TriNet Group, Inc. (TNET) Earnings Call Transcript & Summary

Thanks, everyone, for joining us today. This is the TriNet session for the Ultimate Services Conference. My name is Tien-Tsin Huang, I cover the payments, IT services, a BPO sector at JPMorgan and super grateful to have TriNet back with us again. With us from China, we've got Burton Goldfield, the President and CEO of the company, and of course, Kelly Tuminelli, the CFO. We're going to do a fireside chat. We're going to take questions from the Ask-A-Question portal as well. So I want to keep my eye on that, but I think I've got a good set of questions here that I've gathered from the investment community and we're going to go for about half an hour. But thank you both for being with us again. It means a lot to me to have you.

It's great to be here. Thank you, Tien-Tsin.

Absolutely.

Yes. And the results have been great. There's a lot of things to talk about. But I thought we'd start with the obligatory question about health of SMB clients. There's been a lot of volatility in the stock market as everyone is trying to figure out the macro. I think you have a great view on what's going on. So catch us up. What's interesting now about what you're seeing with the health of the small businesses, what interesting market dynamics have you observed now relative to what we were seeing pre-pandemic?

So Tien-Tsin, there's a lot of changes since the pre-pandemic, but what hasn't changed in my mind is the strength and the execution of the SMBs in the U.S., particularly in the sectors that we're servicing. It is coming through across the Board in terms of they're hiring, their growth and their execution in the face of this pandemic. So what I would say to you is TriNet and other people in the PEO space are benefiting by the hard work and execution of SMBs across America. From a standpoint of change, everything has changed. Small businesses are now in multiple locations, many of them in multiple jurisdictions, complexity is up and the ability to disintermediate that complexity with a PEO has never been a better opportunity.

Yes. And change is good, right, for TriNet and then...

Yes.

Fully appreciate that. So let me just dig in a little bit on the resilience of the markets that you serve. I think you called out tech and life science verticals being quite strong on the white-collar side, but the blue collar market seems to be doing well as well here. So what you -- what trends are you seeing across the base if we were to look at some of verticals?

So across the board, all the verticals are up. I can now say that the Main Street clients, which are relatively small in the TriNet book of business, are now larger, meaning in terms of employees than before the pandemic. I couldn't say that before the last quarter. And what you've seen is over the last 2 years, a varying rate of growth across the core verticals that we serve. Clearly, technology has led the way along with biotech or life sciences. Financial services has also been strong, but there is strength across all verticals. If you followed our volume, and I know you have, it felt muted a year ago. The reason it was muted was you were still losing the WSE count or the employees within the Main Street vertical. As they've come back, you're now seeing the high growth in the total WSE count here at TriNet based upon a much broader recovery across all verticals.

I mean, look, double-digit growth is always a coveted thing. So you're back to that on the work side employee side. So that builds us up to the PEO space. You and I have been talking about PEO for so, so, so long and how much potential there is in the market and how underpenetrated it is? How do you feel about the PEO sort of potential now from a secular standpoint as well as from a cyclical standpoint? It feels like the secular trends are quite good, but I love to hear from you.

Yes. Look, complexity is the friend of the PEO model. There's a lot of great PEOs out there. I believe that they can all succeed. We are still seeing less than 50% of every quote generated against an incumbent PEO. So for me, that represents opportunity very different than the technology world I come from, where there's 5 and 6 and 7 quotes for a particular opportunity. I think that the opportunity for PEOs to find their niche and succeed is absolutely there. We have been highly selective on our customer base, which I believe has been paying off over the last 2 years through this pandemic. So what we do is highly specialized for a group of customers that we covet and we learn to appreciate and build a service model and a technology model around that. But there's also opportunities in many other verticals within the SMB market for other PEOs and the opportunity for the space. So your first question around what is up with the PEO market, I believe over the next 5 years, the PEO market is strong and will get stronger. And with introductions of new players, it only makes us all better. From the standpoint of the ability to service these SMBs, they're growing quicker. The new company formation, which we talked about on the earnings call is significant based on significant funding and we are seeing rapid rounds of B&C funding like I have not seen in the past. So it is a combination of new company formation, coupled with the follow-on funding, which is creating the rapid growth in employment. And then if you add to that the fight for talent, people are simply not willing to fill out paperwork for employment. I don't remember the last time I got to resonate, they say, go to my LinkedIn site. And then when you onboard somebody, you better have the right benefits and you better have the paperless onboarding and you better have the ancillary benefits around the tax advantage 401(k) plans and the flex spending plan, they all come as part of the package with TriNet. So you as a small business can attract and retain phenomenal colleagues across the country. It doesn't matter what state they're in. We will get them great benefits. It doesn't matter whether they have the capability to visit your home office because it's paperless through their iPhone or their computer. And all of that leads to the value proposition is getting greater with this complexity for TriNet and/or any other PEO that drives this type of service model.

