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

Here, thank you all for attending in person and also remotely. I try to keep these as collaborative as possible. Just to -- we have an iPhone up here or iPad, if anyone to ask questions through that or e-mail me, kevin.mcveigh [email protected]. Or will pass a microphone as well. But we're thrilled to round out. This is our last fireside chat, and I couldn't think of a better way to end it than with TriNet. We've got Burton Goldfield, who's the CEO, who's just done a really terrific job of visionary within CEO for sure; and Alex Bauer, who's headed up their Investor Relations effort for a long time, and both have really, really I think, done an exceptional job in terms of delivering outcomes within the PEO industry. And what I've done with all of these, and again, I think this is my fifth or sixth over the course of the last couple of days is really, it sounds basic, but I think particularly within the DNA of this conference, we'll start with Burton, just a little bit about TriNet and from the -- and even start from the founding to kind of where we are today and help with the competitive positioning and maybe weave in the benefits of Zenefits, I'm going to sit down, but I think it's just such a -- it sounds like a basic question, but I think it's really important within the context of the broader HCM ecosystem where you folks sit and then we'll go from there.

Well, thank you, and I'm absolutely thrilled to be here and welcome to the folks in the room and those listening over the air. It is a tremendously exciting time for TriNet and in fact, in my mind for the entire PEO industry. The complexity around the legal and regulatory environment, the complexity of access to health care and other benefits in each of the 50 states, coupled with the remote work environment that we're facing here in the U.S. today makes the value of the PEO model tremendously valuable and increased over the last couple of years. From a TriNet standpoint, we are focused on core verticals using a combination of technology and service which allows us to deliver unparalleled value. So some of the highlights of what we're doing at TriNet is, we own our own technology, and believe that driving that technology forward hand-in-hand with the right service model based on the industries is critical to the long-term success of the company, and we have to deliver continuous value. I believe the solutions that are in the market today, particularly from a development standpoint, and the ability to increase both usability and functionality, leveraging AI, and we can get into that is phenomenal, so much different than when I started my career over 40 years ago and will allow rapid development and deployment of new -- net new technology, which will add value to the customer base. From a customer base standpoint, we are servicing the small- and medium-sized businesses. They continue to survive and, in fact, grow even in a year like we just had. Their growth rate is smaller than it's been in the past as we measure it by a metric called CIE or change in existing, that is our existing customers net growing and terminating their employees. So we will end the year net positive but probably the slowest growth in my history here 15 years, but it is positive. New company formation is slower, but we are seeing more larger companies coming to the PEO model as they wrestle with dealing with the complexity of employment in 50 states.

Let's -- I want to use that as a springboard, Burton, because I think the Zenefits acquisition proved to be pressing, and I think we're coming up on 2 years now, you announced that in December '22. And really maybe talk about the strategic optionality that brings to bear. And really, there's a heavy software component to that.

And I think you've been able to leverage that, whereas historically, our view has been -- there's a little bit more complexity on the PEO side, but you've been able to leverage the software aspect of it. And I think that's probably helped drive maybe some of that larger client. But maybe the strategy behind that because it feels like that's starting to pay [indiscernible] -- continues to pay dividends for you.

The acquisition of Zenefits was a deliberate opportunity for us to acquire customers in a code base with very, very modern technology Amazon-based API-first containers, which we have been able to leverage further, not only in terms of the payroll engine, the HCM solution, but also what's turned out to be an exception benefits administration tool, which we've now integrated into the PEO model. The vision has always been a barbell, where at one end, you have an HCM payroll solution. At the other end, you have the full-blown as you say complex PEO model. We are finding it much easier to go from the full-blown PEO model back into an HCM solution and the vision is to have a single platform where you can use either of these legal constructs without changing the payroll input, the payroll engine, the reporting screens or in fact, any of the base technology. And that is our investment. As you said, we bought the company 2 years ago. That is moving along well with some proof points, including the BenAdmin tool but we are fully engaged in developing the new capabilities where we can roll them out in a continuous value model to our customers. Ultimately, there will never be a knife-edge cutover, we can take the back payroll engine, which we point from the HCM solution to the independent payroll engine and then ultimately, the PEO solution to the new payroll engine completely transparent to the customer. So this is continuous innovation, delivering profitable growth and value every quarter. And right now, as I say, the market is showing tremendous resiliency even in this economy.

