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

Thanks, everyone, for joining. I think we're webcasting this as well. My name is Tien-Tsin Huang. I follow the payment and tech services group and really grateful to have TriNet with us. With us from TriNet, we've got Burton Goldfield, CEO; Kelly Tuminelli, CFO; Alex is in here as well from an Investor Relations standpoint. So I fielded a lot of questions as usual. We'll do fireside chat. We'll take questions from the audience. But hopefully, I'll cover a lot of the more important subjects, but thank you both for being here.

Great. Great to be here.

Always, means a lot to me to have you all here. So -- if you don't mind, I'll ask the obligatory question because everyone wants to hear it. With respect to macro, the economy, we just had ADP and Chase before you. talk about the health of the employee, the consumer? How do you see it because you've got a pretty nice view of the SME space?

So first, thanks for having us here. Thanks to the audience for being here today. It is certainly an interesting and exciting time, particularly for small, medium business market. This market is much more resilient than the overall economy for the last 14 months, we've seen a flattening of hiring, but we've also seen a significant uptake of net new customers to the platform. I believe the new breed of CEO is very focused on delivering a quicker and they have the tools and technology to do so. So I am very optimistic about the technology space over the next 2 years. I am very optimistic that the resilience that the small medium businesses have shown will continue, and I believe that we have bottomed out by the data that I'm looking at, and we will start to grow again.

So you talked about growth in demand on the call. And what stood out was ACV was up, I believe, over 40%.

Yes.

So what's happening there from a demand or sales lead generation kind of thing. But I know you're always right on top of the sales and driving the sales force to drive productivity there. So what's happening?

So you know this has been a key discussion for years. We started the year acknowledging that the sales capacity was not adequate to support the growth that I was looking for. We invested heavily in sales capacity, and we did that without increasing our year-over-year costs overall from an OpEx standpoint. By doing that, we have grown the sales capacity by growing 19% and that is mature reps going into the key market, which is -- or the key time frame, which is the first quarter of 2024. The pipeline for 2024 is the largest pipeline we've seen which is being driven by the complexity in the world, which relates to the complexity in the legal and regulatory environment, the access to top talent, and most importantly, remote work. Once you get outside of a single state of employment, the complexities around health care, the complexities around workers' comp, et cetera, go up exponentially, and that is good for the entire PEO market and very good for TriNet.

I mean, the thing I was going to add to that, Tien-Tsin, is as we went into the beginning of 2023, we recognize there was a lot of uncertainty in the hiring market. And we also recognized to Burton's point, that we needed to add capacity. And so we made some conscious choices. We -- as you can see from our financials, we reduced our G&A cost to fund the increase in sales capacity. And I think our costs are expected on a full year basis to be maybe up 2%.

So let's talk maybe a little bit more of that because maybe it's underappreciated. Customer acquisition cost, any change there? I understand that you're funding some of the growth but making some savings in other places. But any notable change from a customer acquisition cost? I know the sales productivity is up as...

Yes. I mean we are on track because there is a portion of our customer acquisition costs that are just fixed cost. And because our sales capacity is up 40% -- well, up 19% and our close rate in the third quarter was up 40%, that definitely has brought down our overall average cost of acquisition. So we are able to take advantage of that scale.

Okay. How about competitively, we always get the question of what's happening in terms of this balance of trade, who's winning, who's losing? Who's who are you watching that's coming up -- any call-outs there, Burton?

So I'm most focused on our customer base and the fact that our retention is nearing an all-time high, and I've been in this role for 15 years, shows that the delivered value to the customer is there. The service offering is there. The technology is greatly improved with our new technological advances. And as you and I have talked about for years, it's a very different space than the payroll space. Customers are asking us to take over their most coveted assets, which is their people, their families, their medical and by building both the brand, which we've done over the last year as well as the service levels and technology, we are winning more deals. From a pure competitive landscape, still, which amazes me less than 50% of every quote generated at TriNet has no other PEO competitors. So still a wide open market. There's plenty of room for the competition. I root them on because at the end of the day, as the industry grows as it should, based on the value proposition and the complexity of the legal and regulatory environment, it floats all boats and TriNet gets its fair share. So I think that there's no big change. If I was going to point one thing out, it is that the technology advancement in the PEO space putting us aside for a minute, has been slower than I expected, being a technologist. We are investing heavily in technology. And we believe the next 5 years will be particularly exciting as we build out the barbell and able to process both HCM and PEO payments in the same payroll engine.

