Alight Inc - Ordinary Shares Cls A Aktie

Good afternoon, and welcome to Alight's Third Quarter 2026 Earnings Conference Call. [Operator Instructions] There is a presentation accompanying today's call available on the Elite Investor Relations website. I will now turn the call over to Jennifer Belodeau of IMS Investor Relations to read the safe harbor statements.

Thank you. Today's discussion includes forward-looking statements within the meaning of the federal securities laws. These statements reflect management's current views and expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Factors that may cause such differences are described in today's earnings release and in Elite's filings with the Securities and Exchange Commission, including in the Risk Factors section of its most recent annual report on Form 10-K. The company undertakes no obligation to update any forward-looking statements, except as required by law. In addition, during today's call, the company may reference certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the earnings release available on the company's website. I'll now turn the call over to Rohit Verma, Chief Executive Officer of late. Please go ahead.

Thank you, Jennifer. Good afternoon, and welcome to Allie's Third Quarter 2026 Earnings Call. Today, I'm joined by Steve Lasher, our Chief Financial Officer, who will take us through the details of our third quarter results and Dinesh Tulsiani, President in Floor Solutions, who have invited on the call today to give us a deeper look at our operations, particularly our acquisition of Abett. We delivered a solid performance in the quarter. exceeding revenue and adjusted EBITDA expectations for the third consecutive quarter. This result is a great proof point of enhanced and disciplined execution. Our revenue beat was bolstered by strong project revenue and higher volumes in our core business.

During the quarter, we continued to drive progress on our transformation initiatives. As we've shared previously, the focus has been to enhance service excellence, speed of innovation and user experience. During the quarter, we rolled out new genic voice capabilities, delivered our AI-enabled annual enrollment configuration for enterprise clients and further develop our intelligent data interchange. We also expanded account executive coverage to relationships, which represent over 95% of our recurring revenue. These enhancements have enabled us to significantly improve book retention to the high 90s in the quarter while also inspiring greater confidence in the third-party evaluator and the consultant community, which will ultimately help us build an even stronger new business pipeline.

We expect that the financial impact of this enhanced renewal activity will begin showing its impact in the latter half of 2027 and beyond. From an operational standpoint, we further strengthened our leadership team with the addition of Bruce Wolf as our wealth leader, made progress driving increased velocity in our technology delivery and continued in-sourcing critical client service functions. Subsequent to the quarter, we acquired a bet, a provider of advanced data engine capabilities to Fortune 50 companies today.

We are excited about the capabilities will add to help us further strengthen our competitive advantage. Looking at our financial performance. Third quarter revenue of $500 million included $458 million in recurring revenue and $42 million in project revenue. Recurring revenue was down 6% over the prior year period as a result of commercial activity in 2025 and earlier. As we've previously discussed, our recurring business experiences in approximately 12 to 18-month lag between the point of commercial execution to revenue realization.

Our results currently reflect the impact of muted commercial execution from previous years, and we expect our financial results to continue reflecting that impact for the near term. That said, execution of our strategic road map is setting us up well to accelerate commercial activity and reverse the trends from the past years. Our liquidity position is strong with $542 million in total liquidity, consisting of $212 million of cash and $330 million undrawn revolver. Year-to-date, we've generated $108 million in free cash flow, and we remain confident in our cash generation for the remainder of 2026 and beyond.

Overall, we are pleased with our performance and progress during the third quarter and energized to advance our transformation initiatives. It is important to keep in mind that Alight truly has a unique position in the marketplace. We serve a majority of the Fortune 500 and each of our 3 product lines has substantial opportunity for growth and market expansion. In Health, our largest offering, we are continuously evaluating and adding partners to increase our portfolio of solutions to better serve our customers and their employees.

We continue to integrate new partners through our light Work Life platform the industry's largest benefits platform with 30 million participants. We've recently added new partners to provide a full spectrum of mental health support, wellness resources and GLP-1 solutions. Wealth is our second largest business with approximately $1.7 trillion under administration. As you can imagine, for large organizations with diverse employee population and salary levels, retirement plan administration can be complex, and our customers rely on us to provide effective and seamless support.

Alight has the largest scale in pension administration and is one of the largest defined contribution record keeper. Of note, we recently partnered with BNY to create an integrated retirement solution to support plan administration and investing, and we are continuously pursuing opportunities to add value to our wealth offering. Our relationship with BNY also uniquely positions us to facilitate Trump accounts for our clients.

With the existing dependent verification infrastructure we already have in place for our 30 million participants, Alight is well placed to take a leadership position as more employees consider adopting Trump accounts. Finally, leaves our third offering represents a significant growth opportunity. Leaves of absence regulations are continuously evolving and growing and ensuring compliance can be time consuming for employers and their HR teams.

Alight's platform provides a wide range of services including leave of absence administration, medical and disability guidelines as well as short-term disability administration to provide the right options while also ensuring compliance. There are substantial cross-selling opportunities in conjunction with Health and as 1 of the few scale providers in the space, Alight is uniquely positioned to meet the growing leave of absence market. In my view, there are 3 key elements as we continue to build a stronger alight, strengthening renewal retention, rebuilding bookings to grow our market leadership with the addition of new logos and executing on our road map of service excellence, user experience and better benefit outcomes to drive improved commercial activity.

We have made good progress in a short period of time on all of these fronts, and I'm increasingly optimistic about our enhancements appealing to our customers and prospects. Our enhanced offerings, strong coverage of our client base and focused management team gives me confidence in our ability to build momentum in our commercial activity moving forward. As you recall, we have been focused on 5 strategic initiatives for investments that focus on the user experience and service excellence. Now we'll hear from Dinesh Tolsiani on the progress we've made against these initiatives and what is giving us confidence in our commercial activity moving forward.

Thanks, Rohit. The benefits vertical continues to grow and become more complex, driving strong demand for benefit solutions, a like meets the benefits compliance, delivery and technology needs of our clients so that they can focus on running their businesses rather than dedicating internal resources to managing their benefits programs. All benefits, including health savings, financial planning and retirement programs encompass a large TAM and are viewed as an essential offering.

We have a proven track record and legacy of trust providing solutions for a broad range of organizations from Fortune 500 to midsize or smaller entities because benefit programs are largely considered a nondiscretionary expense, -- while we are not completely immune to the macro environment, our business model is highly resilient. As Rohit mentioned, shortly after the close of the third quarter, we acquired a bet, a health care and benefits technology company. Its core product, the data engine unified information from health plans, pharmacy benefit managers, benefits administration platforms, workforce systems, point solutions and other sources.

This acquisition advances our strategy from administrating benefits to helping employers measure and improve them, supporting stronger outcomes for times and their employees, combined with Alight's ability to engage 30 million people on the live work life platform at key decision points. These insights can be translated into targeted communications to drive better benefits decisions, Abbet will further strengthen our core, make our solution more valuable with its ability to broaden our benefits intelligence, we will expand our value proposition to our clients, further strengthening relationships. Abbet also extends a light into a broader health data analytics market. Together, these capabilities strengthen our position within our total addressable market.

We continue to leverage and deploy AI across our organization with the goal of increasing efficiency to improve service excellence and user experience. While we see great potential with AI-driven enhancements -- at our core, we are a people business, and we are unwavering in our view that effective benefits administration requires human insight, empathy and accountability enabled by technology. The AI tools we are deploying are designed to be predictive, personalized and able to give meaningful assistance to our members, while also meeting security, privacy and auditability thresholds.

We've made good progress and seeing favorable results with our launch of agentic AI at our call center. They're using AI, not as a replacement for our call representatives, but as a tool to enable us in responding to the approximately 15 million calls we take every year from our participants. These capabilities allow our reps to provide quicker and more intuitive responses for enhanced service. As we detail here with our AI capabilities, we can more accurately route collars to the best suited representative or in some cases, resolve questions without going to customer service representative. .

Additionally, we have seen call times to use, which allows us to serve more participants with less wait time. We are excited about the efficiencies that AI tools are already providing for our clients and continue to explore opportunities to make the core experience faster and easier.

With that, I can turn the call over to Steve to discuss our financials.

Thanks, Dinesh, and good afternoon, everyone. I'll now walk you through our third quarter 2026 results. As Rohit mentioned, in the third quarter, we're pleased to have exceeded expectations for revenue and adjusted EBITDA for the third consecutive quarter. Revenue for the third quarter was $500 million, a decrease of approximately 6% compared to the prior year. As we discussed previously, commercial execution activity, whether favorable or unfavorable, takes some time to impact our results and disappointing commercial activity in prior years is currently working its way through our financials. Project revenue for the quarter was $42 million, a decline of 5% compared to the third quarter last year.

Project revenue is variable by nature and can create fluctuations in our quarter-to-quarter consolidated results. Adjusted gross profit in the third quarter was $168 million, down $38 million from the prior year period, reflecting an adjusted gross profit margin of 34%. Third quarter 2026 adjusted EBITDA was $86 million, with an adjusted EBITDA margin of 17%, compared to $138 million or an adjusted EBITDA margin of 26% in the prior year period. We exceeded our expectations in the quarter, largely due to higher-than-expected volumes and project revenue in the quarter.

Adjusted net income in the third quarter was $19 million with an adjusted EPS of $0.66, compared to $62 million of adjusted net income and adjusted EPS of $2.32 in the third quarter of 2025. Our balance sheet remains strong with $542 million in total liquidity, consisting of $212 million of cash and our $330 million undrawn revolver. Year-to-date free cash flow was $108 million. We believe our liquidity and cash generation will continue to provide us with the flexibility to effectively pursue our business objectives. Of note, on October 14, 2026, we filed a Form 8-K, updating investors on our confidential discussions with certain lenders regarding our existing credit facility.

We have elected not to pursue a potential transaction with our lenders at this time as we did not reach terms that were satisfactory to a light given our strong position from a liquidity standpoint, better-than-expected financial performance and confidence in our strategic direction. Our term loan does not mature until August 2028, and we believe we have ample runway to extend our capital structure at the right time.

Looking forward, with our visibility today, we expect full year revenue to be between $2.115 billion and $2.125 billion, raising the midpoint of our revenue guidance from $2.08 billion to $2.12 billion. We expect full year adjusted EBITDA between $410 million and $420 million, raising the midpoint of our adjusted EBITDA guidance from $407.5 million to $415 million. Our liquidity and cash generation remains strong, and we continue to benefit from disciplined cost management, operational streamlining and progress on our transformation activities across IT and operations. We believe we have a strong foundation in place to support reinvestment in the business as we look to build momentum in 2027 and beyond.

Now I'll give the call back to Rohit.

Thanks, Steve. As you can see, we are proceeding with purpose, conviction and a detailed road map as we drive our transformation strategy and we believe our ability to exceed revenue and adjusted EBITDA expectations in each of the first 3 quarters of this year serves as early evidence of our initial progress. As we close 2026, -- we continue to strengthen our foundation with strategic investments to enhance our product offering and drive service excellence with a goal of building back a more favorable retention environment and increasing our leadership position.

I, together with our leadership team, continue to be extremely engaged with our clients, prospects, consultants and third-party evaluators to ensure our work is resonating, and we are strictly acting on their inputs to reinforce our relationships. Our client engagement has been wide-ranging, including innovation days for Candidate small group sessions where we show the customers and partners how we build our technology road map. Leadership attendance at finalist meetings to reinforce our commitment and stewardship meetings to demonstrate insights and thought leadership.

As we move through 2027, we expect to see heightened momentum in our commercial activity as we leverage the market advantage of our execution of our strategic initiatives to win new logos and expand existing relationships. In 2028, we anticipate that momentum will accelerate and drive growth across key product lines. Our healthy liquidity and cash generation underpins our ongoing efforts and continue to provide a competitive advantage as we move forward. We have the right team, tools and strategy in place to drive service excellence, deepen client relationships and execute on our strategic agenda with urgency and discipline, and we are energizing clear eyed about our path forward. .

Operator, we'll now open the call for questions.

[Operator Instructions] The first question is from Curtis Nagle from Bank of America.

Great. First, I just wanted to talk through the moving pieces for the recurring revs in the third quarter, I think looked a little better than I think we all were expecting. I think was guys something sort of in the 10% down range. So what drove the upside? And then for 4Q, it would imply kind of a step down. So I'm just trying to figure out sort of what all the moving pieces are from 4Q to 3Q and just sort of what happened, I guess.

Curtis, it's great to hear from you. So there were really 3 drivers that happened. The project revenue came in better than we had expected. We got volumes growing in our wealth business as well. Those were really the drivers that helped the revenue outperformance -- and then as we look at Q3 versus Q4, we are -- as you know, last year, we had underperformance of the project revenue. So we're looking at that, and we're being thoughtful about it as how we think about it. We still believe that we will be roughly flattish to project revenues last year.

So we're just taking a cautious approach and want to make sure that we continue to provide a guide that is our best estimate based on what we can see at the current time. And that's the reason why we passed on some of the outperformance of 3Q into the full year guide.

The next question is from Kyle Peterson from Needham & Company.

Great. I want to start a bit on the margin performance this quarter looked really strong, which is good to see. I guess, how much of that was -- whether it was from some of the project revenue coming in better than expected? Just trying to tease out the swing factors and what drove some of that upside versus expectations?

Yes. As you know, Kyle, first of all, thank you for asking the question. Good to hear from you -- as you know, the 2 areas that caused the revenue outperformance, both from a project standpoint as well as a volume standpoint, that doesn't take as much incremental from a cost perspective, so they just tend to have a better flow-through. So one, you saw that. Second, as I've shared with you before, that we are continuing to push on productivity initiatives. So you saw some element of that coming in.

And those were really the factors that drove the margin performance. As you know, seasonally, Q3 tends to be a lower margin because we take on cost for annual enrollment, that kind of unwinds itself in Q4, and that's reflected in our guide of how we're thinking about Q4 revenue and Q4 margin.

Okay. That's really helpful. And then I guess I wanted to follow up on the comments about the potential kind of debt refinancing and decision not to pursue the transaction. I totally hear you guys have plenty of runway. But I guess maybe if you could give a little more color on what would give you guys more confidence potentially going back to the markets? Like how much of that is, whether it's just better market conditions? Or was there some feedback that you guys want to be able to show some of the improvements and turnaround that you guys are making under the hood? Just any more color as to the decision to wait and what could potentially bring you back would be great.

Yes. Yes. Thank you, Kyle. Look, I think you've sort of answered the question a little bit already. First and foremost, -- it's important to note that we have plenty of time for our maturity, right? Our maturity is in August of 2028. We have $215 million of cash on our balance sheet. We've shared before that we feel confident about our cash generation for the remainder of the year, which means that by the end of the year, we will have more cash on the balance sheet and we'll be in a stronger position from that standpoint. We've demonstrated a beat in Q3, and we've raised our Q4 guidance. I think those are all data points that we believe further strengthen our case as the lenders underwrite our risks.

