Q1 2024 Alight Inc Earnings Call

Participants

Jeremy Cohen; Head, IR; Alight Inc

Stephen Scholl; CEO; Alight Inc.

Jeremy Heaton; Operating CFO; Alight Inc

Katie Rooney; Chief Financial Officer; Alight Inc

Gregory Goff; Chief Technology and Delivery Officer; Alight Inc

Scott Anthony Schoenhaus; Analyst; KeyBanc Capital Markets Inc.

Kyle David Peterson; Analyst; Needham & Company, LLC

Peter Heckmann; Analyst; D.A. Davidson & Company

Peter Christiansen; Analyst; Citigroup Inc.

Tien-Tsin Huang; Analyst; JPMorgan Chase & Co.

Presentation

Operator

Good morning and thank you for holding. My name is Eva, and I will be your conference operator today. Welcome to Allied First Quarter 2024 earnings conference call. At this time, all parties are in a listen only mode. As a reminder, today's call is being recorded and a replay of the call will be available on the Investor Relations section of the company's website.
And now I would like to turn it over to Jeremy Cohen, Head of Investor Relations at Allied to introduce today.
Correct.

Jeremy Cohen

Good morning, and thank you for joining us earlier today, the company issued a press release with first quarter 2024 results. A copy of the release can be found in the Investor Relations section of the Company's website at investor dot aligntech.com. Before we get started, please note that some of the Company's discussion today will include forward looking statements. Such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in the Company's filings with the SEC, including the Company's most recent Form 10-K. As such, factors may be updated from time to time in the Company's periodic filings. The Company does not undertake any obligation to update forward-looking statements.
Also, during this conference call, the Company will be presenting certain non-GAAP financial measures. Reconciliations of the Company's historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's earnings press release.
On the call from management today are substantial CEO. Jeremy Eaton, CFO, Greg Goff, President and Katy Rooney, who as announced earlier today will be stepping down from her CFO position and focusing on the CO. role supporting the payroll and Professional Services divestiture until closure. After the prepared remarks, we will open the call up for questions. I'll now hand the call over to Stephan.

Stephen Scholl

Thanks, Jeremy, and good morning. It's an exciting time for like with our first quarter highlighted by the announced sale of our Professional Services segment and HCM payroll outsourcing businesses, which remains on track to close midyear 2024 executing this transaction is a key priority for the long-term trajectory of light. And we have seen tremendous collaboration across both organizations as we prepare our clients and over 8,000 employees for this transformational deal.
Based on the great progress we have made to date and looking ahead to the closing of the transaction, we are reaffirming our midterm outlook on the remaining business with revenue growth of 4% to 6% fee-based revenue growth of at least 15% and adjusted EBITDA margin of 28%, which would market total of 600 basis points of margin improvement versus 2023 This will be complemented by a stronger balance sheet, including net leverage below three times enhanced cash flow generation and an investor-friendly capital allocation framework supported by $248 million of authorized funding for share buybacks. With this attractive financial profile, we will emerge as a more simplified focused company steadfast in its mission to keep people healthy and financially secure Turning to the quarter and then our view of 2024, we started the year with total company revenues, excluding hosted nearly flat as lower nonrecurring project revenue, offset strong growth of 22% from our BPO solutions.
The VAS revenues represented more than a quarter of total company revenue. Profitability remained stable as testament to our transformational efforts that have delivered productivity savings and building off a strong 2023. Our operating cash flow conversion was 67% in Q1, up a full 20 basis points from last year. Given our typical seasonality. We don't anticipate continuing at this rate all year. However, by completing the restructuring program and continued execution on working capital initiatives, we are well positioned to drive stronger cash flow generation for the balance of the year. We expect 2024 to be a tale of two halves with the first half adversely impacted by the timing of large deal go-lives lower nonrecurring project revenue across both segments and the exit from the hosted business. Second half will benefit from an increase in new deal go-lives for which we have high visibility today as we continue to build the book of revenue under contract, which at quarter end was up to $3.1 billion for 2024 for the total company, coupled with sales momentum and operational execution. Our growth will ramp this year and quickly return to our midterm revenue growth target before year end. Our confidence to sustain that growth post close is grounded in the recent history of the benefits business, which since 2020 includes a 10% total revenue CAGR with be passed as a driver at over 50% growth it has resulted in a $700 million increase to revenue under contract profitability will also improve through multiple levers, including an immediate uplift to margins.
