Alight, Inc. (NYSE:ALIT) Q2 2024 Earnings Conference Call August 6, 2024 8:30 AM ET

Company Participants

Jeremy Cohen - Head, IR
Stephan Scholl - CEO
Jeremy Heaton - CFO
Greg Goff - President

Conference Call Participants

Scott Schoenhaus - KeyBanc Capital Markets
Kevin McVeigh - UBS
Joseph Vafi - Canaccord Genuity
Tien-Tsin - Huang JPMorgan
Pete Christiansen - Citi
Emily Marzo - Bank of America
Steven Wahrhaftig - Wedbush Securities

Operator

Good morning and thank you for holding. My name is Ryan and I will be your conference operator today. Welcome to Alight Second Quarter 2024 Earnings Conference Call. At this time, all parties are in a listen-only mode. As a reminder, today's call is being recorded, and a replay of the call will be available on the Investor Relations' section of the company's website.

And now, I would like to turn it over to Jeremy Cohen, Head of Investor Relations at Alight to introduce today's speakers. Please go ahead, sir.

Jeremy Cohen

Good morning and thank you for joining us. Earlier today, the company issued a press release with second quarter 2024 results. A copy of the release can be found in the Investor Relations section of the company's website at investor.alight.com.

Before we get started, please note that some of the company's discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance.

Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are discussed in more detail in the company's filings with the SEC, including the company's most recent Form 10-K and Form 10-Q as such factors may be updated from time-to-time in the company's periodic filings. The company does not undertake any obligation to update forward-looking statements.

Also, during this conference call, the company will be presenting certain non-GAAP financial measures. Reconciliations of the company's historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's earnings press release.

On today's call, when we refer to ARR, we are speaking of annual recurring revenue, which is derived from long-term contracts with high retention. We see ARR as a key metric in understanding our top line growth and will provide transparency to ARR bookings and ARR revenue. ARR revenue may vary based on overall client headcount as our pricing includes revenue per employee.

On the call from management today are Stephan Scholl, CEO; Jeremy Heaton, CFO; and Greg Goff, President. Dave Guilmette, Alight Vice Chair, is also with us today. After the prepared remarks, we will open the call up for questions.

I will now hand the call over to Stephan.

Stephan Scholl

Thanks Jeremy and good morning. Alight had a transformational quarter where we delivered on key strategic milestones. We continue to accelerate our go-to-market momentum, completed our two-year cloud migration program, and now begin a new chapter as a simplified company with higher margins, greater capital efficiency, and a stronger balance sheet.

With the sale of our payroll and professional services business, we gain a new commercial partner and retain a superior financial model. Our adjusted gross margins are 350 basis points higher at over 40% and adjusted EBITDA margins have increased from 21.7% to 25%.

Our singular focus is on our differentiated, technology-rich benefit services business with long-term annual recurring revenue, higher margins, and improved cash flow. We are an industry leader with four decades of experience serving 70% of the Fortune 100 and half of the Fortune 500, and we have created a better experience for our clients and their employees with the Alight Worklife platform, creating a more valuable and durable enterprise.

Deal proceeds were better than planned and we retired $740 million in debt, reducing our net leverage to 2.8 times on last 12 months adjusted EBITDA, we also announced $155 million of share buybacks, which will retire over 3% of our shares.

Completing our cloud migration program has removed decades of tech debt and will generate $75 million of annual run rate cost savings, which is a key component of our additional gross margin and adjusted EBITDA margin expansion to 28%.

We continue to win in the market with our transformed go-to-market strategy. We delivered 9% growth in ARR bookings in the first half of this year, including great wins this quarter from UPS, Wayfair, American Honda Motor Company, and the Adecco Group. We see strong demand for our high-value solutions and expect double-digit ARR bookings growth in the second half of 2024 and continued growth thereafter.

Our second quarter results were in line with the expectations we laid out last quarter. And for our core ARR business, we expect sequential growth through the second half of 2024.

We see increased cost consciousness and lower client demand for our non-recurring project-based work, which, as a reminder, is less than 10% of our revenue. This influences how we think about 2024 and have updated our revenue outlook accordingly.

Within Alight's core ARR business, we expect sequential revenue improvements quarterly through to the end of 2024 and ARR is over 90% of our revenue and comes from long-term contracts with relationships that span decades with some of the world's largest and most complex companies.