We're not dependent on neither for our working capital nor for investment capital. So -- and we're not in any kind of rush or bind. We are generating plenty of cash. So that's not a rush. We just want to stay disciplined, and we want to make sure that we get the right terms and the right deal for the company. That's the most important thing. And we just felt like we were not getting that because maybe we were a bit earlier than expected, and there was more need to see some proof points, which we're now putting on the board.

The next question is from Scott Schoenhaus from KeyBanc Capital Markets.

Congrats on the quarter and update. So revenue question and margin question. The revenue question is you mentioned in your prepared remarks, Rohit, that you had some new logo wins -- maybe you can provide some color on what kind of customers these are how you won these customers for the competitive conversions. And then you mentioned high 90% renewal rates. Where do we stand from here for the rest of the year on closing in on getting to 100%, if that's possible, and provide any color on the renewals?

Yes. Great question, Scott. I'm looking forward to seeing you next week. Look, let me start by saying that we feel good about where our commercial activity is -- and the progress that we've made. It's tracking to our plan. It's not at the level that we want it to be from a sustainability perspective. So to your point earlier, do we want to get renewals higher? Absolutely. Every quarter this year, we've improved on our renewal position, and that is the first step in winning new business. We continue to win new business. We expanded services with our large market clients on the health side with some point solutions and a light partner network. On our enterprise clients, which is less than 15,000 employees, we added several new logos.

On the lease side, we added several new logos in wealth. We have continued to add some AFA, which is the Allied Financial Advisory business. And our renewal activity was strong in Q3 and it continues to be better from what it was in the prior year. In fact, with 25% of the renewals, we've added -- we've expanded a service with them. And the other thing that I would say is that we have defended competitive renewals against several names to whom we lost last year. So the work that we've been doing in terms of our AI initiative in terms of our user experience, in terms of service excellence, that's really resonating with our client base, and they're starting to see that.

Obviously, those are things that -- some we've delivered this year, some we will continue to deliver. And as we deliver those, I think it gives us the confidence that we can develop further momentum in our commercial execution. Hence, you saw what I said, right, 2026 is all about building the foundation, consolidating the foundation, getting things right, 2027 is about building momentum and 2028 is about driving growth. We -- Q4 is still a very active renewal period. We still have several renewals that are outstanding in terms of the decisions. And I think we will continue to receive those decisions between now and end of the year.

Like I said, so far, we feel good about where we are, but there's more work to do because certainly from a sustainability perspective, we want to get to within a couple of points of 100. Right now, we're in the high 90s, which is better than where we were last year at this point, but more work for us to continue doing, right? We're not taking our foot off the pedal.

Great. Great color, it. On the margin side, you talked about -- and you just mentioned it again, the AI initiatives, and it's really resonating and you're seeing a lot of progress. It sounds like it's helping supplement and support customer service levels beyond expectations here. And clearly, you guys blew out our margin expectations. How should we think structurally now as you're deploying AI more about margins in your business given the outperformance in the quarter?

I would say that our focus of AI has been a lot more on quality and service excellence than purely on productivity. I think productivity is a byproduct that we will continue to see come out over the coming quarters. As we said earlier, we are still seeing the '23, 2026 commercial activity work its way, and that will have its impact in 2027 as well. So we will see a drop in revenue in 2027, as we've shared that with you before. But we believe that some of the things that we've been working on, they will continue to help us hold the margin. And that's really what our focus will be. We will come back to you in Q4 with better guidance on 2027 and how we expect the margin to move I think the seasonality of the margin will continue to hold, which is Q3 seasonally will be our lowest margin quarter Q4 and Q1 being the higher-margin quarters for us.

I think you will continue to see that seasonality. There is more work for us to do before we start to say that AI is truly impacting the margin story. I think there is some impact, but most of that impact we pushed on is on quality and user experience, which are not always margin drivers, but more a driver of confidence from our clients that we can deliver on the work that they want us to. Steve, do you want to add anything to that?

I think you hit on it. And again, just we were happy with third quarter. Some of those improvement within margin is also a little bit of timing. So when you take a look at the back end of the year, when we looked at our second half guide. Again, some of that is we didn't see some of the costs roll in the third quarter that we were expecting. So when you look at how we took our guide up, you'll see we did pass through EBITDA, but not as much from a third quarter to fourth quarter. So again, looking at that second half just to be a balanced perspective. So I just wanted to add that for you.

The next question is from Pete Heckmann from D.A. Davidson.

Sounds like great results, particularly the revenue retention improving every quarter this year. Can you talk about like when you talk about the tracking to high 90s and maybe a target of 97%, 98% revenue retention. Remind us, that calculation include pricing as well as the impact of new business. Remind us what's included in that figure.

Yes, when we look at renewal retention, we look at our entire book and we look at what is the level of revenue we're retaining on the entire book. So that includes any losses as well as any margin compression that we're seeing -- fee compression that is Yes, sorry, not margin fee compression.

Got it. Okay. And then just with some new logos, improving retention? I guess, do you think you can get to a point where like net commercial activity is pretty close to flattish as you exit this year?

Look, I -- that's a measure that we don't report on. So I will not start a reporting trend on it. But what I would say to you is that, as I've said before that I think that kind of momentum is what we expect to see sometime in 2027 and not in 2026.

Got it. Okay. And then just 1 more, and I apologize if you already said it. I have juggling a couple of different reports here this afternoon. But -- did you talk about a target for free cash flow conversion from your adjusted EBITDA guidance goal for the year?

We haven't talked about it, but as we think about it, we would probably -- if you look at conversion from the EBITDA, it's probably in the 40% range.

Yes. I think we're just consistent with what we've shared before.

That's right. Okay. It looks like year-to-date, it's about 38%. So that's in line Okay. I appreciate it. I'll get back in the queue.

The next question is from Peter Christiansen from Citi.

Appreciate the chance to ask the question here. Last question. You did talk about pricing somewhat. Just curious as if pricing discounts, promotions, what have you have intensified over the last year? And then I am curious, I think you mentioned that things are possibly turn around with the TPEs. Just curious if you have any sense of sentiment improvement from that time.

Yes. Thank you for your question. Great hearing from you. So if we step back, there are a few things that are packed in it, right? So if I think about -- let's talk about the TPE sentiment first. I'll go backwards to go forward. The TPE sentiment has been positive. I've actually been seeing third-party values and consultants. They clearly want to see more proof points to come through. But in the conversation that they're seeing the proposals, as they're seeing how we're presenting to clients as they're seeing our commitment to technology and what we're doing, they certainly feel like we're back on our front foot after a while and some of them have even commented that they're seeing the alike that they were used to seeing 5 years ago in terms of how we are showing up in the marketplace.

So we take that as a positive. We're certainly seeing the RFP activity. The second part of your question around the renewal activity, that, as I've mentioned before, we continue to see renewals getting better. We had about 25% of their renewals so far that were competitive this year versus what we have seen in the past, which was a little bit of a higher number than that. As far as compression is concerned, look, we're -- we've got a few places where we've had compression -- and there are a handful of accounts that are accounting for most of the compression -- and it really depends on the kind of service that we have, how long that's been there, how much it has gone into market, how much we are in a position to transform the operation, if there are certain clients that want some very unique handling of their stuff. Those places we're holding on things, and then there are places where we believe that the service is fairly vanilla and it warrants some level of pricing compression to stay competitive in the market. We're doing that.

So -- it's a little bit of a mixed bag. I won't say that there is a universal or a secular trend around renewal and compression.

And the only thing I'll add to that is, look, from a pricing perspective, I think it's competitive out there, but our differentiation is really the integrated health, wealth lease platform and then also the addition of a vet give us that data intelligence layer that really is something that's not easily replicated across the industry, and we feel pretty good about where we are.

Just a quick follow-up. If I recall correctly, I think 2026 was a smaller year in terms of total renewals as a percentage of current clients. Does that reverse in '27? Does that -- does it become a much larger percentage of the overall client book that is renewing next year? Or is that a year ahead of that? I'm not sure.

We've not -- we don't really look at it that way. Last year was a decent size renewal year. This year also has been a decent size renewal year. So it's kind of hard to say. And I'll give you some examples of what I mean by that, right? We could have an account where the actual renewal date says 1/1/2028, and they could decide that they want to do an RFP because they just have a complicated account or they could say that they are about to have some kind of an M&A and they want to get this done. So they might start renewal this year in 2026 well in anticipation of 2028.

Now they may not get to an answer until late 2027 or they may not get to an answer until early 2027, depending on procurement process is running. So it's kind of hard to think about it. I think what we want to start doing at some point is to really give you a sense of how much of the book is actually expiring on a certain date. And for most of our book, it either expires on the first or first of January or first of July. So we can start to give some kind of a window on that. When we look at commercial execution, it's purely on what are the renewals that are in play that we're actively negotiating right now, right? So that's how we have been thinking about it.

And this year certainly started slow, but it has picked up over the course of the last couple of quarters.

There are no further questions at this time. I would like to turn the floor back over to Rohit Verma for closing comments.

Thank you so much, Sachi. Thank you, everybody, for joining us today. Thank you to all our employees for the hard work that they're doing. Thank you to all our investors and stakeholders that are with us and a special thank you to all the clients that continue to place their confidence with us in making some of the most important decision for their most important asset, which is their employees. We look forward to talking to you again soon and until next quarter. Take care and be well, God bless.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you. Good afternoon and welcome to the Allied Second Quarter, 2026 Conference Call. There is a presentation accompanying today's presentation available on the All Lights Investors Relations website. I will now read the Safe Harbor Statement. Today's discussion includes forward-looking statements within the meaning of the federal securities laws. These statements reflect management's current views and expectations. and are subject to risks and uncertainties that could cause actual results to differ materially. Factors that may cause such differences are described in today's earnings release and in allied filings with the Securities and Exchange Commission. including in the risk factors section of its most recent annual report on Form 10-K. the company undertakes no obligation to update any forward-looking statements except as required by law. In addition, during today's call, the company may reference certain non-GAAP financial measures.

A reconciliation of these measures to the most directly comparable gap measures can be found in the earnings release available on the company's website. I will now turn the call over to Rohit Verma, Chief Executive Officer of Alight. Please.

Go ahead. Good afternoon and welcome to Alight's second quarter 2026 earnings call. I'm very pleased to have Steve Lasher, our Chief Financial Officer, joining me today. Steve joined Alight in June, so it's been a busy first few weeks for him, and we are delighted to have him on board. Included in today's discussion will be our thoughts on our second quarter, our positioning in the marketplace, new initiatives we've put in place to continue strengthening our service, delivery, and user experience, and our long-term growth strategy. We reported a solid second quarter as we exceeded market expectations, primarily as a result of strengthened project revenue and higher volumes. Our transformation initiatives remain on track as we continue to focus on strengthening our operational execution, deepening our client relationships, and enhancing our commercial capabilities. To that end, I have now had more than 180 client meetings since I took the role of CEO, and we've continued to see improvement in our renewal activity and commercial execution as a result.

Second quarter revenue of $511 million was comprised of $471 million in recurring revenue and $40 million in project revenue. As expected, recurring revenue was down 4.3% over the prior year period as a result of commercial activity in 2025 and earlier. As a reminder, our lag from commercial execution to revenue realization for a substantial part of our recurring business is 12 to 18 months. This is reflected in the revenue reduction we are seeing now and expect to see for the next couple of quarters as the impact of that activity runs through our P&L. in the second quarter was up approximately 11% over the prior year period. As we've previously discussed, project revenue can be inherently unpredictable and is often the key driver behind quarter over quarter fluctuations in performance. EBITDA of $92 million, representing 18% margin in the quarter and exceeded market expectations, primarily due to the higher than expected revenue performance. We've maintained a strong liquidity position, exiting the quarter with $545 million in total liquidity, consisting of $215 million of cash and a $330 million of undrawn revolver.

Year to date, we've generated $101 million in free cashflow, which includes $48 million in free cashflow in the second quarter, and we remain confident in our cash generation for the year and beyond. Our liquidity position and cash generation provides continued flexibility to drive our business forward. We made several key hires during the quarter to strengthen and bolster our leadership team, which is now largely in place. As I mentioned in June, we welcome Steve Lasher to the team as Alight's new Chief Financial Officer. Steve brings more than 30 years of financial leadership experience across the services, technology, and B2B sectors, has a proven ability to drive transformation at scale, and has the operating expertise and discipline needed at this stage of Alight's journey. In May, we appointed Dinesh Tosiani as President, Employer Solutions. Dinesh previously served as the Light's Chief Strategy Officer and has been part of Hewitt for 20 plus years.

He leads the Employer Solutions business to help accelerate innovation, strengthen how we deliver value, and advance the outcomes our clients count on. As highlighted on our previous call, in April we appointed Naveen Bawaja as Chief Technology Officer. Naveen is a transformation-focused technology executive and leads Alight's technology organization with a focus on advancing innovation and strengthening execution of our technology roadmap. Beyond senior leadership, since the start of the year, we've added numerous account management and sales professionals, and have expanded our overall sales coverage with account executive coverage, now extending to 500 clients as we build greater expertise across our sales and accounts team. During the quarter, we completed the important phase of insourcing critical client service functions that had previously been outsourced. This has been a major strategic initiative for us as we look to strengthen the client experience and align the priorities of all our staff to one goal, to serve our clients with the highest possible service levels. These changes have garnered very positive feedback from our customers, as well as from industry consultants and third-party evaluators that play a critical role in us being renewed by our clients and selected by our prospects.

A fundamental pillar of our long-term growth plan is the continued strategic investment in our technology and people to create consumer-grade customer experience and strengthen service excellence. We made targeted client experience investments during the quarter, intended to modernize our user experience, evolve the data layer, and improve user journeys. Our operating data layer will be the industry's first data framework to bring health, wealth, and LEAF's benefits all under one consolidated platform. It will provide employers with a view that makes benefits experiences for their participants more intuitive and easier to understand. Furthermore, we've made ongoing investments in service delivery excellence, deploying automation with the goal of improving service quality. Alight is the only integrated benefits provider operating at true enterprise scale, with a the capabilities and expertise to manage the full complexity of employer needs across our health, wealth and leave solutions. Our health solution platform is our largest portfolio and spans core health administration, navigation, enrollment services, spending account solutions, engagement services, and point solutions.

Our goal is to help employees administer health benefits and manage healthcare spend while helping employees make better and more informed decisions for their health benefits. Wealth Solutions is our second largest business with $1.7 trillion in assets under administration. Our wealth platform includes a portfolio of financial and retirement-related benefit solutions, including defined contribution, defined benefits, and pension risk transfer that allow employees to better navigate and plan for their financial future. Our leaves business represents our largest growth opportunity and includes leave of absence administration, medical and disability guideline information, and short-term disability administration. Keeping up with ever-changing leave of absence regulations can be a difficult and time-consuming effort for employers and their HR teams, which is why we're here. why our tailored leave solutions assist employers in controlling costs and avoiding compliance risk. We're continuing to see strong client demand across the benefits administration space. Employers are increasingly turning to outsource providers to handle their benefits compliance, delivery, and technology needs, which allows them to focus on their core capabilities rather than managing the ever-complex world of benefits management. non-discretionary nature of benefits means that we're seeing a large and active market for our services regardless of shifting economic conditions. access to healthcare, financial planning, and retirement services remain essential and create the foundation of what we believe to be a highly resilient business model.