Upon closing the transaction at the same time, we are on track to complete the back-end cloud migration in the second half, which should be a key inflection point for profitability with the data center exit. We continue to expect $100 million of annual run rate savings for the total company with a light retaining approximately $75 million of the annualized benefit. Commercially, we continue to close meaningful bypass deals, and our results demonstrate that our strategy is working this quarter included large expansions with existing clients where Light continues to bring a differentiated set of solutions integrated through the Alight workflow platform with one of the world's leading diversified manufacturing companies. Our team demonstrated the value and outcomes with a real life story of health care navigation during the sales process and executive asked if we could help one of their employees and family who was facing a health care crisis, our team quickly mobilized by leveraging both the technology and our medical experts to bring the right support and care to this family. And through this example, the company immediately saw the value and impact the solution delivers while our value engineering team quantified the definitive ROI for rolling out the solution across the Company.
And another example, our team closed a $50 million public sector contract where we will provide the technology administration and domain expertise across 60,000 active members we won because our decades of experience in this space, working with the largest organizations have solidified a light as a tested and trusted partner. These wins are a microcosm of what we're seeing broadly. Large enterprises are continuing to invest in their people and solutions that drive engagement, better outcomes and cost savings for the employer while competitive, we believe the market continues to validate that the winning formula is grounded in a platform-based approach. It simplifies the end user experience. And so as we continue building and closing deals in our pipeline. We're also simultaneously advancing our technology road map and building upon our platform advantages. Ongoing product innovation is core to the platform strategy, and we recently announced the latest release of a light work-life. This biannual release focused on three key areas, strengthening our AI-driven support, deepening the integration of leaves and health navigation and delivery tools that empower greater financial well-being. Taken together, these updates will enhance the employee experience with greater self service and personalization features and deliver improved employer are allied with greater functionality and improved cost savings.
I'm also excited to discuss the leadership announcement this morning, which is the result of thoughtful long-term planning publicly demonstrated by Cadence promotion into the COC. last summer. By extension of our promotion. Jeremy partnering closely with Katy for natural succession into the CFO role with the global finance team reporting into him for the past nine months, I am thrilled to have Jeremy officially in the CFO role as he leverages his in-depth knowledge of our business, finance function and investor base to advance our strategic initiatives. And with this transaction as a turning point after 15 years with Aon and Alight, KT will now focus on the COO role supporting the closure of payroll and Professional Services divestiture, after which she will step down. Katy, as many of you know, has been instrumental to the foundation of a light and our public listing. Personally, she has been a tremendous partner to me and a visionary for what a light has become, though we will miss her. She has built an outstanding team that we are confident we'll continue to execute on our transformation moving forward.
I'm also pleased to announce Greg Goff promotion to President of light, which includes this continued oversight of product technology and delivery. Gregg and his team have moved mountains with our infrastructure planning and post transaction. His voice and expertise with AI analytics and platform will be even more important overseeing product and delivery. Greg is the best positioned to lead our teams and integrating our platform technology with our world-class services on a day-to-day basis for clients. And we look forward to him taking on a more public facing role.
As you may have seen through recent investor meetings, including today's call, we're excited about what you've accomplished in his new position as President. My congratulations to Katy, Jeremy and Greg on their next chapters and my heartfelt thanks to each of them. And as announced on Monday, we are also pleased to have reached a constructive settlement with Starboard who sees the value and where we are headed and we look forward to their continued engagement and support. We've added two new Board members, David Gill, met and Teresa rushing and welcome their deep domain expertise and diverse perspectives. As we collectively put a light forward over the past two years, we have now refreshed half of our Board. Overall, we're moving fast. And as I stated, executing the transaction is a key priority to achieve our long-term goals. None of this is possible without the hard work of our colleagues who continue to serve our clients with excellence, their dedication to our clients and to each other is how we will continue to succeed and is why we recently had the honor of being named a top 100 places to work by Fortune magazine with that, I'll turn it over to Jeremy to walk us through the financials.

