The first quarter 2024 earnings call for Alight Inc. was a whirlwind of information, with major leadership changes, the looming sale of their Payroll and Professional Services segments, and a constructive settlement with activist investor Starboard. While these headlines captured the attention of analysts, a subtle yet powerful detail within the transcript points to a potential undervaluation of Alight's remaining business: the impact of non-recurring events on revenue.

Alight's financial performance this quarter paints a picture of two distinct narratives. On one hand, we see lower non-recurring project revenue and the exit from the Hosted business weighing down overall revenue growth. On the other hand, Alight's BPaaS solutions are booming, demonstrating 22% growth and exceeding a quarter of the company's total revenue.

This divergence highlights the inherent volatility of the non-recurring project revenue stream. While crucial for immediate financial performance, it's susceptible to timing delays, macro pressures, and unforeseen events. A prime example of this vulnerability lies in the Q4 2023 earnings call, where Alight experienced a significant revenue shortfall due to a single client's decision in their Retiree Health Exchange. This "isolated impact," as they termed it, caused a domino effect, significantly impacting the yearly revenue growth and overshadowing the strong performance of other business segments.

However, there's a silver lining to this volatility. By shedding its Payroll and Professional Services businesses, Alight is strategically distancing itself from the unpredictable nature of project-based revenue. The remaining business, primarily focused on benefits and BPaaS solutions, will boast a more stable recurring revenue stream. This shift towards recurring revenue is not just a defensive strategy; it's a shrewd move that positions Alight to capitalize on the growing demand for integrated HR platforms.

Revenue Breakdown (Q1 2024)

This table showcases Alight's revenue breakdown for Q1 2024, highlighting the contrast between non-recurring project revenue and BPaaS solutions.

Here's where Wall Street might be missing the boat. By focusing on the immediate impact of one-off events and the divestiture, analysts are potentially overlooking the long-term value creation potential of Alight's remaining business. The impressive growth of their BPaaS solutions, coupled with their strategic focus on higher-margin recurring revenue, points to a future of sustainable and profitable growth.

Revenue Under Contract (2024-2026)

This chart illustrates Alight's strong revenue backlog, indicating sustained growth potential.

Let's delve into the numbers. Alight's revenue under contract for 2024 stands at $3.1 billion, an increase of over $900 million from three years ago. This strong backlog, coupled with the continued momentum in BPaaS bookings, supports their midterm revenue growth target of 4% to 6%. Furthermore, Alight expects to achieve a 28% adjusted EBITDA margin, marking a 600 basis point improvement from 2023. This is further bolstered by the immediate margin uplift expected upon closing the Payroll and Professional Services divestiture.

It's crucial to remember that Alight's cloud migration, slated for completion in the second half of 2024, will unlock significant cost savings and operational efficiencies. These savings, estimated at $75 million annually for the remaining business, further solidify Alight's path towards achieving its midterm profitability targets.

Here's a compelling hypothesis: by focusing on the impact of non-recurring events and the divestiture, Wall Street is overlooking the potential for a re-rating of Alight's valuation upon achieving its midterm financial targets. A simplified, focused company with a robust recurring revenue base, strong profitability, and a proven track record of BPaaS growth could command a significantly higher valuation multiple.

While the headlines may be dominated by leadership changes and portfolio adjustments, savvy investors should pay close attention to the subtle details within Alight's earnings calls. The strategic shift towards recurring revenue and the impressive performance of their BPaaS solutions point to a hidden treasure: a company poised for a re-rating and substantial value creation in the years to come.

"Fun Fact: Did you know that Alight is responsible for processing over $3 trillion in employee benefits annually? That's more than the GDP of several countries combined! Their deep expertise and vast data repository give them a unique competitive advantage in the rapidly evolving HR technology landscape."