Our combination of scale, expertise, and our relentless commitment to service excellence allows us to serve this market effectively. whether it be large Fortune 500 clients or more major street organizations. Despite our already expansive breadth of clients and partners, the opportunity in front of us remains vast, and we are energized about the prospects ahead of us. We continue to leverage and deploy AI across our organization to transform the HR employee experience and drive organizational impact with our clients and employees always top of mind. For Alight, AI's potential is grounded in the foundation underneath it. Thousands of participant interactions, deep institutional knowledge built over decades, and a platform already operating at scale with an extensive user base. It's this foundation that allows the AI tools we're deploying to be predictive, personalize, and provide actual meaningful assistance to our members, while also ensuring these tools follow strict constraints of security, privacy, auditability, and observability. With that said, we believe there are tangible opportunities across our portfolio of health, wealth, and leads businesses to leverage AI for specific tasks that enhance efficiency, quality, and user experience.

We will provide additional updates on how we are deploying AI across dimensions of quality, efficiency, and user experience as our roadmap is quite extensive. While Alight has evolved with the times to strategically implement AI into our offerings, we wholeheartedly believe in a balanced approach that effectively uses AI and people in tandem. We remain intently focused on service quality. And to that end, the most significant part of our CapEx is invested in operational excellence and user experience. We have five overarching initiatives that are being undertaken under my direct oversight. First, we're building an AI native employee and employer experience with new navigation guidance and end-to-end user journey for a simpler, more modern, and more intuitive experience that makes it easier to get things done, reducing manual work, and most importantly, friction in the benefits process. The design of this is complete and we are getting active user with an expectation for rollouts next year.

Second, we're building the first framework of unified data and knowledge for health, wealth, and leaves that connects systems to enable AI and orchestrate workflows leading to smarter, more personalized experiences and responses which are more resilient to AI misinformation. We are heavily leveraging AI-based development and expect to begin rolling this out next year. Third is our modernization of our service model with smarter routing, expanded self-service, and AI-enabled agents to provide clients with faster call center-based support with higher quality and more consistent resolution. A number of these enhancements are already active in our call center, and new capabilities are planned incrementally every call center. Fourth, we're enabling AI-based ingestion of client specifications, significantly automating the process of implementation, annual enrollment configuration, and off-cycle plan changes triggered by M&A activity. This improves both efficiency and service quality. The first wave of this capability goes live at the end of Q3 of 2026.

Lastly, we're enhancing our file processing with greater transparency, exchange oversight, proactive intervention, and automated validation in order to achieve more reliable processing with lower likelihood of delays, errors, and manual bottlenecks. This capability is now live in our environment and enabling us to better manage our data interchange with clients and partners. The cornerstone of these initiatives are our new client service model, which aims to provide expanded client coverage with clear established ownership and our core culture and values encapsulated by the word of light. Ultimately, we believe that these initiatives align with feedback we've heard from our client base, and we look forward to successful execution of these initiatives to further drive our market leadership. I'll now turn the call over to Steve to discuss our financial results.

Thanks, Ruud, and good afternoon, everyone. I've had the pleasure to speak with some of you since I joined and look forward to meeting more of you in the coming months. now walk through our second quarter 2026 results. As we discussed in the second quarter, we exceeded expectations of revenue, adjusted EBITDA, and free cash flow. Revenue for the second quarter was $511 million, a decrease of approximately 3%. We delivered $471 million of recurring revenue in the second quarter, a decrease of 4% compared to the second quarter of 2025, reflecting the impact of lower-than-desired commercial execution in prior years. Project revenue for the quarter was $40 million, up 11%. compared to the second quarter last year. As Rohit noted, project revenue can also often vary quarter to quarter and drive fluctuations in our consolidated results.

Adjusted gross profit in the second quarter was $176 million, down $29 million from the prior year period, reflecting an adjusted gross profit margin decline of 440 basis points. Second quarter, 2026 adjusted EBITDA was $92 million, with an adjusted EBITDA margin of 18%, compared to $127 million, or an adjusted EBITDA margin of 24% in the prior year period. The BDOT guidance in the quarter was primarily due to the flow-through of higher-than-expected volumes and project revenue in the quarter. Adjusted net income in the second quarter was $26 million, with adjusted EPS of $0.91, compared to $56 million of adjusted net income and adjusted EPS of $2.09 in the second quarter of 2025. We maintained a strong liquidity position and exited the quarter with $545 million in total liquidity, consisting of $215 million of cash and our $330 million undrawn revolver. Year-to-date, free cash flow was $101 million. We believe our liquidity and cash generation will continue to provide us with the flexibility to effectively pursue our business objectives.

Looking forward, with our visibility today for the full year, we expect revenue to be between $2,078,000,000 and $2,098,000,000, with adjusted EBITDA between $400 and $415,000,000. As you all know, our Q3 tends to be weaker on profitability due due to an uptick in expense from investment in annual enrollment. As a result, we expect third quarter 2026 revenue to be between 469 and 479 million, with adjusted EBITDA between 55 and 61 million. This implies a significant rebound in EBITDA and cash in the fourth quarter, enabling us to set the full year expectations where we have. It is also important to note that the back half of the year represents the biggest P&L impact from the commercial activity of 2025 and prior. That said, our liquidity and cash generation remains strong, and we continue to benefit from disciplined cost management, operational streamlining, and progress on our transformation initiatives across IT and operations. We believe we have a strong foundation in place to support reinvestment in the business as we look to build momentum in 2027 and beyond.

With that, I'll turn the call back to Rohit. Thanks, Steve. It's been a pleasure to have you on the team. My first couple of quarters at Alight have been intensely busy. and they've left me increasingly energized and excited about the opportunity we have ahead. As I touched upon earlier, our leadership team is now largely in place. we made key hires during the quarter as part of our leadership transformation. Their experience and record of impact speaks for itself. Our refreshed board adds further strength to the governance and strategic focus of the company. It boasts deep public company governance experience, as well as unique and complementary financial, operational, and industry perspectives that continue to play a fundamental role in our evolving transformation.

Together, we are confident that we have the right leadership team in place to guide the company through the next phase of our journey. Our long-term growth strategy is focused on three primary areas, growing the market reach of our health solution business, expanding our lead solution, and market growth in our core and adjacent spaces. We continue to make impactful strides in health solution as we explore opportunities beyond our traditional Fortune 500 client base, and we are focused on driving growth, importing solutions, and expanding our allied partner network. also making concerted efforts to strengthen our broker and consultant relationships to further penetrate the segment. In our leaves business, Alight is one of the few major players with the scaled capabilities and expertise to handle the current growing marketplace. We remain focused on maintaining and growing our position as a leader in this space as we're capitalizing on opportunities we're seeing in the marketplace, in part by cross-selling alongside our health business as applicable. Despite the depth and breadth of our services, we're consistently looking at additive and complimentary offerings in adjacent spaces. And we are utilizing our partner network where we can work to expand upon our capabilities.

Additionally, we continue to see wealth as a very active space for us. We completed our 300th PRT solution and continue to provide a light financial advisory services to several of our clients and see more opportunity to broaden financial wellness and planning. As we move forward, we are concentrated on strengthening the areas of our business within Retention remains a key area of focus. As we've discussed on this call, we're making investments across a range of initiatives that ultimately drive service excellence and user experience. We've also placed an increased emphasis on rebuilding our commercial execution through addition of account coverage and increasing rigor on renewal activity. We look at our growth trajectory in three distinct segments. It is important to remember that the sales cycle are inherently long in our business, so it can take some time to see the progress we're making reflected in our numbers.

We are confident that we're doing the right things to drive future long-term performance for shareholders. 2026 is where we build upon the foundation that is in place, reinvesting in our business through the support of strong cash generation. We have prioritized delivery excellence and retention while investing in the user experience, increasing our use of AI, and expanding our sales coverage. 2027 is where we expect to gain momentum and start to realize meaningful platform advantages. Our focus next year will be on achieving efficiency gains from our work to drive operational transformation in addition to seeing improvement in our bookings and renewal activities from strengthened commercial execution. 2028 is where we begin to drive quarter over quarter growth as a result of the improvements we're making across the organization. At that point, we also expect AI to have created a real and tangible impact on margin expansion. The underlying foundation through each stage is our healthy liquidity and cash generation, which we expect will continue to be a competitive advantage as we move forward. I, along with a broader leadership team, remain confident in a life's long-term outlook. The path forward is clear. Drive service excellence, deepen client relationships, and execute on our transformation agenda with urgency and discipline.

Operator will now open it up for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, you may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Pete Heckman with.

DA Davidson. Please go ahead. Good afternoon. Thanks for taking the questions. Steve, welcome. Glad to have you on board here. we think about retention can you can can one of you talk a little bit about the retention rates that you saw for full-year 2025 and how that progressed kind of through the year and then I guess in the first half of 2026, do you feel like that number has continued to deteriorate? Has it bottomed or has it improved?.

Hey Peter, it's Rowan. How are you? Good to hear from you. Thank you. The way I've been looking at this, and as you know, right, our focus has been on pushing the renewals. The piece that we've been working on hardest has been expanding our account coverage. So we've added, as I mentioned on the call, several individuals, both on the leadership side, but also deeper in the organization to help us get better handle on the coverage of the account so we've increased the coverage from 100 to 500 what that has done is it's given us better visibility into our renewal work what I can tell you is that we're actually very encouraged by the trends that we're seeing both from a loss as well as compression side at this point of the year when we compare it to at this point last year So we feel good about where things are heading. More importantly, I feel good about the overarching pieces that I see. I'm seeing better momentum and velocity on the changes that we're making from a delivery excellence. That is very encouraging. We just held four client council meetings and four innovation days with our clients. that in total probably included about 100 to 150 total clients that we met.

And the feedback that we got from there was very, very encouraging in terms of what they saw that we're implementing. And these were not just PowerPoints, but actual demos of things that are in place. So those are, I would say, the indicators that encourage me. Obviously, as you pointed out, we have a long cycle. So some of these things just take time before they show up on the P&L. Understand, understand. Okay, and I appreciate...

the company providing four-year guidance that's helpful and should help everyone get their models in line. I didn't hear you say it, but certainly I think that one of the highlights of the first half, one of the main positives has been how well free cash flow is held up on a year-over-year basis. In terms of – if I didn't hear you say it, I apologize. But did you mention at all how you're thinking about free cash flow conversion for the full year against EBITDA? Yes.

Yes, Peter, this is Steve. Thank you and look forward to working with you as you go here. When we think about free cash flow, based off the seasonality of our business, I think the third quarter is going to be a little more taxing on the business just because of some of the activities and outflows from a cash flow. perspective that we have within the business. But then you'll see that rebound within the fourth quarter. So if you look at a full year perspective, we'll probably be in that, you know, 40 to 43-ish percent conversion range when you look at it on a full year basis. Obviously, again, I'll reiterate, third quarter, we'll probably be in that, you know, 40 to 43-ish percent conversion range when you look at it on a full year basis. Quarter is going to be a little bit less for us, but you'll see a rebound within fourth quarter.

Peter, you're aware that in the third quarter, expenses go up to support annual enrollment for a bulk of our clients. So, we see that sort of trough, but then it picks up in Q4. Sure, sure. Okay, well, still, I view that as very encouraging and it compares positively to what we were forecasting.

Thank you. I'll get back in the queue. Thank you.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is from Curtis Nagel with Bank of America.

go ahead. Sure, just a quick one for me. Maybe just, again, kind of square the commentary on the better retention trends. I know these things take a long time to float. through given the contract cycles, but just given, you know, the pretty material step down and applied recurring revenue for the back half of the year, just trying to square again, kind of the timing and, you know, what's, you know, I guess, which contracts, you know, I guess, you know, for, for that step down, which, uh, you know, all those from last year are just, yes, again, it's, it's, it's kind of a big, uh, big step down. So, uh, just if you could square that. Yes, Curtis. Sure, Curtis, good to hear from you. As you, as I mentioned in in Q1 call last time, as well as in the Q4 call, right? We have sort of a 12 to 18 month lag in terms of what we see in the commercial activity to when it starts to show up in our, in our revenue. So, a lot of the 2027 2026.

Weakness that I've talked about. is related to renewal activity that we saw in some of it in 2024, but quite a bit in 2025. So, I would say most of the 27 impact, I'm sorry, the Q3 impact is coming from that. And then some point solutions, but that's a minority of the impact.

box. All right. Thank you. Our next question is from Kyle Peterson. With.

Needman and Co. Please go ahead. Hi, this is Ross Cole on for Kyle Peterson. I wanted to ask a little bit more about your adjusted EBITDA guide. So for, you know, 3Q, it makes sense. But then can you maybe go into a little bit more about how you're thinking about the implied 4Q guide? Because, you know, that's a pretty big step up. I'm wondering, you know,.

plan on getting to that? What's going into that number? Thank you. Yes. So as you know, that Q3, as I mentioned, we tend to have a higher level of expense. So the drag really is coming from that increased expense that happens for annual enrollment as opposed to anything else. And as we get into Q4, you know, some of that gets all the So that's the reason why you're seeing the increase back in the EBITDA. And Q4 tends to be our higher EBITDA quarter anyway. If you look at the seasonality over the last several years, you will see that Q4 picks up and I think proportionately it's picking up in the same way and is not, you know, not off that so I don't believe there is anything abnormal happening in q4 that you haven't seen in the in the past years there is some level of you know new accounts that are coming in line in q4 and you're starting to see the impact of that so there's some positivity coming from there but I think on a relative basis the lift is very similar to what has been in the prior quarters.

Would you agree? No, I totally agree. And as Rohit mentioned, again, as you'll see, the revenue shortfall in third quarter kind of will flow through as we looked at our guidance as we prepared for fourth quarter. That seasonality is really driven by the annual enrollment expenses that we'll see within third quarter. And then we expect free cash flow rebound as we move into the fourth quarter. So again, that really says we've laid it out based on what we can see, that seasonality of our business is kind of, you'll see the stronger revenues within fourth quarter, which will create some of the natural fluctuations within our EBITDA as well as our cash. Thank you for the color.

Our next question is from Pete Heckman with DA Davidson. Please go ahead.

Hey, just a quick follow-up. You had said... A brief comment, basically saying like looking out at 2028 is the time where we should start I think you said quarter over quarter improvements. I just want to see if you could... provide a little additional commentary there. And I just want to make sure you weren't talking about year-over-year improvements. Okay. just given some of the seasonality of the business, or I guess quarter over quarter in some of the metrics.