And maybe talk to that a little bit because I think one of the underappreciated parts TriNetis really the diversification of your client base. And to your point is, you've seen some slowing as a lot of the just broader HCM space has particularly mid- to down market. And again, it hasn't been disruptive but clearly slowing it, you continue to outpace that. And I think that's a function of maybe the client mix a little bit as well as some of the services you're bringing to bear as well as what I think has been -- it's been the past 7 years, right, where you took initiatives pre-COVID to really start to refine and really reprice and optimize the subset of WSEs you had and that you were benefiting from that and then COVID hit, but really starting to continue to see that benefit. So maybe talk to that a little bit.

One of the challenges of the PEO model is the most successful customers grow out of you, the ability to go to an HCM solution and allow the customers to continue the relationship, the great service they're getting with a more robust HCM solution as part of the vision. Our customers are now averaging close to 6 years with TriNet, which I'm very, very proud of. And my goal is to continue to grow that relationship because, obviously, your cost of sales is gone, the customers, you understand them from an underwriting standpoint, a service standpoint, so the ability to have a more robust HCM solution, and I can go into details of what that means, but it's things like access controls, et cetera, that are not normally in the PEO model can be built out with the combination of the PEO and HCM solution also the ability to bring your own medical plan, which perhaps is self-insured as you get bigger, is different than our single employer plan within the PEO. The good news is, at that point, you could choose whether to stay in the PEO model, where TriNet takes the liability or go to an HCM solution where you're using the robust capabilities of HCM and taking on your own insurance in your own liability, the choice would be yours. And by the way, we're finding interesting things, particularly in this economy. It's not linear. You don't start small, grow big and move to an HCM solution. We have customers that start small, grow big, end up shrinking and going back to a PEO model and then eventually growing back to an HCM solution. So like the rest of life, it's not linear in the growth of the company, the ability to do that seamlessly within a single platform has not been done, and we believe we will get that done.

One of the -- and it's interesting, one of the things you come to appreciate over time is some people take health care, some people take workers' comp, some don't take other. And that, to your point, the optionality that creates probably turns out the average life of that customer.

Yes, exactly. And the reason that's exactly it. So the reason people term is either us or them are not commensurate with the health plans that we're offering. So they want something else. And now we can say bring your own health plan. You can stay in the PEO model, bring your own health plan using our BenAdmin tool and be in the HCM model. So the future is that optionality. And at the end of the day, what you want are the long-term value relationships as well as the net new customers who will grow over time.

Makes a lot of sense. Burton, maybe to shift gears, talk about the industry for a little bit because the industry, in my mind, and I've been doing this for a long time, but there's been, to me, a couple of transformational events. Like when I think about PEO 2 to 3 decades ago and being very simplistic to try to drive the point, but it was concentrated in California, Texas and Florida, right, to your point, I think the laws have become from a state level have particularly become much more favorable over the last 3 decades. But when you think about things like Obamacare, which I think was transforming the industry and then more recently, COVID, I think it's really shifted the market opportunity pretty dramatically. And I think there's subtle undercurrent to that. But maybe talk to that a little bit. And again, I think it's that midsized employer, the level of complexity is a lot higher than it's ever been, where it's really not an option to keep it internal, but maybe talk to that a little bit because I think that's going to set the tone for probably why we pace a little bit better. And what I think to be clear, part of our view is we do think we're going to see some adjustments in employment, but on a relative basis, we think the companies we cover are a much better position even relative to cycle-to-cycle.

