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

All right. I think we're good. Welcome, everybody, to JPMorgan's Ultimate Services Conference here in New York. I'm Andrew Polkowitz, payments processors and services analyst here. I'm happy to have on stage with me Mike Simonds from TriNet, President and CEO. Mike, thanks for being here.

Thanks for having me.

So figure to get started, big picture. So you've been in the seat for almost 2 years now, right? And there's been a lot of important strategic decisions that have gone on, particularly over the past year. So I'd love before we dive deeper into some of these topics. I would just ask, like, what are you most proud about in terms of both the progress and execution during this -- as you've described it as a transition here for TriNet?

Yes, absolutely. So I mean, I think for us, it was about taking a really good thorough and objective look at the business and the core of trying at the PEO and increasingly, the ASO business and just the opportunity for profitable growth there, feeling very good about it. But you're right. We had to make some tougher decisions to really narrow the focus in to that -- to the SMB-focused PEO and ASO. We exited the SaaS-only business. We trimmed a couple of other segments at the same time. And I'm really proud of the fact that we built the plan as a team. We went through the organization and really tapped into a pretty remarkable talent base and then just the discipline to execute. So as we kind of have marched through over the last -- laid out the plan here at the beginning of the year each quarter, just working really hard to sort of hit those milestones and we've been able to do that successfully.

That's great. And you kind of hit on my next question. So obviously, you've made a lot of investments in actuarial talent but also kind of refreshing your go-to-market strategy. And we'll talk later about some of the AI products that you guys have rolled out. So I wanted to ask, how are these changes showing up both in day-to-day execution, but then also how we could track impact in the numbers over the next handful of quarters?

Yes. So you mentioned one of the changes that we made early on was to carve out the insurance services group. We added some leadership talent. Tim Nimmer, who was running -- underwriting and actuarial group at Aetna came over. He's added a new Chief Actuary. We've invested a lot in the process and the application of data to that process. So -- where you see that showing up is kind of we laid out a guidance of 90% to 92% on the insurance cost ratio. Did it at a time where there's a fair degree of uncertainty in a sort of pretty rapid inflationary health care cost environment, as you know, Andrew. And so coming through the year in a predictable fashion being where we wanted to be at this point in the year, looking forward to January 1 renewals, which is our last kind of big catch-up renewal on the health care side. And so the growing confidence there, I think, is starting to shine through in the predictability of results from an insurance cost ratio and from an adjusted EPS point of view. And then the second piece is getting the revenues growing again. And so we sort of reaffirmed the midpoint of our guide. So again, we're pretty much on track from a revenue point of view. And I'm sure we'll talk about some of the initiatives and how those are meeting the market.

Okay. Great. And why don't we take a step back for a dive in. I always tend to get the SMB macro question out of the way early. So just kind of wanted to ask, from your seat, you obviously have a lot of data, a lot of businesses under your purview. So what macro trends do you see around areas like employment, wages, SMB new business formation and even the implications for TriNet's key verticals?

Yes, sure. So TriNet focuses on typically skews white collar, higher income, lower employee turnover vertical. So technology is our largest, financial services, very large life sciences. So historically, we would see net hiring in those verticals through the cycles of, call it, 8%, 10%. So these are high-growth entrepreneurial type businesses. And we're really probably 2.5 years, Andrew, into pretty muted net hiring. If anything, we've seen -- we've talked about it on the last call, probably about 50 basis points improvement year-over-year in net hiring. Bright spots for us, the tech sector is one. A little more we've seen fewer layoffs in the small end of the tech sector than we had seen in the prior year. And financial services has actually held up really well as well.

Okay. That's good to hear. And I wanted to transition now talking a little bit about ICR range. And you've kind of communicated a few times that you have pretty good confidence in returning to that targeted zone. You called out the 90% to 90% to 88% over the long term, excuse me. And let's see, I had a few questions here. But maybe to start, you suggested at earnings that you're expecting to track towards the lower or more favorable end for 2025. So I kind of wanted to ask -- are there any swing factors you would call out that kind of gets you to the higher low end or what informs your confidence there?