Yes, that's right. Look, I think when I look at it, I'm looking at it overarching as the net commercial activity. And what I'm looking at is that as we get our foundation consolidated by doing the work that I'm talking about, right, we've established the team. We started to insource the work that had been outsourced, which is helping us shore up our Our velocity of implementations has increased and we're bringing a lot of AI capability online. So those capabilities today we are doing demos of and showing it to our clients, right? 2027 when clients start to pick that up and they become standard part of our RFP responses. And as you can imagine, right, as we do that in 2027, right, those are the RFPs then that come through in 28. So I'm looking at the overall activity picking up and as a result of that, you should see improvement in our commercial execution. I think from a P&L standpoint, again, we're not prepared to give any guide because we're still working through it.

But I think what you should see is that the growth factor in 2028 should start to get better because of that improvement in the commercial execution, which is being foreshadowed by the improvement of the operational that we're working on right now and in the better half of 2027. So it's really giving clarity on how we're thinking about phasing their turnaround.

Yes, yes, that's that's very helpful. And then, you know, I'm still working on the model, but just just assuming that no other uses of cash beyond just that reduction. But would you assume kind of your net leverage would, net leverage ratio would maybe peak. Maybe in the first quarter of 2027 or I guess, do you have insights into that yet or that you can kind of talk to us about?.

Yes, I think we're still working through, and this is Steve, so Pete, thank you for that. We're still working through the models within that. Again, as I look at our net leverage ratio, obviously one of the focus for me is to shore up our balance sheet, so looking for all opportunities. The third quarter obviously will be difficult for us because of the reduction. revenue, reduction in cash, but then it rebounds in the fourth quarter. So, again, from a ratio perspective, we'll be balanced from a full year, but you'll see some, we're not looking to make any major pay downs at this point. The focus is really for us to continue to reinvest within the business. make sure we have that financial flexibility as we look to continue to strengthen our balance sheet.

Yes, I think, as you know, this has been sort of a feature of what I've talked about pretty much since the Q4 earnings call that I did, that I want to make sure that we have flexibility of all capital allocation options open to us. We were kind of locked into that by the dividend. So that's the reason why we canceled the dividend. It has helped us build a decent amount of capital. on a cash on the balance sheet, and that gives us the flexibility to deploy that cash that we think makes the best sense for us to implement our long-term strategy. So we want to continue to maintain that flexibility till we get clarity on exactly what's the best way for us to use that cash to get the best cash on cash return. And, you know, buybacks, leverage, all those options are open. We're evaluating those options as we speak, and with Steve on board, it's given me a great thought partner to work through that.

So we'll soon be coming out on how we want to deploy this cash.

Great, great. All right, that is helpful. Thank you. We have reached the end of the question and answer session. I would like to turn the floor back over to Rohit for closing remarks.

Thank you, Jasmina. Thank you all for joining our call. I appreciate the hard work of all our colleagues at Alight, the trust of our clients, and the confidence of our investors. I look forward to updating you on our progress in the quarters ahead. Until then, thank you, and God bless.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Good afternoon, and welcome to Alight's First Quarter 2026 Earnings Conference Call. [Operator Instructions] There is a presentation accompanying today's presentation available on the Alight's Investor Relations website. I will now read the safe harbor statement.

Today's discussion includes forward-looking statements within the meaning of the federal securities laws. These statements reflect management's current views and expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Factors that may cause such differences are described in today's earnings release and in Alight's filings with the Securities and Exchange Commission, including in the Risk Factors section of its most recent annual report on Form 10-K.

The company undertakes no obligation to update any forward-looking statements, except as required by law. In addition, during today's call, the company may reference certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the earnings release available on the company's website.

I will now turn the call over to Rohit Verma, Chief Executive Officer of Alight. Please go ahead.

Thank you, Sachi. Good afternoon, and welcome to Alight's First Quarter 2026 Earnings Call. Joining me today is Greg Giometti, our Interim Chief Financial Officer; and Susan Davies, our Chief Accounting Officer. It has been a busy and productive first few months for me, and I'm pleased to have this opportunity to share my thoughts with you.

Today, we will cover my perspective on our results, some further transparency into the business a view of the opportunity ahead, some reflections of what I've heard from clients, including its role in shaping our strategy and a view of the team we are building and finally, a perspective on AI. Our first quarter financial performance was solid. -- as we exceeded the guidance shared during the last earnings call, which, as you will recall, took place just over 30 days into my time as CEO.

Our outperformance was driven by higher-than-expected project revenue as well as better-than-expected performance of partner revenue in the quarter. While our Q1 performance was better than expected, we will continue to see a difficult revenue comparison to prior year due to the commercial execution over the last couple of years. It will take the next several quarters for that revenue pressure to completely work through our P&L.

For these reasons, the team and I are intently focused on improving commercial execution by retaining clients and winning new clients. I'm pleased to share that we are already seeing improvement in our new sales activity as well as our renewal execution.

First quarter revenue of $534 million was comprised of $498 million in recurring revenue and $36 million in project revenue. As you all have observed before, our project revenue has been the major driver of volatility in our results. Project revenue was up 29% compared to Q1 and this comes in succession to Q4, where project revenue was down 27% to Q4 '24, showing the volatility we have discussed before.

Our recurring revenue was 4% below last year, resulting in a consolidated revenue decrease of 3%, which was better than expected. Adjusted EBITDA of $104 million benefited from the revenue flow-through and lower-than-expected employee health care expenses in the quarter, which kept the margin decline to only 200 basis points.

All in all, we are happy with where we landed compared to expectations and glad to see the progress we are making. We are maintaining strong liquidity and generating significant cash. We exited the first quarter with more than $500 million in total liquidity. This is after our Q1 '26 TRA payment. At the end of Q1, we had $178 million in cash on our balance sheet and $330 million available on our revolver.

Additionally, we generated free cash flow of $53 million in the quarter. a 20% increase compared to the same period last year, and we believe we'll continue to see solid cash generation through the end of the year. This provides us the foundation to execute our core strategies. Additionally, it gives us the flexibility to invest in our business to accelerate the service and customer excellence initiatives that are critical to enabling industry-leading outcomes for our clients.

I, along with our team, have operated with considerable intensity and urgency in the first quarter. I have met 90-plus clients to date in '26 made critical senior hires and launch initiatives all focused on strengthening our market position and demonstrating our commitment to relentless execution.

As I have met with clients over the last quarter, I have been increasingly energized about the strength of our solutions and quality of our customer base. Their feedback has been instructive and insightful. What is evident is that our clients want to work with a light, and we believe we are really the only company that can truly service the needs of a diverse client base. On many occasions, the exact quote of our clients was that we want to see Allied successful. These interactions have reinforced my confidence in our client retention and ultimately, cash generation capabilities.

During the quarter, we made key hires across the organization, including the Head of Delivery Transformation, Head of Specialty Sales, Head of Account Management and Head of Marketing, along with making some critical additions deeper in the organization. Following the close of the quarter, we announced our new Chief Technology Officer, Naveen Baweja, who previously got technology at the Consumer Products division of Disney.

I cannot think of anyone better to help reimagine customer experience and translate technology leadership into meaningful business and customer outcomes. Additionally, last week, we announced the appointment of Dinesh Tulsiani as President of Employer Solutions. Dinesh previously served as Alight's Chief Strategy Officer and played an integral role in company's strategic evolution.

In his new position, he will collaborate with other key leaders across the business to continue to advance Alight's strategies to deliver outcomes for clients at scale. We also launched multiple initiatives across the organization to maximize operational excellence and drive consumer level client experience. Notably, we have expanded from our previous strategic coverage of the top 100 accounts to now include our top 400 accounts that represent just over 90% of our ARR in aggregate.

Our increased coverage gives us a greater handle on serving those clients even better, building stronger partnerships, improving retention and building a deeper pipeline. We provide market-leading solutions derived from our full-service integrated approach to managing health, wealth and leaves on behalf of our clients. Within our health solution, we provide comprehensive health benefits including spending accounts as well as foreign solutions like health care navigation services.

Our primary focus is on ensuring a seamless consumer level experience whether the consumer is simply checking their benefits eligibility or scheduling of physical or contending with a life-changing diagnosis. We also integrate 50-plus partners across the ecosystem. -- which positions a light as the critical nerve center of the benefits ecosystem. Wealth comprises a portfolio of solutions for financial planning, including defined contribution plans retirement savings and pension plans to enable employees access to a pathway for financial preparation.

We administer pension both for corporations as well as various carriers, who take on pension risk from corporations. Leaves business handled absences due to short or long-term disability, military leave or family and medical leaves. Which are not always straightforward or easy to navigate. Our LeavePro Absence Connect platform help our clients and their employees develop appropriate solutions to meet the needs of both the individual and the organization when an extended absence is necessary.

As we move through 2026 we are focused on leveraging our scale, market recognition and financial strength to capitalize on attractive industry dynamics and grow our leadership role. Benefits programs are a fundamental nondiscretionary offering for most organizations, creating a large addressable market for our capabilities. Our ability to provide effective outsourced benefits administration is an attractive alternative to employers who often lack the in-house expertise to manage the demands of compliance, delivery and technology.

Additionally, because benefits programs are fundamental and nondiscretionary, our business tends to be more resilient through economic cycles. We believe our expertise across the benefits administration landscape coupled with our scale, experience from a diverse client base and disciplined execution creates a competitive advantage for us to win customers and establish long-term relationships with predictable revenue.

We remain energized and committed to expanding our market-leading position and believe that the market opportunity in front of us is substantial. Alight's opportunity in the marketplace is unique. We have established a leadership position as the only company to effectively service our customer base, ranging from large Fortune 500 companies to smaller, more main street operations as well as organizations in the public sector.

These companies and organizations are all unique in their own way and require benefits offerings that match their structures, legacy and priorities. We have more than 30 million participants on our platform, including corporate executives feed operators, young new employees to retirees and our products and solutions are designed to deliver the reliability and personalization these employees deserve.

We understand the challenges inherent in navigating the benefits ecosystem and we are well positioned not only to provide solutions, but to manage complexity and drive adoption. In addition to human expertise, we are leveraging enterprise AI adoption to capture efficiencies and further improve service excellence and user experience. To that point, we have all heard a lot about AI and its potential impact on a variety of industries.

At Alight, we are uniquely positioned to deploy AI that is personalized, predictive, assistive and grounded in real world data while drawing on information from our large user base, participant interactions and decades of domain expertise. We view AI not as a stand-alone solution, but as a force multiplier across our scale platform. By strategically implementing AI, we can turn data into guidance, turn guidance into action and action into better outcomes in the moments that define health, wealth and leaves decisions.

It is important to understand that we deal with situations of bearing complexity that include unions, grandfathered plans or multiple enrollment dates. We are also embedded in our clients' workflow as the core system of record for their benefits and accountability is essential since regulatory compliance and outcomes both matter in our space. health, wealth and leaves all have a significant regulatory component. That accountability needs clear definition and ownership that cannot be made by an AI agent alone.

AI isn't a replacement for what we do, rather, it's a mechanism to unite the data, insights and human expertise our clients depend on. A meaningful portion of our participants are navigating decisions related to managing a life-changing development, and those decisions cannot be made with the support of AI alone. Some of these are happy life events and some require the empathy and guidance of the human touch. I expect to share more with you about our AI journey and its impact in coming quarters.

As I mentioned on our last call, we are driving the business forward with our commitment to 3 clear operating principles. Deliver service and operational excellence, innovate products that create value and actionable insights, build relationships that result in enduring trusted partnerships.

These operating principles are the compass as we continue to pioneer this space. We are the only company of our size and scale with a singular focus on benefits administration providing a full range of health, wealth and leave solutions, and we believe we have a substantial advantage in the industry where most of our competitors take a more singular approach providing health or wealth or lead solution or benefits administration is a small noncore part of their business.

Our focus on benefits as a whole allows us to provide deeper engagement, effective solutioning and targeted investments. I'm confident that our team's commitment to these guiding principles and our leading position in the marketplace will drive favorable results for our clients and for Alight, and we're already seeing notable progress through enhanced execution.

With that, I'll turn the call over to Greg to go over the details of our first quarter 2026 financial performance.

Thanks, Rohit, and good afternoon, everyone. I'll now walk you through our first quarter 2026 results. Echoing Rohit's comments a moment ago, we delivered stronger-than-expected first quarter revenue, adjusted EBITDA and free cash flow. Revenue for the first quarter was $534 million, a decrease of approximately 3%. We had anticipated a revenue decline in the high single digits for the quarter, and we were pleased to achieve a more favorable results.

As you know, we think about our revenue mix in 2 distinct categories. revenue from recurring renewable business and nonrecurring project-based business. In the first quarter, we recorded a recurring revenue of $498 million, which was a decrease of 4% compared with the first quarter of last year, reflecting higher partner network revenue in the quarter that was originally expected later in the year.

Project revenue for the quarter was $36 million, up 29% compared with the first quarter last year, exceeding expectations. Adjusted gross profit in the first quarter was $189 million, down $11 million from the prior year period, reflecting an adjusted gross profit margin decline of 110 basis points.

First quarter 2026 adjusted EBITDA was $104 million or adjusted EBITDA margin of nearly 20% as compared to $118 million or adjusted EBITDA margin of nearly 22% in the prior year period. The first quarter adjusted EBITDA decrease was less than anticipated due to flow-through from the better-than-expected revenue performance and timing of expenses.

Adjusted net income in the first quarter was $35 million with adjusted EPS of $0.06 compared to $52 million of adjusted net income and adjusted EPS of $0.10 in the first quarter of 2025. Looking forward, with our visibility today, we expect second quarter 2026 revenue in the range of $490 million to $505 million; adjusted EBITDA between $80 million and $90 million and free cash flow ranging from $35 million to $45 million.

Our guidance reflects the continued impact of prior commercial execution, which is expected to work its way through our P&L over the coming quarters. Turning to capital and liquidity. we closed the quarter with strong liquidity of more than $500 million following our 1Q '26 TRA is. At the end of 1Q 2026, we maintained significant financial flexibility, including $178 million in cash and equivalents, $330 million of availability on our revolving credit facility and free cash flow of $53 million.

With cash flow growth in Q1, we have continued to strengthen our liquidity, providing us flexibility to pursue our capital allocation priorities, which include investing in the long-term growth of the business, deleveraging and opportunistic share repurchases.

With that, I'll turn the call back to Rohit.

Thanks, Greg. My first few months at a light have been educational and productive. Allowing me to synthesize the valuable customer feedback we've received with what I've learned about the scope of our solutions and the scale of our capabilities. Since January, our team has made excellent progress executing our core operating principles and building on our solid foundation to strengthen our organization. Our success depends on our focus as a client-centric organization, and that starts from the top with me.

As I mentioned, I met with 90-plus clients. Since joining Alight and regular engagement with our client base will remain a top priority for me. We are assembling a leadership team that brings significant industry experience and who embrace a commitment to client engagement and service excellence. We are moving quickly and are building a team that can accelerate the pace of flake.

Key initiatives to decidedly strengthen our market leadership are underway. These are focused on reimagining the user experience and drive AI-based service excellence that will help define the new standards for the industry. Our ability to deliver reliability and personalization in a scale benefit management solution that provides value to our clients and better outcomes to their employers is a competitive advantage in the marketplace.

