TriNet Group, Inc.
Q2 2022 Earnings Call Transcript

Published: 26 Jul 2022

[Operator:]

Good day, and welcome to the TriNet Second Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Alex Bauer, Head of Investor Relations. Please go ahead.

[Alex Bauer:]

Thank you, operator. Good afternoon. This is Alex Bauer, Head of Investor Relations. Thank you for joining us, and welcome to TriNet's 2022 Second Quarter Conference Call. I'm joined today by our CEO, Burton M. Goldfield; and our CFO, Kelly Tuminelli. Before we begin, I would like to address our use of forward-looking statements and non-GAAP financial measures. Please note that today's discussion will include our 2022 third quarter and full year financial outlook and other statements that are not historical in nature, are predictive in nature or depend upon or refer to future events or conditions, such as our expectations, estimates, predictions, strategies, beliefs or other statements that might be considered forward-looking. These forward-looking statements are based on management's current expectations and assumptions and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for adjusted net income per diluted share. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see our earnings release, 10-Q filings or our 10-K filing, which are available on our website or through the SEC website. With that, I will turn the call over to Burton. Burton?

[Burton Goldfield:]

Thank you, Alex. I am pleased to report that TriNet's customers performed exceedingly well during the second quarter, which drove our ongoing strong financial performance. The current macroeconomic environment perhaps counterintuitively is creating opportunities for TriNet. The value of our solutions, which address regulatory complexity and geographically distributed workforces is delivered independent of the current macroeconomic trends. This is reflected in our performance for the second quarter. During the second quarter, total revenues grew 9% year-over-year in line with the top end of our guidance. This growth in total revenues was driven by the installed base. Our vertical go-to-market strategy is focused on dynamic SMBs. As a result of this customer selection, our installed base continue to grow and thrive in partnership with TriNet during Q2. Additionally, in the second quarter, we grew new sales double digits year-over-year, whether measured by ACV or WSEs. We are excited to build on this success throughout the second half. The TriNet model enables our clients to effectively scale up and down as they navigate rapid changes in the global economy. This model becomes increasingly attractive for SMBs as they look for ways to convert fixed costs into variable costs. With health care utilization remaining below our estimates, we created and launched our 2022 credit program. This enables us to return savings to customers who help generate them. The credit program, which is fully accounted for in our Q2 results, had the effect of lowering total revenues growth in the quarter by approximately 2 points. Kelly will go into more detail around this industry-leading program. In the quarter, we maintained our expense discipline even as we invested in TriNet Zenefits. As a result, we generated strong cash flow and delivered robust earnings. In the second quarter, our GAAP EPS declined 1% year-over-year to $1.35. This result outperformed our guidance by $0.55, reflecting both better volume and stronger insurance performance. Our adjusted net income per share grew 10% to $1.72 outperforming guidance by $0.51. We ended the second quarter with over 610,000 users across our PEO and ATM platforms. Throughout the quarter, we kept our focus on execution and delivering the best possible service to our customers. We delivered financial performance in excess of our guidance. Our 2022 credit program is the third such program in our Recovery Credit program series. We helped our customers navigate the increasingly difficult regulatory environment. We continued the integration of TriNet Zenefits and importantly, we began delivering on the promise of these 2 complementary product offerings. Finally, we added 2 senior executives to broaden and deepen our leadership team, positioning TriNet to successfully execute on our strategic initiatives over the long term. For years, I have highlighted regulatory complexity as the secular trends supportive to TriNet. A decade ago, the Affordable Care Act expanded health care access. TriNet was there helping our customers avail themselves of the best health care for their employees. TriNet was also instrumental to our customers as they navigated the governmental response to the COVID-19 pandemic. TriNet help customers access PPP loans and as importantly, navigate PPP loan forgiveness. We help customers access the employee retention tax credits and additionally, we help facilitate the complex and ongoing transition to remote work. TriNet has been there for our customers. Most recently, last month, Supreme Court Dobbs' ruling represents another opportunity for TriNet to assist and advise our customers. In the past, I have often spoke of the diverging regulatory regimes between federal, state and local governments. Historically, I was referring to diverging employment-related law, but this latest ruling is not directly related to employment law, it extends the complexity trend to health care. By returning legislative decisions on reproductive rights to state jurisdictions, the Supreme Court has potentially created as many as 50 different regulatory environments for the governance of those rights. This shift has huge implications for SMBs and their employees as approximately 50% of Americans access health care through their employers. For example, SMBs will find it difficult to provide equitable medical care for their employees. This is especially the case if the companies or their employees reside in different states with divergent laws. TriNet has long understood the importance of choice and access and benefits as a fundamental driver for SMBs to attract the best talent. We are unique in the industry for offering unparalleled choice and access in benefits options for our WSEs. Currently, we have over 500 national and regional plans within our single employer plans. Throughout our industry-leading unique benefits offering, TriNet is helping our customers retain choice and access for their WSEs under diverging state regulatory regimes. But for TriNet, this isn't enough. People matter to us. Our customers, our WSEs, our employees matter to us. Similar to our efforts around COVID, TriNet remains the leader in providing advice and support to our customers and SMBs. However, advising customers is not enough for TriNet. Listening to our customers is just as important. On the heels of the Dobbs' ruling, customers reached out to us for help. They articulated the challenges of managing a geographically distributed workforce with unequal access to health care. Regardless of your position on this ruling, TriNet has and will continue to endeavor to provide equal access to health care within the limits of the rapidly changing federal, state and local laws. We have listened to our customers. Today, only a month after the regulatory construct for health care across America changed, I am announcing the launch of TriNet Enrich. This innovative industry-leading product line helps our SMB customers enrich their benefit offering. Importantly, TriNet Enrich is available to purchase for new and existing PEO as well as TriNet Zenefits HCM customers. Today, we are launching 2 offerings under TriNet Enrich, Enrich Access and Enrich Adopt. These TriNet-developed proprietary products leverage our scale and health care domain expertise. Enrich Access supports WSEs who need to travel to access medical services by covering travel expenses. Enrich Adopt further supports WSE family planning by extending a second supplemental benefit for families seeking to adopt. Often, the adoption process requires significant travel and out-of-pocket expenses. Enrich Adopt will enable WSEs to cover travel needs as well as many other adoption-related expenses. The TriNet Enrich product line gives our customers a solution for providing their employees equitable access to medical care and family planning while importantly, preserving anonymity for the WSEs. Over time, we will further extend the TriNet Enrich product line to include additional supplemental benefit offerings that are requested by our unique customer base. I look forward to updating you on this exciting new product line. As we look forward, beyond the current cycle, we are focused on business transformation and growth. TriNet took several actions in the first half of 2022 to position us to successfully achieve both. Our acquisition of TriNet Zenefits has everything to do with driving our company forward in our product offerings and our technology. During the second quarter, we started to realize the promise of our diversified product offering. We saw customers who outgrew the TriNet PEO migrate to our TriNet Zenefits HCM platform. And we saw customers who are experiencing increased complexity migrate from TriNet Zenefits to our TriNet PEO product. Historically, as a customer transition from TriNet to their in-house HCM solution of choice, TriNet supported our customers and we celebrated their success. Ultimately, however, we lost these customers. With TriNet Zenefits, this calculus is beginning to change. One such example of a customer migrating from the TriNet PEO to TriNet Zenefits is Qualified. Qualified is the pipeline generation platform for revenue teams that use Salesforce. TriNet is proud to have supported Qualified through its rapid growth. With a significant capital raise completed and strong future growth prospects, Qualified decided now is the time to in-house HR and seek an HCM solution. After evaluating multiple HCM vendors, Qualified selected TriNet Zenefits for 3 key reasons

