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

I think TriNet is a terrific way to close out the day. So we're thrilled to have TriNet. We've got relatively new CEO, Michael Simonds. I'm Kevin McVeigh, part of the UBS Research. We also have TriNet IR, Alex Bauer here with us. Typically, and again, we closed out kind of last year with Burton, so it's nice to almost close out this year with you, Mike. Maybe since you're relatively new to TriNet, maybe a little bit about yourself, I think it would be helpful. It's -- you're filling some pretty good shoes and doing a nice job with it. But a little bit about yourself, what you -- TriNet opportunity, and we'll talk about TriNet more specifically. But since your first time with us, maybe a little bit of background and what kind of drew you to the opportunity?

Yes. Thanks, Kevin. I appreciate you inviting me, excited about it. And yes, I'm coming up on 10 months at TriNet here. And I kind of have built a career prior to TriNet in the employee benefits business on the insurance side, knew TriNet by reputation, and it's been terrific just getting to know so many of our colleagues and getting to spend time with our customers. We target the SMB market. We target verticals that are higher growth, tend to be higher income, tend to value employees and target lower employee turnover. And so our value proposition around being a sort of a premium provider, taking risk, which enables us to do some different things on the benefit side has been a pretty good fit.

And in terms of -- if you think about the go-to-market motion, and we've done a lot of this over the course of the day, just because I think the nuances of the TriNet model, Insperity relative to maybe ADP Paychex. Maybe talk to that a little bit in terms of competitive positioning? And I think 1 thing that maybe you don't get enough credit for is think your retention is higher than what folks think. And I think to your point, that kind of talks to the caliber of the client, the duration of the client. So talk about the competitive positioning a little bit amongst the other publicly traded peers, if you would. And then a little bit on the retention, and then I want to talk about the client mix a little bit because I think it's really impactful in terms of particularly the areas where you lean, whether it's financial services, things like that, that help you kind of manage some of the claims risk, which we get into a little bit too.

Yes. And it's a great question about sort of what's the competitive mix and how does TriNet differentiate, what sort of our value proposition in the go to market. And I think it's worth saying, Kevin, as you know, it's like -- this is a fantastic market from -- in terms of like the addressable size of the market, the penetration, 10%, 12% of what it could be. I think things like health care cost trends and the complexity of health care, it's a very painful in the current moment. But that pain for small businesses just makes our value proposition as a PEO that much stronger. A small business trying to sort health care today and into 2025 and '26 they need help. And that's what we do by bringing large employer benefits, sophistication, bargaining power into really a bunch of their HR support, including benefits. And so we really like the market. We see sort of tailwinds around health care costs and around complexity. The distributed workforce post COVID. You're now dealing with payroll taxes in multiple states, even small firms who have employees in 6, 7 different states working remotely. That all sort of underpins what we try to do as a PEO. And for us, like I said, we really do target a segment of the SMB market. It's a big segment, but it's a little bit different than some of the other competitors. We do sort of focus in on the smaller end of the market. So we're looking at average customers that run sort of 20 to 30. We serve much, much larger, but new customers coming on at that size. They tend to be higher growth, net hiring in a normalized environment. It's really important to our model. And for us, it's about being a premium provider. We're typically not the least expensive offer out there. But through the acquisition of Zenefits, which I'm sure we'll talk about. I think having proprietary technology and having really strong, highly engaged colleagues that we -- are just uniquely focused on the PEO space allows us to bring something that's differentiated into the market.

You made an important point on the pricing, maybe we'll talk to it a little bit. You're not the lowest, right? But it's, I think, the service and kind of the tailored plans that help kind of drive the retention, some of the pricing that you enjoy. So maybe give us an example of go-to-market motion. A lot of the kind of hedge fund clients we deal with actually use TriNet? So maybe what's so unique about that. And I think 1 of the thing that highlighted, too. I just referenced, Burton because you did a nice job, but I would say in certain instances, there are certain plans, companies couldn't go out and procure on their own. And I think that's 1 of the real differentiators for you folks. So maybe talk to that go-to-market motion maybe with a little more vertical specificity.

Sure. If you're in a high growth, 1 of our verticals, high-tech financial services, like you mentioned, you want to compete with very large, very well-established firms. And when you go into the small case commercial market, the benefit plans that are available to you are just different than what you could get if you were a scaled enterprise player. And so our ability to sort of around the geographies and the verticals, put together benefit bundles, carriers, plan designs. I think it's something that's pretty unique and something we're actually leaning into. Because 1 of the first things as I joined the company was to carve out the Insurance Services group. We brought in some new talent, Tim Nimmer, who is Chief Actuary, Head of Underwriting Pricing for Aetna prior for Aon kind of runs that insurance services group, and he's added some new talent. So we're going to lean into getting better and smarter about kind of the value proposition from a benefits point of view to that discerning buyer. And I think that helps us with strong service build. Yes, I would agree. Very strong retention. We're sort of enjoying, I think, a record retention here for TriNet.

Mike, I think to your point, you've been on board 10 months. And maybe we'll leave this into -- let's talk about Zenefits first because that's important. Not only you talked about, I think, the average client size scaling a little bit, does Zenefits help that process? And number one. And then number two, I think benefits allowed you to probably more efficiently rearchitect your tech stack, right, which was something quite frankly, that maybe some of the other -- some of your other public peers were unable to do. So maybe talk to how important -- I think that deal is 3 years already, which I can't believe, but maybe talk to that a little bit because I think it was right around the holiday times. I think you had announced on Christmas Eve, right, '21, something like that. So maybe talk to that a little bit because I think part -- obviously, there was a technological aspect of it, but there's also the go-to-market motion that allowed you to flex up market a little bit more and maybe talk to that a little bit?

Yes. No, you're exactly right. I mean the primary rationale for that acquisition before my time, but I'm the beneficiary of it was bringing modern technology into the organization. And in particular, good -- around most of what you need to do to execute on a PEO, particularly good around benefits. That was the background of Zenefits. So again, it sort of plays to our competitive strategy around that part of the offer. But yes, that's been our strategy, is amazing technology and even better people that have come with that acquisition that really elevated our engineering game, elevated our product game. And so we've been sort of module by module, not a sort of a big bank switch over, but then bringing that technology into the core of our customer base. I think that's helping us, and we have a long runway still to go take a lot of manual and complex processes, simplify them down and automate them. This year, I think you may have noted expenses were very flat over the course of the year despite sort of inflationary pressure. I think we've got a runway still to manage expenses while reinvesting and that technology is a big piece of it. So I get pretty excited about this sort of repetitive cycle of getting more efficient, improving the experience for a customer, taking the gains from that efficiency and redeploying it into the things that are going to differentiate us and help us grow going forward.

Makes a lot of sense. I would say kind of disruption can be opportunities for your folks. And when I think about the evolution of the PEO sector over time through multiple decades, there's been kind of certain transformational events, whether it was Obamacare, whether it was COVID. Maybe talk to that a little bit. And I think 1 of the things that impressed us all the more was there was Obamacare, which I think drives some meaningful adoption. But then when they kind of legislated out the individual mandate, you still saw relatively resilient to the model. Is it -- maybe talk about kind of the importance of those changes, the kind of step function change in COVID? And then is there anything you've seen near term? Because, again, I think any type of change is good for the business from a regulatory perspective and it's still relatively early with the new administration. But anything you think about just the puts and takes more from an industry perspective.

Yes. I mean, I think you're right on the last point. So it's a little early to say, but certainly optimistic. And it feels as though at a federal level, a more sort of favorable business climate from a regulatory point of view, that's very good news. We've had depressed sort of net client hiring in our customer base. Like you said, it's sort of high single digits to low double in a good healthy year because of the segments we target. It's been pretty flat. So anything that sort of is conducive to growth and investment in our customer base is very, very good. We grow along with them. And that growth, that net hiring growth comes with very little acquisition costs and just modest incremental service cost. So that's a very healthy new business as it starts to come in. I will say like having spent my career in regulated business, when you have periods of less action at the federal level from a regulatory, certain states come in quickly to fill that gap. And so you just have sort of this interesting dynamic where the overall climate may be more conducive but you may actually end up with more state-level complexity, which, again, is actually a tailwind for our business. So post-COVID, you have even small employers that are dealing with rules, regulations in multiple jurisdictions. They've got this distributed workforce. And again, it's like they got to manage all that on their own. In the PEO construct, we can help them do it. So I think there are some things that the timing is very uncertain but sort of line up as tailwinds for our business on a go-forward basis.

Interesting, you mentioned the state level because I think when you think about the initial kind of founding of PEO, if you would, it was kind of concentrated in Florida, Texas, California. And it feels like the states overall generally become much more conducive to the PEO model, which I think helps you.