Jeremy Heaton

Thank you, Stefan, and good morning, everyone. I wanted to add my personal thanks to Katy, who has been a tremendous mentor and surround me with a winning team. I like the opportunity ahead is a testament to her hard work team building Envision. I'm honored and excited to lead the team forward, continue driving the transformation of our company and to spend more time with many of our key stakeholders.
As Stefan said, closing, the transaction is front and center across our organization and is on track to close midyear, which will accelerate many of our strategic and financial objectives.
Upon closing, we estimate an immediate 300 basis point increase in our pro forma adjusted EBITDA margin to approximately 25%, which includes an estimated $20 million of dissynergies that are temporary and will be managed out within one year post closing shortly after the closing, we expect to use net proceeds from the upfront $1 billion payment for debt paydown as we delever to below three times. And importantly, the difference in proceeds from gross to net of approximately $250 million will be 90% weighted toward paying down the TRA liability and will be paid in 2026. The remaining 10% will be a tax payment. The additional $200 million seller notes should follow in a similar structure in terms of gross to net of that $50 million is noncontingent and $150 million is performance based tied to the 2025 adjusted EBITDA of the divested business serving as downside protection on performance at current levels, coupled with our commercial agreement. This framework will drive continued focus on the shared success of both companies. Given the pending transaction, we have transitioned the payroll and professional services business into discontinued operations going forward, a light financials will be presented on a continuing operations basis. However, this quarter we will also disclose our metrics on a total company basis. So you may more easily compared to our prior results. As you review the split between continuing and discontinued operations, I would note that we believe the continuing operations income statement understates the true earnings power for Allied. For example, the continuing operations financial results are fully burdened from certain shared costs that will move upon separation post-close. We expect EPS upside from the planned debt reduction, improved margin profile and a more aggressive buyback program.
And now to the quarterly financial performance, I will be speaking largely from a total company basis as it's more easily compared to history and prior guidance, total revenue was $816 million, a decline of less than 1% when excluding the impact of the hosted business. Importantly, our high-growth category of B pass revenue increased almost 22% and represented more than a quarter of total revenue for the Company. Revenue from our non-BPA solutions were impacted by several items. First, as I mentioned earlier, we no longer generate revenue from the hosted business, which delivered $10 million of revenue in the prior year.
Second, as Stefan mentioned, our nonrecurring project revenue finished below expectations by approximately $15 million, split evenly between professional services and employer solutions.
Finally, the impact on go-lives from softer bookings in early 2023, we expect a more favorable trend later this year where we have revenue under contract supporting our growth plan.
Adjusted gross profit was $278 million, with margins nearly flat at 34.1% and adjusted EBITDA was $4 million lower at $150 million. Despite the revenue decline, we continue to benefit from our productivity efforts, which helped offset much of the revenue impact from a profitability perspective. In addition, our cash flow continued to expand materially. We generated operating cash flow of $100 million, reflecting growth of 39% or $28 million more than the prior year. This represents a conversion rate of 67% compared with 47% last year and is driven largely by continued focus on working capital efficiencies. Capital expenditures in the quarter were also lower by 20%, and our free cash flow improved significantly.
Spending on our restructuring program resumed in the first quarter following the planned slowdown during annual enrollment last year. We continue to target the second half of 2024 for completing the cloud migration and expect to see financial benefits in late 2024 with full annual run rate savings in 2025 of the expected $100 million of run rate savings. We expect the majority approximately $75 million to remain with the light.
Turning to the balance sheet, our quarter end cash and cash equivalents balance was $286 million, which includes $30 million that is in current assets held for sale and total debt was $2.8 billion.
As it relates to interest expense, continuing operations carries the full interest cost. Today, we expect after paying down debt post transaction to under three times annualized interest expense will be a tailwind for profitability while also providing greater balance sheet flexibility. Similar to our fourth quarter, there was no repurchase activity. Given the strategic portfolio review and subsequent transaction announcement, we upsized our share repurchase authorization by $200 million and now have $240 million of availability, enabling a more consistent and aggressive buyback plan going forward.
Turning to our outlook, while we'll formally update our 2024 guidance following the close of the transaction, I do want to provide some color on our near term expectations. We continue to build revenue under contract, which for 2024 is now $3.1 billion for 2025 is $2.2 billion and for 2026 is $1.6 billion. Our sales momentum continued to provide greater long-term visibility. Directionally on a total company basis we view the second quarter similarly to the first quarter from both a revenue and margin perspective, consistent with what we have said about our performance, we expect it to be second-half-weighted We still expect 2024 revenue growth to ramp through the second half of the year with continuing operations revenue growth being in line with its midterm outlook of 4% to 6% before year end as we benefit from new deals going live. We continue to watch our shorter-term project revenue pipeline and any impacts from the macro environment, and we will look to offset potential headwinds with continued growth in new deals.
From a profitability perspective, we expect to see benefits from our customer care efficiencies, which comes predominantly in the third and fourth quarter as our teams execute through the annual enrollment process as well as from our restructuring program that I mentioned earlier. This progress and visibility enables us to reaffirm our midterm outlook. Overall, we're making significant progress on a day-to-day basis while diligently working to close the transaction in my new role, I look forward to meeting those of you. I have not yet had the pleasure. I would like to thank all of our light colleagues around the world for what they are doing every day. This concludes our prepared remarks, and we will now move into the question and answer session. Operator, would you please instruct participants on how to ask questions?

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by number one on your touchtone phone. You will hear from that your hand has been raised. Should you wish to decline from the polling process, please press star followed by number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question, your first question comes from the line of Kevin <unk> of UBS. Your line is now open. Please ask your question.
Great.

Thanks so much, and congratulations to everybody on all and the management changes.

Jeremy Heaton

Best of luck.
Thanks, Kevin and extend and Thanks, Kevin.

Sure, Jeremy, that is the context on the guidance, which was super helpful. Is there any way to think about kind of the total revenue 2024 relative to the initial guidance, realizing there's a there's a lot of moving parts there, but just any way to think about that and are you seeing any G any initial thoughts and from the customers on some of the recent changes around the sale of professional services kind of the payroll business? Just any initial thoughts there would be for sure.

Jeremy Heaton

So maybe I'll take the first part and then give it to Katie for the second, just on the deal and with clients, I'd say for 2024. As we said, we will come out with the formal guide on on one to fund the remaining business once we get through the close, I'd say that the one element that we talked about has been the nonrecurring project revenue on and as we said before, but we expect growth to ramp. We can see the revenue under contract building today as we have continuing momentum building on the sales on the booking side. And so we still see that path in that build and expect to be, by the way by the end of this year at a growth rate that was within the midterm outlook that we've laid out. So I think all else equal versus what we talked about several months ago, we're seeing it line up as we expected, and we just need to continue to focus on the bookings momentum and the sales team and our operational execution.

Katie Rooney

And Kevin, I think just on the deal. Listen, it's progressing really well. As you can imagine, we're talking with all of our major clients and they're asking really good questions. But I think the great part of this deal is we maintain that level of commercial partnership and partnership in terms of the delivery and execution and so on. Neither neither side wins, if we don't you know, navigate and laminates for customers in a kind of thoughtful way. And so again, we're working through that. And I think customers have been really good partners as we continue to do that and think we're on track.

Great.
And then just real quick helpful commentary on the buyback. Can you be in the market where the deal closes now and everything's been disclosed or is that something because it sounds like you upsized the buyback, which directs, is that something you have to wait till after the deal closure or could we expect some some some activity before the transaction close?

Jeremy Heaton

Good question, Kevin. So as we've said, the deal's on track. So that's our focus right now in terms of getting that to close here, middle of this year. That being said, we continue to assess our portfolio composition and the strategic alternatives just to ensure we're maximizing shareholder value for the company upon the closing of Axiom. And so with that, we'll be open in the market as we can as we go through that process.