Sure. So we guided in 2025 to 90% to 92% insurance cost ratio. And like you said, we've run maybe a tick or two more favorable this year, and the outlook is to kind of finish to the favorable end of the range. We've actually spent a little less time trying to guide externally to what happens every quarter in insurance because I think inherently, there's just going to be just more volatility in every 90-day period But when we step back and sort of look at 200 basis points different in the guide and sort of finding ourselves to the middle favorable end of that. I think it sort of speaks to just getting to a little bit more predictability for TriNet. So we'll see how the fourth quarter plays out. It's only a quarter of the year. We do -- like we take about $500,000 of risk per member and offload the remainder. And we reset that every year on 10/1. So that can introduce a little bit of volatility in the fourth quarter as well. And it's part of the reason it tends to be the higher -- highest ICR cost quarter out of the floor.

Got it. That makes sense. And yes, it's an interesting dynamic with the October 1, but also the fall selling and retention season is always very important kind of heading to that January 1 renewal period. So obviously, we're in the midst of that right now. We still have about 1.5 months to go. But I figured I'd ask the question just any comments you could give so far on how client conversations have been going? Obviously, you went through repricing a year ago. So it's not a totally new dynamic this time around. I just wanted to hear what you're hearing on the ground.

No, I think it's really important. It is the most wonderful time of the year, and it's because it's January 1, and a lot of small businesses make decisions around that Jan 1. A couple of ways I talk about it is, one of the beautiful things about this business model is it's so much broader than just the health insurance. So it's tapping into all the benefits. It's the workers' compensation, it's payroll, it's HR. So that breadth of -- it ends up being a very sticky relationship. And in an SMB business, historically, TriNet's been around an 80% retention rate in these kind of high-growth markets. And our forecasts have us coming in right about at that level, maybe even a little bit better. In an environment where we're putting double-digit health fee increases. So I think that bodes well for us kind of getting back into the long-term range of 87% to 90%, probably to the top end of the range next year. But also kind of -- I think it underscores just how powerful this business model is and how much value we add to these SMBs.

Got it. Yes, I was going to ask about that later, but I'll jump ahead and ask. So you mentioned before you're tracking ahead of that 80% retention bogey despite it being a pretty challenging year from just a pricing setup. So maybe just to put a bow on this topic of pricing. I figured I'd ask the question, is there a way for you to contextualize how much -- or excuse me, how much churn this year is attributable truly to the elevated repricing versus more what's normal course SMB economy, that type of thing?

Yes. Yes. I think probably a couple of dimensions. So one would be where we were a year ago. And as you can imagine, we spend time with every client that's trading and talk through in that exit, what's the drivers of it. A year ago, the fourth largest reason was health fees. That is now our single largest. If you took all the other reasons and set aside health fees, we're actually doing better this year on retention by a reasonable amount than we were a year ago. We've put a lot of work into the platform. An entire service delivery and we can spend some time on that. But our Net Promoter Score, we've been tracking for about a dozen years at TriNet, we posted our highest that we've ever had in the company's history in a time when you're passing through big rate increases. And I think as we get through these January 1, it's really our last catch-up renewal that we need to do on the health fee side. As we get through that, I think that bodes well for retention as we work our way through '26.

Got it. That makes sense. And maybe just staying with the worksite employee side. So obviously, there's some mix dynamics going on where, obviously, the churn from pricing isn't friendly, but it comes out to higher margin, more margin-friendly customers. So thinking about the earnings power that comes from this repricing exercise that you're doing, is there anything that you could kind of share in the margin profile of, call it, the remaining base versus what's attriting or what you've had to attrit?