I'm confident that we have the right people and strategies in place to continue building momentum across the business, and I am optimistic about what the future holds for our life. Finally, our CFO search is progressing well, and we expect to have some news to share shortly. Susan Davies, Alight's Chief Accounting Officer and Global Controller, will step in as Interim Chief Financial Officer, as Greg Giometti leaves the light to pursue a new opportunity. We bank Greg for serving as interim CFO for the past several months and wish him all the best. Sachi, we can now open the call for questions.

[Operator Instructions] The first question is from Kyle Peterson from Needham & Company.

This is Ross on for Kyle Peterson. I was wondering if you could provide any commentary on how the RFP season looked in the past quarter? In other words, have you won any business here?

Thank you so much. As I mentioned in my remarks, our execution, both from a renewal perspective and new business is getting better and better. We had a very good new business as well as renewal activity season in Q1, and it was better than the Q1 last year.

Then if I can ask another question. Could you talk a little more on the working capital dynamic and if it should start becoming a source of cash? And also, what percent of the book is up for renewal this year?

I can take the first arrow and then I'll let you comment on renewals. But yes, I would say we definitely did see some working capital benefits in the first quarter. across a variety of areas, including cash taxes and just general working capital that helps drive the free cash flow results.

Yes. And then the second part of the question was -- the size of renewals for the year, that's -- I would say it's definitely less than last year. I would put it somewhere between that 25% to 30% range of the total book, which is in the normal range that we would expect.

The next question is from Curtis Nagle from Bank of America.

Yes, just maybe any help you might be able to give in terms of expectations for cadence of recurring revenue year-over-year growth. And then just would you be able to size how much that influx of partner revenue, I guess, earlier, partner revenue helped the 1Q recurring rates in the quarter?

Sure. I think as we've mentioned, we've been giving revenue under contract at the start of the quarter. If you recall, when we started Q1, the recurring revenue under contract was about $1.97 billion. Our recurring revenue for starting of Q1 is just over $2 billion. So that effectively sets a floor for where we are in terms of the revenue under contract. Does that help?

And just that's total revenue under contract 94% of which is recurring.

Recurring Yes. And then in terms of the partner revenue sorry, go ahead. Yes. On the partner revenue side, it was about $4 million to $5 million that was -- essentially, we had expected that to come over the full year, and that came in pretty much all of it in the first quarter. It is recurring, but it doesn't recur every quarter.

Okay. Great. And then just any guidance you might be able to give for free cash for the year expectations.

Yes. Look, we believe that we'll continue to see solid free cash flow generation for the year. We saw $53 million this quarter, which was about 20% higher. And Greg shared with you that we're expecting $35 million to $45 million in the second quarter. So that's sort of as much guidance that we are prepared to give right now.

The next question is from Peter Heckmann from D.A. Davidson.

And good to see the stronger-than-expected first quarter results. In terms of your EBITDA range for the second quarter, down significantly more than the first quarter, should we infer that, #1, you don't expect quite a strong professional services quarter. #2, some of the timing of expenses, some of those expenses that you plan to make will kick in. any other factors playing into the year-over-year decline in EBITDA in the second quarter that weren't present in the first quarter.

Yes, I think that's right. If you think about the guidance that we gave in terms of expectations around first quarter profitability, the second quarter guide is relatively in line with that. And so the exceeded expectations in the first quarter in terms of what we've talked in the past about heavy drop-through high profit margin on project revenue, certainly drove higher margin in the first quarter.

And so we are kind of expecting a more muted project revenue at this point in the second quarter. So that's driving kind of more consistency with what we had expected for the first quarter from a profitability perspective. And then to your point, yes, we do see some of those expenses just shifting between quarters.

Okay. Okay. And then just as a follow-up, the thanks for giving the free cash flow guidance, it still looks like something like 44% to 50% free cash flow conversion. And that's relatively decent. Do you think that's something that, again, were reflected by some working capital timing or favorable working capital or just at the right range to be thinking about for the full year?

Yes. I think, generally speaking, it's a reasonable range that we expect to -- as you know, there can be some variability quarter-to-quarter, especially with the seasonality of some of the commissions business and things we have in the back half of the year. But as we think about kind of averages, I think it's a reasonable measure.

[Operator Instructions] The next question is from Schoenhaus from KeyBanc Capital Markets.

This is Summer on for Scott. I was just wondering if you guys could talk more about the momentum you're seeing building out the new team and the impact you've seen so far?

Thank you so much, Summer, for the question. Look, we're excited about the team that we're building. It's not just the senior hires that we've made, but also deeper in the organization. I think the most important piece for us is increasing the coverage of accounts -- as you heard me say that we were covering about 100 strategic accounts for us whether it's a true dedicated or designated account executive.

That number is up to 400 and covers 90-plus percent of our ARR we believe that, that kind of coverage really gives us a good view of our clients a good view of the health of our clients as well as helps increase our ability to retain clients and build a pipeline along with them.

As I mentioned earlier in response to the question, we are -- we've had a good renewal season in Q1. We've had good commercial execution in Q1. And and we are expecting to continue to build on that momentum. We still have a lot of work to do. As the team is new, we're building a newer muscle in the organization, but we feel good about the progress that we've made.

There are no further questions at this time. I would like to turn the floor back over to Rohit Verma for closing comments.

Thank you, Sachi, and thank you all for joining. I would like to thank our clients for their trust and confidence in us and importantly, our employees that have been relentless in their efforts. I appreciate your continued interest in Alight, and I look forward to updating you on our progress in the quarters ahead. Thank you so much and God bless.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Good morning, and welcome to Alight's Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] There is a presentation accompanying today's presentation available on a Alight's Investor Relations website.

I will now read the safe harbor statement. Today's discussion includes forward-looking statements within the meaning of the federal securities laws. These statements reflect management's current views and expectations and are subject to risks and uncertainties that could cause actual results to differ materially. Factors that may cause such differences are described in today's earnings release and in Alight's filings with the Securities and Exchange Commission, including in the Risk Factors section of its most recent annual report on Form 10-K.

The company undertakes no obligation to update any forward-looking statements, except as required by law. In addition, during today's call, the company may reference certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the earnings release available on the company's website.

I will now turn the call over to Rohit Verma, Chief Executive Officer of Alight. Please go ahead.

Good morning, and welcome to Alight's Fourth Quarter 2025 Earnings Call. Joining me today is Gregory Giometti, our Interim Chief Financial Officer. This is my first earnings call as Alight CEO and I'm pleased to have this opportunity to speak with you so early in my tenure. I joined Alight at the start of the year and over the past 30 working days have focused on meeting with our colleagues and clients and diving into our operations. I'm extremely pleased with a very warm welcome from our colleagues as well as the support I've received from the Board and the connections I've already created with our clients.

I'd like to take this moment to share why I chose to join Alight. And over the last 6 weeks have only strengthened my conviction in the opportunity ahead of our business. Alight has strong underlying DNA our scale, client relationships, domain expertise and operational footprint provide a significant competitive advantage and leader position in the marketplace. We serve a wide spectrum of employers, including the majority of the Fortune 100. We offer essential and unmatched benefit solutions via a platform that offers extensive flexibility to accommodate a wide range of client needs from straightforward to the most complex plans in the market. Our midsized clients benefit from simpler platforms, and we also provide specialty solutions such as leave administration to meet our clients where they are.

Our vast data lake creates a proprietary advantage that enables predictive and to an orchestration when implementing AI, which will allow us to transform employee experiences into proactive life's journeys driving better outcomes for employers, employees and their families. And our top-tier partner network allows us to provide participants a holistic experience, putting us at the center of the benefits ecosystem. More than 30 million people and dependents rely on us in their most important moments when someone is sick and needs access to their insurance when someone is looking to start a family and wants to better understand their health and wealth benefits or when someone is disabled and needs to understand their leave options.

At the end of the day, it is about delivering a frictionless experience with empathy and care that delivers a compelling outcome. The ability to provide benefits is a fundamental offering for most organizations, yet regulatory requirements and rising costs make it challenging for organizations to do this on their own. Most employers do not have the in-house expertise, scale or technology required to manage the complexity effectively. -- making the outsourced administration of health, wealth and leaves and essential purchase. We believe our products and solutions are needed regardless of external economic cycles. And when we execute well, we create sticky relationships with predictable revenue. Our expertise across the benefits administration landscape and our ability to provide effective plan solutions to a wide variety of employee groups is a competitive advantage. The strength of our solutions and our organizational expertise lead us to believe that the market opportunity in front of us is substantial.

Not only do we see opportunity in the broader market, we believe there is meaningful white space within our existing client base. With deep penetration among the large and midsized employers, we have a solid foundation from which to expand our relationships and grow market share over time. That said, we have work to do. In 2025, we did not meet our internal financial targets and new bookings and renewals did not meet our expectations, leading us to miss our forecast to the market. During my first 6 weeks at the company, I've connected with more than 35 clients, and it is clear to me that clients want to continue working with us as we play a critical role in helping them manage increasingly complex health, wealth and lease programs.

They're also clear in their request that we bring simplicity to their participants and management by providing cutting-edge solutions. Our clients expect flawless service delivery and continued innovation in products that create better outcomes. The attractiveness of our market, our coveted position and the clarity of the asks from our clients enable us to be clear eyed about our priorities going forward. As a result, our immediate focus is driving service and operational excellence across our unmatched portfolio of benefit solutions, innovating products enabled by AI to create a cutting-edge user experience. real value and actionable insights for clients and participants while building relationships that result in enduring trusted partnerships with clients, participants and partners.

These priorities are all things within our control, which give me great confidence in our ability to improve as does some of our recent progress. For example, during the fourth quarter, we piloted conversational AI with 2 of our largest clients during the recent annual enrollment cycle. We are very encouraged by the results where we saw a significant reduction in channel jumping, which is when a user moves from digital enrollments to calling the call center. This high reduction rate is indicative of the improved efficiency and participant efficacy experience with the conversational AI products.

Before I turn the call over to Greg, I want to provide some details on our 2025 financial performance. We generated $2.3 billion in revenue with adjusted EBITDA of $561 million and an adjusted EBITDA margin of approximately 25%. With that said, I would reiterate that we believe there is significant opportunity to improve our performance moving forward. Our adjusted EBITDA in the fourth quarter was impacted by an increase in compensation expense driven by our commitment to invest in the business with a focus on promoting service quality, strengthening relationships and positioning the business for growth.

Importantly, the business generated $250 million of free cash flow in 2025 and which enabled us to maintain a strong liquidity position and positions us well as we head into 2026.

With that, I'll turn the call over to Greg to walk through the financials in more detail.

Thanks, Rohit, and good morning, everyone. I'll walk you through our fourth quarter and full year 2025 results. Turning to our fourth quarter results. We continue to think about revenue mix across 2 categories: recurring renewable business and nonrecurring project-based work. Revenue for the fourth quarter was $653 million. Recurring revenue of $607 million was down 1.6% compared with the prior year period. Project revenue of $46 million was down 27%. Fourth quarter adjusted gross profit was $272 million, down 9.3% from the prior year period. reflecting an adjusted gross profit margin decline of 240 basis points.

Adjusted EBITDA for the fourth quarter was $178 million as compared to $217 million in the prior year period. Fourth quarter 2025 adjusted EBITDA margin was 27.3% compared to 31.9% in the prior year period. Adjusted EBITDA during the fourth quarter of 2025 was adversely impacted by increased compensation expense, which we believe is critical to executing on our priorities. This impacted adjusted EBITDA by approximately $45 million. Excluding this, adjusted EBITDA would have been within our previously communicated guidance range.

Adjusted net income in the fourth quarter was $96 million with adjusted EPS of $0.18. And compared to $127 million of adjusted net income and adjusted EPS of $0.24 in the fourth quarter of 2024. Looking at the full year, total revenue was approximately $2.3 billion, Recurring revenue of approximately $2.1 billion was down 2.2% compared to the prior year period. Project revenue of $154 million was down 22%. Adjusted gross profit for the full year was $883 million compared to adjusted gross profit of $942 million in 2024.

Full year adjusted gross profit margin decreased 100 basis points compared to 2024. Full year adjusted EBITDA was $561 million with adjusted EBITDA margin of 24.8% compared to adjusted EBITDA of $594 million with adjusted EBITDA margin of 25.2% in 2024. Adjusted net income for the full year was $266 million, with adjusted EPS of $0.50 and compared to $313 million of adjusted net income and adjusted EPS of $0.57 in 2024.

In the fourth quarter of 2025, we recognized a noncash goodwill impairment charge of $803 million. We have remaining goodwill of $83 million on the balance sheet. Turning to capital and liquidity. We ended the year with $273 million in cash and equivalents, in addition to a $330 million fully undrawn revolving credit facility and free cash flow for the year was $250 million, providing us with significant financial flexibility. With this, we are well positioned to fund our 2026 TRA payment which is estimated to be $156 million. Importantly, as a result of tax reform related to the 1 big beautiful bill, we do not expect to make a significant TRA payment in 2027 and or 2028, which meaningfully increases our flexibility around capital allocation.

After reviewing our capital allocation priorities with the Board, -- the company has decided to reallocate capital in favor of higher return priorities, including investing in the long-term growth of the business, deleveraging and opportunistic share repurchases and which will replace future dividend payments.

With that, I'll turn the call back to Rohit.

Thanks, Greg. Let me build on that and provide some more detail on our capital allocation. With the support of the Board, we're thinking more holistically about capital allocation. Our goal is to create the best return for our cash deployed. The current structure locks us into dividend and takes away the flexibility to be more thoughtful on our capital allocation. With our strong cash flow and anticipated TRA deferral, we believe it makes sense to take this opportunity to return value to our shareholders through a combination of reducing the company's leverage and through the opportunistic repurchase of stock rather than continuing our quarterly dividend at this time.

Our existing repurchase plan has a remaining buyback authorization of $216 million, giving us the ability to reengage our repurchase activities in the near term. At the current levels, we believe our stock is undervalued and that repurposing our capital allocation towards debt reduction and share repurchases is a more efficient and effective use of capital. As I shared with you earlier, we are disappointed with our 2025 results. While we are focused on embracing a disciplined execution plan, we do believe the weakness experienced in 2025 will spill into 2026, and our performance improvement hinges on the successful execution of our priorities over the next 9 to 12 months. We will keep you up to date on our progress.

We view 2026 as a launching pad for our performance inflection as we focus on positioning Alight for sustainable long-term growth. We entered 2026 with strong liquidity and a solid cash position and a portfolio of strong client relationships. We are being methodical in our approach with a focus on a small set of key operating priorities and expect to deploy more than $100 million of capital to strengthen the foundations of the business and position Alight for long-term growth. First, we are focused on delivering service and operational excellence that includes investing in our client-facing teams by adding sales and account management professionals to increase coverage across our client base.