Thank you.

Jeremy Heaton

Thanks, Kevin.

Stephen Scholl

Thank you.

Operator

Your next question comes from the line Scott of KeyBank. Your line is now open. Please ask your question.

Scott Anthony Schoenhaus

Hi, team up.
Apologies.
I've had several earnings calls this morning. I believe you mentioned a $15 million impact revenue impact split evenly between employer solutions and professional services. Can you guys just provide more color on that if I missed what you provided color earlier on what exactly happened what that shortfall was if that continues into 2Q? And then a little I have a follow-up question on that, the 2Q kind of guidance.

Jeremy Heaton

Sure. Sure, Scott. Good morning, Scott, so yes, let me provide a little bit more color there. So Employer Solutions revenue was down 1% year over year and professional services was up 2% year over year. Importantly, to your point around project revenues, that was really the driver across both segments as both were impacted on the project side, project revenue and Employer Solutions was down 11% and project revenue and professional services was down 3%. And so that was the driver as it's split across both of those, both across both of those segments, the driver in professional services is just lower deployments, a little bit of that's timing. Again, that's Workday SAP deployments that we see and drives the project revenue in the professional services business and the project revenue on the Employer Solutions side is really in the health business, driven by benefit plan changes and lower regulatory changes that drive projects in that business. And so as we look at it today. As you know, it's a shorter sales cycle as it's a nonrecurring business. We do expect and it's what we were, as I talked to and gave some color on the second quarter. We don't expect to see a very different profile in the second quarter, but that starts to ramp as we get into annual enrollment within the health and wealth businesses that really starts to ramp with project work around the annual enrollment process. And so we do see a better path and are building the revenue under contract in that space later in this year.

Stephen Scholl

And that's really how we think about the ramp that I think to your point, Scott, about looking ahead, this is the big one of the big reasons why we pushed so hard to have us sell some of these components of the business that volatility of the people-based business, as you've heard me say, in a few calls, $10 million here of $15 million there. Those are three or four or five projects around the world that just start later. So not having that as part of our portfolio as we head into the back half of the year, it's going to be really helpful in building a more credible com backlog of business with a much higher percentage of recurring revenue as part of the baseline. So much less volatility.

Scott Anthony Schoenhaus

Absolutely. And thanks for all that color, guys. And just as a follow-up, Jeremy, on the actual 2Q, when you said it's similar kind of results this first quarter, do you mean that from like an absolute basis as a trajectory, you don't mean like we've had flat pretty flat growth from second quarter like we saw the right kind of up.
Yes.

Jeremy Heaton

So Tim, a similar growth rate and EBITDA margin in the secular growth rate.

Scott Anthony Schoenhaus

Okay. All right.
I'll hop back into what you think us.

Jeremy Heaton

Great. Yes.

Operator

Thank you.
Your next question comes from the line of Kyle of lead. Have your line is now open. Please ask your question.

Kyle David Peterson

Great. Thanks, guys. I appreciate you taking the questions. I just wanted to drill down again on the first quarter results again, kind of inter-quarter, you guys had said expected things to be maybe some top line about flat year over year. I think that was in March. So I just wanted to see and on the Delta kind of what drove the shortfall in the last few weeks there end of that, like kind of what is going to still be part of the life after this transaction goes through? And why is more in the discontinued ops?

Jeremy Heaton

Yes, it's split about half-and-half between what goes with the deal style and what stays as part of the benefits RemainCo business is the mix between the two, as we've talked about, it's a shorter term, in some cases can be very if we can, within a week out, build the pipe and execute on the revenue generated around the project business. So there are elements there as we look at when we build the pipeline and execute through, it can can be very quick. And so that was the dynamic that was different for us this quarter. Versus where we had our expectation set in terms of where we were going.
The other elements that we had already talked about, we knew we had the compare with the hosted business going away. We also knew that we had timing softness last year, which which drove the ramp that we're going to see in the growth side on coming into into 2024. Maybe I don't know, Greg Goff with us who leads delivery and product and maybe give you a flavor for some examples we're seeing today is, as we think about commercial execution and progress.

Gregory Goff

Yes, hi, good morning. Just a little bit of commentary on a little on project and then a little bit broader. I mean, I think on the project side, as Jeremy said, that's typically driven by regulatory changes, plan changes in M&A activity among our clients. And so we just saw a little bit lower activity there, but we're bullish on that going into the sort of second half?
As Eddie said, I think more broadly, as we look at commercial activity going forward, the strategy that we've been on and we see we see resonating still in the market, right in terms of cost being top of mind for clients in terms of the integration and employee experience being very top of mind for client and clients. And the platform strategy resonates right, coupled with really strong delivery and care. And I think we're really well positioned to that as we head later into the year.

Kyle David Peterson

Okay. Yes, that's helpful. And then I guess just it does seem like this year kind of a follow-up here. I guess this does seem like this year, the trend will be fairly back-end weighted. But I guess is can you just remind us on the timing of ramps for some of these deals from last year's bookings as to what the kind of lag time is on some of these deals before they start contributing to revenue? And just how we should think about the progression from here?