Yes. No, I hear you loud and clear. So given all of that, how do you organize the sales force to go after this pipeline now? I mean, it's got to be -- sales is close to your heart. So I'm sure the pipeline is quite large. But how are you organizing to take advantage of this?

So there's a really big difference in the pipeline today and the pipeline 2 or 3 years ago. What I'll start by saying is the switch to holding sales meetings over Zoom is a very difficult thing in the PEO business or I'll actually just speak for TriNet. The reason is, it's a trust sale, do you trust TriNet to take care of your family in terms of medical benefits, to take care of your employees, to help you grow your business. So it's much less of a financial sale. It's more of a trust sale, like picking your lawyer or your accountant. So that switch has been difficult. The good news about that switch is it's driven the necessity to instrument your leads and score your leads to go after the opportunities that are real because you don't have the same capabilities you had in the past. The sales calls go very differently. You don't call up today and say, "Hi, Tien-Tsin, how many employees do you have? What states are you in?" That information is readily available on the web and needs to be appended to the lead before it ever gets to a sales rep. So the knowledge that comes with a qualified lead needs to be there. So the first question is more of a statement that I know you opened an office in New York, Tien-Tsin, how are you handling medical benefits for your trusted employees in New York City? It's a very different approach to qualifying the opportunities and immediately trying to add value in that sales situation. But look, sales is always a challenge, particularly in SMBs. It's certainly an expensive part of the overall equation. The key to that is when you bring a company on board, you have to keep them and get them to see the value and deliver that value each and every day because the key to the PEO business is not selling them day 1, it's keeping them an average of 5-plus years.

Yes. No, the retention piece is big. And I know you've done a good job and seen good results there. So just to round up this thread here on the competition side, you mentioned it, there's a rising tide, rising -- all the boats here will get lifted up. But talk to us about the landscape. Has it changed? Are you seeing more of the traditional players on the PEO side? What about the non-PEO ASO-type players and then also other parts? Are there upstarts in the PEO side that you're bumping into more than that you're watching?

I think in the PEO landscape, there's players there. There always have been, as I mentioned a few minutes ago. There isn't a dramatic increase in the direct head-to-head competition. But I didn't expect that because we're playing in a very small niche within that. I would say that the pure software vendors are out there more readily than they were in the past. And what they are doing, particularly the ones that service the very small clients that we don't serve is trying to convince those clients to stay longer on their solution before they go to a PEO, TriNet or another one. So the fact I saw the other day, which I loved was no, TriNet is great, you should go to TriNet, but wait until you're 100, wait until you're 200, you can stay with us up till that point. So there's certainly good software solutions and they will continue to get better. My belief is that with the complexity, it is tipping the scales towards companies looking at the PEO earlier and more often. So that's why I believe with our earlier comments, PEOs in general, the publicity around funding opportunities for new PEOs and PEOs possibly going public are going to be really interesting because people have never heard of a PEO will suddenly say, "Well, why aren't I doing that? Why would I not want to transfer the liability? Why would I not want to get great medical benefits and advantageous price choice and user experience?" So as you know, we spend a lot of money on brand and demand and whether it's people force with Larry Summers and Michelle Obama, and Stacey Abrams, we are trying to coalesce this small medium business market around the idea that we can be their trusted adviser. The more the PEO construct comes to mind, the better off it is for us and for every other PEO out there.

Got you. I love the enthusiasm. No doubt about it. Burton can pitch the PEO at any time for us. Kelly, let me bring you to the conversation. Let's talk about health utilization a little bit and I know that's obviously been impacted by the pandemic, probably an understatement. And I think you've also talked about how you're going to rebate the full amount of the recovery credit. So a lot to unpack, I know in general about health care utilization, but tell us what you're seeing and how we might think about the year playing out and as we go into next year?

Yes. No, we very recently gave guidance and that guidance did give an estimate on our health care utilization. We really only have about a month worth of data since then, Tien-Tsin. But what we're seeing is still a favorable environment. So we are expecting health care utilization to snap back to more pre-pandemic levels as we move into 2022. But we are still seeing some level of favorability in terms of health care utilization. If I really unpacked it, we're seeing things like preventative visits back to normal. And so people are able to get to their family practice doctors. People are able to get to make sure that they got their annual checkup and that their kids are getting their shots, et cetera. But what we are seeing is really things like ortho appointments and things like that still being suppressed at this point in time.

Got you. I booked my physical. So I'm hoping to get my physical done. So the Recovery Credit program, I know caught a lot of attention was quite different. How would you grade? How it's performed relative to expectations overall sitting in mid-November here?