Second, we are advancing product innovation by creating a world-class user experience using AI as an enabler to simplify user interactions and improve insight for both clients and participants. Alight's deep and highly differentiated data lake is enriched by decades of domain expertise and scale and we are uniquely positioned to deliver more personalized, predictive and outcome-driven experiences that set us apart in the market. Likewise, we plan to more broadly deploy AI internally to assist with routine tasks so that our professionals can focus on providing the thoughtful expertise our clients and their employees expect.

Driving innovation in our solutions from the top down is another critical priority for us. To that effect, we recently announced that Karen Frost will lead our Health and navigation solution and Kevin Curry lead our Leaves solution. we intend to announce a leader for our wealth solution shortly. We believe these additions will effectively align our solution strategy and heighten our ability to deliver a high-quality benefits experience for our clients. Third, we are focused on strengthening our existing relationships while adding to our client base. we have proven our ability to provide operating efficiency, consistency, reliability and execution across the complex benefits landscape, and we will leverage this success to expand our relationships with current and new clients and established partner collaborations that allow us to serve at the front door to a holistic benefit experience. I am confident that we are at the forefront of implementing the right strategy to return the business to long-term growth, but this will take some time. Given that we missed guidance targets several times in 2025, I don't think it's prudent for me to provide full year guidance, and I'm just 30 working days into my role.

What I can say is that we expect first quarter 2026 revenue to be down by high single-digit percentage range. Likewise, we anticipate that our planned investments in sales, account management and user experience will create short-term adjusted EBITDA margin pressure, resulting in a decline of 500 to 750 basis points as compared to last year's first quarter. We view these investments as critical to executing on our stated priorities and meeting the expectations of our stakeholders. While our business has faced challenges, attractive market dynamics, our strong leadership position and clear direction from our clients gives us a very achievable road map for driving margin expansion and growth in the midterm.

Our strong cash flow provides us the financial flexibility to invest $100 million to drive innovation, partner expansion and an enhanced experience for our clients and their employees. Our recent service and innovation successes leave us confident that we can further expand our already enviable market position. I'm energized by what I have seen so far and certain that we're putting the right strategy in place. I believe we can put the business back on a path to sustain profitable growth with the expertise and focus of our teams.

With that, let me open the call for questions.

[Operator Instructions]

The first question is from Peter Christiansen from Citi.

Thank you. Welcome, Rohit. Thanks for the question. So the messaging on the scale, the partner ecosystem, the mission-critical platform capability . This has been quite consistent with the prior execution teams here. But there's been a real gap between this sentiment in the asset value of the company and the core financial performance. It has been regular misses on client retention, pipeline conversion and any stability to growth. I recognize that you've been in the role for 30 days.

But I was just curious -- I had 3 questions. I'm just curious, what's your take on what are -- what have been some of the drivers in some of the financial underperformance in recent periods. Second question. Your experience previously CEO at Crawford, what do you bring to the table in terms of being able to turn around the company. Just curious on that perspective. And then final, I understand this is yet another transition year for the company. how should we think about measuring any milestones in the next 12 months? I appreciate it.

Thank you, Peter. Great set of questions. So let me start from the top, right? What do I think are the drivers for the financial underperformance. First and foremost, I had a hypothesis when I was coming into the organization. And that hypothesis was, as you stated, right, we're in a great industry. We've been here for a long time. Our brand is well recognized we've got an enviable client base. And we have a service that if we execute well, it should be sticky. 30 days in, I have only strengthened that conviction, right, which is that those things are absolutely correct.

Obviously, while coming in, I also knew that financially, we had not performed to the expectations of the organization as well as that of -- the Street and that also have seen I would say the biggest challenge for us has been on driving operational excellence, which, to me, is an execution piece, right? So this is not a change in the strategic direction of the company, this is a change in the execution of the company. So the biggest piece that we need to tighten is around execution. It's execution around operational excellence, it's execution around client management and relationship management, it's execution around technology and it's execution around continuing to innovate our products and services. So that, to me, are the 3 biggest pieces, right, that we have to push on.

That leads me into my experience as a CEO at Crawford. When I joined Crawford, right, we had not grown for 10 years. And again, when I was there, what I realized was it was again in a market that was strong. It had an 80-year legacy it had the expertise. But again, the execution was what was missing. So I've had several experiences of turning around execution and turning around execution is a cultural change a change in leadership philosophy, a leadership rhythm is being clear-eyed about what the priorities are and staying focused on what the priorities are continuously and consistently. And that is the experience that I had before, and I've done that 2 or 3 times, once as a CEO before that has more of an operating leader, and that is the experience that I'm going to bring here and drive that execution.

In terms of measuring, I want to make sure that, first, let me start by saying that the investor community is a very important stakeholder for us. So I want to make sure that what I'm giving you is something that is very clear very definitive and something that I can consistently report on. So that's the reason why I want to hold back. I'm 30 days in, as you know, while Greg is doing a great job as our interim CFO. I'm in the process of appointing a full-time CEO. I want to make sure that appointment is done and we collectively put our heads together on what are the things that we need to come back to the investor community with that we can share with you consistently and continuously so that you can measure how we're doing against our progress.

Thank you. I look forward to meeting with you soon.

The next question is from Scott Schoenhaus from KeyBanc Capital Markets.

I guess maybe you can dive deeper into the first quarter guidance, all the moving parts, renewals, pipeline, pricing. Just walk us through what you're seeing at the start of the year here, Rohit, how you think you can manage this throughout the year, how we should expect the cadence both in the near term without providing distinct guidance. And then the longer-term targets of approaching mid-single-digit revenue growth at 30% adjusted EBITDA margins, can you recommit to that target?

Scott, thank you so much for your question. I think what I would say to you is that, as I mentioned before, right, that we did not execute well in 2025, specifically on our renewals. And that's why I said that the financial underperformance of 2025 is expected to spill into 2026. There is a whole bunch of data that I'm analyzing with the team. And right now, that is the reason why I'm projecting to be high single digits, lower on the revenue as well as about a 500 to 750 basis points lower on the margin because we had a less than stellar renewal season last year, I would say that typically, we want to target our renewals at the mid- to high 90s, we were significantly below that number. We had -- I think we had given you guys last year revenue under contract, which was about $2.1 billion. Our revenue under contract starting 2026 is about 5% down. So and then the level of volatility that we've seen in the project revenue, right now, I'm just not comfortable in giving any more things just because I don't want to put something out there and then have to track back. given up 30 days in, there's a lot of work that I'm doing right now with the team. And I can assure you, like I said to Peter that the investment community is a very important stakeholder for us.

So as I get a more full-time CFO in place, as I get a better handle on all of the moving pieces, I will be coming back to you something very definitive.

Great. I guess this is more of a sort of thematic AI industry question here, but are you seeing clients not renewing partly because they're testing their own AI bots in their own products them sell their own applications internally themselves using these AI platforms?

Scott, I'm so glad you asked that question because that gets asked to me all the time. Look, I think I mentioned that I have met 35 to 40 clients so far. Our client base typically tends to be on the upper end of middle market, right, and then all the way up to the Fortune 100 the level of complexity that you have in those plans, right, whether it is in terms of the various grandfathered plans that they have, whether it's in terms of the unions that they have, that it's really not possible to do this in-house by quoting AI to do this work, right? If we were talking about a company that has 100 people or 200 people or maybe even 1,000 people. I think the conversation is a little bit different than the scale at which we're talking about.

And I would tell you that I would put clients in 3 categories. There are clients that already have the governance structure in place in their organizations for AI. They're very open to putting AI in. In fact, I will tell you that there was a large client that I spoke to just a couple of weeks ago who said, "I don't want to enable any AI because we ourselves are trying to figure out how to be managed AI because of all the security and privacy risk that it opens up. So you have a second category of clients who are still figuring out how do they actively manage what AI is doing and what other controls that have in place and they are cautious about that. And then you have a third where they have put the infrastructure in place on AI, they want something with it, but they're still waiting to see what's the best way to deploy AI and where it's going to have the biggest impact. In fact, I think I heard 1 of the large bank CEOs just a couple of days that from their perspective, AI is not delivering what they had expected AI to deliver.

So Look, there's a lot of promise. I'm a computer engineer by education, myself. I studied AI 30 years ago in college. And obviously, AI today is very different than what it was at that time. But what I can tell you is that we have not seen a meaningful or any kind of disruption right now from an AI perspective neither in terms of the employee base that we have. We have -- as I said before, we have about over 30 million participants on our system. We have not seen any major change in the number of employees. Now I would also tell you that several of our large employees have had very public restructuring, but also several of our large clients have had new acquisitions. So we have not seen a meaningful change in the number of employees on the platform. Hope that helps.

The next question is from Kevin McVeigh from UBS.

The next question is from Peter Heckmann from D.A. Davidson.

Rohit, congrats on the new role. I think it's good to have you at the firm and look forward to working with you. I think the the termination of the dividend program right after that was the right decision. And as we look into some of the initiatives here that we've just talked about, the additional comp in the fourth quarter of '25 and then the $100 million of incremental investment spend in certain areas, I guess, what portion of both of those do you view as recurring versus onetime? And in terms of the $100 million recurring, would you expect that to be front-end loaded in 2026.

Great question, Peter. Thank you so much, and I look forward to meeting you as well. Peter, the way I would think about it is that -- the $100 million is not an additional investment. It is the CapEx that we have planned for this year. It's the capital investment we planned for this year. Do I expect it to repeat it? I expect some part of it to repeat, right? Because a lot of these things that we're trying to do aren't going to be done in 1 year. But as I had answered to Peter from Citi before that this has been an execution journey for us or this will be an execution journey for us and a large part of that depends on us doing -- bringing about changes in our processes, bringing about changes in our systems and modernizing those things to really meet the needs and ask of our clients.

As far as the nature of the compensation, I do expect that to be recurring. And the reason I say that is because we are adding more horsepower from a sales management perspective, I want to make sure that individuals are incentivized for driving execution. And because I want execution to be the way we do business, I expect that part of the expense to be recurring.

Okay. Great. I'm glad I clarified that. I must have misheard kind of rushing through the press release here. question Great. Great. Just the second question, if I remember correctly, does 2026 represent a bit of a lighter renewal cohort versus the last 2 years?

Yes, you're absolutely right. 2026 is definitely lower compared to 2025, particularly, and it's lower by about 30%. 30% 30% to 40% compared to what it was last year.

Okay. That's helpful.

The next question is from [ Ross Cole ] from Needham & Company.

I was wondering if you could talk a little bit more about the internal impact of AI and if you're expecting to see any margin improvement related to that through 2026. Or if that's something that's expected in the out years?

Yes. I would say that right now, there is a lot of work that we need to do on technology within the organization. And I believe that we're making a lot of progress on that. So I would say that I don't see any near-term impact on productivity improvement purely from AI. I think there are a bunch of other things that we're doing that should continue to have productivity improvement. We are leveraging AI across, I would say, 3 parts within the organization. One is , which is also client facing. One is on the user experience side, which obviously is going to impact more of the participants that we have from our clients.

The second is in how we configure the system. So today, what happens is when we onboard a new client or when we set up a client for annual enrollment, there's a lot of manual work that happens in terms of taking the requirements from the clients. going through them and then actually configuring them in the system. We are exploring using AI to actually configure the system. As I shared before, some of the clients that we work with are 100,000, 150,000 employees and multiple facets of employees by classes, I mean, like you can have unionized, nonunionized, full time, part time. And all those required today a significant level of configuration that we believe can be managed with AI, and that's something that we will be working on this year.

And then the third thing that I would say from an AI perspective is -- we do a lot of file handling today. So what happens is a client sends us a file of their employees and then we send we take that file and then we send that over to, let's say, a carrier, we could be sending that to a financial services provider. And we expect that there is a lot of opportunity there with AI, not just from the standpoint of efficiency, but also accuracy.

And then the final thing that I would say is in that, 1 of the most proven use cases of generative AI has been in call centers. We have a pretty large call center, and that's also something that offers an opportunity for us. But remember, for AI to be effective, the most important piece that you need is data, right? And we have tons of data, but that data has to be organized into a knowledge layer. And unless you organize into a knowledge there, your ability to actually capitalize on that is very limited. So a big push for us in 2026 is to build that data and knowledge layer. Once we do that, we will be in a much better position to drive the efficiencies that come from AI. And that's why I expect those to be more 2027 opportunities than 2026. So hope that helps, Ross. I know it was rather elongated answer.

No, that was very helpful. I appreciate that.

[Operator Instructions]

The next question is from Kevin McVeigh from UBS.

Can you help us understand, it sounds like some of the renewals that slipped from a retention perspective, what was driving that? Because obviously, that kind of cascades into 2026 overall, but just maybe help us understand what drove some of that slippage. Was it just churn, consolidation? Like what was the main driver of that?

Yes. And I think the main driver actually comes through the -- what I said in the app or the request from the clients, right, which is driving operational excellence, being more modern with our user interface making sure that the relationships that we're building are deep and consistent. So -- those are the 3 things that the clients have been very clear about, and that's what I'm attributing right now from a retention perspective as the reasons why we underperformed on that. And those are the 3 things as you heard from me, are very clear priorities that we're working on right now.

Got it. And then just from the dividend perspective, makes sense, I think that was about $86 million, but maybe help us understand like -- why have we been paying a TRA in 2026? I mean I think it's $130 million, but like it's a massive use of cash. I get to '27 '28, but is there no way to maybe manage that a little bit better just given how much the dynamics of the business has changed?

Kevin, first of all, I would love that if we didn't have to. But I'll let Greg explain the mechanics of why we're doing this in 2026.

So the TRA payment in 2026 is for our 2024 tax returns. And so what it includes is the gain on the sale of [ STRATA ] and so that's why the payment is so elevated. It's really around the divestiture transaction. There's just a 2-year lag in terms of when the payment actually goes out.

Got it. And I guess with the -- because obviously you had massive impairment charges, things like that, that doesn't impact that calculation at all.

No, because those kind of impact the 2025 tax year, which then will kind of roll into our '27 and '28 payments.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you, Sachi. Thank you all for joining. I appreciate your continued interest in Alight, and I look forward to updating you on our progress in the quarters ahead. Thank you, and God bless.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Great. Good afternoon, everybody. We're thrilled to start our day 2 with Alight's CFO, Jeremy Heaton. We've got some Q&A., and 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 on 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 Cohen, who's in the audience as part of our Technology Conference here at The Phoenician. This is our 29th Annual, I think, our eighth or ninth. But Jeremy, again, always terrific to have you folks here.

Thanks for having us.

Probably the best place to start is probably with the recent CEO change. 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 yes, Dave Guilmette, who's our current CEO, joined the Board in May of '24 and pretty quickly after that, took the CEO role in August of '24 and has done just a tremendous job with the teams focusing-in, this business post divestiture of Payroll, just on the benefits industry, stabilization of this business and a refocusing around the innovation and digitization.

And just over the last few months in discussions with the Board, just thinking through the longterm of the business and the company, the results 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 1.