Jeremy Heaton

Sure.
It's I'd say and an average basis of 12 months is the right way to think about it. Carl made it smaller, more vanilla. I'd say deals can be as early as six months and some as you know, the the some of the bigger deals we've talked about can be 18 months or more. And so as you think about the bookings and the timing, as you looked at last year, you start to get to that 12 month point as we get into the second half of this year. And then you also start to think about the calendar year, which can be important in parts of the business. And so you start really the enrollment work happens within the third quarter and the fourth quarter where we start to generate the revenue on those deals and then certainly fully live in January. And so those are those are the elements that as we look at the revenue under contract today by quarter compared to prior years. You start to see where the ramp is and which drives our growth in expectations this year, again, we'll and we'll come out, of course, as I said, with more a formal guide on the remaining bit of that business as we go forward when we close the deal.

Gregory Goff

And I said this on the last call to Kyle, right, and when I said the word tale of two halves with deals like thrift fully online in the first half of this year, a lot of big deals were brought online last year. So the compare in the first half, as you know, it's 10% CAGR over the last couple of years. On the revenue side, we added $700 million of backlog as I said, I wish in a perfect world, amended thrift ends. You get GE. online. Nobody wants another another one of those massive deals that we announced, not only the last year, but in the prior year. So that's going to be coming online in the second half. So you start seeing some of the bigger deals that we've closed, but it's not a it's a volatile dynamic, right? But so it's hard to see with an accordion just have to take a step back sometimes and let history be it Sky, right, as I said, if you look at the last three years, 10% CAGR on an on an average basis and our $700 million more in backlog

Kyle David Peterson

makes us appreciate the color

Jeremy Heaton

Thank you, Scott.

Operator

Your next question comes from the line of Peter of D.A. Davidson. Your line is now open. Please ask your question.

Peter Heckmann

**Hey, good morning, everyone.
I wanted to follow up and just see how the story the Alight story is being received by clients as we get a little further away from of great resignation and wage inflation. It has there been a shift in terms of what benefits the Lite can bring to a company? Has there been a shift in terms of what companies value or what they're attracted to in terms of why they would make a change?

Stephen Scholl

Yes, great question, Pete. We talked a lot about this in the calls in the last few earnings, right? The sentiment across our Fortune 100 or Fortune 500 client, as you as you know, we serve 70 plus of them and half the Fortune 500. So we're very deeply entrenched in every single client union. I have and I'll ask Greg to jump in in a minute, but because he's done, he just did a big 30 day tour with lots of big clients the sentiment is the same, which is the CHRO, CFOs and CIO.s. Those three departments are banding together more than ever before. And when you think about what I said over the years, the space of ERP, supply chain, financial systems and controls. Those of all for the last 20 years gone from best-of-breed enterprise. And I've said this for over four years. This employee population in terms of how we engage with them across these systems is a multitrillion dollar cost base when it comes to health. And that hasn't been consolidated right so the engagement capability still is 30, 40, 50 different systems. So the pressure of employee of employers to cut costs is at a at an all-time high. It hasn't abated at all. And so we're going in with a much more sophisticated model around value engineering and ROI.
Greg can talk to a couple of key deals

Gregory Goff

just to just to give you an example.
I was with a big client a couple of weeks ago and the defense at the CHRO side and the CIO. side are now working together more than I've ever seen at these large clients as cost becomes a pressure, right? And the IT side of the world is typically very good at managing cost. And so the story of platform, the idea of consolidating spend the idea of doing that while still delivering a more compelling employee experience resonates right, but that's also, you know, departments within clients working together that typically haven't worked together on that. And so we provide a lot of that, that kind of stitching together of how to bridge the IT world, how to bridge that the HR world and the employee world back together. And I've seen that U.S. defense that I have with a lot of clients over the last couple of months.
And I see that as a very consistent theme, certainly among our largest, and we're continuing to still see these big deals. And it may be the last piece on this because kind of a long answer, but it's an important topic is a lot of our biggest clients looked to Microsoft or ServiceNow as that integration platform messages on a few calls before.
Right?
And what's kind of what's come back from those departments is they're good companies. They're amazing places to integrate on, but they're static platforms. They're not dynamic platform. So they find that when people log into these front doors of ServiceNow. It's just more informational than it is transactional because we own the sources of data. So remember, our approach is the best of both worlds we own the most important set of data over $3 trillion of information across health and wealth comes through our transaction engines, populating that through WorkLife and then engaging the employee before they actually make the decision is how you take cost out is how you take complexity out and Microsoft, ServiceNow, Oracle, all the ones that have been trying to become these front doors even worked down some of the cases we have more content than some of them do. That's our secret sauce is the connection of those two components, and that's what's giving us an advantage still today.

Peter Heckmann

Great.
That's helpful.
And any surprises in terms of the market reaction to the announcement of divestiture either from current clients, prospects or even software partners idea you'll be any yes, any indigestion there as you've as you separate those two, those units, you have had a clearly a lesson that

Katie Rooney

I actually would say it's Ben, really positive overall, I mean, even with the vendors, the idea of having that one, that integration of professional services with payroll, right in a global platform with focus and investment really resonates and I think to with clients again, remember, we're trying to deliver the best of both worlds here. So you'll have the focus and investment for the payroll and professional services business along with. So the remaining life businesses with that continued integration. And I think that's really what's important. So that when you think about the experience for the client, it won't change the integration behind the scenes will be slightly different. But that partnership, that experience, that interaction model will still be valid, which I think has really resonated with them with folks

Gregory Goff

This is Pete.
I said this on the last call, people get it that when we do the payroll processing payroll and running a professional services business around SAP or Workday, those are full-time jobs, right? And those were divisions within a light. And that's why I keep saying being in that heavy labor-based or have a heavy capital intensive payroll business that takes a 100% effort to do right. And we did well with it. Don't get me wrong, I loved it. It was a great contributor. But now having somebody completely solely focused on that. And then as Katie said, with a strong partnership because they still want to come through work life as a platform to drive the engagement processes, that's kind of the best of both worlds. So we're pretty excited about it.