Do you want to start with that one, Burton and then I'll...

Yes. So absolutely. So Tien-Tsin, I love the Recovery Credit program. It's easy for a CEO to sell a bunch of philosophy. But when there was a dislocation between utilization and premiums, we returned those premiums to our clients. No other PEO did that. To me, it was as much a gesture of this is a partnership, this is a true relationship as anything else. And as you can imagine, it was received well. Kelly can give you more of the details. But I would do that again in a heartbeat because it's easy to talk about it. It's a lot different when you're calling somebody up and giving them that Recovery Credit check when they didn't ask for it. Not a lot of companies do that.

Yes. And kind of pivoting into the details, Tien-Tsin, of the customers that participated or really to the full extent of our Recovery Credit program that we launched in 2020, over 50% of them took annual contracts and less than 1% of them attrited. And so that's really the benefit to me as we saw the value of really enhancing annual contracts given -- and we've been able to even spin it out beyond the Recovery Credit program where more and more of our clients are signing up for annual contracts. The other thing I would tell you about though is in 2021, just given first quarter health utilization, we did a second recovery credit program for about $25 million. And just given what we're seeing on health utilization, I still fully expect to pay that out to our clients in the first quarter.

Good. Look, it builds up a lot of goodwill. And like you said, the idea was to improve the retention and it sounds like you had [Technical Difficulty]. One more question on utilization. I know that there's a lot of moving parts around what's going on in the world with COVID and everything else, but just your high-level thinking on health as a percent of revenue, what's the longer-term thinking there?

I mean, our longer-term thinking is related to the health piece of our insurance cost as a percentage of revenue or insurance cost ratio. We truly do try to price -- first of all, we price to risk. So we try to assess the risk of the groups that we're looking at. And as we're assessing that risk, we come up with appropriate banding and pricing to match our view of the perceived future risk associated with that individual group. And then what we try to do is really cover our costs associated with the health portion of the offering. And so when you unpack the whole thing and put it back together, we still do try to look at roughly a high 80s to 90% insurance cost ratio overall as we look over the long term, we will be we -- we expect to be better than that for 2021. But that is our overall target in the high 80s to 90% as we're looking forward. The good thing about that model, too, though, as we see experience, we are on the health side, we're repricing clients on a quarterly basis. And I don't mean we are repricing them for an annual term that every quarter we have a cohort of clients that we are able to reprice and take new and emerging information into account, things like digital health. Are people really embracing digital health? Is that going to lower our costs overall? Are they really looking at the best source to get a knee replacement or a better of it, we will align with our interest overall. So that is something that's maybe a little bit different with our model.

Okay. Good. And then just to be complete on the insurance side, quickly on workers' comp with blue collar starting to come back, does the risk equation change a little bit? Would you consider making changes to your working comp programs because of that?

We have had good experience with our workers' comp program. As you know, we still have roughly, call it, 80% white-collar. So we will lower risk charges as well as lower claims expectations associated with that book. I would expect as people are going back into the office that the claims to pick up somewhat. But I still think -- I don't anticipate it being as anything that I would be concerned about whatsoever.

Okay. Good. So obviously, we've talked a lot about the outlook, a lot about PEO and there's a lot of opportunity here. From an investing standpoint, where do you think you can lean in a little bit harder? Is there a need more on the product side, on the service side, on the tech side, people front? What's the -- what are the priorities there?

Yes. We spend probably slightly over $100 million a year on technology. And as we look at tech investments, that is probably where I'm a little more focused on when it looks at M&A opportunities to think about what would align with our customer needs. Burton, anything you want to add to that?

Yes. I'd like to add value across every one of those, Tien-Tsin, over time. I think that the idea is to make the relationship stickier, last longer. We're spending a lot of time on total lifetime value because as you know, the dynamics are phenomenally different on each client. The dynamics of a company like Ring Doorbell going from very small to very large and then being bought by Amazon is a wild and wonderful ride in terms of the WSE count. The question is, is that 4 years better than 10 years with a financial services client who has an investment firm of 100 people and there were 100 people 5 years ago and 100 people today. Not only do you have to look at the overall lifetime value of those clients, but what do they need is different from a service model standpoint, from a technology model standpoint. We've already unlocked a lot of the value out of the insurance -- the medical insurance side, as you know, with the premium plans, which are coveted. But what else can we do to help build that relationship over time? So there is still the idea of how do you capture more wallet share? And then how do you capture more market share with the net new customers?

Sure. So just zeroing on the technology side, $100 million of investments there. This is -- there's always this talk about how modern is your technology in this whole modern versus legacy debate? Where does TriNet fall in that spectrum of modern versus legacy from a technology standpoint? What are you doing to continuously modernize? And are there still some platform consolidation or sunsetting that's taking place?