I think that's right. The other thing is a -- super question, Kevin, is like a second order impact that you mentioned the impact of Obamacare and some of the legislation and that did serve as a catalyst. I think there's a second order, which is a lot of that legislation sort of required minimum loss ratios and carriers responded in small case commercial with capitating broker commissions. And so what we've seen is a lot of consolidation in the health brokerage market. And as these brokerage firms get larger and more sophisticated, what they're concluding because of those dynamics, the small business is not as profitable, a part of their portfolio, which I think, over time, creates a real opportunity for us at TriNet for the PEO business, which heretofore has been sort of sometimes cooperate sometimes compete. And I think, at least for us, over time, -- we're not in the brokerage business, and I think, increasingly see employee benefits brokerage enabled by some of the changes that were regulatory in nature as a new channel that could be a good grower for us.

That's helpful. I mean, maybe switching gears a little bit, Mike, because the DNA of the revenues kind of shifted a little bit. Historically, we've always considered kind of 2/3 service, 1/3 insurance. I'd say, over the last 5 to 7 years, has been a little more balanced 50-50. It feels like it is shifting back to services a little bit. So 1 thing we try to highlight to investors is you've obviously done a really, really nice job managing some of the insurance costs, which I know increased a little bit recently, but it might be helpful for the audience to go back to kind of 2018 where I think there was a real focus on maybe a little bit more profitability that helped kind of the revenue growth despite kind of relatively flat WSEs and heading into COVID and kind of coming out of COVID. Because 1 thing we always give you full credit for was being really thoughtful as to what the margin was through COVID because you're clearly over earning. I don't mean that in a negative way. You were being balanced in terms of managing that margin given what was just really unprecedented time. So maybe talk to that a little bit and then kind of where we are today.

Yes, I think for us, and we've learned a lot through the period, if you think about not just health insurance, but all the insurance that we're on risk for, we target between 87% and a 90% insurance cost ratio. And you're right, during COVID, people were delaying care. You just saw much less inflation coming through in the health care claims. And so we were below that ratio. And so we were sort of intentionally in our renewals being thoughtful and working to bring that insurance cost ratio a bit more back into that range. Hindsight is 2020, but we certainly saw health care cost inflation start to take off last year and it sort of accelerated through the early part of this year. And I think for us, what we will always do is prioritize just predictability on that insurance cost ratio. And so like I said, 1 of the first things we did was carve out the Insurance Services Group and really invest in the quality of the talent. We've spent some time redesigning process and putting a bit more discipline in the full sort of pricing through renewal processes. And at the end of the day, it's not to try to create outsized gains from that part of the business. To your point, I mean, at the end of the day, we want to grow the number of customers. We want to grow the number of WSEs. We want to actually give more predictability to our customers primarily, but certainly to investors as well around that insurance cost ratio.

That helps. And just along those lines, too, it's probably helpful to remind the audience the pricing isn't onetime, right? So when you go through the renewal process just directionally, I think, there's 2 or 3 x where you capture meaningful reset of pricing and go to the market. So maybe remind us where we are in that.

Yes I think it's like if you're not familiar with the PEO model, it's a really important point. So 1 thing that we do at TriNet is as customers come on, they go into quarterly renewal cycles. And so everyone has an annual contract, but the cohorts come through -- there's a cohort that comes through to be repriced. And that allows us to adjust as we see changes in the external sort of cost environment. We had a big cohort go through October 1, just going through another 1 getting ready for January 1. So it gives us that ability to adapt. And what's really amazing, I think, coming into this from the outside, is if you're a carrier, you really just have the insurance product and you're repricing the insurance product and your customer is making a decision based on that. In the PEO context, the insurance is just part of the bundle. And when you're providing the payroll, you're providing the HR support, you're providing the compliance support and you're providing the benefits, the stickiness of that customer is very different. And so their willingness, again, assuming that you're being predictable about it and it's justified our ability to sort of place the necessary rate increases and maintain high retention has been a real -- a big benefit of the model.

And I think 1 thing that is important, right? The core of what you're doing is helping companies deliver a solution that they would be unable to deliver on their own, right? So if they were to go to try to procure that and they have a pretty good sense of where the market sits. And also might be worthwhile just to revisit because as we were scaling up on the sector a long time ago, obviously, but the kind of the natural inclination was its health care. Well, it's not only health care, could be workers' compensation. It could be all different types of insurance that you're providing and really client discretion in terms of what they want to take from the offering you're providing?

