TriNet Group, Inc. (NYSE:TNET) Q4 2023 Earnings Call Transcript

TriNet Group, Inc. (NYSE:TNET) Q4 2023 Earnings Call Transcript February 15, 2024

TriNet Group, Inc. beats earnings expectations. Reported EPS is $1.6, expectations were $1.18. 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 day and welcome to the TriNet Fourth Quarter 2023 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, Head of Investor Relations. Please go ahead.

Alex Bauer: Thank you, operator. Good afternoon. My name is Alex Bauer and I am TriNet’s Head of Investor Relations. Thank you for joining us and welcome to TriNet’s 2023 fourth quarter conference call. I am joined today by our current CEO, Burton M. Goldfield; our CFO, Kelly Tuminelli; and future President and CEO effective tomorrow, Mike Simonds. Before we begin, I would like to address our use of forward-looking statements and non-GAAP financial measures. Please note that today’s discussion will include our 2023 fourth 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 will turn the call over to Burton. Burton?

Burton Goldfield: Thank you, Alex. Fiscal year 2023, including the fourth quarter was highlighted by strong and accelerating new sales growth near record customer retention and prudent expense management. I am particularly pleased with these results given we successfully executed in the areas that are under our direct control. By emphasizing our value proposition, expanding our sales force, and improving our go-to-market efforts, fourth quarter new sales growth exceeded our forecast and my high expectations. We successfully executed on our plan to enhance customer service, which resulted in near record customer and WSE retention rates across all customer sizes. With the difficult 2023 economic environment, we responded by managing our expenses prudently and made every dollar of investment count.

Given our strong execution across all facets of our business, we believe our stock in 2023 represented significant long-term value. We bought back over $1.1 billion in TriNet stock. As you know by now, today, I announced my retirement as CEO of TriNet effective midnight tonight. As CEO of TriNet for over 15 years, my overarching vision was to build an enduring company, one that thrives for decades and one that is fundamentally different. I view this as a very high standard, but more importantly, it is actionable by every colleague at TriNet. This standard impacts who we hire, how we train and invest in our colleagues growth and development, the balance of short-term versus long-term investment, to achieve our strategic plans for the future, and most importantly, how we treat our customers and partners, providing them unparalleled value and a vision for a long-term relationship.

TriNet introduced to the PEO industry, a vertical go-to-market strategy where we focused our sales and services on six core dynamic industries, technology, financial services, professional services, life sciences, non-profit and Main Street. This remains a hugely successful approach to the market and has given TriNet a customer base consisting of the most dynamic SMBs in the US economy. Because our this approach and the effectiveness of our execution, we have been able to attract dynamic sales people, keep them longer, and ultimately grow our team. During the fourth quarter, we leveraged our go-to-market approach, benefited from our larger more mature salesforce and we delivered new sales ACV growth up 55% year-over-year. I am pleased to report that this drove 2023 full year new sales ACV growth to 32% year-over-year.

More importantly, our sales momentum continued into January 2024, where we realized the best new ACV performance in our company’s history. New sales in the month of January grew by 56% when compared to the previous year. I look forward to continued new sales momentum, which is not only driven by strong sales execution, but also exceptional service and a very strong brand. Enduring companies are associated with strong brands and at TriNet, we have built the strongest brand in the PEO industry. In recent Harris Polling, TriNet aided awareness was 82%, the highest in our company’s history. But for me, it is not enough to have brand awareness. I have always wanted TriNet to be viewed as a trusted adviser for our customers. I was pleased to find that in the same Harris Polling, TriNet’s reputation is the strongest in our industry.

TriNet brand triggered the highest positive emotional response of all the key players in the PEO industry. Said differently, our strategy is working and I am very proud. We have come a long way with our brand and TriNet is in an excellent position to leverage this brand now and in the future. Just this week, we were informed by Newsweek that we were ranked number one in the Excellent 1,000 Index for 2024. The global companies listed in this index exhibited a firm commitment to best practices in business and financial growth. Newsweek partnered with the Best Practice Institute to conduct this index. I am particularly proud of this recognition, and it highlights TriNet’s success in balancing employee satisfaction, R&D investment, ethical impact, and customer excellence, among other factors.