As Jimmy will outline in more detail, we have billions of revenue under contract through 2026 and beyond. We are intensely focused on accelerating ARR with our transform go-to-market model and by ensuring our clients and their employees have an extraordinary service experience.

Our revenue under contract, focus on client retention, and high-quality ARR bookings growth will yield revenue growth of 4% to 6% annually over time. Our transform business will generate adjusted EBITDA margin expansion from 21.7% in 2023 to 25% to 26% in 2024.

We also reaffirm our mid-term adjusted EBITDA target of 28%, over 600 basis points of margin improvement. And we are also reaffirming our midterm guidance on operating cash flow conversion of 65% to 80% and maintaining net leverage of less than 3 times. We are confident in this guidance independent of top line growth.

In line with the closing of the divestiture and after almost five years in my role, it's the right time for a new leader to take the company forward in this exciting next chapter. I'm very proud of what we've accomplished during my time, including taking the company public, our cloud transformation with the Alight Worklife platform, and now with the sale Alight is a new company simplified and focused with a tremendous opportunity ahead.

The Board and I have been succession planning for months and we've announced today that I will step down when a new leader has been named. In the meantime, I will continue to lead the company alongside our highly experienced management team, Dave Guilmette, Vice Chairman of Alight's Board of Directors, who will work closely with me to support an organized transition. I want to thank all of our colleagues around the world for their tireless efforts to deliver on these key milestones and delivering for our clients each and every day.

Jeremy, over to you.

Jeremy Heaton

Thank you, Stephan. Good morning. Before I get into the quarter, I have a few notes on presentation. First, the payroll and professional services business is included in discontinued operations. As you review the split between continuing and discontinued operations, I would note that we believe the continuing operations income statement understates the true earnings power of Alight.

In the presentation filed this quarter, we highlight the accounting view of continuing and discontinued operations and also includes certain pro forma supplemental financial information, which aligns with the normalized view of historic information we provided investors on July 18th. We believe this normalized view better reflects our go-forward well-being and benefits business, and that is what I will speak to today.

Second, when we refer to ARR, we are speaking of annual recurring revenue, which is derived from long-term contracts with high retention. We see ARR as a key metric in understanding our top line growth and we'll provide transparency to ARR bookings and ARR revenue. ARR revenue may vary based on overall client headcount as our pricing includes revenue per employee.

First, I will cover our commercial progress. Last year, we realigned our go-to-market structure to drive more sales intensity and greater demand generation. Our teams are incentivized to sell high-quality ARR, which flows into our long-term revenue under contract and we are now seeing the results.

Our ARR bookings were up 9% in the first half versus prior year. We also see a stronger ARR pipeline and an 8% increase in our win rates in the first half. Based on our current pipeline, we expect double-digit ARR bookings growth in the second half of 2024 and continued momentum thereafter.

Now, let me turn to our second quarter performance on a pro forma adjusted basis. Total revenue was $550 million, a decline of 2% when excluding the impact of the exited hosted business, which represents a 100 basis point improvement versus the first quarter. BPaaS revenue increased 12.7% and represented 21% of total revenue for the company.

Adjusted gross profit was $219 million with adjusted gross margin of 39.8%. Adjusted EBITDA was $128 million with an adjusted EBITDA margin of 23.3%, 20 basis points ahead of first quarter profitability.

Our year-to-date operating cash flow was $145 million, which represents a conversion rate of 56%. Excluding separation costs, operating cash flow was $181 million or a conversion of 70%.

Capital expenditures year-to-date were $67 million, down $11 million or 14% from a year ago as we begin to benefit from lower spend on our cloud transformation. Adjusted EPS for the year-to-date period was $0.25 compared to $0.28, driven by depreciation from the cloud migration. We will benefit from the share repurchases moving forward.

Turning to the balance sheet. Our quarter end cash and cash equivalents balance was $183 million and total debt was $2.8 billion. After quarter end, we used transaction proceeds to repay $740 million of debt. As a result, we reduced our net leverage to 2.8 times, below 3 times as committed and our remaining debt is 100% fixed for 2024 and 70% fixed for 2025.

From a capital return perspective, we have been more active since May with announced share repurchases of $155 million. Today, we have $93 million remaining share buyback authorization, and we will continue to make share repurchases a priority.