Peter Heckmann

Okay.
That's great to hear, and I'll get back in the queue and I continue to monitor.
Thanks, Bill and greetings.

Operator

Your next question comes from the line of Peter of TT. Your line is now open. Please ask your question.

Peter Christiansen

**Yes, good morning.
Thanks for the question and also congrats to market and best. Best of luck to KD on care starts that start sorry, multiple calls going on right now. I'm just curious on the bookings front. Sounds like there's been a little bit a little bit of momentum there. Just curious if and also the divestiture to just a simple or sale and you think perhaps maybe convert sale conversion and how do you think that improves now with some with the post divestiture?
And then a quick follow-up.

Jeremy Heaton

Thanks, Pete. And I listen, as we talked about the revenue under contract, which I think is important now that we disclosed the three years, you can see growth in both 2024, 2025 and 2026 as we're building the book. So we are seeing the results of continued momentum in what we're doing. I think with that focus, you do see you see more pipeline, you see better conversion. And I don't from a deal perspective, it's maybe harder to say on the you know, the simplified view of what the business is going forward and what we're driving. But that today includes all parts of the business. So again, you know, as I think through the the commercial agreement that we have with the business being divested to HIG, the shared success that we will both see from what we're doing and we're building the book of revenue under contract that's going to benefit both of the businesses and supports our ramp in growth. And we're really excited, again, getting this deal closed for the light business. And what it means going forward is we've got a great track record here of history and growing this business. We can see the ramp and the revenue under contract and it's profitable growth, right? We are really excited that we come out of getting the deal closed. We get the immediate margin uplift. We're higher recurring. So we have less of this volatility on the project revenue side, better cash flow, lower leverage and flexibility for us to operate the business in a simplified way. So I think all of that works by you're right, we are seeing the momentum on the commercial side, and it's important for us to just drive that greater visibility for ourselves. But importantly, for you and investors as they see the revenue under contract.

Stephen Scholl

Bill, if you want.
The only thing I would add to that, Pete, is on the people front. As you know, in the last year with Greg George, coming on the new vice presidents, we've hired the professionalism, the scalability, the capability of driving these larger enterprise deals on one end yet still going after the call the other smaller best-of-breed deals, we've really gotten much better at that. And so I've been really pleased with the progress around the hiring and recruiting, and we have top talent from I mean, we've hired probably some of the best reps from most of our competitors that are here right size. I always say it's great when clients vote with their wallets, but it's even better when people but with their careers. And so we've been able to recruit some incredible talent in commercial, as I said,

Peter Christiansen

it's helpful.
And then post divestiture, I would imagine the picture or the potential for allies to form some solid go-to-market partnerships, perhaps with other payroll providers, there's an opportunity there. Just curious if you have any comments on that and if you see any any windows there to partner with another player?
Thank you.

Stephen Scholl

Yes, that's an absolute. I mean, the topic we don't talk a lot about is the AI. topic, I guess I just said trillions of dollars of not dollars, but trillions of data sets are run through our platform on the wealth and health side. And every client is asking us continuously to leverage this consolidated platform to do what leverage analytics AI to give a recommendation engine down to the individual level. As you know, in the health and wealth world. Everything is is based on job codes. It's never down to the individual level. That's never been the somebody know that's never been done at the level of specificity that we want to get to. So our partnerships are with some great AI companies. Maybe, Greg, you want to jump in?

Gregory Goff

Yes.
I mean, I think to your question, certainly, it opens up more possibilities, but that's something we pursue even today.
Right.
In terms of I think we have a very unique asset in terms of the data we have. We also have unique assets and they are AI and intelligence that we provide among and on top of those datasets and is in the domain of defense that earlier of health wealth well-being, which is very unique to us as opposed to a more sort of general software players. And so we're additive to those any datasets that we can get, whether that be payroll as you mentioned, that could be financial data sets that can be social datasets that can be anything health and wealth related. Those are all accretive to the outcome that we can provide. Ultimately on behalf of employees.

Stephen Scholl

And then maybe the last piece because I don't it's not a secret. You know, I said ServiceNow and Microsoft rather than debating who's a better front door for our topics. We realize there's room for both. What ServiceNow does is amazing on a lot of case management capabilities around help desk and providing a lot of skill sets there but what we provide is really around that central nervous system around employee engagement. We are that better front door. So that needs to be either or same with Microsoft. They both realize that there's a strong partnership between the two of us rather than competing with each other like we have in some cases years back. So I think that's also exciting realization that all help our clients.

Peter Christiansen

Okay.

Operator

Thank you,
Secondly, your next question comes from the line of Joseph Vafi of Canaccord. Your line is now open. Please ask your question.

Hey, everyone, good morning. Congrats on everybody's new roles and to Katy.
Best of luck come after the close on the deal on Pecem, maybe just a lot of questions have already been asked, but maybe we could get a little update on where you see the macro, what clients are saying, how that may be affecting the cadence of discussions on new bypass deals and now have a quick follow-up.
Yes.