Yes. We're -- a couple of things, trying to price to risk on everything. So that's really important to come back to is we're looking at sort of the block factors and the individual experience factors at each case. So over time, you would anticipate and certainly is true to your question, the attrited runs typically at a lower margin. We're asking for bigger healthy increases for the ones that are attriting. So you could sort of see that as likely to be margin accretive over time.. I think the really good thing is like we price every 90 days, a cohort of our business, which is a little bit unique for us. So that enables us to kind of react pretty quickly as changes happen in the external environment and also to be a little bit more balanced knowing that we can work it through and kind of balance the retention with the margin improvement with each cohort as we go.

And kind of speaking to that balance, I wanted to ask on the competitive landscape because I know you guys were early to reprice last year, but it sounds like the industry has sort of caught up to where TriNet is repricing. So just I'm curious, is there any change that you've seen competitively, obviously, been in the industry for a long time, but even just versus a year ago?

Yes. Yes. And I think -- a couple of things. I -- sometimes it's just sort of circumstance, but I had come new into the role, so that's a fresh set of eyes. We carved out the insurance group, and we had some pretty talented people with a lot of experience with a fresh set of eyes. So I think that sort of broke the company out of sort of the regular routine. And I think we did jump on the fact that it felt like trend was taking off and that we weren't adequately pricing for that. I think that it helped in the -- we kind of outlined at the beginning of the year that 2023, early 2024 new business. So I think we were on it a little quicker. Like I said, we're kind of pricing through each cohort every quarter. So we're moving instead of on an annual basis every 90 days. So I think we're a little quicker up on that curve to catch it. And the reality is we're not facing anything unique at TriNet when it comes to health care cost claim trend. So I'm fully confident the market is going to get there. But yes, I'd say as we're looking at the conversion rate, for instance, on new business as we've worked our way through the year, say, on direct PEO, that conversion rates improved. And I think it's indicative of kind of the market coming up.

Yes. Absolutely. A lot of our friends in the industry have been talking about the same dynamics. So it's been a consistent story. Great. So maybe to transition a little bit. You alluded to it before, but kind of exiting the HRIS business, investing in the ASO side. I know you've said that it's early, but demand has probably been more favorable than expected in the early days. So maybe just for those who are less educated on it, I kind of wanted to walk back around the strategic decision to exit HRIS, go into ASO and how it fits with the broader TriNet model.

Yes. I think at the end of the day, we sort of just looked at it and said, if you're looking for really good HCM software and you want to spend $8, $10 PEPM, there's going to be some really good, really focused options for you out there and really good competitors. What I think makes TriNet special is strong proprietary technology with outstanding service layered on top of it and kind of the benefits and the HR expertise that comes with 30 years in the business. And so those are price points that are considerably higher. That's considerably more value that you're delivering. It allows our organization to really focus on what we do very well. So one of our key values is we always start with the customers. So the first thing we did was if what you need is an $8, $10 PEPM software product, we identified good partners, set up the data feeds, made that as seamless as possible for customers. But -- and we made some assumptions about who would buy up the services into the ASO model, which think of that as kind of a 4x increase in the PEPM, so not insignificant. 4 to 5. And yes, we've been surprised to the upside at the rate at which SMBs were interested. And so we've kind of taken some more steps to invest not just in the conversion, but in the new net logos coming in on the ASO platform. And I think that really helps us in the long run for two reasons. One is being SMB focused, we're going to have some very successful clients that outgrow the PEO model, but the reality is they don't outgrow the whole model at the same time. They don't want to change their health plan and their payroll and their benefits administration. So being able to unwind aspects of maybe down to an ASO is a really good way we can maintain a relationship and professional service fees on a go-forward basis. And then the other really important one is it puts another really viable solution into our sales reps portfolio. And what we've learned over time is tenure is immensely important in this business. And so when you can bring other and in some cases, simpler product solutions to help sales reps get to success quicker? And maybe our master health plan or the co-employment relationship is not a good fit. You've got ASO to fall back on.

Got it. That's helpful. And maybe sticking on that topic around the sales force and just the funnel. So is there a different funnel that you operate with internally for getting kind of customers in the pipeline for ASO versus PEO or you look at it more holistically that this could be a candidate for either or, but let's figure it out together?

