TriNet Group, Inc. (NYSE:TNET) Q1 2024 Earnings Call Transcript

TriNet Group, Inc. (NYSE:TNET) Q1 2024 Earnings Call Transcript April 26, 2024

TriNet Group, Inc. misses on earnings expectations. Reported EPS is $2.16 EPS, expectations were $2.46. TriNet Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the TriNet First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alex Bauer, Investor Relations. Please go ahead.

Alex Bauer: Thank you, operator. Good morning. My name is Alex Bauer and I am TriNet's Head of Investor Relations. Thank you for joining us and welcome to TriNet's 2024 first quarter conference call. I am joined today by our President and CEO, Mike Simonds; and our CFO, Kelly Tuminelli. Before we begin, I would like to address two items. First, for the first time, we are presenting our financial results pre-market on a Friday. Please note that the change this quarter was due to our internal calendar and our desire to reach the broadest audience possible. Second, I'd like to address our use of forward-looking statements and non-GAAP financial measures. Please note that today's discussion will include our 2024 second quarter and full year financial outlook and other statements that are not historical in nature or predictive in nature or depend upon or refer to future events or conditions such as our expectations, estimates, predictions, strategies, beliefs, or other statements that might be considered forward-looking.

These forward-looking statements are based on management's current expectations and assumptions and are inherently subject to risks, uncertainties, and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties, and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for adjusted net income per diluted share.

For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see our earnings release, 10-Q filings or our 10-K filing, which are available on our website or through the SEC website. With that, I'll turn the call over to Mike. Mike?

Mike Simonds: Thank you, Alex, and thank you to our shareholders, analysts, colleagues, customers and all others joining us this morning. I am excited to lead my first earnings call as CEO of TriNet and will center my initial comments on two topics. First, thoughts on our first quarter performance, and second, my initial impressions after working alongside our customers and my TriNet colleagues over the past 10 weeks. Reflecting on our first quarter performance, TriNet continued to execute well in the areas most within our control, most notably, new sales, retention and expense management. We maintained our recent strong sales momentum and grew 50% year-over-year in the first quarter, historically, our largest sales quarter of the year.

Our strong first quarter sales performance reflected a broad team effort across our organization. We are delivering a differentiated offer to the market and a strong onboarding experience for our new customers. At TriNet, we work hard to understand the evolving needs of small to mid-sized organizations in the industry verticals we target and we apply that insight to deliver services and access to benefits designed with their unique needs in mind. Owning our own technology allows us to operate with this unique vertical focus and do so while capturing the benefits of scale. Our investment in expanded distribution, both the growth and maturation of our sales consultants and the growing momentum with channel partners allowed us to capitalize on our differentiated offering.

In fact, in the first quarter, we benefited from both a 28% year-over-year growth in tenured reps and a similar percentage productivity improvement amongst those same mature reps. Of course, our unique offering helps us not only win new business, but retain our existing customers as well. With a strong multi-year positive trend in Net Promoter Score, our retention improved by over two points versus the first quarter a year ago. As a result of our strong new sales and retention, we nearly achieved positive sequential core worksite employee growth in the first quarter. This is an important achievement to highlight. TriNet came very close to replacing first quarter attrition with new sales additions. And when we think about opportunities for accelerating our growth at TriNet in the coming years, offsetting attrition with new sales is a large and obvious objective to target.

And one, I think we should expect to consistently achieve. Once new sales is offsetting attrition, positive CIE, which is natural growth within our existing customer base becomes entirely upside. Furthermore, we would expect to achieve this objective while maintaining our pricing and expense discipline just as we did this past quarter and in previous years. I do want to underscore this last point. As we embark on this effort, we will maintain our financial discipline, we will not be trading undisciplined pricing for growth, and we will remain focused on driving efficiency in all parts of our operations. While I was pleased with our operational performance and how our offering is resonating in the market, the broader economic environment still remains challenged for SMBs. We saw this economic reality impact us in two ways, through our customers' hiring and normalization of insurance costs.