Stephen Scholl

Listen, as I said, kind of earlier, what we see is the continued dynamic of pressure in our install base, especially who we serve we serve the largest companies in the world. And every single CFO, when I've talked to CIO. and CHRO are collectively trying to figure out how to get employees spend down how to drive engagement across these disparate systems. So that theme is as loud as ever, yes, there's no abatement of the activity. So our investments in value engineering, our investments and in driving outcome-based deals versus transaction based deals, I think is the most exciting chapter ahead because we're the only ones when you go to our client base and consolidate the data set, we are underwriting two cost takeouts, but by driving better processor engineering, I think that's the holy grail that so few companies ever achieve, right? So most companies get stuck at the transaction level. And as we all know, the most powerful companies in the world truly are platform companies, right? I mean that's there's no debate about that. And so that's been our journey for the last 4.5 years on that path. We've also had to modernize our technology over the last four years. So in four years, we're undoing 40 years of history. And as everybody else on the call knows, so few companies at scale tackle that problem, right? Most of them are Band-Aid solutions. So we've done the heavy lifting so at the end of this year, by being out of our data centers, will also then allow us to be even more flexible in tooling and capability and being able to configure a truly personalized platform for a retail client that's going to be very different than a banking client that's going to be very different than a manufacturing client. So we continue to evolve our platform and technology to the needs of our clients and really helping bring together an end to end true employee engagement platform, which up until today has not existed by any company to have to truly drive an effective outcome for clients.

Jeremy Heaton

And maybe, Joe, what I'd add is you can see in the results the past revenues being up over 20% for both the total company and the continuing operations business. So you're seeing demand across the board in that space. And I think you look at those results in the totality of the company. But then you also in the prepared remarks, Stefan talked about the example of the client, right, where you had a a critical medical need for somebody within the HR organization and really saw the value on a personal basis of the combination of the technology that we have, but also medical, the medical expertise and the services that we bring together with that to drive a solution for a family in need. And that's really the ITO as a singular point.
As you think about how we drive the value and outcomes and how we showed that to that particular company. So as Stefan said, demand in that space, right? We're in a differentiated space and the value proposition that we have and what we're able to do, and I think the results show that.
And then finally, as in the macro, we'll always watch the nonrecurring part of the business, right? We're pleased that part of that. It goes away with the deal and some of that volatility. But in the benefit space.
On the project side, it's a little bit of you're always watching what that pipeline is the shorter term sales cycle. M&A and regulatory, as Greg talked about, are areas that drive project revenue. So we watch that. But again, as we go to a business that is greater than 90% recurring revenue that becomes less of what we need to be able to what we have to watch from a macro perspective.

Sure.
That's helpful.
And then I know you mentioned the Board composition has has changed, I think, at about a 50% clip over maybe the last year or so. And maybe that's reflected here have some changes that are going on in the organization, but how does that change in the Board composition effect strategy or any other interesting points or salient point threshold relative to the board driving strategy are thankful.
Yes.
Thanks for that.

Stephen Scholl

And we've been very thoughtful since a major sponsor, as you know, has left the Board. We've been able to fill that with some great content and voice of client capability. And so for us, we always look for ability to speak to product and technology speak to industry the notion of what it means to be in the wealth business, the retiree business, the benefits business in its entirety. So with voice of client around that, in terms of CHRO. position, voice of industry technology and product. And then, of course, no good stewards of cost and and financial horsepower, right? So I think we have a really good cross-section of capability. And then we also have really strong. Where's the puck going as I I'm a Canadian. So I can say that, right? Where's the puck going to be to where they are versus where it is. And so our Board is very thoughtful on while we're always in this 90-day cycle, as you've heard us say, we're willing to sacrifice a 90-day or even a six-month window for the longer-term strategy this company, right? Because many have asked, you know, you're selling some pretty good growth assets here. And but you've seen the history of this business, which is it's very volatile. And so we're making some big bets on better profitability. And Jeremy used the word profitable growth two or three times. So the orientation of the Board around thinking long term, more profitable growth orientation, even though it may mean some as we said, tale of two halves this year, it's worth it right? It's worth it for the long-term game. So strong, strong Board support for that objective.

Great.
Thank you, Stefan.

Stephen Scholl

Yes, you bet.

Operator

Your next question comes from the line of Heather from Bank of America. Your line is now open. Please ask your question.

This is Emily on for Heather Balsky. And I'm wondering if we can look at the go forward business, how did 1Q sales perform versus your internal plan? And are there any areas of upside or community that you are?

Jeremy Heaton

Hi, Emily. Morning.
Sure. So I'd say the drivers of if you think about the remaining business in growth. It is a ramp this year, as we said, and we expected all along given the timing of the bookings from last year. And of course, the hosted business today, that comparison sits within the continuing operations. So that's a couple of points of of of a driver of the headwind from a growth perspective.
The one piece as we've said already, is that what's different in our from our early expectations was the nonrecurring project revenue, which is split between both the continuing operations and discontinued. But we continue to build the revenue under contract. The bar, the B pass revenue growth within the continuing operations was over 20%. The revenue under contract is growing, and we continue to see the build of from from commercial execution and on the operational side. So I would say the only thing was just that nonrecurring project revenue. But otherwise, we feel good and we'll come out with formal guidance on this business when we close the deal.

Thank you.
As a follow-up, the revenue under contract on, that's for the total, do you have it broken out for Amgen, we have not.