It's a huge part of our investment thesis is it's largely the same funnel. And so the work that we do, building the brand, generating top of funnel leads, the reality is we can meet our ASO growth objective several times over alongside the PEO objectives with just that top of funnel demand. And to be -- like we're baby steps in it right now. So we're encouraged. We'll get smarter, we'll get more sophisticated, but yes, it's largely the same funnel.

Got it. Okay. That's great. Maybe the last question I'll ask on this topic. You mentioned that there's opportunity on kind of what would be the traditional PEO graduation side to kind of keep some of your customers in-house. Is ASO also an offering that potentially could work for a smaller business that potentially you're not willing to underwrite yet, but you still like and they're still growing overall? So like -- in other words, is it like an above PEO and below opportunity?

It is. It is -- and I think that's been a big -- it's a big thing for us is the mindset prior maybe it was a little bit more binary like your're all PEO or you're nothing. And I think increasingly, it's like, hey, at the end of the day, PEO is a construct around co-employment, but the reality is it's a bundled set of services and product. And so ASO represents a subset of what goes into the PEO model. But even within ASO, there's ways to -- maybe it's payroll help that you need more than benefit. So again, it sort of puts solutions in front of clients that, yes, sometimes they may just have less funding to put towards funding the HR support that they get, so they may start with something more basic and then grow over time. And then they may want to in-source as they get bigger and that allows them to unbundle on the other end.

Got it. So basically, it's improving the flexibility of the offering on both sides. Great. I do have some more questions. I should have said it upfront. We would love to take questions from the audience as well. So we'll save time for that. But I wanted to talk about AI. So there's -- I'll break up my question for you, but there's sort of the AI impact inside TriNet and then outside of TriNet. So maybe let's start with inside of TriNet. You recently launched your AI suite, Personal Health Assistant, TriNet Assistant, your dashboard. Where would we expect to see TriNet continue to invest on the product side? And what are some of the areas that you're most excited about?

Yes. I mean there's opportunities everywhere, and we're in early innings, for sure. we did take three different AI-based solutions to market. I would actually tell you, though, that represents a pretty small fraction of our investment in AI. The majority of it has actually been in the data infrastructure. So before I got here, frankly, starting to put the right data lake in place, pull data extracted from our application layer, make sure we were curating it and had good stewardship there. So even I think we'll see greater velocity, Yes, because the AI capability is getting hardwired into our product development life cycle, but even more so because it's enabled. We've got the data to be able to train those models. So I think it's everything from that top of the funnel and how do you move prospects 2 or 3 runs down that before the first salesperson needs to get involved. I think it's data mapping to make the process of implementing a new client a lot easier. And then at its core, it's like what we do for customers is manage complexity. So the ability of AI to serve up the right answer for payroll tax withholding in the state of Wisconsin, being able to do that at the fingertips of a client versus involve a call in or a chat in. I think there's big experience gains and big efficiency gains.

Okay. Great. And then maybe let's flip the question around. So that's the AI impact within TriNet. I also get the question from investors, AI outside of TriNet. And specifically, it's a little bit of a macro question, but nobody really knows the impact of AI across the labor force longer term. Obviously, you guys work with lots of tech-forward companies. So the question actually comes up. Do you see any change to the normal CIE growth algorithm driven by AI? Obviously, with SMBs, SMBs tend to be a little bit more careful around laying off because it's hard to hire. So it's a difficult question to answer, but I wanted to throw that at you.