[Kelly Tuminelli:]

Thank you, Burton. TriNet's second quarter operating and financial performance continued to demonstrate the power of our sustainable business model and result in cash generation. After a solid first half, we are positioned for strong performance throughout the second half of 2022. In our second quarter, our financial performance once again outperformed our guidance. We continue to highlight TriNet's value proposition through our combined HCM and PEO product offerings as well as our efforts to help customers navigate the operating environment post the Supreme Court's decision around the Dobbs' case. We launched our 2022 credit program, the third in our Recovery Credit program series, potentially returning as much as $25 million to a core group of customers who helped generate these savings. And finally, because of our operating model, our solid revenue growth, coupled with our disciplined cost management generated strong corporate operating cash flow during the quarter. Our second quarter achievements clearly demonstrated our commitment to serving our customers, employees, shareholders and the communities in which we operate. During the second quarter, total revenues increased 9% year-over-year to $1.2 billion, in line with the top end of our guidance. If we were to add back the impact from the 2022 credit program, total revenues growth would have been 11%, 2 points above the top end of guidance. The outperformance in total revenues for the second quarter was driven by 2 factors

[Burton Goldfield:]

Thank you, Kelly. During the second quarter, TriNet's dynamic customer base successfully managed through the difficult macroeconomic environment. This drove our strong financial performance. The economic environment, coupled with increased regulatory complexity is strengthening a secular trend for TriNet. People matter to TriNet, and we will continue to be there for our customers, helping them to navigate this complex regulatory and post-Dobbs' health care environment. We are listening to our customers and understanding their needs. By leveraging our scale and domain expertise, we built and are launching TriNet Enrich, an industry-leading product that helps SMBs offer health and family care solutions otherwise impossible for SMBs to access. The addition of TriNet Zenefits is showing early promise as customers can see value in our complementary products as they move through their business cycles. Finally, I am proud of the TriNet team. They are mission-driven and putting our customers first. Thank you, TriNet colleagues. I am pleased with our second quarter results. But more importantly, I continue with strong optimism for the future of TriNet. Operator?