Jeremy Heaton

So that will be part of the guidance that we give and disclosure when we close the transaction. But you can you can think about it relative to the size of revenue, they're slightly higher on the revenue under contract on the remaining business, just given the profile of that business.

Stephen Scholl

Okay. Thank you.

Jeremy Heaton

Yes.

Operator

Your next question comes from the line of Kian Chan from JP Morgan Chase. Your line is now open. Please ask your question.

Tien-Tsin Huang

Thanks so much and know a lot of moving pieces, but just on the free cash flow side, the operating cash flow conversion. Can you give us some directional views here in the coming quarters on that?

Jeremy Heaton

Sure, more intention. So yes. So as you said, op cash flow was $100 million in the quarter, so up almost 40% versus versus last year. So which was the conversion of 67%. We guided this year to 55% to 65%. I would say that's still the frame we're in. There's obviously seasonality plays. It plays a part in terms of what we're seeing, but generally speaking, 20 points up year over year. We are driving we've got a big focus around DSOs, working capital efficiencies, how we're generating revenue earlier into transactions that we're doing in deals. And so we're seeing the benefits of that as we as we come through.
So the cash flow development on an operating basis, we were really pleased within the quarter. And as I said, with capital expenditures also down 20% and drove drove a pretty significant more than doubled the free cash flow for the business in the quarter and I think the only thing I'd add and Tengion is there will potentially be some additional transaction expenses in the second quarter.

Katie Rooney

But then obviously those go away in Q3 and Q4 so you'll see in our kind of as you think about the seasonality of it, you know, down a bit in the second quarter and then back up in Q3 and Q4 that's good.

Tien-Tsin Huang

That's helpful. That's helpful. So on my follow-up, maybe just a bigger picture. One for you, Stefan, just with the cloud conversion on the way, almost they're open, go into a lot of these different user conferences and investor days. It feels like the theme again towards not surprisingly, componentization modularization and amplifying everything. So this whole best of breed versus best of suite conversation comes up a lot. What does that mean for for a light as you guys have been going down this monetization journey yourself? I mean, do you see more thread as you're going through this from point solution providers? And I'm just curious what what what the latest thinking is there.

Stephen Scholl

Yes.
It's been the one we've talked quite a bit about before, right. And if you look at, you know, my history, right? And I've been on the forefront of a best-of-breed enterprise and there's all there's not many places left or that battle still exists. And this is the one that I'm in right now. And what I'll tell you is the minute we send a value engineering team into some of the big banks or big utilities or telcos or manufacturings. And we ask some basic questions. How many point solutions do you have across navigation and retiree and benefits under the VSO, your questions. The answer gets between 30 basis points and 50 basis points solutions and you say how much are you spending on that? And it's, you know, you started in and if you add the category of claims. It begins with a B, right? You're talking about billions of dollars of expense. And then you asked those the real home run question, which is what engagement and success are you seeing and you're seeing still I mean, it's still despite those HealthSmart, we've all gotten past COVID tension. It is shocking to see how many big smart companies are getting between 1% and maybe 7% to 8% engagement on some of these key components. So very quickly, the ROROY., when you get the CFO in the room is why are we wasting all this money for so little output? How can we can bend the claims curve, which is still going up between 7% and 12% on average, and that's pure bottom line EBITDA, right? Then you get the CIO. in the room, which has become for us a much, much larger client, especially in the banking world tension. You know this the CIO.s are very powerful individuals now seizing the day a little bit more in that department of saying why do we do it this way, why do we have all these point solutions? So the challenge has been there's been nobody I mean, you see all my competitors in these point solution areas, and they're in there. And there's some talk tracks talking about the importance of engagement and platform yet they just don't have the capability like we do so.
So our advantage still is that engagement, platform level, consolidation of all these point solutions into one place. And then the final pieces we have the financial horsepower and the technology capability. And to your point, you know, we've been doing a lot of deals, even though we've been in the midst of this massive technology transformation when Greg, and that's why I wanted to Greg's his promotion and visibility to clients is going to be super helpful is when we're done this, the tooling and the capability to take data and do a lot more with it to drive a truly individual level experience will be here by the end of this year. So that will really help us in the next chapter.

Gregory Goff

The one thing I would add is, I think just like in every other areas dominated by platforms, the ERP world, et cetera, in this space, slicing up the sort of amplifying of all the individual pieces that sub-optimize the decision process and the outcome you can create for an individual, right? If I'm having to go, transact might leave in one place and that's an individual thing.
Am I going to add transact my benefits in an area. And that's one thing I'm going to have to transact my for one case in a different app. And that's a different thing that's sort of it hampers my ability to create the best outcome for the individual and the best outcome for the employer in terms of what they can utilize. And so we see this right, we see companies choosing best breed. We have to be great at the individual solutions, right, but the overarching opportunities we talk about AI., we talk about intelligence. We talk about our ally is to bring those things together under an umbrella. That's that's really the benefit at the end of the day.

Tien-Tsin Huang

Okay.
Thanks for going through that. And Greg, congrats on the promotion seem to Jeremy and of course, Katy, thank you and all the best in general we toggle.

Operator

That is the end of our question. And answer session. I'll now turn it over to management for closing remarks.

Stephen Scholl

But I really appreciate everybody's time early this morning and appreciate the questions and look forward to seeing so many of you at upcoming conferences. Have a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.