Next, I'll cover our 2024 outlook, starting with revenue. We expect that our core ARR business, which represents over 90% of total revenue, will improve sequentially through the remainder of 2024. This is the core long-term contract base of our business that is stable and resilient. From a bookings perspective, we expect the momentum will continue.

Now, turning to our non-recurring project revenue which represents less than 10% of our total business. Revenue was down 7.8% through the first half of 2024 and we are seeing even less demand today, driven by increasingly cost-conscious customers for this project work and is limiting large-scale projects related to benefit plan rollouts, regulatory changes, and M&A.

For the second half, we expect non-recurring project revenues to be down approximately 20%. This project work will return as it has before and with more clients in ARR, so we will have an even larger base to drive project growth in the future.

Given this context, we outlined an impact on non-recurring project revenue, we expect second half revenue down 1% to 3%, with total year revenue down 2% to 3%. Revenue under contract for the second half of 2024 is $1.2 billion, or 97% of our expected 2024 total revenue.

For full year 2025, revenue under contract is now $1.7 billion and for 2026 is $1.3 billion. We expect total year adjusted EBITDA margin of 25% to 26%, which includes the start of run rate savings from the cloud migration.

On a quarterly basis, third quarter profitability will likely be lower compared to 2023, given our lower project revenue. In the fourth quarter, we will begin seeing the benefits of the cloud migration and expect stronger profitability versus the prior year.

From a cash flow perspective, we expect our operating cash flow conversion in the range of 55% to 65%. We believe our revenue model of 4% to 6% annual growth is supported by our long-term revenue under contract, historic revenue retention of 95% to 99%, continued go-to-market progress that will increase ARR, and our history of growth, as you saw from the supplemental investor deck we shared last month.

Also, we reaffirmed our midterm targets related to operating cash flow of 65% to 80%, maintaining net leverage below 3 times; and finally, an adjusted EBITDA margin of 28%, and we're not stopping there.

We have a value creation program underway with Alex Partners to leverage our technology to drive better quality and experience for our clients and to streamline the company.

This is a new chapter for Alight and we are energized by the opportunity in front of us to continue building the go-to-market momentum and ARR growth. We will be holding an Investor Day before the end of this year, where we look forward to sharing more detail on our strategic and financial objectives.

With that, let's open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]

Our first question is from the line of Scott Schoenhaus with KeyBanc Capital Markets. Please go ahead.

Scott Schoenhaus

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

Stephan Scholl

Thank you, Scott.

Scott Schoenhaus

I guess this is a question for both Stefan and Jeremy. I mean, Jeremy, you gave a lot of color there on the back half guidance, project revenue being down, I think you said 20%. But you noted that you should see sequential improvement in ARR. And I think you noted about double-digit booking growth.

I just kind of want to break down the back half, if you could. Can you provide more color on the revenue dynamics in third quarter versus fourth quarter? Because I think that's important for investors to understand the moving dynamics between those two quarters?

Jeremy Heaton

Sure. Thanks Scott. Good morning. So, on the recurring revenue side, we still have a slight headwind from the COBRA volumes last year. So, on a comparable basis, that subsides at the end of the third quarter. And so the growth will accelerate through the second half with higher growth in the fourth quarter. And so we would expect the third quarter to be better growth than the second quarter and then the fourth quarter to be the highest growth for the year as we continue on.

On the project side, we'd expect to see almost the inverse, which is the fourth quarter typically carries even more project revenue. And so as we see that impact of the project revenue and more cost consciousness, that will impact the fourth quarter more.

So, you'll still on an absolute basis, you'll still have a fourth quarter that's larger in revenue sizing. But I would say you have more improvement in the fourth quarter on the recurring side from the ARR and less so. So, it's a greater decline in the fourth quarter. Is that helpful?

Scott Schoenhaus

Yes, that's helpful. And then my next question was on the margins. Clearly, a nice acceleration in the second half outlook given the divestiture, how should we think about the cadence of margin expansion in the back half from third quarter to fourth quarter? And then what are the opportunities you're looking for post -- what are the opportunities in the near and longer term there? Thanks.

Jeremy Heaton

Sure. So, third quarter will be slightly lower profitability than we had last year, and that's just driven by some of that project revenue decline, drops through. So, from a margin perspective, slightly lower than last year.