And Rohit has 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 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. Much of what we've got 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, #1 priority. It 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, build 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 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 and free cash flow in this business.

That makes a lot of sense. And I know it's early, it's only been a couple of weeks, but any initial early view on it? And if you were to think about where Rohit's priority will be maybe top two, three initiatives?

Yes. I think it will be in my discussions with him and with the team and the Board, much of what we're -- what is underway today is continue 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 certainly around AI, but just automation in our space is important as it drives a better experience. And so that experience, that seamless infrastructure for employees to be able to navigate the health care system and their benefits is going to be important. So I certainly expect he's going to want to get in front of investors in the group very quickly after starting in the role. But I today wouldn't see anything that is significantly different than where we are.

That's helpful. And it's amazing a lot has changed in a year, not only from a macro perspective, but just internally, 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 we'll weave in some of the macro dynamics as well.

Yes, sure. So we feel good about many of 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 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 big positive for us in terms of what we see this year.

The usage of automation and technology and AI. We've got -- right now, we're in the middle of annual enrollment. Just we'll be finishing up 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 great clients like UBS, who leverage Alight 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, being 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 the -- on the macro side, historically, this business has benefited 1% to 2% growth based on just employee count. 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 2 years, 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.

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 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 don't -- aren't impacted by that.

So maybe talk, 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-live and so on and so forth. And I think a lot of that is tethered to the scale of your clients?

That's right. And so yes, in this business, like I said, we've got 50% of the Fortune 500, very diverse across both white collar, blue collar 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, 92% of our business is recurring revenue tied to 3- to 5-year contracts that are per-employee, per-month 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 take from 6 to 18 months to get that client live. If a client is leaving us, it similarly will take them likely 6 to 18 months. And so you do get visibility in terms of where we're at with clients, the visibility on the revenues under contract over a pretty longterm. And like you said, 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 is -- if you're dealing with something where you need leave and connected to your health care and the leaves process, it's just we -- and what we hear from the market is, listen, you get this right from 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 uplift of what we'd have on the revenue from -- coming from Benefits Administration. So large deals, large white space, great pipeline. So 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 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, much more stabilized, I think, in just the market narrative of who we are, right, post the Payroll and Professional Services sale last year, focused and through 4 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 increased 800 basis points from the '23 cycle to the '24 cycle. And that has stabilized and continued. We 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 2 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 big logos we had talked about over the past 2 to 3 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 the 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 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 in 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 not 1 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 the kind of the aircraft carrier relative to the battleship. It takes time...

That's right. It always -- thanks for -- and that is an important dynamic here. It is 6 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 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, you continue 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 of the story that we don't think is being properly calibrated by the market?

I agree with you. The team has 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're battling a bit against the top line pressure. But what we really laid out at Investor Day, the team has more than delivered-on in the short term. And we view that as really important in terms of where we're at, both from the margins and the cash flow side.

That's important. And as we try to navigate the Gen AI landscape, 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'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 -- the time line of the 6 to 18 months, the ability to compress that time line, that's always a drag for us on working capital is, 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, 4 years of real work on the front end of what the experience is on the technology, but also moving into the -- 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 get lost is -- 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 start-ups 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, quite frankly, that bottom and start to see re-rate some of that, but it's an important point.

It's -- this business is -- 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 where 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 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 is 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 in this business is 96% to 98%. It's just if you're delivering services and executing to the commitments that you've made and the partnerships aligned, we see very high stickiness in this business.

Great. And it's just critical offerings, too, right? I mean Healthcare and Retirement is critical to people's sustainability. And just on that, we talked a little bit after the quarter, but with the benefit of the enterprise, you have a pretty good advantage on white collar workers more broadly. And there's one of the things we've obviously been struggling with along with the market is, does this Gen AI 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 -- 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 some markets that might be either in consolidation or everybody that's navigating -- just market changes with Liberation Day and tariffs and AI.

But like I said, flattish this year, even in markets where we see growth in spaces where the headlines say a completely different story. And so 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, 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.

We agree on that. 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 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, kind of in that journey and where you hope to be?

Sure. So yes, 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 -- client management was sat really with the delivery and the commercial teams in a bit of a, call it, a matrix structure historically for the last few years.

Rob's team has a set of client executives. They manage roughly the top 200 clients. And really just sitting with those clients, where are we at from a delivery standpoint? Where are the clients focus? 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 partnerships? 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 geared towards the technology side and clients 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, 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 2/3 or more of our book over the last 2 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 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 in the last couple of years. So it will be a lower year in terms of dollars up for renewal.

As I said, '25 cycle was really good in the large market, in line with what we saw in '24 was not -- really the low point was '23. We were about 77%, 78% in the large market renewal in 2023. That was up to 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 -- that has historically been closer to 90% in the large market. So there's still room for us to improve as part of the revenue and the target growth model in this business.

The 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. So that's a watch item for us here in the fourth quarter as we talked about through the -- so nothing new from what we said at earnings, but we'll always watch that a little bit, but it's not -- the material driver is really that large market and where we're at from the renewal space.

That's helpful. And one other thing I think it's worth mentioning to the audience, too, its is not really core to the business, but you don't have float, right? So a lot of your competitors in the space had terrific benefit from 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 -- where some of your competitors on a relative basis will be comping that, its something you're not impacted by?

That's right. That's right. Yes. 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 because I think there have 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 where puts and takes were relative to maybe expectations coming into the year?

Sure, sure. Yes. So project revenue has -- 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 that we've had on performance for the year.

Project revenue, just make sure to -- what is -- 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 recordkeeping 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.

We've -- within our client base, M&A remains relatively low, while there's been volatility on the Administration side, there hasn't really been regulatory changes and law changes in our space, which has required much work. And benefit design changes, 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 is, offset a lot of the headwinds from the top line. And so that you would think about is certainly upside at whatever point it comes back.

Sure. And one thing, and you mentioned a couple of times is important -- those clients that churn, there's the attachment rate on the project, too, that creates some of that pressure too, that churn starts to...

More ARR bookings will bring in more opportunity. That's right.

Aircraft carrier, it takes off, but it's important. it's important, and 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. But 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. And maybe talk about the view philosophically on that margin benefit? How much of that -- without getting too too specific, just how much of that goes back into the business as opposed to the market? And just I think we could spend a day on AI, but it's an important...

For sure. 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 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 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 experience to go through. We're taking three of our top clients through this year as kind of the first phase, and that will be a full rollout next year. And so this is a very different experience from an enrollment standpoint, conversational AI, Gen AI-backed, really bringing in the transactions and the data that really personalize 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 Gen-AI 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 in a competitive 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, over time, is a much more important space and even the efficiencies that we drive in how we deliver those services. But we think about that in 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 competitively of how you look at that and the expectations in the market.

Perfect. I think that's a good place to end. So I appreciate your time.

Thank you for having us. Thank you.

Good morning, and thank you for holding. My name is Dina, and I will be your conference operator today. Welcome to Alight's Third Quarter 2025 Earnings Conference Call. 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 Jeremy Cohen, Head of Investor Relations at Alight, to introduce today's speakers. Please go ahead.

Good morning, and thank you for joining us. Earlier today, the company issued a press release with its third quarter 2025 results. A copy of the release can be found in the Investor Relations section of the company's website at investor.aligt.com. Before we get started, please note that some of the company's discussion today 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, except as required by law. 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. Financial comparisons related to prior year free cash flow made on today's call are on a pro forma basis, giving effect to the payroll and professional services transaction completed in July of 2024, and are consistent with the presentation we have published on our Investor Relations website.

On the call from management today are Dave Guilmette, CEO; and Jeremy Heaton, CFO. After the prepared remarks, we will open the call up for questions. I will now hand the call over to Dave.

Thank you, Jeremy, and good morning, everyone. We've made significant progress during the quarter to strengthen our position as a technology-enabled employee benefit services company. We've accelerated our technology road map and delivery capabilities while reimagining the client and participant experience with new solutions already in use by some of our largest clients. Through our AI and automation investments, and rapidly expanding partner collaborations, we are bringing immediate benefit to clients and ensuring our competitive advantages for the long run. We feel good about the substantial improvements we have made in our product line with more to come.

Likewise, our service delivery is unmatched. Clients are impressed with our new AI-centric services and delivery capabilities. The next step is improving our commercial effectiveness, starting with a new leader with deep industry expertise. Our emphasis includes the diversification of our revenue streams, including through our partner network, while continuing our operational progress. With the current macro environment, the continuing and unprecedented rise of health care costs for our clients and the advancement of AI, I'm more confident than ever that our initiatives, coupled with our track record position us best to tackle these dynamics. With that, let's review our quarter.

For the third quarter, Revenue was $533 million compared to $555 million a year earlier, and adjusted EBITDA was up 17% to $138 million. Free cash flow year-to-date remains strong and is up 45% from the prior year to $151 million. Jeremy will provide additional color on quarterly results in a few minutes. As I mentioned, one way to accelerate our financial performance is by expanding our comprehensive partner ecosystem. Our refreshed strategy in this area is making fast progress to meet the changing needs of clients and participants while sharing in the value creation with our partners.

Our relevance with 35 million participants is unmatched and potential partners are looking for ways to work with us to unlock their own value. For example, Recently, we welcomed Sort Health to be Alight partner network, complementing our long-term partner, Hinge. Participants now have access to an additional leading clinical grade resource for managing pain and avoiding surgery, as well as access to behavioral health and mental well-being platform. Our Goldman Sachs Asset Management integration into a Alight work life, which we mentioned last quarter is well underway. We've already signed our first client with several more active client conversations taking place. And just last week, we introduced a new guaranteed income solution through MetLife. This arrangement allows participants to purchase solutions that convert a portion of their savings into predictable monthly income as they prepare for retirement.

Over a dozen proposals are outstanding from additional top-tier partners and you should expect a regular cadence of announcements on this front. At the same time, our investments in the most impactful technology and service capabilities are moving at an aggressive pace within the call center, We enhanced our automated voice response system. This technology drives a better user experience and has contributed to a 13% drop in call volumes year-over-year. Our new AI agent assist software is in pilot with nearly a dozen clients. This tool assesses calls in real time to provide customer care agents with next best actions to more effectively service participants.

Finally, in September, we brought critical delivery and technology talent back in-house, which allows us to better manage service quality and productivity. These actions, along with previous improvements are strengthening our service quality. Our participant satisfaction scores increased to 90%, which is the highest level achieved since completing our technology transformation. Regarding product, advancements in our AI road map continue to accelerate. The embedded value in our petabytes of data is unmatched, which means we can drive a far more accurate, predictive and differentiated user experience than anyone in our market. Our carefully curated mix of technology and services provides a trusted high tech, human touch experience that is core to our success.

I want to share a few highlights from the last 3 months. First, we piloted a conversational AI agent solution with 2 of our largest clients to assist with annual enrollment this season. broadly available to all clients in 2026, this is a game changer. To help participants feel more confident in their benefit selections while requiring less human intervention.

Next, we've rolled out Gen AI-enabled search summaries to more than 95% of our clients. AI-enabled searches are growing exponentially, and we delivered over 300,000 summaries in October alone. The breadth and depth of our platform will only get stronger as more users interface with this feature. And finally, we announced our expanded collaboration with IBM, a decades-long business partner to deploy IBM's Watson X Orchestrate agentic framework across the light. These advancements and our capabilities are critical to our Renew everyday program agenda.

We have been successful at retaining top clients with a large majority of our largest clients going through the renewal process in the past 2 years. Since our last earnings call, some of our noteworthy renewals include Campbell's, Essilor-Luxottica, Ally Bank, Air Canada and MetLife. Our client management team is focused on proactively renewing and expanding relationships with our tremendous client base. Our renewal rate in the large market was up significantly in '24 and we're pleased to maintain that same level in 2025. And we're working hard on expanding renew every day to all of our clients, strengthening the approach to supporting smaller clients endpoint solutions. We are making great progress with the renew everyday program and expect continued improvement to our renewal levels over time. I'm very pleased to share that Steve Rush has joined as our new Chief Commercial Officer.

Steve's long history with a light along with his deep understanding of our clients' needs, position him to make a meaningful and quick impact. Steve is a highly respected leader in the benefits industry and he's excited to rejoin a team and business he already knows very well. As I step back on where we are today, our progress has been substantial in moving us forward to our future. I'm proud of how our team members have come together to advance our technology and operations, and I want to thank them for their hard work and dedication. We have more scale, scope and talent than any of our competitors today and the resulting opportunity in front of us is immense, to drive higher bookings, retention and new streams of partnership revenue.

Operational results of our initiatives will be evident before they play through the financials, and we are confident in our ability to deliver an unmatched benefits experience for clients that are embolden in new technology. And with that, let me turn it over to Jeremy.

Thanks, and good morning. We continue to make operational progress and competitively, we're well positioned for long-term success, validated by the third-party evaluators and brokers in our space, and echoed by the many clients who have renewed or expanded with us. Our primary focus continues to be on adding value for our clients and their people every day. Moving into the quarter. Revenue was $533 million, which includes a $4 million onetime revenue reduction from finalizing the commercial agreement with the divested Strata business. Normalized for this, total revenue would be $537 million. Nonrecurring project revenues were down $7 million or 14% for the quarter. Adjusted gross profit was $206 million, up 3% from the prior year, reflecting 260 basis points of margin expansion.

Similar to prior quarters, our adjusted gross profit is impacted by cost to support the divested business, which are reimbursed through the TSA and other income. Normalized for this, adjusted gross profit would have been higher by $7 million. Adjusted EBITDA was $138 million for the quarter, up 17% and adjusted EBITDA margin expanded 460 basis points. Free cash flow for the first 9 months was $151 million, up 45% from the prior year period. Given the business trends this year versus expectations, our profitability and cash flow results include a nonrecurring impact of lower variable and performance-based costs.

While we've made tremendous progress, there is more work ahead to improve our top line results. Longer term, we expect improved commercial results with an optimized go-to-market function along with key product enhancements. We feel good about our renewal rates in the large market and expect the 2026 cycle to have over 30% fewer dollars up for renewal. We also have near-term revenue opportunities through in-year bookings, partnerships and engagement services that our team is highly focused on to close out the year. Our operational and technology initiatives continue to drive increased efficiency while delivering a better experience for our clients, and this has benefited our profitability and cash flow metrics.

Turning to the balance sheet. Our quarter end cash and cash equivalents balance was $205 million and total debt was $2 billion. Our net leverage ratio improved sequentially to 3x. We continue to actively manage our debt, which is 70% fixed through 2025 and 40% through 2026. While having strong confidence in the long term, with our market valuation change over the past quarter, combined with current business trends, we recognized a noncash goodwill impairment charge of $1.3 billion. With respect to the tax receivable agreement, our payment in the first quarter of 2026 is expected to be lower by $25 million compared to our previous estimate, reflecting the completion of tax filings for 2024.