TriNet will always work to keep our customers at the center of everything we do. We are continually evolving and enhancing our service model, striving to ensure that our customers are being served in a fashion that exceeds their expectations. As I discussed on our last earnings call, our Net Promoter Score saw a significant year-over-year improvement. And for 2023, we realized the second highest customer retention rate in company history across all customer sizes. Throughout my years at TriNet, I have stressed the importance of technology innovation and the importance of owning our own technology. This is strategically important so that TriNet is in control of our future as the market continues to evolve. There are a few examples of organizations in any industry that have fallen behind the technology curve and have been able to maintain predictable growth and profitability.

At TriNet, technology is the bedrock that provides scale in service of our exceptional customer base. It enhances the accuracy, expediency, and breadth of value our service team delivers. With the acquisition of Zenefits, we accelerated our commitment to technology innovation, specifically around API integration, benefits administration, and advanced payroll constructs that are flexible and easy to adopt. TriNet is well on the path to developing a unified platform with an advanced data model that can serve our customers throughout their business lifecycle, including PEO and HRIS. I am proud of the many acquisitions over the years and particularly proud of the colleagues from these acquisitions who still today, are an integral part of TriNet’s value.

This trend started with Gevity in 2009 and many of our current senior leaders came from this acquisition 15 years ago. This is the embodiment of an enduring company where colleagues can grow and prosper personally and professionally by committing to our mission. TriNet is exceptionally well-positioned as a tech-enabled business services company with growth, predictability, profitability, and strong free cash flow. This can only be provided by a company with dynamic technology, complemented by extraordinary service, delivered by an incredible team. All of this is to say I am confident that TriNet’s best days are ahead. I feel the company is in an excellent position with strong momentum to facilitate my retirement. With today’s announcement of Mike Simonds as TriNet’s next CEO, TriNet took another extraordinary step on our journey as an enduring company.

Mike brings extensive SMB market and insurance experience as well as strong credentials across all facets of management. I’m confident Mike is the right leader for TriNet as we enter into the next phase of our growth. I will still be here working with the company through the end of March 2025 to ensure a smooth transition. With that, I will pass the call to Mike so he can share a few words with you. Mike?

Mike Simonds: Thank you, Burton for your extraordinary leadership at TriNet these past 15 years. Yours are going to be big shoes to fill and I very much appreciate your commitment to stay on as an adviser to ensure a seamless transition. I’ve spent much of my career working with insurance benefits and HR technology and certainly have always appreciated TriNet’s excellent reputation in the market. The more time I spent in conversation with the company and others in the market, my excitement grew about this business, a strong brand and culture, excellent cash generation, and a large market opportunity still in front of us. My primary focus initially will be supporting the team as we onboard the customers associated with our record January as well as getting out to meet with colleagues, customers, marketplace partners and our investors.

I look forward to opening up a dialogue with all of you in the coming weeks and months. Now, I’ll pass it on to Kelly to take you through our financial results and guidance. Kelly?

Kelly Tuminelli: Thanks Mike. I know I speak for all colleagues in welcoming you to TriNet. During 2023, TriNet continued to excel in the areas we controlled. We accelerated new sales growth, we kept customers longer, and we managed our expenses prudently while still investing in our growth and digital transformation. As it relates to capital, we published our financial policy and capital allocation approach to our investors, we issued $400 million of bonds, and renegotiated and borrowed on our revolving line of credit, and we repurchased over $1.1 billion of our stock. This execution reflects the continued maturation of the company’s financial management. We’ve built towards these actions over several years, having negotiated borrowing terms, issuing long-term debt, and enhancing our forecasting capabilities.