In the fourth quarter, we start to -- that's really when the run rate savings from the cloud migration kick in for a full quarter worth of benefit. So, we're expecting -- typically, you would have -- I think last year, we had on a 25% margin business, we had over 30% EBITDA margins.

We would expect this year in the fourth quarter to be slightly higher than we were last year in the fourth quarter. So, you do get the typical ramp and that gets accelerated slightly just given the cloud migration benefits that we have coming through.

And so that will be -- and again, that starts the run rate of the $75 million of annual cost savings that we will get now that the cloud migration is completed. So, that's the next big step for us as we think through the next couple of years. We've got the cloud migration benefits as well as, as I mentioned, Alex Partners has kicked off with us to support us in removing any dis-synergies from the transaction as well as driving the streamlining across the rest of the company.

Scott Schoenhaus

Thank you very much.

Jeremy Heaton

Sure. Thanks Scott.

Operator

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

Kevin McVeigh

Great. Thanks so much.

Jeremy Heaton

Morning Kevin.

Stephan Scholl

Morning Kevin.

Kevin McVeigh

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

Stephan Scholl

Thank you.

Kevin McVeigh

I wanted to talk to the second half guidance just a little bit because -- and maybe be thinking about this wrong, but I always thought typically that the professional services was lower margin, but it seems like if you look at kind of the pacing of the EBITDA relative to the revenue, it looks like the EBITDA is underperforming the revenue in the second half. I guess, is that right? Or is there anything else in there that's driving that?

And then what's the dollar amount of the cloud migration in the fourth quarter of the $75 million, how much comes in the fourth quarter? I just want to start there.

Jeremy Heaton

Sure. Thanks Kevin. So, it's about, I would say, $20 million for this year. You start to get some of the benefits in the third quarter on the cloud migration. And then I'd call it, we were at run rate in the fourth quarter on that. So, just think about that as, call it, $18 million to $19 million of benefit in the fourth quarter as we're a run rate on the cloud migration.

On the first part of your question as it relates to project revenue, I think about it differently. So, the professional service of the divested professional services business can carry a lower margin on that revenue. But the project revenue that we're talking about now in the second half with the go-forward benefits business can carry a higher margin. So, that can be upwards of, call it, 50%-ish margin because it's our client delivery teams that are working and already on-site with our clients driving that project revenue. So, that's what you see there, and that's the impact as we think about the third quarter. Again, that gets more than offset from the cloud migration benefits in the fourth quarter.

Kevin McVeigh

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

Jeremy Heaton

Correct. That's right.

Stephan Scholl

That's right.

Kevin McVeigh

Which is great. And then the incremental buyback, any sense of timing and pacing on that? And -- just maybe I'll end it there. Thanks.

Jeremy Heaton

Sure Kevin. So, on the $75 million, we executed the accelerated share repurchase program on July 15th. That will run through likely the end of August, beginning of September timeframe. So, that's when that $75 million will fully become executed and bought back.

And then as I said, we've got the $93 million of remaining authorization. So, we will look to be opportunistic in terms of that as we move forward through the remainder of the year.

Kevin McVeigh

Thank you very much.

Jeremy Heaton

Yes, thanks Kevin.

Operator

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

Joseph Vafi

Hey everyone. Good morning and also my best wishes to Stephan on your next chapter as well here. Maybe we just kind of start on the ARR commentary, I know you're looking for some good acceleration in ARR bookings in the second half. Could you just kind of remind us kind of what the compare is looking like in the second half versus a year ago to get a feel of -- was it -- is it a tougher or easier compare?

And then if you look at ARR bookings on a dollar basis first half, second half is there some commentary there? Are we up in the second half on a dollar volume basis? And then I'll have a quick follow-up.

Jeremy Heaton

Sure. Sure. Thanks Joe. Yes. So, I mean, as you remember from -- in 2023, we did have an acceleration in our bookings. We had a slow start in 2023 around bookings. We saw acceleration in the second half. So, the compare gets harder in the second half of 2024 for us, but we still see double-digits as a view from the field and how we look at pipeline and win rates today, where we expect that momentum to continue.

