얼라이트(ALIT) 2026년 3분기 실적 발표 컨퍼런스 콜: 매출 6% 감소에도 가이던스 상향

핵심 요약

• 얼라이트(Alight)는 이전 연도의 수주 영업 실적 약세가 반복 매출에 지속적으로 영향을 미치면서 2026년 3분기 매출이 전년 동기 대비 약 6% 감소한 5억 달러를 기록했다고 발표했다.
• 반복 매출은 4억 5,800만 달러로 6% 감소했으며, 프로젝트 매출은 5% 감소한 4,200만 달러를 기록했다. 예상보다 호조를 보인 프로젝트 활동과 자산관리(Wealth) 부문 거래량이 이번 분기 실적을 뒷받침했다.
• 조정 EBITDA는 1억 3,800만 달러에서 8,600만 달러로 감소했으며, 마진은 26%에서 17%로 축소되었다. 경영진은 매출 구성, 생산성 향상 이니셔티브, 특정 비용의 인식 시점을 주요 요인으로 언급했다.
• 얼라이트는 연간 매출 가이던스를 21억 1,500만~21억 2,500만 달러로, 조정 EBITDA 가이던스를 4억 1,000만~4억 2,000만 달러로 상향 조정했다.
• 계약 갱신 유지율은 90%대 후반에 달했다. 경영진은 개선된 계약 갱신의 재무적 효과가 2027년 하반기 이후부터 나타나기 시작할 것으로 전망했다.
• 경영진은 이전의 영업 약세가 실적에 반영됨에 따라 2027년에도 매출이 감소할 것으로 예상되나, 2028년에는 영업 모멘텀이 가속화되어 주요 제품군 전반의 성장을 견인할 것으로 보고 있다.

주요 재무 데이터

사업 및 운영 성과

얼라이트는 반복 매출 사업이 수주 계약 체결부터 매출 인식까지 보통 12~18개월의 시차가 발생한다고 설명했다. 이에 따라 현재 실적에도 지난 몇 년간의 부진한 영업 활동 영향이 계속 반영되고 있다.

계약 갱신 유지율은 90%대 후반으로 개선되었으며, 갱신 계약 중 약 25%는 서비스 범위 확장을 포함했다. 당사는 임직원 수 1만 5,000명 미만의 기업 고객군에서 신규 고객을 다수 확보했으며, 휴직 관리(Leaves) 및 자산관리(Wealth) 부문에서도 추가 수주를 달성했다고 밝혔다. 또한 경영진은 전년에 얼라이트로부터 물량을 빼앗아갔던 경쟁업체들과의 갱신 경쟁에서 계약을 성공적으로 방어해냈다고 덧붙였다.

얼라이트는 서비스 운영 전반에 AI 도입을 지속 추진했다. 에이전틱 AI(agentic AI) 도구는 향상된 라우팅, 더 빠른 응답, 경우에 따라 자동화된 문제 해결을 통해 연간 약 1,500만 건의 참가자 전화 상담을 지원한다. 경영진은 현재의 AI 투자가 주로 서비스 품질 및 사용자 경험 개선에 목적이 있으며, 생산성 향상 효과는 시간이 지나면서 나타날 것으로 예상된다고 강조했다.

이번 분기 이후 얼라이트는 건강보험 계획, 처방약 관리업체(PBM), 복리후생 관리 플랫폼, 인력 관리 시스템 등 다양한 출처의 정보를 통합하는 데이터 엔진을 보유한 에벳(Abett)을 인수했다. 경영진은 이번 인수를 통해 복리후생 인텔리전스를 강화하고 얼라이트의 헬스 데이터 분석 역량을 확장할 수 있을 것으로 기대하고 있다.

당사는 플랫폼을 통해 3,000만 명의 참가자에게 서비스를 제공하고 있으며, 약 1조 7,000억 달러 규모의 자산관리(Wealth) 자산을 관리하고 있다. 아울러 헬스(Health), 자산관리(Wealth), 휴직 관리(Leaves) 부문 간 교차 판매 기회도 강조했다.

경영진 가이던스

경영진은 프로젝트 매출의 변동성 있는 특성을 고려하여 4분기 프로젝트 매출에 대해 신중한 태도를 유지하고 있으며, 연간 프로젝트 매출은 2025년과 거의 비슷한 수준을 유지할 것으로 예상하고 있다.

당사는 계절적으로 3분기가 가장 낮은 마진을 기록하는 분기로 유지될 것이며, 4분기와 1분기는 통상적으로 더 높은 마진을 기록할 것으로 예상하고 있다. 경영진은 4분기 실적 발표와 함께 보다 구체적인 2027년 가이던스를 제공할 계획이다.