To top it off, we’ve just announced today the initiation of a quarterly dividend of $0.25 per share. The initiation of our dividend signifies two things for TriNet. One, we manage a business that generates significant and predictable corporate cash flows, which enable the funding of a dividend. And two, with that dividend, we now have diversified capital return options for shareholders consistent with our financial policy. Now, let’s dive into our fourth quarter and full year financial performance in greater detail. Total revenues grew 2% year-over-year for the fourth quarter and 1% for the year, in line with our guidance range. Total revenues performance for the year was largely characterized by the offsetting impacts from lower average WSE volumes and higher rate and mix contributions.

Our lower overall average WSE volumes was due to workforce reductions in some verticals of our installed customer base and the lack of hiring in others throughout 2023. This was a result of the challenging economic environment, particularly in the technology sector. Professional service revenues in the quarter and for the full year were flat year-over-year, in line with our guidance. Consistent with our total revenues performance, professional services revenues were impacted by lower volumes, largely driven by the lack of customer hiring, offset by modest rate increases in HRIS performance. Our HRIS performance for the year was driven by three factors; first, the renegotiation of certain broker arrangements during the third quarter; second, our success at lifting price to properly reflect the value of our HRIS services provided.

And finally, our HRIS performance benefited from a full year of revenue in 2023 when compared with the timing of our acquisition in February of 2022. Regarding WSE volume, we finished the year with approximately 348,000 WSEs, slightly down year-over-year. This reflected a continuation of the trends we experienced throughout 2023. We saw net positive contributions from new sales. Customer hiring was significantly lower than historical levels, but modestly positive and retention remains strong. Last quarter, we introduced a broader WSE definition, which reflects those receiving PEO services and using the value of our PEO platform. As we build our new platform and think through the opportunities to drive revenue by delivering value to an even broader base, we will continue to work through our existing categorizations and adjust as appropriate.

We do earn revenue on each of these WSEs at varying levels as we refine our processes and expand our product offerings, the incremental service fees we receive on WSEs will be additive to PSR. The recategorization of WSEs added just under 12,000 to our final tally. On a legacy apples-to-apples comparison, we finished the fourth quarter with 336,000 WSEs, down 4% year-over-year and flat sequentially. For the fourth quarter, our insurance cost ratio was approximately 87% lower than our forecasted range for the quarter of 88% to 92%. For the full year, our insurance cost ratio was 84.3%, slightly lower than our latest guidance range for the year of 84.5% to 85.5%. The lower insurance cost ratio in the quarter reflected an uptick in health care utilization, particularly in November, more than offset by favorable workers’ compensation prior period claims development.

This workers’ compensation trend was consistent with our full year experience. Turning to operating expenses in the quarter. We continue to prudently manage our expenses in response to the challenging economic environment. We saw that our plant hiring would remain choppy throughout the quarter, and therefore, we began to scale back or cancel some of our discretionary hiring and project spending, while still ensuring we were investing in critical go-to-market capabilities. The recalibration of our expense run rate strengthens our cash flow position as we wait for our clients to resume hiring. As such, for the fourth quarter, operating expenses declined 6% year-over-year. And for the full year, operating expenses grew a modest 2%. Now, let’s move on to earnings per share.

Fourth quarter GAAP net income per diluted share exceeded the top end of our guidance by $0.31 to $1.31, up 68% year-over-year. Our fourth quarter earnings outperformance versus our guidance was driven by expense favorability and the workers’ compensation performance I just discussed. This brought full year GAAP net income per diluted share to $6.56, up 17% when compared to 2022. Fourth quarter adjusted net income per diluted share also exceeded the high end of guidance by $0.27 to $1.60, up 44% year-over-year. This brought our full year adjusted net income per share to $7.81, up 10% versus 2022, exceeding the top end of guidance by $0.26. Turning to capital allocation. Today, we announced the institution of a quarterly dividend of $0.25. The record date will be April 1st, payable on April 22nd.