Typically, we would have, call it, 60% to 65% of dollar amount of bookings would happen in the second half of the year. And so it's always a tougher compare in terms of dollars. But again, it's also the buying season continuing right now, and we've got a nice pipeline of deals. You saw the key wins that we've announced. So, some really nice momentum in the ben-admin space, in the navigation world, leaves administration. So, that's really the drivers for us.

So, it's a bit of a tougher compare from last year, but we reorganized this go-to-market structure last year. We've got better coverage now in terms of how we think about strategic and enterprise accounts, how we're going after new logos. And so that's a lot of the driver in terms of just building an overall larger pipeline, higher quality pipeline around ARR and then our win rates and being able to execute.

Stephan Scholl

Yes, Joe, we're definitely seeing with this cost-conscious environment that are -- it's to our benefit on the ARR side, you look at UPS moving away from best-of-breed to more enterprise approach, we're seeing lots of more deals like that in our pipeline. So, we're excited about what we see ahead. And yes, the compare is tougher, but the pipeline is larger than we've seen in a while.

Joseph Vafi

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

Jeremy Heaton

Sure. Thanks Joe. So, again, I think the next six months of execution on what we're just talking around on the ARR bookings as well as time to -- this project work. I wouldn't say it's, yes, sensitive to macro, but you do see more cost consciousness as we talked about.

And we have a project-based business, which once again is less than 10% of the revenues on our business. We have seen this flow and go through the peaks and valleys over periods of time. We wouldn't expect that it continues for an extended period of time. But I think the next few months will give us a better view on pipeline, what we see coming into the early parts of 2025 and I think it will be important for us, as you saw, we announced the Investor Day later this year, where we can watch execution on the era booking side as well as see what this environment looks like, as we head into 2025.

But I wouldn't expect this for a very extended period of time. But again, it is project-dependent. M&A activity is a driver for us in terms of these large projects as well as the regulatory environment. So, it's an election year. So, coming out of an election year, you would typically see some public policy changes, and you can see some pickup in project work.

Stephan Scholl

I mean our go get, Joe, is a lot less going into next year in the outer years. As you know, our revenue under contract and backlog used to be in the 80s. Now, we're going to be in the 90s, but that doesn't give us a lot of room to drive a lot of India revenue, right?

So, the ARR bookings is going to be, to your point, key metric to look at, and we're going to continue to support that data set with what we just gave today, and you'll see over the next six months that, that will help drive a good quality book of business in terms of helping sustain a better profitable growth orientation for the company.

Joseph Vafi

Great guys. Thank you very much.

Jeremy Heaton

Thanks Joe.

Operator

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

Tien-Tsin Huang

Thank you. And all the best to you Stephan. I'm just curious, you brought a lot of tech and software experience to Alight. What do you think -- or what can you share with us on what the Board is looking for in a successor here and the next step of Alight?

Stephan Scholl

Well, listen, Yes. I appreciate that comment, Tien-Tsin. And I think it's -- as you know, it's in my fifth year, and we've done a lot to modernize and undo the last 40 years of technology into a better platform, to all to do what, to meet the needs of what our customers are looking for, which is this best-of-breed point solutions environment, is not supportive of driving better engagement with their employees. And I've talked about that for years. This cost-conscious environment has even brought it more at the forefront.

And again, if you look at the deals I announced, Honda, you look at UPS, you look at Wayfair, if you look at Adecco, all of them are coming to us and talking about we need to simplify, we need to consolidate, we need to take cost out, and now with this divestiture of the business, Tien-Tsin, 8,700 people out of the company into a new business, we got rid of payroll ProServe, capital-intensive, labor-intensive. So, getting back to the core of benefits administration and getting back to the service delivery elements of what that core business is, that's a great combination that we're excited about how the platform together with strong service delivery really gives us an advantage on the enterprise side.

So, that's why the pipeline is where we see it in the second half and beyond. And that's why we're committing publicly on paper to say that we're going to drive double-digit booking into the second half. So, really excited about where the company is today.

Tien-Tsin Huang

Got it. My follow-up -- thanks for that. My follow-up just on the -- I know a lot of questions have been asked and answered on the non-recurring side. Just big picture, is this just a cyclical issue? Or are there some structural issues as well as we think about things like benefit changes, I'm curious of automation or some of these AI tools that are coming out. Is that playing a role in some of the effort change? I'm just trying to understand a little bit better.