We returned $47 million to shareholders this quarter via our quarterly dividend and through the repurchase of $25 million worth of shares. Year-to-date, we've repurchased close to 14 million shares or approximately 3% of shares outstanding. We ended September with $216 million remaining on our share buyback authorization. Management and the Board of Directors will continue to evaluate our capital allocation policy as it does on an ongoing basis. With today's earnings report, we have updated our 2025 outlook and enter the quarter with $2.25 billion of revenue under contract.

For the year, we expect revenue between $2.25 billion and $2.28 billion, adjusted EBITDA of $595 million to $620 million, free cash flow of $225 million to $250 million and EPS of $0.54 to $0.58. We are intensely focused on execution and improving our top line performance and remain confident in our position for the long term. This concludes our prepared remarks, and we will now move into the question-and-answer session. Operator, would you please instruct the participants on how to ask questions

[Operator Instructions] The first question we have comes from Kyle Peterson of Needham & Company.

Great wanted to start on the update to the guide, see if you guys could walk us through some of the moving pieces on the reduction here. It looks from the slides, it looks like it's from kind of a combination of volumes and new business wins. But I guess any clarity or context as to what you guys are seeing? And when -- at least some of the new business wins, obviously, you made some announcements during -- in the release today, but I guess like when should some of the fruits from those wins start to pay dividends?

Sure. I'll start, Kyle. So yes, still in the guide, we reduced at the midpoint revenue down $40 million. that's really split between projects and recurring. Project is the biggest with, again, a $20 million update there on project. And we just have not seen an inflection in pipeline and activity, I think some continued cautiousness as we're going through the annual enrollment process right now. So even on a low comp, we had expectations to see more build in the pipeline coming into the fourth quarter, and just not seeing that. On the recurring side, it's a bit of volumes. You see in the update in the deck that we've got. Some in that is really we've seen modest declines so far year-to-date, but just a sentiment overall, just a cautiousness around that. We're not going to certainly expect with the headlines see any upside there. So really just expecting flat to slightly down on the volume side.

The Strata update on the customer care agreement was impacted in the third quarter, and so that's part of the update as well as going through. And as you said, a small amount of just the in-year revenue from the bookings that we've had so far this year. So those are the guide. As you think beyond revenue, the biggest piece is just the project update for us is really the biggest piece that drives the EBITDA and free cash flow aspects and the guide and the update there is we still feel really good in terms of the initiatives underway around the operational side around delivery, around the AI and technology and the customer care side of the house on the call centers. It's just, again, as you know, that's about a 90% to 100% drop-through. And so seeing project at this level. is just what we see in terms of the roll-through around profitability and free cash flow.

There's always going to be elements of retiree health and some other areas within the business that can drive upside into the higher end of the range here. But that's -- those are the dynamics we're seeing as we go into the fourth quarter.

Okay. That's helpful. And then maybe just a follow-up. I want to see if you guys are seeing any impact or whether it's client decision-making or around open enrollment related to the government shutdown. Obviously, it's been getting kind of long in the tooth here. But I guess any impact on your business, client decision-making, employee decision-making. Anything you guys are seeing? Or so far, has it been something you guys have been able to work through?

Kyle, it's Dave. Thank you for the question. Let me take that. So as Jeremy mentioned, you've got a few of the headlines that are out there. But in general, whether it's the government shutdown and the impact on federal employees or it's what passes through to clients. We've really not seen anything material come through at this stage. And just keep in mind that even if there is an action, a reduction in force with a big company, there's a pretty big lag factor associated with that. You'll have individuals who will be on COBRA for a period of time. Sometimes they're furloughed, so they're still sort of there. So -- or in the case of the federal government, you've got people working and not being paid in some circumstances.

So longer term, the volume that would typically tick up, we're not anticipating, but we haven't really seen a material negative impact, at least through this quarter, and we're not envisioning that through the fourth quarter.

The next question we have comes from Scott Schoenhaus of KeyBanc Capital Markets.

So if we strip out the project revenue -- so if we stripped out the project revenue noise, recurring revenues down low to mid-single digits implied here, and you walked us through some of the assumptions just now and on the slides. But how do we think about returning to flat to low single-digit growth for the business? Is it obviously securing renewals. It sounds like the sales cycle like you talked about last quarter is elongated. You talked about upselling opportunities as well, and we're seeing maybe some slowness on lead can you walk us through like how do we get this business back to flat to up in growth on the top line?

Scott, it's Dave. I'll take that one. So there's a few elements here that we're sharply focused on. And you've touched on a little of those -- some of those in your question. Firstly, just on the renewal activity, we're seeing good results as it relates to our largest client base, and that's coming through the renew every day. program initiatives. And we're looking to cascade that through our entire client portfolio. So one, we think improving upon the retention rates for our existing clients kind of locking the back door to the house, so to speak, is important, bringing more clients through, so new logos or expansion on existing clients Again, we've got some good activity out there in the lead space. We've got a number of opportunities that were deep in discussions or near the contracting on core ben admin from middle market up to some of the larger opportunities.

So that's kind of taking the clients in through the front door as well. So all of that really bodes well for the return to the growth that you're asking about. There's a lag effect involved in that. If this is a big client, large client, ben-admin, typically, you're looking at implementation cycles that could run 12 to 15 months, right? So some of that revenue on a new business win that could occur now might not make its way through to our financials until 2027 or beyond. Smaller deals have shorter gestation periods, lead deals depending upon how big they are, could be shorter gestation periods as well.

So as we continue to build back the momentum and the strength of our pipeline under Steve's leadership and in collaboration with Rob, feel good about where that's headed. And our product positioning is as strong as it's ever been.

Great. And as a follow-up, again, stripping out project business that falls down to the bottom line. What can you guys do as a company to drive secular margin expansion? We've always talked about the [indiscernible]. And it sounds like that you're moving some things back in-house on the service side, which I imagine would be a little bit more expensive. But just can you help us -- ex the project business, can you help us walk through -- you previously outlined your longer-term margin opportunities or goals or targets -- just help us walk through where you see your ability to drive margin improvements in the near and longer term?

Scott, I'm going to have Jeremy talk through some of the elements of how that drops through. One thing I want to make sure we focus on as part of your first question is the opportunities that exist across our partner network. We highlighted that in the opening remarks. We're feeling really good about the level of activity and the interest that the partners are expressing and being part of our network, just given our size and scale and reach for the customers and the clients that we have. and that represents revenue growth opportunity as well. That will phase its way in. It takes a bit of time before you get a contract established and you get the run rate going as is indicative of what we talked about last quarter with Goldman Sachs. But the more of those that we put in place the stronger our revenue opportunities for growth are going to be there.

As it pertains to your question on margin expansion, we're deploying AI in a variety of different places. We've got to make investments in that. Those aren't trivial and we expect to see some impact on the way we serve our customers with AI, right, either a reduction in the call volumes that we talked about in the opening remarks or a change in the kind of -- in the way that work gets done. And we've also pulled a number of resources back in-house, and that's a strategy that we'll continue to look at. Jeremy, anything you want to add on the drop-down?

No. I mean I think it is in line with what we've talked about earlier this year, Scott. So I think we feel very good in terms -- and I think we're probably ahead of where we thought we would be around the operating model in which our delivery team. So if you think about delivery as the bulk of the teams that are sitting with our clients every day. So from a cost standpoint, that's where we need to drive a better experience for our clients first, but we've standardized a lot of that work across the different groups and the solutions that we've got. We've got COEs in place now. bringing some of that work back from third parties, it's actually more cost-effective, Scott, just given the way that the terms and conditions work and also the flexibility around where the productivity sits and the things that we can drive and the flexibility.

So it gives us much more room to kind of drive the expansion in what we do and probably our largest cost base in the business on the delivery side. And then as Dave said, we have seen a big reduction in call center OpEx over the past couple of years and the work that we've been doing. But there are step functions in some of the new technologies that we've rolled out. And so really just want to get through this annual enrollment period to really see the impacts of that, helps us staff then going forward as we think about '26 and '27 of the elements that we can drive there. But we feel really good in terms of everything that we've got around the efficiencies within this business. And I would say we're ahead of what the timing would have been around those expectations. Some of that is to offset some of the top line that we've got. But certainly, as we get some of that operating leverage back certainly drops through in a more significant way.

The next question we have comes from Kevin McVeigh of UBS.

Great. I guess I want to start with -- I've never seen an initiative on approval for declassification. Can you just help us understand what that is and what drove the decision to do that?

Sure. I think -- Kevin, it's Jeremy. I'll start. Just from a Board perspective and what that is, is today, we have a staggered board. So 4 directors are up for nomination every year. and just through ongoing discussions with our Board and from a governance perspective and I think in discussions with investors, frankly, is to over time, destagger this board, which would eventually have all directors up for nomination annually as we go through that process. So it's just a governance update for us as we transition out of going from private to public through the SPAC and just kind of more, I'd call it, more normal course governance of a public company.

Kevin, I'd just add, as part of the process, we're letting the shareholders know that that's our intent, but this will be up for a vote of shareholders at our annual meeting next year.

Got it. And then I guess, I mean, you've had 2 consecutive meaningful impairments. You've guided down 2 consecutive quarters. Just help us understand just the modeling on the guidance relative to where you're coming in, particularly given we're 9 months into the year because it just continues to be an issue in terms of how you're guiding.

Sure. I think the guide and as I'll just walk through briefly, I think in the fourth quarter, the biggest piece is the project revenue, which I would say is we've never seen levels this low in terms of project revenue. We did expect and our teams going through with clients every day as we build through kind of the second half of the year in terms of where that pipeline is. it's well below our expectations in terms of project revenue. So absolutely, that's the biggest piece coming through here. There's also the impacts of what we've talked about in terms of the bookings element that we have. and just the macro factors around the headlines around employee and participant accounts.

So those are the biggest pieces for us in the guide. As you can see in the transcript and we talked about this morning, we are at $2.25 billion of revenue under contracts coming into the quarter and the range on the guide is $2.25 billion to $2.28 billion. So I think as you think about this, this is what we see today in terms of what's in front of us for execution in the -- at the end of the quarter. On the impairment side of it, that's a factor of, again, noncash impairment accounting adjustment. Largest piece being just the valuation change of the company, through the quarter. And that's -- there's a market valuation test, which is done every quarter. It's normal course controls that we have around the financials, and need to go through the valuation process. That takes into account the trends that we do see in the business, but it's a much longer-term view taking in the market cap and market value of the company.

So we recognized that charge here this quarter in line with where we closed out the quarter from a valuation of the company.

The next question we have comes from Peter Heckmann of D.A. Davidson.

I wanted to see if you could give us an update just on the follow-on payments from the divestiture, I think there's $150 million contingent based on the performance of that business in 2025 and then a $50 million fixed payment. Can you give us an update on the first and then the timing on the -- on both potential payments?

Sure. So the timing on the payments themselves are a 7-year term from the close of the deal, $50 million. So there was $200 million of deferred payments. $50 million was in effect guaranteed, which will be paid out. There was $150 million, which was contingent on EBITDA performance of the divested business through 2025. So we have that really recognized at 0 value on the balance sheet today, contingent upon the performance of the STRATA business and their EBITDA in 2025. So we'll go through a full annual look at that as we close out 2025 to see what the valuation is there. That will be recognized on the balance sheet and then will be paid out at the end of that 7-year anniversary of the close of that deal.

Okay. Both payments would be on the 7-year anniversary.

Correct.

Okay. And then on the headwind, given stronger retention levels in 2024 and into 2025. Do we still expect attrition to be a smaller drag on revenue growth in 2026, maybe something closer to 450 basis points versus something like 650 this year?

Yes, Peter, it's Dave. So let me take that one. Firstly, we had a considerable amount of volume that played through the renewal process in 2025. And as we said in our opening remarks, we're going to see a pretty material drop in that activity next year. And in addition, among our largest clients, which is where there's a pretty big concentration of revenue, the vast majority of those have gone through the renewal process. in the last couple of years. So we've had a lot of renewal activity in 2024 and 2025. We feel good about our retention rates for those largest clients, and we're going to see a drop going into 2026.

In addition, our expansion of the Renew Everyday program initiative and the collaboration between Rob and Steve is going to push that level of client management focus down for all of our clients. And the initial focus was on our largest ones. So as we continue to expand that initiative through the full client suite, we expect to see some positive returns on both retention and the upside and cross-sell opportunities that exist by bringing new services to those clients.

The final question we have comes from Andrew Polkowitz of JPMorgan.

I wanted to ask, so last quarter, you spoke to changes within your go-to-market organization, including greater specialization, domain expertise in the sales force. Obviously, these things take time to ramp. But I was curious if you could just provide an update 3 months later about the progress here, how these things have resonated with your sales force.

Sure. So it's Dave. I'll take that one, Andrew. Firstly, bringing Steve Rush back to Alight has been a tremendous boost for us and for our sales team. This is somebody who knows our business really well, has tremendous credibility in the marketplace and is a great team player. So he's collaborating working through, looking at every deal, et cetera. So that's helpful. We brought some industry expertise on board as well with specialty areas of focus in the leave space, in the navigation solutions and in core health admin. And it's Steve's intent to continue to build out that domain expertise across the sales force. To your point, those changes then have to play their way through on new business situations and opportunities.

We're laser-focused on those deals that are deep in the pipeline right now. We still have a material number of those that we're pursuing. And the key there is to improve our close ratio. And I feel confident that with Steve and the additions that he has already impacted and we've impacted we should see some uptick on our success with closing on those deals. And then as we enter into 2026, we're going to have the right alignment of our go-to-market teams, and our client teams, which I feel really confident is going to give us the opportunity, both for upsell, cross-sell and for new logos coming into the company.

Great. That's good to hear. And just 1 follow-up for me, more of a macro question. I was curious if there's been any change in the hiring assumption or net hiring assumption you laid out last quarter in the outlook, understanding there's offsets like you called out, Dave, what kind of lagged impact. So maybe even just adding on to that question, how material is the hiring assumption within your model or within your outlook considering you have this offset.

Included in the guide for this year, Andrew, we've got -- and you'll see it in the deck that we posted online. So we've got about down 0.5 point to flat is what we've got in for 2025. And again, year-to-date, it's been really minimal in terms of any impact, I'd say, slightly down. But again, you're talking basis points. And so certainly not seeing what we historically have had with the, call it, 1% to 2% of help on the growth side. So our expectations right now, and we would know typically in the fourth quarter right now as we stand if we had larger impacts that were happening already through our client base. And so -- that's the call and the guide and based on what we see so far this year. And then as we think about next year, I'd say it's hard with the headlines to think that it's certainly going to be anything that is additive to growth. But we'll manage that. Our teams stay close with clients on a daily basis. And so we're always getting a pre-read, if you will, around what might be happening within the client basis.

There are no further questions at this time. I would like to turn the floor back over to Dave Guilmette for closing comments. Please go ahead, sir.

Thank you, operator. So in closing, our strategic execution is transforming our delivery services and is reenvisioning the client and participant experience. Our progress is making a real impact across our current clients and operations, and we're confident in how that translates to our competitiveness and our long-term growth. Thank you for joining us today.

Ladies and gentlemen that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.