No, it's one -- it's a good one. I get that one a lot, but we have a lot of attention to it. I'd say a couple of things. One, we saw sort of this sort of current malaise around net hiring 2.5 years ago. So it was kind of predates where GenAI would be a big driver of that. And if anything, like I mentioned, this year, we'll actually sort of forecasting to be slightly better on. Net hiring in our customer base than we were a year ago. So nothing sort of precipitous, I don't think. And then in conversations, admittedly, pretty optimistic crowd. But in general, in the SMB market, tools that drive productivity and enable them to move faster is only going to elevate their growth ambitions in general, particularly the verticals that we play in. So I'm not saying at some point, a massive tech company isn't going to use AI to sort of manage their workforce down or slow their hiring. I think in the entrepreneurs that I'm talking to and that we're talking to, I think it's a reason for optimism about their business broadly. And so -- and I guess the last one would be, you highlighted tech. That's the first place we win and said, hey, one of the most compelling obvious immediate use cases is building software, testing software, automating test scripts. And tech has actually been relatively recently more of a bright spot for us. So it's holding in there pretty well.

Got you. That makes sense. And we're at the JPMorgan services conferences, lots of people up in this stage talking about AI, but it's consistent. It feels like there's a lot of interest in driving productivity, but at least in terms of scale offerings, it's still early days as far as how that impacts the labor force.

I think that's right.

Great. I'll ask one more, then we'll open it up to the crowd. Cost containment has been really sharp this year, and that's been a theme. I wanted to ask about your capital allocation framework. We talked about some of your investments already and how you rank order, more organic investment, M&A, shareholder returns. And then a question I've been getting from investors has just been like the right level of OpEx considering that you've been so careful as far as what's sort of the launch points into next year, even over like a midterm horizon OpEx growth?

Yes. Maybe I'll take OpEx and then we'll talk capital. A lot of questions priorities. I mean I'm here. I'm with you. So I'd say OpEx, yes, I mean, I think really good discipline from the team. Thinking hard about both technology investments and globalizing workforce, it's allowed us to sort of bring expenses actually down. I think that's very sustainable. I still think we have a lot of runway. AI is a big opportunity. As we look forward, I do expect over the medium term, operating expenses will grow year-over-year. But we're pretty committed to being sure that there's two, three points of daylight between operating expense growth and revenue growth as that comes through. So as kind of the macro picture impacts that top line, we'll manage the bottomline or operating expense part kind of in lockstep. And then capital allocation pretty straightforward. So like I said, these are great businesses. They're underpenetrated. They're growing and so investing in organic is a big deal for us. So that's the platform and technology that is definitely investments in our sales force and new broker channel. Secondary is there inorganic opportunities? And I would say our third is shareholder friendly. That's something we're committed to at TriNet. And given where the market is and where TriNet stock is trading right now, that's a pretty high bar for us when we think about inorganic. But yes, in general, it's still a fragmented market, both PEO and ASO. And to the extent they're made sense to do something on a tuck-in basis, that might be something. But in general, given where we are, it's a really clear bright line between driving to that 10% to 11% EBITDA margin improvement, getting revenue growth back up into that 4% to 6%. I think the team can sort of see the pathway to that. And I think for the most part, we're heads down and executing.

Okay. Makes sense. We have a little over 5 minutes left. Now it would be a good time. Any questions in the crowd. It looks like we have a couple..

I wanted -- it's tough from our seat to get like a sense for kind of the insurance risk pricing and kind of the edge you have. So could you just spend a little bit of time talking about that? You mentioned carving out the insurance services. I know your background, but maybe just a little bit more detail you can provide us around that and the edge TriNet has.

Yes, sure. So just real quickly, we broke it out and have invested in the talent. So we brought people in that come from health insurance and their background, pretty deep actuarial talent. So that's key. We look pretty sharp at our process and what we can do to improve there. And so there is the construct that TriNet operates under, which is pretty unique in the industry. Most PEOs are a pass-through on the health insurance. And they're typically getting a renewal on their entire book once a year. And so again, by in-sourcing that, having talent, both at the macro and at the case level and then putting a cohort through every 90 days. I think it just puts us in a spot never to be able to predict the future, but just to get our forecasting better and to move pricing to risk through that pipe more quickly. I think what you would anticipate, like, okay, okay, what would I see in results if that's the case, what you see is, in times where health care cost inflation took off, what you'd see for TriNet is, we get quicker to predictability on ICR, and we would see constraints on growth, right? Because it's going to take the rest of the market a little bit longer, and that's exactly what's played here in 2025. So I hope that helps.