Stephan Scholl

Yes. Do you want to jump in? Go ahead [Indiscernible].

Greg Goff

This is Greg. I don't see anything structural with that. I view it as much more cyclical. If you think about some of the macro factors that Jeremy said, plan design changes sometimes that's higher in certain years than other years, regulatory environment, the M&A environment.

Those are really what drive it, not a macro technology trend, certainly in the large enterprise market, are still driven by the same factors that they have been for quite a long time. So, I don't see anything structural there.

Stephan Scholl

Yes, I mean, I'll probably give you a great example. We're in an election year benefits changes aren't as much this year. So, the core part of our business around this upcoming annual enrollment is super strong and the bookings and the deals we're getting are amazing wins that we've had.

But when you get to annual enrollment, to your point on what's different is that small 8% book of business, which is the project stuff, as you know, during annual enrollment, a lot of clients want to do communications to their employees on what are the benefits changes? What are some of the new things you should be excited about.

We make millions of dollars in comms -- in the communications category that's exactly what that is. So, whether that comes or goes, there's peaks and valleys to that book of business. This year, pre-election is a lighter year in that comms business.

If M&A comes back next year, with the new government dynamics potentially with new rules and regulations, there will be new plan changes going into the beginning of the year. That drives increased communications requirements.

So, that's that project part of our business when you talk about structure versus what's different. So, it ebbs and flows. And that's why you're seeing us be so aggressive on the more ARR focus, which really transcends these short-term trends.

Greg Goff

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

Stephan Scholl

Tends to be anyway.

Tien-Tsin Huang

Thank you.

Stephan Scholl

Thanks Tien-Tsin.

Jeremy Heaton

Thanks Tien-Tsin.

Operator

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

Pete Christiansen

Good morning. Thanks for the question. Best of luck to Stephan. I'm just curious, in terms of the renewal fees and upon us, how are you thinking about the radio contracts that are versus this year and--?

Stephan Scholl

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

Pete Christiansen

Sorry, is that better?

Stephan Scholl

Much better.

Pete Christiansen

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

Jeremy Heaton

Thanks Pete. We have -- it's a pretty standard set every year in terms of how much is up for renewal. If you just think about our kind of three to five-year long-term contracts. I think our teams are very focused on retention, right, the value that we can drive to some extent, reorienting ourselves on the service, Greg Goff is here with us, I mean, spending time with our clients from a delivery perspective, and an ability to once again differentiate ourselves, we're the leader in this space. We've got long-term relationships, average tenure over 15 years.

And so I wouldn't say the dynamics are any different this year going in and how we think about 2024 and 2025 and into the midterm very focused on how we differentiate ourselves with our clients. We're very close every day with them. And as you can see, we've got between 95% and 99% retention levels that we expect to maintain as we go through the long-term here for the company.

Stephan Scholl

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

Pete Christiansen

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

Jeremy Heaton

Sure. So, as you know, we rolled out the new pricing model about a year ago, and that has particular SKUs in it, which have annual increases, which is an offset to some extent to how our typical contracts work in terms of inflationary ECI protections.

And so I think we think about price as an opportunity with the new technology and some as we roll out and go through the renewal cycle and additional products and service and solutions for our customers. So, I don't think about it as a large driver, either up or down, frankly, from a price perspective as we go through the renewal cycle.

But you're right, we do -- sure, I was just going to say on the -- you're right, on the COBRA side on volumes, that's just a comparable to last year and that's just -- it's a fixed headwind that goes away here in September.

Pete Christiansen

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

Stephan Scholl

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

Greg Goff

Yes, that's right. That's exactly the way to think about it is from an implementation and ongoing delivery perspective, we don't see anything changing there. It's very much on course. And that's partially driven by the benefit side of the business has very specific timing that implementations need to happen in order to hit annual enrollment cycles in order to hit contract ins.

You saw that dynamic much more as Stephan said, on the Workday Professional Services side and the payroll business that tended to be much more subject to implementation delays.

Pete Christiansen

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

Stephan Scholl

Yes, thank you. appreciate that. Thanks Pete.

Jeremy Heaton

Thanks Pete.