얼라이트는 2027년 중 영업 모멘텀이 강화될 것으로 전망하고 있다. 다만 경영진은 이전의 영업 실적이 재무제표에 지속적으로 반영됨에 따라 내년 매출이 감소할 가능성이 높다는 점을 재확인했다. 또한 2028년에는 모멘텀이 더욱 가속화되어 주요 제품군 전반에서 성장을 나타낼 것으로 예상하고 있다.

리스크 및 주요 관전 포인트

• 이전 연도의 영업 실적 부진은 단기적으로 반복 매출에 부담을 주고 2027년 매출 감소의 원인으로 작용할 것으로 예상된다.
• 프로젝트 매출은 변동성이 커 연결 실적의 분기별 변동을 유발할 수 있다.
• 3분기 마진 개선의 일부는 비용 인식 시점에 따른 영향을 반영한 것으로, 일부 비용은 4분기로 이월될 것으로 예상된다.
• 가격 경쟁은 계속해서 치열한 상황이다. 경영진은 일부 한정된 계정에서 수수료 인하 압박이 있었다고 보고했으나, 이를 광범위한 시장 트렌드로 규정하지는 않았다.
• 개선된 계약 갱신의 재무적 효과는 시차를 두고 나타나며, 주로 2027년 하반기부터 본격적으로 반영될 것으로 전망된다.
• 얼라이트는 제안된 조건이 만족스럽지 않아 잠재적인 대주단 거래(lender transaction) 추진을 거절했다. 만기 대출(term loan) 만기는 2028년 8월에 도래하며, 경영진은 보유 유동성을 바탕으로 자본 구조 개선에 대응할 시간을 확보했다고 밝혔다.

애널리스트 Q&A 주요 내용

경영진은 자체 전망치를 상회한 3분기 매출 실적이 프로젝트 매출 호조와 자산관리(Wealth) 부문 거래량 증가 덕분이라고 설명했다. 이러한 매출원들은 추가적인 비용 발생이 적어 생산성 향상 이니셔티브와 함께 EBITDA 이익률에 긍정적인 영향을 미쳤다.

고객 유지율과 관련하여 경영진은 90%대 후반이라는 수치에 전체 포트폴리오 전반의 고객 이탈 및 수수료 인하 영향이 포함되어 있다고 설명했다. 유지율을 100%에 가까운 몇 퍼센트 이내로 올리는 것을 목표로 하고 있으나, 4분기가 여전히 계약 갱신이 활발히 진행되는 시기이며 아직 확정되지 않은 결정들이 남아있다고 지적했다.

경영진은 2026년 동안 순 수주 영업 활동이 보합 수준에 도달할 것으로 기대하지는 않는다고 밝혔다. 이러한 모멘텀은 2027년 중에 형성될 가능성이 더 높다고 지적했다.

리파이낸싱과 관련하여 경영진은 얼라이트가 운전자금이나 투자 수요를 위해 외부 자금 조달에 의존하지 않는다고 말했다. 당사는 풍부한 유동성, 현금 창출력, 2028년 8월 만기인 부채를 바탕으로 적절하다고 판단되는 조건이 갖춰질 때까지 기다릴 계획이다.

실적 발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

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

Unknown Attendee

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

Rohit Verma

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

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

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

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

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

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

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

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

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

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

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

Dinesh Tulsiani

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

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

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

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

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

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

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

Stephen Lasher

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

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

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

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

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

Now I'll give the call back to Rohit.

Rohit Verma

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

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

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

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

Operator

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

질의응답

Curtis Nagle

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

Rohit Verma

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

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

Operator

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

Kyle Peterson

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

Rohit Verma

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

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

Kyle Peterson

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

Rohit Verma

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

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

Operator

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

Scott Schoenhaus

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

Rohit Verma

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

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

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

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

Scott Schoenhaus

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

Rohit Verma

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

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

Stephen Lasher

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

Operator

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

Peter Heckmann

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

Rohit Verma

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

Peter Heckmann

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

Rohit Verma

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

Peter Heckmann

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

Rohit Verma

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

Stephen Lasher

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

Peter Heckmann

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

Operator

The next question is from Peter Christiansen from Citi.

Peter Christiansen

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

Rohit Verma

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

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

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

Stephen Lasher

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

Peter Christiansen

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

Rohit Verma

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

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

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

Operator

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

Rohit Verma

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

Operator

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