Yes. So there's two different points there. The first point is the remote work fundamentally changed employment in the U.S. So I'll give you an example, a creative services company in Century City, 100 people coming to work every day in the same location. COVID hits, they sold the location and the 100 people went to 17 states. I knew the CEO, I could not sell him the PEO model. He said, "I'm fine with my medical care when everybody was in California, I'm fine with handling with one HR person, the legal and regulatory issues". When the 100 people went to 17 states, he called me up and said, "If you can do the payroll at the end of this month, we will become a TriNet customer". so there's no -- that's an example of what has happened in the past couple of years to drive the growth in the PEO industry, it's that complexity. The second part of your question is, I'm finding a resiliency in the small businesses, which is very heartening. There's still a lot of problems to be solved. There's a lot of patents. Biotech is doing really well. We're seeing growth in that area. There's still -- what's happening is bigger companies are selling patents, small private equity-backed firms are buying those patents and putting them into use. We're seeing new company formation with CEOs that are perhaps more mature than we've seen in the past. The maturity I rate in terms of time to profitability, our realistic expectation about growth rates and something that's -- and again, in my opinion, much more realistic than 5 years ago. So although there may not be as many new companies, I'm incredibly optimistic about the U.S. economy and the ability to build new profitable businesses over the next 2 to 5 years. What I don't know is, whether employment will boom next year, the year after, but I'm not counting on that. And one of the things I'm most proud of, if you look at the financials is we've been able to grow the channel, the sales channel while holding costs. And that's part of the challenge is having flexibility on the cost lever as you navigate an economy, which is uncertain.

Terrific. About the midpoint, usually, I open it up, see if there's any questions in the audience or I don't think there's any coming through here. I'm just going to check.

While you're looking at the questions, one of the things I wanted to talk about in this session is that we are seeing the continued growth in net new sales. And as you know, from the industry, January is the most important month of the year. We do about 40% of our revenue in the first quarter. And my expectation is that new ACV growth year-over-year in January will exceed 25%, and it was up 20% last January. So we are seeing strong demand for our products and services, and I see that demand continuing into next year in the most important month of the year, which is January.

And Burton, if you were -- to the extent you can disaggregate that 25% because it's just an incredible number, right, because it's not an easy comp -- it's not easy comp and accelerating growth on a tough comp, more uncertain macro, is there any way to maybe think about what parts directionally, if you can, that are contributing to that growth from a product perspective.

So like everything else in life, it's a bunch of small pieces. One is our NPS scores are as high as they've ever been. Number two is retention is as high as it's ever been. So our referrals are up significantly. Number two is the brand identity and the brand reputation is strong as measured by independent parties. So -- we are getting the opportunity for much more at [bats], which makes a much larger pipeline for TriNet to go after. And number three is we have scaled the sales force as promised about which allows us to take those opportunities, which are in the pipeline and close our fair share of those opportunities. So that's about it. That's sort of where it looks like to me. And it goes back to I think we're doing a great job, but I do think the market is ripe for this type of construct, whether it's us or someone else because people don't want to deal with the issues that we're dealing and scale in service of the customer work. When we file, I think we're in 14,000 jurisdictions at this point and scale matters and the application of AI to help that scale is making it even more productive for us as a company.

I want to pivot to AI. But before that, I don't want to lose this thought, because you had a terrific rebranding event in the city, I remember we went to it, and it was just -- it was a really, really, really nice event. Is that obviously you alluded to it, but maybe help us understand that just the reason for that, and clearly, you're seeing some benefits from that.

I think there's a big vision of building relationships with a subset of the SMB market that we believe that we can serve. I don't believe that a generalized solution can give the biggest impact to the verticals that we're serving. So we're verticalized by industry. And in so much, I would rather go deep within a specific industry, then I would go very broadly across the entire SME market. The idea of the branding was to put our customers first and highlight the amazing things that they are doing, whether it's curing cancer, cleaning the waters, building green software and being a partner, a true partner, and I believe a true partner is when they have a problem, we take care of it. But I do think there's a resiliency that is very heartening to me and the branding events and people force was exceptional this year is we truly want to help the small and medium business, and it's fun to do. It's a great market. It's a great set of customers and the people behind that are shot out of a cannon. So it's fun to see the evolution of the CEOs because that's who I'm dealing with. And it keeps me optimistic. I think that if you look at the next 5 years, the U.S. economy will be strong. There's nothing to me that indicates it won't. That's a pretty strong statement based on where the world is today.

Sure. And I think -- no, not at all, please.

I'm just curious about how [indiscernible].

I think it helps exactly. So it goes back to this idea of scale in service of the client. When I'm negotiating medical, I'm negotiating on behalf of over 400,000 people and that scale in the negotiation certainly matters. The fact that we can price the risk usually is a really good thing because you are paying for the risk of your population as opposed to paying for the general population of the entire U.S. So pricing to risk, negotiating what the admin phase of that 15% is using scale is a really important part of our model and certainly part of the general PEO model. I think that goes across the board, whether we're negotiating with outside legal firms when we get into lawsuits, whether how much of it we can do in-house, so we are always monitoring how we settle both EPLI and workers' comp claims and how that compares to an open market or the rest of the market. And the value is the triage between what a case gets settled for and what we actually settle it for. So whether you're talking about medical insurance, whether you're talking about life insurance, whether you're talking about workers' comp or EPLI, that delta between our ability to address those issues effectively for you as a client is all built into the value of TriNet as a solution.

One thing, and I think it's a really important point you bring up, I'd also highlight Burton, you have a very rigid framework in terms of the type of clients and the end markets that you serve, which helps you deliver a better outcome, I think, across your collective WSEs. I mean when you think about these models, it really matters the end markets and the type of clients you serve. And I think the effort you went through and it's 5, 7 years ago now continues to pay dividends today because a lot of that is -- whether it's incentive-based or claims based, you're seeing that, and that allows you, I think, to drive better value across the pool of WSEs you serve.

And it's not that one is a good group and one is a bad group. It's that where can we effectively build a long-term profitable relationship that will continue. I think it's very hard to do the entire SMB market. So for me, it was focusing like a laser on core verticals and servicing them in a certain way that will add the value to them. So it's not that we picked a better or worse market than anybody else. It's more my strong belief that understanding the industries you serve, understanding what is -- there's people in this room that more than one that are customers, understanding what investment firms need in terms of the service model, in terms of the insurance constructs is very important. And those insurance contracts and the service model is not necessarily applicable to a restaurant or a retail outlet. Not that one business is better than the other, it's fit for purpose over the long term and the ability to take scarce dollars and build technology that will delight the customer.

Sure. I wanted to shift gears talk about AI a little bit because I think it's again, it's an industry that I think has historically had a little bit more of a complex sales process, but I think there's a lot of synergies and expense optimization that we have both on the front and back end. So maybe talk about where we are in that process, which is still -- is probably still relatively early, but maybe how AI can help.

My personal belief is AI will permeate every aspect of your life and every aspect of business. And for us, it's particularly important. If I go back to that 14,000 jurisdictions, making sure that the tax rates are right, making sure that the timing is exact. AI is a perfect application for that. When you talk about things like investment tax credits. So I'll give you an example with Clarus R+D, there's a 4-part test to see whether you're eligible, we can put that through an AI model before we ever review the final outcome, but it's an absolutely perfect application. When you talk about building pipeline and analyzing propensity to buy, there's about 8 or 10 attributes of the prospects to become customers. AI can analyze those and bring those leads to the front of the pile. When you talk about cash management, AI works incredibly well to park the cash at night when a company like us has over $85 billion in cash flow. So AI is a big part of what we're implementing within the company. Coming from a technology background, which is where I came from, seeing things like copilot that will allow effective documentation, code it where you're building the test -- really building the test case as you build the code, the ability to build security into the code from the beginning, the flexibility of the code, the APIs that can be built seamlessly. And we could spend hours talking about it, but what I'm excited about is that we own the technology and we're using advanced technology to build the future models to service our customers. It's not that I'm excited about technology or AI because of the buzzword, I'm excited about what it can do for the verticals we serve and how we can delight our customers.