In the aggregate, net customer hiring was slightly negative, performing similarly to last year's first quarter and to many of the hiring trends we've experienced since 2022. Ultimately, we firmly believe that pursuing business in our chosen core verticals with disciplined pricing is the right long-term approach. And as hiring improves, particularly in the technology industry, TriNet should receive outsized benefits from our differentiated model. Secondly, the broader market continues to experience health cost increases. We too saw an increase in health costs in the first quarter. We experienced some claims variability within the quarter, and while Kelly will provide more details in a minute, I would stress that we have a strong model in place to manage risk and we are uniquely advantaged.

In our ability to reprice as necessary for these costs, with cohorts available each quarter. Finally, before passing the call to Kelly, I want to finish my prepared remarks by sharing two initial impressions from my first couple of months at TriNet. First, TriNet operates in a very attractive market. Since joining the company, I've spent considerable time with customers and channel partners. Without exception, these visits confirm that the challenges facing small to medium-sized businesses are very real, whether they're working to attract great talent, deal with cost inflation or stay in compliance with an ever more complex regulatory landscape, the need for what we do is significant and it's growing. With this as a backdrop, it's not surprising that PEO industry awareness has never been higher, and I'm pleased to report that a recent third-party survey work confirms that TriNet's brand in our target market is now amongst the most recognizable in the HCM space.

Our product is resonating, as evidenced by our sales and retention performance and ultimately, in this attractive market, we can and will do more to grow and capture share. My second impression relates to what I found within TriNet. Thus far, I've had the opportunity to meet with literally thousands of my colleagues across the country. This has been an energizing experience to say the least. TriNetters have not been shy with their recommendations and feedback, and I was so pleased to hear a great many ideas on how we can improve our processes, better leverage technology and expand our offering for the benefit of our customers. Ultimately, the overwhelming theme which emerged is a genuine passion for serving our customers. The customer is truly at the center of everything we do and it shows one of the great legacies of my predecessor.

I share these two impressions with you, the growth opportunity for PEO, and the engagement of my colleagues, because over the next few quarters, TriNet will embark on a review of our strategy with the intent of further aligning our considerable resources with the biggest opportunities for profitable growth. To successfully embark on this review and ultimately to execute, you need colleagues ready, willing and able to deliver on the underlying drivers of the plan. I believe we have that team here at TriNet, and I'm excited about what we will accomplish together. Now I'll pass the call to Kelly for the financial review. Kelly?

Kelly Tuminelli: Thank you, Mike. In the first quarter, TriNet once again excelled in the areas within our control. New sales, as measured by annual contract value or ACV grew 50% year-over-year, which resulted in a significant number of new WSEs joining TriNet. Our customer relationship and customer success teams worked diligently to provide customers with incredible service, and the result was strong retention. When you combine our net new WSEs in Q1 with our attrition, we nearly offset our Q1 attrition with new WSEs, representing significant progress on this front. As Mike said, when we think about accelerating growth at TriNet, offsetting attrition with new sales is an obvious objective to target. We, again, demonstrated financial discipline and manage our expenses prudently with only modest inflationary increases.

We made choices and reinvested our cost savings into our business for growth. During the quarter, we encountered two headwinds. One, a continuation of recent trends, and the other, an emerging trend. First, continuing a multi-year trend, customer hiring came in slightly negative, again, pulled down by our technology vertical specifically in January. While we continue to have success selling into the technology vertical, customer hiring within tech remains constrained. The second headwind we faced was an increase in insurance cost trends in Q1, which drove our insurance cost ratio to the low end of our first quarter guidance range. In the quarter, we saw a broad increase in utilization and cost inflation, reflecting trends seen across the healthcare industry.

Within the quarter, paid claims in January and February skewed much higher than in March. It's unclear to us whether March represents the ongoing trend. During March, a significant ransomware attack impacted change healthcare, one of the largest claim processors in the U.S. It's possible that the reduced paid claims in March was partially the result of this incident. Because of this incident, we did not reflect the March favorability in our ending reserves. We will learn more in the coming months and with several upcoming investor conferences, we will have opportunities to share more as experience develops. Now, let's turn to our first quarter financial performance. In the quarter, total revenues grew 1% in line with our guidance and was muted from overall customer hiring headwinds.