Yes. it feels like there's always -- and I talked to candidly about -- TDP about this, the whole pendulum between outsourcing versus do-it-yourself and blurring of the lines between tech and services. Do you see a notable difference there?

I think that it's very hard to convince somebody who's doing it themselves to use the PEO model, and it's very hard to unhook PEO customers to a do-it-yourself model. So the idea of a seamless ability to switch between the two -- and by the way, I've seen a lot of interesting things in the last couple of years with the pandemic and the recession where companies driven by HR departments, say, no, we want to do it ourselves, so they leave TriNet and then they shrink and then they're back at TriNet. The transition in the onboarding is complex. So the ability to offer them a value do-it-yourself solution and also be able to switch them back and forth between two legal constructs is very achievable if you have the right data model and the right platform.

I mean the one thing I'd add to that as well, Tien-Tsin, is when we think about our HCM offering, we are really seeing an uptake in services. So it's nascent still, a new offering for us, but we're seeing more people are really interested in the services, just given the complexity of payroll. And so it's an opportunity for us to upsell but to provide the right value and maintain the stickiness.

All right. Good. So let's drill into the numbers a little bit. In the third quarter, professional services revenue down 2%. I know you were hurt by some of the hiring environment being tougher, but rate has been a nice contributor as well. So can you unpack that for us a little bit and how that might inform the next couple of quarters as well?

Yes, I'd be happy to. When I look at the third quarter results, it really is just a volume story. So we were down just given the hiring environment overall. It has been a tough hiring environment, but we were planning for it. When I think about rate on the PEO side, we are getting low single-digit rate increases. So we're really in sort of the low-single-digit rate increases year-over-year. When I think about HCM, though, just given some of the bundled offerings, we've actually increased price about 20%. So it is a good sign that people are seeing the value there and willing to buy the more expensive offerings because they like what they get. Separately, we did have a broker commutation, which helped revenue in the quarter.

Right. On the WSE or volume front -- is there -- has your thinking around how the benchmark the right level of growth in WSE changed here in the last 3, 6, 9 months? We've seen it be pretty tough from a unit standpoint across the entire group here.

No, I don't change my mind that quickly. I do think hiring is going to come back. I am strongly interested in the tech space because I do believe the ability to deliver real products from a technology standpoint, have gotten much easier and the development cycle is quicker. That's the combination of the cloud and AI capabilities to generate code. So I'm very excited about where technology is growing and the growth in hiring within that space. Now I'm not saying it comes back in Q1. I'm talking about over the next couple of years. I still think mid- to high single-digit growth in WSEs. We are now putting up, I believe, the second or third quarter of sequential WSE growth. It doesn't -- it's still taking time to come back. But with the muted hiring, I am thrilled with the areas which we directly control, which is retention and NPS at an all-time high. New sales with the biggest pipeline that we have had experienced since I've been here and the ability to deliver year-over-year net new ACV results. I think it was 25% then 40%, and we will continue to eclipse year-over-year net new sales.

No, it's impressive -- is impressive. Is it worth going through the verticals that you might be over indexed to?

It would be a short discussion. I love where we are. Has the waiting on technology dampened the hiring over the past couple of quarters? Absolutely. But I wouldn't want to give up a single one of those customers. And this is very different than the financial crisis in 2008. We are not seeing the higher COBRA. We are not seeing the companies going out of business. It's a different environment. There's a lot of -- and you know I spend a lot of time with our clients -- there's just a lot of young CEOs that I would bet on with my own money and certainly love having them as customers because they're much more focused and they have tools that no CEO had in the past.