With the institution of our new dividend, TriNet capped off an extraordinary year as it relates to our capital allocation strategy. Our capital priorities remain unchanged; we will always invest in our business for growth, we will explore accretive M&A, and we will return capital to shareholders through both share repurchases and our newly instituted dividend. During 2023, we publicly articulated our financial policy, which included our commitment to manage our business at a leverage ratio of 1.5 times to 2 times adjusted EBITDA and return up to 75% of free cash flow to investors. For the year, we generated $539 million in corporate operating cash flow, an 8% year-over-year increase. and we generated $697 million in adjusted EBITDA, representing 1% year-over-year growth.

In summary, we exit 2023 in a strong financial position. Now, let’s turn to our 2024 first quarter and full year outlook, where I will provide both GAAP and non-GAAP guidance. In the first quarter of 2024, we expect total revenues to grow in a range of 0% to 3% year-over-year and professional service revenues to grow in a range of 2% to 8% year-over-year. Our first quarter revenue growth guidance includes contributions from new sales growth and strong retention, offset by the limited contribution from CIE as weak customer hiring trends persist. In Q1, we are planning for health care utilization to increase over recent experience. This will result in an insurance cost ratio between 82.5% to 86.5%, reflecting our seasonally lower ratios at the beginning of each year.

This brings our estimate of first quarter GAAP net income per diluted share to be in the range of $1.81 to $2.55 per share and first quarter adjusted net income per diluted share to be in the range of $2.10 to $2.85 per share. Regarding our full year 2024 guidance, we are forecasting our year-over-year total revenues to be in the range of down 1% to up 4% with our professional service revenues to grow in the range of 1% to 5% year-over-year. We expect our insurance cost ratios to follow seasonal patterns and reflect favorable cost ratios in the first and second quarters as participants work through deductibles. we then foresee a return to higher insurance cost ratios in the third and fourth quarters as deductibles are exhausted and when pooling limits reset in October.

We should continue to benefit from strong workers’ compensation performance. These trends bring our full year insurance cost ratio forecast to be in the range of 86.5% to 88.5%. This ICR projection is about 2 to 4 points higher than our 2023 result, reflecting increased health care utilization, higher provider costs, particularly for outpatient services, and higher pharmaceutical pricing as we see continued adoption of GLP-1s as an example. We will watch this closely throughout 2024 and assess any refinements needed as we determine quarterly pricing changes. Regarding our expectation for operating expenses, we will continue to manage our expenses prudently. As such, we expect a modest low single-digit increase in operating expenses for the year.

Given these anticipated trends, we expect full year GAAP net income per diluted share to be in the range of $4.57 to $6.08 per share and adjusted net income per diluted share to be in the range of $5.80 to $7.35 per share. Our guidance for adjusted net income per diluted share includes a net benefit of between $0.25 and $0.30 per share at the midpoint versus a benefit of $0.13 per share last year as a result of our 2023 share repurchases. For 2024, we’re assuming in our guidance a level of share repurchases that will continue to offset normal dilution arising from stock compensation. Before I pass the call back to Burton for his concluding remarks, I would like to take a moment and thank him for the leadership he has provided TriNet over the years and for the successful partnership we forged over the last three and a half of those.

We accomplished a lot in such a short period of time. Your vision for building TriNet into an enduring company redefined what a PEO could be and created over $6 billion of enterprise value during your tenure. I know I speak for all TriNet colleagues when I wish you nothing but happiness in your well-deserved retirement. Burton?

Burton Goldfield: Thank you, Kelly. TriNet is a unique company made up of incredible, passionate people. Throughout my over 15 years leading TriNet, our colleagues have been dedicated to solving problems for small businesses across the country, providing unparalleled service to our customers, building value for our shareholders, and most of all, supporting each other as we build this enduring company. I could not be prouder of the work that our team does every day helping entrepreneurs to fulfill their dreams and ensuring that our country continues to be the center of innovation for the world. I am grateful to every one of our colleagues who have allowed me to leave them by channeling our combined passion and service of our customers.