Operator

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

Emily Marzo

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

Jeremy Heaton

Sure. I mean I think I'll start and maybe Stephan can add. I mean I think, Emily, it's pipeline, right? Just I go back to realigning our go-to-market team last year, and it does take some time to get better coverage of the market, both with how we expand with our current relationships we have, but also driving new logo wins, and so it takes time to build that pipeline, mature that pipeline, and as you build a higher-quality AR pipeline to have higher win rates and execute on it.

So, that was a big driver now in terms of as we do a bottoms-up build in terms of the forecasting, it's really looking at the pipeline that we've got today, the stages of the deals within the pipeline and working with our teams in terms of win rates and execution moving forward.

So, it really starts in the bottoms-up basis of what the funnel is and the pipeline going forward. So, -- and again, the new products, absolutely, as you think about expansions of current relationships, if I've got long-tenured benefits administration clients, we now have the newer products and solutions over the last couple of years, navigation leaves administration, retiree.

So, we've got a number of newer products over the last couple of years as you think through either going through a renewal cycle or even outside of the renewal cycle to just build pipeline.

Stephan Scholl

I really want to give hats off to Greg George, our new leader we brought in last year, who heads up our commercial business, and he has brought in a great new team. Our net new expansion has really helped us with some great new wins. Sarah, who works for him is also new in the last year and has just driven an incredible amount of capability in our installed base.

As I said earlier, the macro environments that we're seeing help us in this environment because a lot of clients are looking to cut cost. The value engineering capability we built up the last four years, really helping customers understand the road map of how to consolidate service delivery capabilities across a lot of point solutions into a more enterprise approach, takes us to a new outcomes-based approach that is unique to us.

And I think we're now, Greg, what, on our sixth release of work life where we continue to deliver integrations and capability and functionality that allows people to make better decisions. It allows us to drive higher engagement.

We put a whole bunch of new functionality into our products that allow to really build a personalized experience to each individual, which is hard. As you know, we serve some of the largest clients with millions and millions of employees and trying to build an individualized experience in the category of benefits. It's really hard to do, so we've cracked the code on that, and I think that's really going to help us continue to drive momentum and helping clients do better with less.

Emily Marzo

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

Jeremy Heaton

This project work is pipeline-driven, as the team said earlier, as you build your ARR base, it drives this work that goes through, again, if M&A is lower, as it rebounds, we do a lot of work around acquisitions and divestiture regulatory changes impacts almost every one of our large enterprise clients. So, that project work comes back.

So, there's a lot of history around this business in terms of what drives and how we sit as partners and communications for large benefit plan changes that exist in this space. So, that has not gone away over the long term as we look at this business, it's just the project work we really look from a pipeline perspective of what's in the near-term as we go through. So, I think we'll look forward to updating more as we go through and think through Investor Day towards the end of this year of what the outlook is for 2025.

Stephan Scholl

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

Emily Marzo

Thank you.

Stephan Scholl

Welcome. Thanks Emily.

Jeremy Heaton

Thank you.

Operator

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

Steven Wahrhaftig

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

Stephan Scholl

Thank you.

Steven Wahrhaftig

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

Jeremy Heaton

Sure. Thanks Steven. So, think about $20 million of the $75 million annual run rate starts this year. So, we'll get some savings that come into the back end of the third quarter and then effectively at full run rate into the fourth quarter. and that will drive $75 million of annual run rate savings next year. So, call it $55 million incremental in 2025 as a benefit.

But what it really does importantly is you look -- as you think about how we laid out the 28% in the midterm as an EBITDA margin, the drivers of that now that the cloud migration is completed is our ability to standardize the operating model and how we deliver for clients.

The history is a bit more customized, right, for specific clients. This -- because of the standard back-end infrastructure, the standardized technology allows Greg and his teams now to build process COEs to deliver for our clients, you leverage the technology, you can drive better quality of service for our clients and -- but also streamline the costs around the delivery side of the business.

And we'll continue to also leverage the technology within our customer care centers. As we talked about last year going through annual enrollment, we brought down call volumes 10% to 20%, we expect to continue that once again with the right levels of technology and AI to drive a better service quality there. And so those are the big drivers as we think about out to 28%.

But I want to make sure the cloud migration is really the pivot point for that. And so that was a huge element for us to successfully migrate all of our clients, all of our applications into the cloud now that allows a lot of this work to move forward.

Steven Wahrhaftig

Great. Thank you.

Operator

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

Stephan Scholl

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

Operator

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