Yes. Okay. Good. So pivoting a little bit maybe to the health side of the equation. Health utilization trends, health cost inflation. These are questions we get all the time. Where are you in that evaluation process and thinking about the impact to your P&L?

Yes. One thing that we have an advantage as TriNet is we do manage a very comprehensive claims database. So we get -- we have access to almost all of our claims pretty much real-time on a monthly basis to be able to analyze trends as we're seeing them. Where we're really -- we are seeing health cost inflation absolutely. We're seeing unit utilization relatively flat. We're seeing situs of care move from inpatient to more outpatient, which is the lower cost there. But we are seeing pretty significant inflation in pharma. And when I think about our health book overall, Tien-Tsin, about 24% of our health costs are related to prescription drugs.

Got you. And then when you first joined, Kelly, you talked about the opportunity to work closer with the carriers to get more access to data. Has that played out already? Or is there more room for improvement there?

I think there's always room for improvement. We have -- we get weekly claims files from certain of our carriers. We get daily claims files from other of our carriers. But as we continue to evolve, I think really the opportunity is better and smarter use of AI tools just to get quicker insights on it.

Okay. So from a utilization standpoint and cost standpoint, what you're baking in? Can you just remind us of what the assumptions there are for the balance of the year?

Yes. I think on a full year basis from a net insurance margin, I think the high end of our guidance is around 84.5% insurance cost ratio. And that takes into account both workers' comp as well as health care, health care, lower margin than workers' comp overall, but workers' comps is a smaller piece of the pie.

But -- so I'm sure maybe we'll let the audience ask questions there are other follow-ups on the health care side. But I did want to make sure we hit Zenefits. I know Andrew went to HR Tech from our team, and we've been hearing a lot about ASO firms trying to drag out this bundling and you made a big investment, obviously, in that with Zenefits. So update us on where you are in the integration, both from a platform and tech stack standpoint as well as the go-to-market.

So there's a couple of different factors there. From a technology standpoint, I'm absolutely thrilled that the benefit administration site, the Ben Admin capability of Zenefits has been integrated into the PEO model and is being utilized successfully by many of our customers. That was part of the Zenefits package that we acquired. But we're also -- and that is giving us access to customers that we couldn't get access to before because we had the inability to write them from a medical standpoint. So it becomes bring-your-own medical benefit, which opens up the market to the brokers that we deeply appreciate and would like to do more of. So it's a whole different sector of the PEO market from my standpoint. And so now we have the single employer plan. You become part of our plan or you have the capability to access a potentially government-funded or open market plan and bring it to TriNet. That will be an interesting addition as we grow the business because, as you know, you can only grow so many sales reps so quickly. So we believe an acceleration in the go-to-market strategy will be around that capability, which exists and is now in the market. From a payroll engine standpoint, the idea of bringing together HCM and ASO, the payroll engine that was integrated into Zenefits is now being removed from the HCM platform, being put on its own Amazon Instance, which allows us not only to give customers access but also to start to build the capabilities we need from a PEO side onto that payroll engine. There will never be a knife edge. We're adding capability. So the customer will never know when we switch from one payroll engine to the other. The ability to have a single payroll entry screen for both PEO and ASO, the ability to have a single data model and the same reporting capability. So when you're within the TriNet environment, your legal construct is tangential to your ability to access the reports, the tools and the payroll. And it just hasn't been done yet.

So from a revenue synergy standpoint, is there a milestone that we should be watching for that might allow you to get into another gear on growth with respect to the Zenefits?

Yes. So we've talked about -- my first focus is keep customers longer, and we are doing that now...

The retention piece, yes.