We finished the first quarter with approximately 352,000 worksite employees and approximately 332,000 co-employed WSEs, up 1% year-over-year. Average co-employed WSEs followed the same trend. Change in existing or CIE was an additional headwind as it came in negative in the quarter. Negative CIE was elevated in January, while we saw the improvement in modest customer net hiring in February and March. Our overall WSE growth affirmed our investment into our go-to-market capabilities, driving new sales and in service areas driving retention. As we continue to build sales capacity, we believe we can achieve consistent new sales volume growth in excess of our attrition in the intermediate term. Professional services revenue grew 4% in line with our guidance.

Professional services revenue growth was driven by volume, normal rate increases and was offset slightly by mix given the reduction in hiring in certain verticals who pay for higher levels of services. Insurance revenue grew 1% year-over-year as healthcare participation rates were slightly lower than Q1 2023. Annual inflationary rate increases offset our slightly lower participation rates. Insurance costs grew 6% year-over-year, reflecting higher healthcare and pharmacy utilization. It's safe to say that WSEs are no longer delaying care as they had during the pandemic and we have returned to a more normal healthcare utilization and higher cost environment. Related to our workers' compensation, results were in line with our forecast and remained strong overall.

This brought our insurance cost ratio to 86.4% at the low end of our first quarter guidance. Now let's turn to operating expenses. We continue to demonstrate financial discipline. Our operating expenses grew modest 2% year-over-year as we reinvested cost savings back into our business to support our sales and marketing function and drive new sales and customer retention. The 2% growth does exclude the non-recurring GAAP accounting remeasurement and acceleration of stock compensation related to our former CEO's retirement, which was approximately $5 million. During the quarter, we benefited from the sustained higher rate environment in interest income on investments and our operating cash. The income generated was slightly more than our interest expense during the quarter.

Summing it up, we are reporting $1.78 in GAAP net income per diluted share and $2.16 of adjusted net income per diluted share for the quarter. We had $201 million of corporate operating cash flow during the quarter and ended the first quarter with $298 million in unrestricted cash on our balance sheet. Now let's turn to our financial guidance. In the second quarter, we're forecasting total revenues to be in the range of down 1% to up 1%. We expect continued strength in new sales and modest CIE growth. In the second quarter, we expect to see modest CIE growth as companies typically hire for full time recent graduates and summer internships, yet we do expect it to be muted from historical averages. Given this expected employment dynamic, we forecast professional services revenue in the range of down 2% to up 4%.

Turning to our insurance cost ratio, we're forecasting our ICR in the range of 90% to 87%. The 90% would imply a continuation of first quarter trends, while the 87% implies modest improvements. Finally, we're forecasting GAAP net income per diluted share to be in the range of $0.68 to $1.17 and adjusted net income per diluted share to be in the range of $1 to $1.50. Given our expectations for Q2 financial performance and first quarter results, we are leaving our full year revenue guidance unchanged. Total revenues are expected to be in the range of down 1% to up 4%. Professional services revenue is expected to grow between 1% and 5%. Our insurance cost ratio is now expected to be in the range of 89.5% to 87.5%, reflecting our first quarter experience.

Given the resetting of our insurance cost ratio guidance, we now expect GAAP net income per diluted share to be in the range of $3.94 to $5.46 and adjusted net income per diluted share to be in the range of $5.25 to $6.80. In summary, we are pleased with our first quarter performance, we are operating well, building on our new sales success and our strong continued customer retention, while exercising expense discipline and investing for growth. We are experiencing a different insurance cost environment over the past few years and we are prudently managing through this changing environment. We remain very positive in our ability to generate great outcomes for our customers, employees and shareholders. With that, I'll turn the call over to the operator to open up the call for questions.

Operator?

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