And to your point on that, it's -- you own the technology, you're going to layer the AI into it and probably is what -- when you think about the sensitivity of client data, it does get much more sensitive than health care records or compensate. So it's -- and part of our core thesis across all these sectors is it's the uniqueness, the sensitivity of the data and what you're going to layer on top of that from an AI perspective, it's just you're going to really be in a pull position given the input.

And it's sort of an arms race on all sides because the government will use that to audit the tax credits. The government will use that to audit tax payments and personal income tax. So the level of exactness and the ability to follow the changing rules and regulations is a critical part of our business, which is why people come to us because they don't want to worry about. It becomes our problem by making it our problem, I need to be able to deliver a solution that's effective and it has to also be cost effective.

which I think, and it's probably early to make this call, but I think that's going to drive higher retention. Now again, there's always going to be a certain amount of success based as clients grow. But -- and the other point, I thought you made a minute ago was you're in a unique spot to see a lot of companies mature over time, right, in terms of as they grow, they typically stay with -- and again, at a certain point, they're going to grow out, but it's -- you've got even a lens that's I think, unique.

And as I say, I absolutely am in awe of this new generation of CEO. I think that they -- the model like everything in life, the pendulum has been swinging back and forth. I think it's in a really good place. I haven't heard the word unicorn uttered in about 2 years, and that's really good from my standpoint. I see people being really realistic. And at the end of the day, you have to be able to attract and retain great people. There's more great people in the market right now than there's been in 4 or 5 years because the bigger companies are weighing off people and the smaller companies had no access to those folks and now they do. So there is an issue with access to capital that I don't deny. There's an inflation issue. But on the other side of it, there's a flight to safety and there is capital available for companies that have the prospect of profitable growth over time.

Great. I don't think we can end or even talk without -- I think you made a pretty sizable commitment to TriNet vis-a-vis the buyback and I think it underscores how you view the organization, but maybe talk to that a little bit, due to a big buyback, which is very well received and maybe talk to that a little bit through the lens of capital allocation. And do you see an opportunity for maybe more -- without being too specific benefits out there, but your cash flow and the -- just for [ stating ] your balance sheet affords you a lot of optionality. So how should we think about that?

I'll talk a little bit about financial policy, But we can talk about M&A. But our priorities are always to invest in our organic growth first. And I think if anyone is listening to Burton or have spoken to him, you can hear the trade-offs that we're making between cost management and investing in sales right now. Of course, the second priority is to look at M&A. Burton can talk about that. And then lastly, as evidenced by the buyback, returning capital to shareholders is an important part of our capital policy. Did the $1 billion buyback, I think we'll always manage equity-based compensation and manage dilution. But underpinning all of this is our financial policy, which we came out with this year for the first time publicly, I think two important parts there just to touch on is the leverage ratio that we're comfortable operating in, 1.5x to 2x that we find that to be the sweet spot where we can optimize our balance sheet. And then, of course, with respect to free cash flow, returning approximately 75% to shareholders. Currently, that 75% is in the form of share repurchases. We also are contemplating a dividend. No decision has been made on that, but that's absolutely another tool for us to use in our capital allocation and capital return to shareholders.

Then on M&A.

On M&A, always looking, but I don't see anything on the near horizon. I believe that I still need to extract more value out of the Zenefits acquisition. As I said, that's a big focus right now. We call it the [ Denali ] customer platform, a single platform for PEO and HCM and that will be derivative of the co-base that we got from Zenefits. And it's -- look, as you know, it's a tremendously cash-generative business, capital-wise -- and I believe we can continue to grow profitably. I believe I earned the right to do what I do by delivering on the numbers every 13 weeks, and that's what I intend to do.

It's been more than one 13 weeks?

Yes, it's 15 times more, that's 60 quarters, right?

It's a lot of weeks.

It's a lot of weeks. Is there any other questions?

Any other questions.

Thank you all.

This is terrific.

I appreciate, Kevin, yes, bye-bye.