So there's a handful of dominant players in the PEO space. And then there's quite a number, as you said, fragmented players down below. Is there just too much industry capacity for this marketplace, particularly in a -- in an economy where the birth rate is pretty much hovering above zero?

Yes. Really good question. I think the very short answer is no, I don't think so. We -- the industry is -- it depends on where you look, Napo is a pretty good source. But we would estimate for our verticals, maybe 10% to 12% penetration. So I feel like there's still a lot of white space there I do think the PEO as a construct is just a better way for small businesses to do their HR and to acquire benefits using buying scale. But it's an interesting concept around co-employment that for a lot of small businesses is unfamiliar. So what we observe is that there's concentrations geographically around the country, where it does get a little bit more saturated. So part of the opportunity in terms of us investing in the brokerage channel is bringing kind of the network that spans the entire country, trusted advisers that can sort of speed up the familiarity cycle and ultimately, the sales cycle for us. Maybe one other point that's interesting. The top 5 of us do have a decent sized share of the industry, but there's still 300, 400 small PEOs out there. And I think what's happening, Andrew, as we talked about, is just as technology improve and AI comes on, the ability for a local player to compete with historically on a bespoke, very sort of custom local service delivery model. Over time, that barrier gets higher and higher around the technology and what the workforce of today is starting to expect. So I would imagine that the consolidation that's happening out there is likely to continue down the road.

So I remember a few years back, I believe that TriNet took an approach to addressing the graduation issue in the business by verticalizing and hiring some specialists by verticals go after the law. The legal practice marketplace and a few others. Is that paying a dividend in terms of seeing some of those larger players, some of those larger employers be retained better? Or is it just kind of had an overhead expense issue as opposed to a real benefit issue?

Yes. I think knowing and understanding the client base is quite important. I'd say just three quick things. One is, yes, 100% graduation is an issue. I think the ASO product and the ability to unbundle health care and do things like that. I think it's got a lot of potential in starting to show some green shoots. I actually will tell you that the two biggest things we can do is get through the current health care pricing to drive retention north. And then the second thing is we still see small and midsized forget graduation, clients that are trading because the service isn't quite what they expected or the value for what they're paying in professional service fees. And so this push to really drive Net Promoter and improve our service delivery, I think, is actually our biggest lever to keep retention moving up.

Great. Time has flown by. We have a little less than a minute left. I'll ask my last two questions together because I think they're a good way to close. So number one, we've enjoyed working with Kelly over the years, but obviously, you have Mala Murthy coming in. So I wanted to ask, number one, why she was the right choice to become the next CFO of TriNet. And then number two, just a closing question, why is TriNet such a good investment today? It's obviously been a choppy macro, but demand has seemed pretty durable. So I figured I'd ask these last two together for a final minute.

Well, it gives me an opportunity to say thank you to Kelly Tuminelli, 5 years as TriNet's CFO did a fantastic job and I think has done a lot with the investment community and things like with our outside audit and just the blocking and tackling that needs to happen. And also, our open conversation allowed me to spend time at market, find Mala Murthy. We won't miss a beat on any of the blocking and tackling. And I think Mala comes with a sort of very commercial-minded and strategic skill set from her time at Pepsi and Amex and most recently, Teladoc. And so -- she is very excited. She starts in a couple of weeks, and we are excited to have her. And I think Mala, like me, like hopefully, an increasing number of investors sort of see the opportunity here. It's an underpenetrated market. We're a top 5 share. I think we've taken the steps to be disciplined, refocus on our core, reprice the business, get the expense leverage and get growth going. And again, January 1 will be our last big catch-up, and then we kind of work through '26 with a lot of the capabilities we've been investing in starting to ramp up.

Awesome. All right. Thank you very much.

Good. Thanks for having me, Andrew. Appreciate it.

Yes. Thank you.