[Operator:]

Our first question comes from Andrew Nicholas of William Blair.

[Andrew Nicholas:]

I just wanted to start with kind of a big picture question on the health of the SMB market. Obviously, hiring within your installed base remained quite good. But interested to hear what your conversations are like with clients and maybe with a specific focus on some of your bigger verticals, there's been a lot of headlines around hiring slowdowns in some of the bigger technology companies. Obviously, that's not something that impacts you directly, but I'm just curious if you're seeing similar trends in the smaller end of the market. So just any high-level thoughts on the broader SMB ecosystem, that would be great.

[Burton Goldfield:]

Yes. Andrew, great question. This is Burton. We are still seeing significant elevated hiring in our core verticals, particularly in technology and life sciences. They are working hard to get net new employees on board, and they're trying to navigate the complexity that exists today. So we have not seen the drop and we started in Q1, a little surprised about the veracity of hiring. It continued into Q2. And we're just not seeing that slowdown in the sectors of the small businesses that we are working with today. So there's not much more I can say. I certainly don't know what the future holds, but these companies are still trying to hire and they spent a lot of time and a lot of money hiring these people. And I believe they're focused on delivering results and retaining the people they have.

[Andrew Nicholas:]

I know you mentioned it in part of your answer to my question that the future is hard to predict, but I'm going to ask this question anyway, which is just sort of around the potential impact from a recession. Maybe not -- I mean if you can speak to how you'd expect trying to navigate that would be really helpful. But I'm also just curious for the industry as a whole kind of looking back at the last recession, it actually seems like the PEOs were pretty resilient in the aggregate. And I'm just wondering if you'd expect a similar reaction this time around and maybe what the drivers are to that sort of resilience, that would be great.

[Burton Goldfield:]

Yes. I would expect a similar result, and there's a couple of big drivers. The first and foremost one is that the TriNet model is a variable cost model, and we are hearing folks talk about taking fixed costs and moving them into variable costs. And what I mean by that is you're paying on a per employee per month basis. And at any time, if you should decrease employees, you don't pay the fee for that specific month. So the model is -- works particularly well in an economy that's highly variable. And of course, as you hire back, you have the pattern attached to each individual employee. So that's the first point. I also believe that, as I've talked about on the earlier calls, this remote work is highly complex and the amount of overhead -- fixed overhead that it takes to manage that remote work is put on to TriNet and that helps reduce the overhead costs. So we didn't have the remote work when it happened in 2008, 2009 at the same level, but we did see a move towards this type of model. And the last point I'd say is in 2009 and '10, I saw larger companies looking at the PEO model because they were headed in 1 direction, rapid expansion and then realized the cost savings moving to a model like TriNet.

[Andrew Nicholas:]

And if I could just ask one more. I think one of the reasons for your -- maybe not conservatism, but caution or a wide range of guidance, Kelly mentioned the possibility of -- or the impact of provider and carrier cost inflation. Would you mind walking us through kind of the puts and takes to that dynamic, both in '22, but also as we think about how that could affect kind of medium or long-term growth targets as well?

[Kelly Tuminelli:]

Andrew, I'll be happy to. This is Kelly. As we're looking forward, we are seeing the potential as carriers renegotiate rates with providers, as providers are facing the same inflationary pressures as everyone else for costs to go up overall, we're watching it both from a utilization and an individual cost perspective. But the thing I want to remind you is we do reprice our clients every single year to risk based on what our expected future medical cost inflation is going to be and their individual experience as well. So I'm not going to give you any specifics in terms of what we're seeing. It does vary market by market, and it also varies as insurance carriers are renegotiating provider agreements as well. But every quarter, trying us out there repricing a cohort of clients based on the emerging information that we're seeing and their individual experience. So we've baked that in and we'll continue to evolve it. It is difficult to predict. As I said, just given not knowing when the next COVID spike is going to happen. One other thing though that unrelated to medical costs, Andrew, that Burton mentioned, and I just want to reiterate, so you make sure that your model reflects or understand -- you understand our guidance is, we have assumed that hiring slows down significantly, just given all the talk of a recession. But to Burton's point, we have not -- we haven't seen it yet in our numbers.

[Operator:]

Seeing no more questions. This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect.