tien-Tsin. As you know, I'm in my fifth year here, and we've made significant strides in modernizing and transforming the technology from the last 40 years into a more efficient platform. This is all aimed at addressing our customers' needs for a best-of-breed point solutions environment, which currently does not effectively engage their employees. I've emphasized this issue for years, and the focus on cost-consciousness has made it even more urgent. If you look at recent deals with Honda, UPS, Wayfair, and Adecco, all of these companies are reaching out to us to simplify, consolidate, and reduce costs. With the divestiture of the business, we have transitioned 8,700 people to a new entity, allowing us to eliminate payroll ProServe, which was both capital and labor-intensive. This enables us to concentrate on benefits administration and enhance the service delivery aspects of our core business, which is a strong combination. We believe that our platform, when paired with robust service delivery, gives us a competitive edge in the enterprise space. That's why we are optimistic about our pipeline for the second half and beyond, and we are publicly committing to achieving double-digit booking growth in that timeframe. We are genuinely excited about the current direction of the company.

Tien-Tsin Huang, Analyst

Got it. Thank you for that. My follow-up question is regarding the non-recurring side. Just looking at the bigger picture, is this primarily a cyclical issue, or are there also structural issues to consider, particularly with benefit changes? I'm curious about the impact of automation and the new AI tools. Is that influencing some of the shifts we're seeing? I'm just trying to gain a clearer understanding.

Stephan Scholl, CEO

Yes. Do you want to jump in? Go ahead.

Greg Goff, President

This is Greg. I don't see anything structural with that. I view it as much more cyclical. If you think about some of the macro factors that Jeremy said, plan design changes sometimes that's higher in certain years than other years, regulatory environment, the M&A environment. Those are really what drive it, not a macro technology trend, certainly in the large enterprise market, are still driven by the same factors that they have been for quite a long time. So, I don't see anything structural there.

Stephan Scholl, CEO

Yes, I'll give you a good example. Since it's an election year, there aren't many changes to benefits this time. The core aspect of our business related to the upcoming annual enrollment is very strong, and the bookings and deals we've secured are impressive wins. However, during annual enrollment, many clients want to communicate with their employees about benefit changes and new offerings. We generate significant revenue in the communications sector related to that. This year, though, leading up to the election, the communications business is somewhat lighter than usual. If mergers and acquisitions return next year, along with potential new government dynamics and regulations, there will be changes to plans at the beginning of the year, which will lead to increased communication needs. This reflects the project part of our business, highlighting the differences and how it fluctuates. That's why we are focused on increasing our annual recurring revenue, which helps us navigate these short-term variations.

Greg Goff, President

That's right. ARR growth is what drives that project business.

Stephan Scholl, CEO

Tends to be anyway.

Tien-Tsin Huang, Analyst

Thank you.

Stephan Scholl, CEO

Thanks Tien-Tsin.

Jeremy Heaton, CFO

Thanks Tien-Tsin.

Operator, Operator

Our next question is from the line of Pete Christiansen with Citi. Please go ahead.

Pete Christiansen, Analyst

Good morning. Thank you for the question. Best wishes to Stephan. I'm interested in how you are approaching the radio contracts in relation to this year and the renewal fees.

Stephan Scholl, CEO

You're really breaking up. We can't hear you very well. Sorry.

Pete Christiansen, Analyst

Sorry, is that better?

Stephan Scholl, CEO

Much better.

Pete Christiansen, Analyst

Apologies. Thanks for the question. Best of luck Stephan. I'm just curious as it relates to the upcoming renewal season, how are you seeing the degree or the amount of contracts that are up for renewal in the back half of this year, I guess, versus last year? And any sense on how the renewal season is shaping up or early sense there? And I have a follow-up.

Jeremy Heaton, CFO

Thank you, Pete. Every year, we have a standard amount of contracts up for renewal. When considering our three to five-year long-term contracts, our teams are very focused on retention and the value we can deliver. We are reorienting ourselves on service, and Greg Goff is working closely with our clients to enhance delivery and differentiate ourselves as the leader in this space. We have long-term relationships, with an average tenure exceeding 15 years. The dynamics remain consistent as we look ahead to 2024 and 2025; we are committed to distinguishing ourselves with our clients and engage with them daily. We anticipate maintaining retention levels between 95% and 99% as we move forward.