The retention. So it's going to keep the ability to add the capabilities to keep customers longer. I believe now we're almost at 6 years. So that's a big difference than 5. When I get to 7 and 8, you'll see how that technological advancement is keeping customers longer as they get bigger. So I want to be able to service the bigger customers. On the other end of the spectrum, as Kelly was talking about, I want the ability for somebody to come on an HCM platform, do it seamlessly do it through our website, no TriNet interaction and be absolutely satisfied with that solution. I believe there's a price point that makes sense there. Our -- as Kelly said, our average selling price has gone up dramatically since the Zenefits stays and part of that is there's a certain subset of customers that we probably can't service as well as others. So we are looking for that sweet spot where perhaps they want great technology and some ASO services on top of that.

Got you. Got you. So when you were here last year, we talked about the cloud journey and moving more applications to the cloud and how you're excited about that. So catch us up on where you are with that. And remind me, is that more to improve attach rates and sort of the product innovation life cycle, maybe accelerating because of that? Or do you see it more as a cost opportunity as well?

I see it as both, whether it's for our clients building software or for us building software, the capabilities in the cloud, the security, the test -- the test harness capabilities the backup. The backup and recovery are phenomenal. And what we've been able to accomplish over this year, which and you heard at the HR Tech was we put the entire platform and all the ancillary services in the cloud. and it was done without fanfare by an amazing group of people at TriNet. So that was accomplished on time, ahead of schedule, within budget. And what I see now is additional security better backup and recovery capabilities. I see quicker cycle time on software development, so we can get to proof of concept quicker. And ultimately, you have a lot more visibility. So I'll be able to see the payroll engine running in the cloud separate from an HCM environment. And we have some exciting things we're talking about there and what we can do with that, but we're taking it a step at a time. The goal is to deliver value every quarter. Because at the end of the day, our customers are evolving, they're expecting more from TriNet, and they're telling us what we need to do. There's no -- I'm not looking to get in a new market. I'm not looking to go international, I'm looking to help -- my passion is small businesses in America, and how we can help those businesses, their energy fuels my energy, drives the culture of TriNet and drives the innovation at TriNet. If we don't innovate, we are failing our customers and the cloud allows us to innovate faster.

All right. Good. So we pass it -- we got less than 10 minutes ago. I promised we'd ask the audience a chance to ask questions, so that's okay. Absolutely. Any questions from the group here? Otherwise, I can keep going. Yes. That's you.

You can just scream loud. Yes, I can hear you.

We'll repeat it.

Heard things from a lot of different players, who have got exposure to SMB. So if we kind of take a step back, could you walk us through how you think about the strength and resilience of your client base?

Absolutely. So there's so much -- it's a great question. There's so much data to look at, and you can pretty much create your own story. I would start by saying that we have a pretty interesting customer base. If you're contemplating using TriNet, you value your human capital, you're looking for growth, you are accessing the best benefits, all the things. So we're not looking at the 3 neighbors who get together to start a company. So I want to start by saying what I am looking at every day with these CEOs is a subset of the overall SMB market. I also -- the data is really interesting. The company -- so let's take tech for a minute. Tech hiring is down, but 50% of our tech customers are hiring. So it's a tale of 2 worlds. And if you split it by size, the bigger ones are laying people off because they got ahead of their budgets and their funding. The smaller ones are getting funding and growing very quickly. So when you look at the 10 to 30 space, growth. When you look at the 100 to 500, people are still being laid off. So you have to cut the data in a different ways. Biotech is still very strong for us. Software technology is strong. And thank you for acknowledging the comment because I really am excited. I get excited because I look at these CEOs, and I'm going, you guys haven't been beaten down by the last 30 years like I have. It's really cool to see how optimistic you are and how far your $10 million funding is going to go. I also see the VC world being more realistic of out setting goals that can be made by the CEOs and their teams and delivering on those goals. And then there's a whole group of midsized start-ups, and I would say in the $10 million to $30 million range that are being turned over to private equity or merge with other companies because their ability to see profitability is not there in the next 12 to 18 months. So I do think there's a return to logic, and that's why I'm optimistic. But it is pretty funny because I was -- I was with a group of founders the other day with some great technology, and they were just -- they were just over the moon. And when you look at the tools they're using, they're showing me these wire frames and how quickly they can get it to a working model, which, in my day of technology would take us 2 to 3 months, and they're doing it in 2 to 3 weeks. So that sort of ties it all together from my standpoint.