In today’s world, a diverse team of almost 4,000 committed people can do miraculous things. As I end my last earnings call, I would like to thank my colleagues at TriNet. Thank you for what you do for our small business customers across the country every single day. I know you will continue to do this and will thrive in the future. I am excited for my own future with my wife, Carol, and my family, including my first grandchild. I am particularly excited to work with TriNet over the next year and watch all of you continue to grow and prosper. I am happy to take your questions now. Operator?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Kevin McVay with UBS. Please go ahead.

Kevin McVay: Great. Thanks so much.

Burton Goldfield: Hey Kevin.

Kevin McVay: Hey Burton. Let me add my congratulations. I mean you’ve been a steward across TriNet for a long time, create a lot of value, and congratulations on your retirement, your first grandchild and just a terrific, terrific job and rarely do CEOs go out on their own terms, and it’s just a terrific outcome for you. So, congratulations on that.

Burton Goldfield: Thank you.

Kevin McVay: Burton, this might be a little unfair, but what do you think has been your greatest sense of upside from when you set out 15 years ago, I mean — and you can’t say the stock because that’s obviously been terrific, but just you’ve been so early in the sector. Just any thoughts on that more for the broader audience to make because I think it’s just — there’s just going to be a real knowledge for you as you transition into retirement?

Burton Goldfield: Well, thank you, Kevin. And look, I can retire because of this amazing team. I can retire because the culture is focused on the customer. I can retire because we weren’t following anyone. We were trying to lead the industry with unique technology, the vertical strategy, the service model. And I am just — it’s not about me, it’s about a culture that’s been created where this company is going to do great, and I would never do this if I didn’t think it would continue to grow and prosper. So, I think like any CEO, what have I done well, I haven’t changed the mission or the vision every year. I haven’t said go after this shiny object or that shiny object. For a while, I was a little bit of a lone ranger in the technology needs to be the substrate of scale and service to the customer.

So we’ve been investing in technology during my entire tenure, I don’t have to catch up right now. But I really appreciate your comments. I believe that our tech-first approach with great service and scale and the leadership around this Executive leadership table, combined with Mike coming in the door, is a great combination. I’m really proud of that. I’m proud of the team more than my individual contribution.

Kevin McVay: That’s terrific. I’m going to leave it there because the rest are just numbers and just–

Burton Goldfield: Thank you. You’re awesome, Kevin.

Kevin McVay: Thank you.

Operator: Thank you. And our next question today comes from Kyle Peterson with Needham. Please go ahead.

Burton Goldfield: Hey Kyle.

Kyle Peterson: Thanks. Hey guys. Good afternoon. I guess I’ll pick up with the numbers. But I wanted to touch on the guide a little bit and see kind of what you guys had assumed for CIE for the current year. I guess it sounds like you guys are being fairly conservative based on client conversations, but I just wanted to see if you guys had kind of modeled in any improvement in the back half or kind of what your expectations are as we sit here today.

Kelly Tuminelli: Hi Kyle, it’s Kelly. Good to hear from you. Great question because it’s something we watch every single day. As we’re thinking about CIE overall, 2023 was the lowest CIE year TriNet has ever had. And I think it’s just proof of our resilient model, frankly, that we were able to still grow revenue and profits and get there. As we’re looking into 2024, what we’re really forecasting on the low end of guidance is really low single-digit CIE. At the high end of guidance, we’re at middle single-digit CIE and think that it is skewed towards the back half of the year.

Kyle Peterson: Great. That’s very helpful. And then just a follow-up, great to see the dividend announcement today. I just want to kind of pick your brain on capital return priorities for the coming year. I guess, last year was a big year, obviously, for the buyback. I guess is the dividend going to be the big –or the prominent priority today outside of offsetting with dilution? Or how are you guys kind of thinking about returning capital to shareholders for the current year?

Kelly Tuminelli: Yes, Kyle. Right now, our guide assumes related to capital return, just the offset of dilution because due to the timing, stock price, a variety of other factors, we don’t actually bake that in. But we just laid out our financial policy in the middle of the year. So, our priorities really have not changed. We’re going to first invest in the business to drive growth. We’ll look at accretive M&A, but as it relates to returning capital to shareholders, we will look at both share repurchase opportunistically as well as the newly instituted dividends that we’re doing. So, our target is, on average, 75% return of free cash flow to shareholders, and we’ll look at the tools we’ve got to see what the best approach is.