Stephan Scholl, CEO

Yes. And as I said on the macro side earlier, this environment helps us on that high-value ARR business, right? Companies are looking to us to help them consolidate and simplify and drive more of an enterprise approach. So, if that plays to us because we're the only ones that can really provide a true benefits and navigation and leaves integration capability. That's helpful.

Pete Christiansen, Analyst

That’s helpful. And then I'm just looking at Slide 9 and the volume comparison in the growth model here obviously impacted by changes in COBRA, likely the bulk of the attribution for this year's performance. But I guess as you think about going forward, notwithstanding what's going on in the employment environment. But just generally, how are you thinking about pricing as a potential uplift as you think about $25 million?

Jeremy Heaton, CFO

Sure. About a year ago, we introduced a new pricing model that includes certain SKUs with annual increases, which somewhat offsets our typical contracts in terms of inflationary ECI protections. We view pricing as an opportunity with the new technology as we proceed through the renewal cycle and offer additional products and services to our customers. I don't see it as a significant factor impacting prices, either positively or negatively, during the renewal process. You're correct regarding the volumes related to COBRA; it's comparable to last year, and we expect that fixed headwind to diminish in September.

Pete Christiansen, Analyst

That's good to hear. Last one for me. Just curious if you have any sense of any decision delay or go-live delays or any chatter on that? I know it's been an issue in previous quarters here and there, maybe in terms of the bookings, but given the volatility in the environment these days. Just curious if there's been any sense of decision delay creeping in?

Stephan Scholl, CEO

Yes, I'll let Greg answer that since he runs delivery. But to your second part of your point, the previous delivery delays were in our Workday implementation business, which no longer sits with the Alight business today. So, those were the previous delays.

Greg Goff, President

Yes, that's right. That's exactly the way to think about it is from an implementation and ongoing delivery perspective, we don't see anything changing there. It's very much on course. And that's partially driven by the benefit side of the business has very specific timing that implementations need to happen in order to hit annual enrollment cycles in order to hit contract ins. You saw that dynamic much more as Stephan said, on the Workday Professional Services side and the payroll business that tended to be much more subject to implementation delays.

Pete Christiansen, Analyst

Okay, that’s super helpful. Thank you all. Best of luck Stephan.

Stephan Scholl, CEO

Yes, thank you. I appreciate that. Thanks Pete.

Jeremy Heaton, CFO

Thanks Pete.

Operator, Operator

Our next question comes from the line of Heather Balsky with Bank of America. Please go ahead.

Emily Marzo, Analyst

Hi, this is Emily Marzo on for Heather Balsky. Thank you for taking the questions. I think I'm going to ask 1 other further questions a little bit differently. With the double-digit ARR expected in the second half, with an improvement from where we are today, what are you seeing that you can achieve that target, especially with the slower growth this year? Is it from new products, new customers, upsell that target of the mid-market. If you could give us some color there.

Jeremy Heaton, CFO

Sure. I think I'll start and maybe Stephan can add. Emily, it's about the pipeline. Looking back to when we realigned our go-to-market team last year, it takes time to improve our market coverage, both by expanding our existing relationships and acquiring new customers. Building and maturing the pipeline takes time, and developing a higher-quality accounts receivable pipeline is essential for achieving higher win rates. A significant part of our forecasting is based on the current pipeline, analyzing the deal stages within it, and collaborating with our teams on win rates and execution moving forward. The foundation lies in our understanding of the funnel and pipeline ahead. Also, with our new products, as we consider expanding existing relationships, we now offer new solutions developed over the past few years, such as navigation, leaves administration, and retiree services. Therefore, we have several new offerings to consider when renewing contracts or even outside of renewal cycles to develop the pipeline further.

Stephan Scholl, CEO

I really want to give hats off to Greg George, our new leader we brought in last year, who heads up our commercial business, and he has brought in a great new team. Our net new expansion has really helped us with some great new wins. Sarah, who works for him is also new in the last year and has just driven an incredible amount of capability in our installed base. As I said earlier, the macro environments that we're seeing help us in this environment because a lot of clients are looking to cut cost. The value engineering capability we built up the last four years, really helping customers understand the road map of how to consolidate service delivery capabilities across a lot of point solutions into a more enterprise approach, takes us to a new outcomes-based approach that is unique to us. And I think we're now, Greg, what, on our sixth release of work life where we continue to deliver integrations and capability and functionality that allows people to make better decisions. It allows us to drive higher engagement. We put a whole bunch of new functionality into our products that allow to really build a personalized experience to each individual, which is hard. As you know, we serve some of the largest clients with millions and millions of employees and trying to build an individualized experience in the category of benefits. It's really hard to do, so we've cracked the code on that, and I think that's really going to help us continue to drive momentum and helping clients do better with less.

Emily Marzo, Analyst

Thank you. And turning to project revenue. Have you seen any project delays that are being canceled? I guess, what gives you the confidence that the business is going to come back?

Jeremy Heaton, CFO

This project work is pipeline-driven, as the team said earlier, as you build your ARR base, it drives this work that goes through, again, if M&A is lower, as it rebounds, we do a lot of work around acquisitions and divestiture regulatory changes impacts almost every one of our large enterprise clients. So, that project work comes back. So, there's a lot of history around this business in terms of what drives and how we sit as partners and communications for large benefit plan changes that exist in this space. So, that has not gone away over the long term as we look at this business; it's just the project work we really look from a pipeline perspective of what's in the near-term as we go through. So, I think we'll look forward to updating more as we go through and think through Investor Day towards the end of this year of what the outlook is for 2025.

Stephan Scholl, CEO

And the project business is a derivative of the ARR business. So, let's not forget that. The continued focus for us to get to this higher quality net new wins expanding the footprint of our products into our clients, all lead to further downstream project business. So, I want to make sure that's a clear point we want to make.

Emily Marzo, Analyst

Thank you.

Stephan Scholl, CEO

Welcome. Thanks Emily.

Jeremy Heaton, CFO

Thank you.

Operator, Operator

Our next question comes from the line of Stephan Warhaftig with Wedbush Securities. Please go ahead.

Steven Wahrhaftig, Analyst

Hi guys. This is Steven Wahrhaftig on for Dan Ives. Great to hear from you guys. Stephan, best of luck, and it was a pleasure working with you over the past couple of years.

Stephan Scholl, CEO

Thank you.

Steven Wahrhaftig, Analyst

I wanted to talk a little bit about the cadence of this annual run rate cost savings that you guys are seeing from this cloud migration. Can you just clarify a little bit on what the factors are driving both the gross margin and EBITDA over the next 12 to 18 months? And is this $75 million of cost savings is going to be realized on a sequential basis more straight line? Or are you expecting more fluctuations? Thank you.

Jeremy Heaton, CFO

Sure. Thanks, Steven. We're anticipating that $20 million of the $75 million annual run rate will begin this year. We expect to see some savings from this in the latter part of the third quarter, and fully realized by the fourth quarter, contributing to a total of $75 million in annual savings next year. This translates to an additional $55 million in benefits for 2025. Importantly, as we consider our target of a 28% EBITDA margin in the midterm, the completion of the cloud migration positions us to standardize our operating model and enhance client service. Historically, our approach has been more tailored for specific clients. However, with a standardized back-end infrastructure and technology, Greg and his teams can now establish process centers of excellence to serve our clients better. This technology enables improved service quality while also reducing costs in our delivery operations. Additionally, we will continue to implement technology in our customer care centers. As mentioned last year during the annual enrollment, we reduced call volumes by 10% to 20%, and we aim to maintain these reductions through effective technology and AI. These are the key factors we see driving us towards the 28% margin. It’s crucial to note that the cloud migration is a significant turning point for us, allowing for successful integration of all clients and applications into the cloud, facilitating our progress moving forward.

Steven Wahrhaftig, Analyst

Great. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now hand the conference over to Stephan Scholl for closing comments.

Stephan Scholl, CEO

Great. Thanks. I appreciate everybody joining me and Jeremy and the team here this morning. Great questions, good discussion, good dialogue and look forward to seeing all of you out there. Thanks very much. Have a great day.

Operator, Operator

Thank you. The conference of Alight has now concluded. Thank you for your participation. You may now disconnect your lines.