I mean the other macro trend that we're seeing too, though, is while we are seeing significantly depressed hiring and reductions in force and tech, we're not seeing a lot of companies go out of business. So we're seeing the rationality there and it's really heartening to see.

Yes. Anyone else? Yes, Andrew.

One of the questions I wanted to ask is when I was out at HRTech, I talked to some of your sales leaders and they talked about somewhat of a cultural evolution within TriNet, where there's more focus on upselling and cross-selling, particularly after the acquisition. So just from your perspective, I wanted to hear how that evolution has kind of taken hold and where you sit now versus a couple of years ago in terms of like how married the 2 organizations are.

It's a great question. So first, they're completely 100% Mary. There is no hold out. We completed that midyear, I would say on -- from an org structure, we completed at the beginning of the year, but now the orgs are now fully integrated. And I know that Kelly has a comment about we had committed to getting to breakeven as of January of this year and 2024, we're going to meet that from a financial standpoint. Financial discipline is becoming the watch word with the economy the way it is at TriNet. I would love more products to upsell and cross-sell. As you know, we've never done that before because from my standpoint, as long as 50% of the net new quotes were to new ground and open market. I didn't want to focus on the cross-sell upsell. What you're seeing and what you heard at HRTech is as we bring out new products around some of the acquisitions we made, we're starting to sell them from the installed base sales folks, and we're using our relationships with our customers. One of the things that's interesting at TriNet is it's a trust sale. We've never dealt with an HR -- we've never dealt with a purchasing department. We deal with the executives in the HR department. So there's a huge upsell opportunity. I don't want to overdrive that because I still think net new logos for the next couple of years are going to drive TriNet's ultimate growth, particularly as CIE comes back. When CIE returns and the companies start growing, even Tien-Tsin is going to think we're a genius. It's really -- I've been trying to -- I do think there's something there about still focused on the net new, but the balance is changing. I'm glad sales folks told you that because I do think there's an opportunity to cross-sell, upsell, but it has to be significant revenue for me to put a lot of fuel on that. It's a great way to keep customers longer. I'm thrilled with our retention. But I'm still focused on the net new WSEs.

Yes. And the thing I'd add to that, Andrew, is when Burton is talking about the integration, really, we've got a virtual sales team out there that is going and evaluating what's the right offering for our customer. So they are really looking at those customer needs, making sure we're putting the right thing in front of them that makes the most sense, and it makes sense for us as a company and makes sense for the potential prospect. And when Burton mentioned about the breakeven, when we bought Zenefits in 2022, the economic outlook was very different than it is right now in the short term. And we had really anticipated at that point that we would make them breakeven through humungous revenue growth. Well, we haven't quite got to the humongous revenue growth. So we accelerated the integration. And by accelerating that integration we've been more rational from a cost perspective and have 2 great offerings that we can fit to the customer that fits at best.

Great. Let's take one more.

Yes.

And I'll say on the record, I'm happy to be wrong on the stock. It's been one of the best stock performers in the group, and I'm happy for you.

Thank you so much. No, look, I -- you realize -- I don't know if you remember, but March is our 10-year anniversary, ringing the bell on the New York Stock Exchange and you were there at the time. So you've heard me talk for the last 10 years about this. And it's just fun. It's just fun. What can I tell you?

No, it's a fun run. Please.

It's a quick one. What do you see as normal growth in the PEO business?

Do you want to answer that? It depends on how you measure the growth if it's -- go ahead.

No, I was going to say, it depends on you if you are talking about short term or long term. And so obviously, given the hiring environment, we'll be somewhat constrained. But I think we both feel comfortable about mid- to high single-digit growth over the long term.

So that's volume and I think margin expansion needs to continue. And I think the opportunity is out there, honestly, for us and all the other PEOs. I guess that's a good place to end.

Great enough. Thank you all for coming.

Thank you for the time. Appreciate it.

Grateful for it.