Kyle Peterson: Great. That’s really helpful. Leave it there. Thanks guys. And and Burton, congratulations and enjoy the retirement.

Burton Goldfield: Thank you so much.

Operator: Thank you. And our next question comes from Jared Levine with TD Cowen. Please go ahead.

Burton Goldfield: Hey Jared.

Jared Levine: I just want a little bit to start. Yes, first, I wanted to say congrats Burt on the retirement. But in terms of the FY 2024 guide, can you give us a little more color in terms of what you’re assuming in terms of average WSE growth and kind of how to think about the cadence of WFE levels for 2024?

Kelly Tuminelli: Yes. Well, as you know, we are — we don’t forecast WSEs or give a future guide on WSEs, Jared. But the way that we’re thinking about the pieces of it is given the sales momentum that we’ve got and the strong January that Burton talked about, we’ve really narrowed the gap between new sales and customer attrition. And CIE definitely helps bring that up as well with the assumption that we’ve got right now. So, we’re not really forecasting WSEs, but you can tell probably from our — both our professional service revenue growth forecast as well as our assumption around total GAAP revenue, roughly assuming how that comes in with a real low single-digit on the bottom end for CIE.

Jared Levine: Got it. And then in terms of the FY 2024 ICR guide, does that assume a health insurance margin that’s aligned with what was contemplating your long-term ICR target of 88% to 90%?

Kelly Tuminelli: Yes. When we — related to 2024, really probably the difference in terms of us versus the 88% to 90% is the expected continued favorability from workers’ compensation. Now, we are looking at definitely health care prices increasing. We’re looking at increased pharma prices, et cetera. So, that is contributing significantly to the year-over-year drop because we’re not anticipating 15.7% NIM or 84.3% insurance cost ratio going forward. So, the increase in health prices, et cetera, are really driving that piece.

Jared Levine: And if I could sneak in one more here. In terms of one of your competitors last week announced a partnership with Workday, just thoughts on that announcement in terms of that competitive advantagement on new client sales for organizations with 100-plus WSEs.

Burton Goldfield: So, I’ll take that. There is plenty of opportunity for all the competitors in the space. We are still less than 50% of quotes or against a direct competitor. And the opportunity to address that space from a TriNet standpoint is completely in our hands with our software and our vision of Denali and where it’s going. Other competitors are taking a very different approach to that. And I believe that our expertise, our service, and our core technology will lead us to a very, very competitive place as you go up market over the next couple of years. But there’s plenty of room for everyone, and I welcome others to address that segment of the market as well.

Jared Levine: Great. Thank you.

Operator: Thank you. And our next question comes from Andrew Nicholas with William Blair. Please go ahead.

Andrew Nicholas: Good afternoon. Hey, I wanted to extend my congratulations as well, Burton. Been a pleasure working with you. I do want to ask a question on the quarter and the guide, though, on the salesforce, in particular, it sounds like new ACV growth is very good. January momentum continued. How much of that are you baking into the guidance at this point? And if there’s any way to kind of translate some of those ACV growth numbers into the professional services growth guide, that would be helpful for us to make that linkage.

Kelly Tuminelli: Why don’t you start?

Burton Goldfield: Yes. So, it’s a great question, and there’s a couple of pieces to that. First, the strategy around the salesforce and sales leadership is working. We are up 19% in net new sales capacity. That’s a pure capacity number. Efficiency is also up. So, you’re seeing dramatic increases year-over-year. January was way up as we talked about, and that’s against a really strong January last year. So, there’s a lot of momentum in the net new ACV and the onboarding of our new clients. Additionally, attrition is way down and retention is incredibly strong right now. So, we’re entering the year from a very strong position. It is really nice to be ahead of the curve at the beginning of the year, which is a continued momentum from Q4.