IPO Update: Alight Proposes Terms For $752 Million IPO

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About: Alight Inc. (ALIT), Includes: ADP, CDAY, IBM, KRO, ORCL, SAP, ULTI, WDAY
by: Donovan Jones
Summary

Alight aims to raise $752 million in a U.S. IPO of its Class A stock.

The company provides human capital management and administration software to enterprises.

ALIT is growing topline revenue only modestly and will still have a heavy debt load post-IPO.

Quick Take

Alight (ALIT) intends to raise $752 million from the sale of its Class A shares in an IPO, per an amended registration statement.

The firm develops and provides cloud-based human capital management and benefits administration software.

ALIT is growing only moderately and has a heavy debt load typical of private equity-owned IPOs.

Company & Technology

Lincolnshire, Illinois-based Alight was founded to help companies manage their employee health, financial, and HR needs.

Management is headed by CEO and Director Christopher A. Michalak, who has been with the firm since was previously.

Alight’s HR solutions include ‘cloud advisory and deployment, application management services and HR and payroll services for cloud platforms.’

The company’s health solutions comprise ‘health technology and administration solutions that enable employees to enroll in and manage their medical, dental and voluntary benefits’ as well as ‘consumer-directed healthcare solutions, such as spending accounts, and data and analytics-driven healthcare navigation services for employees.’

Among ALIT’s wealth management solutions are ‘defined benefit and defined contribution plan administration and financial well-being solutions, including wealth navigation tools and participant advisory services.

Customer Acquisition

Since 2014, Alight has focused efforts on its human capital software business and away from its Hosted business.

ALIT markets its solutions through a direct sales force as well as a number of key partners to large-market and mid-market businesses with a focus on the North America region.

The company has prioritized partnerships with mid-market brokers and platform providers to unlock additional opportunities for growth.

Sales and marketing expenses as a percentage of revenue have been stable as revenue has grown, per the table below:

SG&A

Expenses vs. Revenue

Period

Percentage

2018

19%

2017

20%

2016

18%

Sources: Company registration statement and IPO Edge

For the years of 2017 and 2016, the firm generated annual revenue retention rate of 97% and 99%, respectively. These are reasonably good results, although figures above 100% are considered top-tier for software companies.

Market & Competition

According to a 2017 market research report by Markets and Markets, the total human capital management market was valued at $14.5 billion in 2017 and is projected to reach $22.5 Billion by 2022, representing a CAGR of 9.2% between 2017 and 2022.

The main factors driving market growth are the need for standardization of the processes of main HR activities, talent, and workforce management, advancements in cloud technologies as well as the adoption of mobile technologies.

Major competitors that provide human capital management software include:

  • Workday (WDAY)
  • Ceridian HCM (CDAY)
  • Oracle (ORCL)
  • SAP (SAP)
  • Kronos (KRO)
  • Automatic Data Processing (ADP)
  • Ultimate Software Group (ULTI)
  • IBM (IBM)
  • SumTotal
  • EmployWise

Source: Sentieo

Financial Performance

ALIT’s recent financial results can be summarized as follows:

  • Growing topline revenue, although at a low rate
  • Increasing gross profit
  • Increasing gross margin
  • Sharply reduced EBITDA, swinging to negative in 2018
  • Reduced but still positive cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2018

$ 2,378,000,000

3.3%

2017

$ 2,301,000,000

1.8%

2016

$ 2,260,000,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2018

$ 851,000,000

6.0%

2017

$ 803,000,000

9.1%

2016

$ 736,000,000

Gross Margin

Period

Gross Margin

2018

35.8%

2017

34.9%

2016

32.6%

EBITDA

Period

EBITDA

EBITDA Margin

2018

$ 191,000,000

8.0%

2017

$ 75,000,000

3.3%

2016

$ 204,000,000

9.0%

Cash Flow From Operations

Period

Cash Flow From Operations

2018

$ 196,000,000

2017

$ 303,000,000

2016

$ 388,000,000

Sources: Company registration statement and IPO Edge

As of December 31, 2018, the company had $220 million in cash and $4.9 billion in total liabilities, of which long-term debt represented $3.4 billion.

Free cash flow during the twelve months ended December 31, 2018, was $119 million.

IPO Details

ALIT intends to sell 32 million shares of Class A stock at a midpoint price of $23.50 per share for gross proceeds of approximately $752 million, not including the sale of customary underwriter options.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $8 billion.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 15.6%.

Per the firm’s most recent regulatory filing, it plans to use the net proceeds to pay down debt.

Management’s presentation of the company roadshow is not available.

Listed underwriters of the IPO are BofA Merrill Lynch, J.P. Morgan, Morgan Stanley, Barclays, BMO Capital Markets, Citigroup, Credit Suisse, Deutsche Bank Securities, Goldman Sachs, Blackstone Capital Markets, CIBC Capital Markets, PN Capital Markets, Baird, KeyBanc Capital Markets, Macquarie Capital, Stifel, Stephens, Academy Securities, BTIG, Loop Capital Markets, Ramirez & Co, and Siebert Cisneros Shank & Co.

Valuation Metrics

Below is a table of relevant capitalization and valuation metrics:

Measure [TTM]

Amount

Market Capitalization at IPO

$4,806,837,439

Enterprise Value

$7,984,837,439

Price / Sales

2.02

EV / Revenue

3.36

EV / EBITDA

41.81

Earnings Per Share

-$0.10

Total Debt To Equity

5.95

Float To Outstanding Shares Ratio

15.64%

Proposed IPO Midpoint Price per Share

$23.50

Net Free Cash Flow

$365,000,000

Sources: Company Prospectus, IPO Edge

As a reference, ALIT’s clearest public comparable would be Ceridian HCM (CDAY); shown below is a comparison of their primary valuation metrics:

Metric

Ceridian HCM (CDAY)

Alight (ALIT)

Variance

Price / Sales

8.93

2.02

-77.4%

EV / Revenue

9.81

3.36

-65.8%

EV / EBITDA

62.76

41.81

-33.4%

Earnings Per Share

-$0.63

-$0.10

-84.1%

Sources: Company Prospectus, IPO Edge, Sentieo

Expected IPO Pricing Date: March 21, 2019.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.