Always, always looking at new products, new features. Over the last couple of years, we've completely rebuilt our reporting capability, which is so critical to many of our clients, departmental reporting, historical reporting on payroll and benefits. So if I break it down, I'll break it down to a couple of pieces. We're actively modernizing the back half of TriNet from a financial standpoint because we've grown a lot over the years. So we're investing in technology going next level to next level. As you know, we're putting those million dollars through TriNet. This is a company that needs the right financial systems, the right service models, the right technology to support all of these customers out there, the 351,000 WSEs. The second part of it is, which is very important to me, is the user interface and what is installed on the app, how much capability you have in the app, how usable it is? We've talked in the past about rewriting the iPhone app on React because it gave us the ability to dynamically reallocate on an iPad or a PC or an iPhone. That was really important because it looked pretty bad when it was a big screen and it has the tiny [Technical Difficulty] in the middle. So there's always room for improvement in terms of usability and functionality. The last thing I'll talk about is new capabilities. We have talked a little bit about the fact that we are in the process of updating a new technology around third-party medical plans. As you know, we have a single employer plan. As companies get bigger, they want to have their own plans. I don't want that to be a reason why they leave TriNet. if they're getting great service, they love our platform. But as you can imagine, having the knowledge base for any medical plan that they might take, having the service model where any of their family members can call in, and I can say, okay, Tien-Tsin, I know you're not on our single employer plan, that's okay, I have the information on your plan. Maybe it's a UHC plan we don't have. But those are the kind of things that allow us to extend the life of a client and give us additional capability. We will never stop investing in technology. But it's not technology for technology's sake, it's technology for usability, functionality and value. And when I say value, I mean value to the client and to the employee and their families.

Got you. So this doesn't sound like we should expect any step function benefits from tech savings, but rather than just a continuous investment process, which leads me to the other question I have.

I want to say, yes -- I'd love to say yes, but probably not because for me, it's in service of longer-term retention and higher long-term value of the -- lifetime value of the customer, longer lifetime value.

Yes, if you can extend the duration and the life of those clients, that's -- the value is in the LTV. So I think just to be clear around this part of the conversation out. Balancing margin expansion and revenue growth, is it important to expand margins? I know that it's been a while since we've talked about target margins for TriNet given all the volatility in the health care piece, but is it important to expand margins and drive revenue growth?

Yes. First and foremost, we will always -- when I think about capital allocation priorities, my organic growth is my first and foremost priority in terms of allocating capital to drive organic growth. Obviously, Tien-Tsin, it has to be profitable organic growth. And when we're thinking about margin expansion, I do think we have a scalable platform that will expand over time. Like I mentioned, we're not trying to expand our medical margins through health performance or through pricing. But what we are trying to do is make sure that as we add net new clients, that we can scale them with the size and scale of our platform and then really also use the scale of the 351,000 WSEs that we've got right now to reduce the volatility in the health margins as well.

Okay. Good. We've got 3 minutes left. I got a few more questions I want to hit, but let's see how many we can get through. The stock has been really strong, obviously. Is the appetite to do M&A stronger now that the currencies there are relative to before? I know that when we first met Burton back in the beginning from the IPO process that M&A was something that you said that we could maybe expect. How do you feel now what's the appetite?

The appetite is there, and I'm actively pursuing opportunities, Tien-Tsin, but I haven't found the 1 yet that I want to do. But I will tell you that I spend significant time and look at the opportunity to have accretive opportunities for TriNet. As our stocks gone up, the value of the private companies has gone up dramatically as well. And I am looking at it very soberly as I look at these opportunities because we have a great business. I don't feel forced to do an acquisition. I want to add value to our clients. And after almost 14 years, I'm very protective of what I bring into the TriNet world.

I appreciate the discipline, no doubt. So we have 1 minute. So I guess I'll close it out with a simple question around you've been talking to investors. You had people force recently as you mentioned, the stock has done pretty well. I think the story is getting better understood. But what do you think is underappreciated at this point with TriNet given all these different conversations you've had with industry players as well as with shareholders?

So at the macro level, I believe the PEO market is strong and going to continue to be strong. At the TriNet level, I still believe that the customer segmentation, the amazing CEOs and employees within the SMBs that we're servicing are somewhat unique and somewhat valuable. Hopefully, we've shown that with our growth through the pandemic. And ultimately, we are very disciplined about what we are doing, why we are doing it and fairly protective for both our employees, our shareholders and our customers to make sure that we're adding value every day.

Good stuff. We are right at the end here. So Burton and Kelly, thank you for your time. I know it's a busy day for you guys as well, but it means a lot to have you.

Great. Thanks a lot.

It's great to see you, and thanks all the folks who are listening. Appreciate it. Bye-bye.

Thank you.