That's right. That's right. Yes. And it's both kind of like to your point, it's the breadth of the offering. It's also sort of the integration of the offering. So you may be able to procure 60% of the bundle of services that TriNet provides with separate vendors. Actually having them work together on an integrated basis is a real challenge. And if you think about your -- you've got 45 employees. You probably have an HR staff with 1 or 2. You want them focused on a lot of other things besides making sure that payroll and withholdings and benefits and deductions and that all those things are happening sort of seamlessly behind the scenes.

Switching back to kind of your transition over again, you've been here about 10 months or so. If you think about kind of your expectations coming in, you mentioned earlier, you kind of changed out the actuaries, things like that. Anything on the go-to-market? And is it the technology that's allowing you to do that in a more thoughtful way or the market shift? Just what's helped driving some of those decisions.

I'm really excited about the distribution because we do operate in this underpenetrated market. Our biggest competitor you asked about, and we have very good competitors in the PEO and multi-vendor kind of solutions. The reality is like inertia, that's our biggest competitor. It's just getting a small business that's got a million things to go on to sort of sit down, understand the concept of the PEO, invest the time. Because once we get to that point, we're going to be able to create a lot of value for that small business. So I'm excited about a few things. One is, we've grown our sales reps by about 15% year-over-year. And what's really exciting about that is once you have them, the real magic starts to happen at 36 and 48 months of tenure, and we're about 18 plus months into growing the sales force. So we're starting to see some of those reps and over the course of '25 and into '26 they're going to be hitting those key sort of productivity thresholds because the PEO is a complex concept. You need repetitions. You need to build your local ecosystem out. So I'm really excited about that. Like I mentioned, when you've got tenured salespeople, they are just going to have more credibility with the employee benefits brokers that we target. I think that's a way to speed the sales cycle and do it in a sustainable way. And yes, I think, the technology is absolutely helping us just get better and better at identifying leads, figuring out who's going to be a good fit for PEO, yes, but for TriNet in particular. So that we just get more efficient in terms of our cost of acquiring new customers.

That makes a lot of sense, particularly given, I think, to your point, some of the technology. I think 1 of the things you've talked about as the models kind of started to shift a little bit is potential alliances, things like that. If you think about -- again, I think, you were able to really efficiently reset your tech stack through Zenefits, but you think about it might be tough to comment on what Insperity did. But in terms of different types of alliances, how do you think about that potential as another growth driver for the business?

Yes. I think part of the value of owning your own technologies, like I said, is like integrating the service delivery and the technology together. And I think we've actually sort of captured some of those costs synergies, there's a lot more that we can do over time on that front. First and foremost, it's actually not the cost energy. It's the customer experience. They don't want to be calling. They don't want to be chatting. And so kind of baseline digital automation, layering in, and we're starting to see the AI use cases. Because as we do the work to make sure that our data is housed in 1 place, you got 1 source of truth, and it's clean. There's all kinds of interesting things that we can do there. But yes, I mean, I think it's -- in general, when you've sort of taken it module by module and built it, 1 of the very nice things it enables you to do is actually unbundle over time as the customer grows. Because when you're an SMB-focused company like we are, very successful SMBs become medium-sized businesses and enterprise-size businesses. And so at some point, they're going to outgrow that PEO model. But the reality, as you know, Kevin, is they don't outgrow the whole model at the same time. It's pieces and parts. And so again, when you've got a modular and modern technology stack, I think it's opening the possibility of beginning without the clunkiness we have today to sort of unbundle and keep a longer customer relationship over time.

Right? The more efficient the interoperability the...

Yes, exactly, exactly.

You mentioned a point earlier, but I think it's important. The average ramp on the sales force could be 36 to 48 months. the function of the complexity of the PEO. Maybe talk to how much because I think technology, particularly through Gen AI, whether that's kind of onboarding clients, ingesting benefit plans, the back office on the call center, the front office. Where are we in that journey? And because we think, again, that could be another -- I think our view more holistically across the sector is maybe not necessarily a step function change from a revenue perspective. But clearly, potential real margin benefit and the debate becomes what do you do with that? But talk to that because, again, I think, it's a very -- much more complex delivery than traditional payroll and it's not to minimize any of the other go-to-market motions, but the health care is much more personal, much more complex. Plans are more difficult to aggregate and implement and so maybe talk to that a little bit.

Yes. Yes. I mean, I think first is that you have to have a firm sort of disciplined around your data set. And so I mentioned insurance, actually, even before that, 1 thing we did back in the first quarter was we consolidated our entire data and analytics team, and we actually saw that was a pretty remarkable talent, but it was distributed in pockets around the organization. And so you ended up with different definitions in the data set. And so 1 of the precursors of actually being really effective from digital and certainly with the Gen AI piece is like data is kind of the foundation that is built on. So we've already started to make some really good steps in that direction. I think you're exactly right. There's some marginal adds on the distribution effectiveness. I don't think it's step change at this point. I think our use cases that we're most excited about are the ones that are about improving the service and the quality because we do operate in a really complex environment. So most -- all of our use cases are human in the loop at this point. But instead of spending 15 minutes or 20 minutes researching what paid leave law in the municipality of San Francisco is for a particular WSE. That answer is being served up to our colleague to make it more accurate, quicker and faster, they can serve more people over time. So I think we're at the kind of the first phase of a multiphase opportunity for us, but I get pretty excited about it because there is a lot of complexity. There are still a lot of things that are done manually that I think our colleagues can get freed up from. So they can do what they -- only they can do, which is build relationships, think critically, help consult with our customers.

Sure. And I guess if you think about the model longer term, like -- how do you think about WSE growth relative to sales force growth relative to margin profile of the business? And just any thoughts around that as you kind of build it up from a revenue perspective, kind of new logo cross-sell? And obviously, the WSEs would factor into that as well.

Yes. Yes. That's right. And you know because you followed us for a long time, in general, like we've done quite well, but with a pretty -- it oscillates a bit, but a pretty stagnant WSE count at TriNet for a pretty extended period of time by shifting the mix towards higher-value segments to pricing well for the insurance aspects as that inflation drives growth. There's been a good growth story there, but it hasn't been about expanding the customer base. So I kind of, Kevin, I think, it is pretty simple. It's like, one, I would just say we're going to price to risk on the insurance. And right now, we're in an inflationary cycle. Our insurance cost ratio is a bit high relative to our target. We have the tools and the processes in place. We'll work that, and that's kind of something we need to do. But if you look past that, boy, we do get excited about what can you do to expand the distribution, drive retention and productivity through the sales force, open up the health brokerage channel. I think that enables us to get into some new geographies where we're underpenetrated more effectively as we look at it. And then I think -- actually, I think the retention is strong. I think we can continue to do better on that front. I do think we still lose customers that outgrow the model a little bit because of the clunkiness of some of our processes. And as we get smoother and better more consultative, I can see us adding quarters and potentially years to the average tenure of the customer base over time. So I think there's a lot of angles we can get at to sort of break out of a relatively sort of flat WSE count, but do it, I think, in a prudent, disciplined way.

Sure. Just maybe amend on the health care cost, Mike is important. Do you think that's more normalization of kind of discretionary? When you think about some of the drivers of that -- what's been driving it indeed that's a tough question, but just maybe try to frame that a little bit more.

Yes. I think for us, we've -- and it's really important, like we certainly use our data set, and that's a really effective one because of its granularity. But we also use our carriers and use consultant partners so we get access to bigger data sets. And I'd say in general, you have a catch up, to your point, COVID, a lot of deferral of care, elective surgeries. You have -- because things were deferred when they do get treated, they tend to be higher cost. And so that's coming through. You just have provider renegotiations, hospitals are experiencing the same inflation pretty much everybody is in the economy, but it gets lagged in the pricing in health care because they tend to be 2- and 3-year contracts and so that's kind of working its way through. In general, our -- and I think this is kind of important. We're not betting on that being a bubble here in 2024, like we've talked a lot about the fact that we would see certainly in 2025, in our pricing decisions we're making today, we're assuming that same sort of outsized growth in health care cost inflation. Because we think it's got a little bit more to play through here in the environment before it tempers.

Agreed. Agreed. I didn't open up. Does anyone -- we're almost at time, anyone in the audience have any questions? Okay. Anything we didn't ask. I mean, listening to you folks always do a real nice job anything you want to highlight as we are closing out here.

I know, Kevin, I think you covered it really well, but 10 months in, it's like I came in believing that there was a really good growth opportunity here and a really great company focused on customers. And I'm more excited about that today than I was when I joined.

Listen, it's been a real nice transition, and there were big boots to fill.

That's the truth...

Been there a long time.

I feel like I should be...

Point like Alex leaving, but it was close.

Not quite. Well, thanks for having us. Appreciate it, Kevin.

All right, thanks. Take care. Thanks Mike.