All right, good afternoon everyone. Welcome to the Needham Tech & Media Conference. My name's Kyle Peterson. I'm a research analyst here. It covers TriNet. It's gonna be our next fireside chat here. We have Mike Simonds, CEO, and Kelly Tuminelli, CFO here. So yeah, guys, welcome and, and thanks for joining us. You know, maybe if you could start off and just kinda give the quick, you know, elevator pitch overview of, you know, TriNet for, you know, those that might not be as, as familiar with the story.
Sure, thanks Kyle, and thanks for having us. We appreciate it. TriNet is a leading provider of human capital management that targets the small to midsize business segment. We have both PEO but also a SaaS solution as well as administrative services, though PEO is our leading product. Really the basic business model is taking the burden of HR, of benefits, of compliance off the SMB so that they can focus on running their business. We are fortunate to have a very large addressable market, so think in terms of 60 million folks in the U.S. that are working for firms with under 500 employees. TriNet's a little bit unique in that we focus on a specific set of verticals. They tend to be skewed towards more white-collar industries, so it's usually, you know, 20%-25% of the full U.S. labor market.
So think in terms of 12-15 million folks. And I think, you know, as we go to market, as we take on the provision of benefits, workers' compensation, payroll administration, as well as HR and compliance, do it for these white-collar segments. There's a few, you know, unique things to focus on those verticals. We've made some strategic choices to own our own technology and bring that in-house, and so that affords us a lot of flexibility. And then, we tend to lean into, as you would expect for a white-collar customer and prospect base, into benefits and giving them the leverage to compete against much larger firms. And our ability to take on risk, design our own approaches, I think gives us a bit of a competitive edge there.
It has proven to be a model that creates a lot of value for our customers and creates a lot of value for our shareholders as well.
Great, you know, that's, that's really helpful. And maybe, you know, you could talk about, you know, some of the key drivers, you know, for your business on, you know, the PEO and, and the HRIS side. That'd be great.
Sure. Yeah, thanks. So I mean, maybe if you think about drivers, I'll think about kinda what are the macro drivers that sort of drive the sector entirely, and then some things that are unique about TriNet. And kinda about the macro level, I'd say things like medical cost trend. So in the short term, that's something that we need to price for and are pretty good at doing over time.
In the longer term, though, the more that medical cost is a burden, particularly into segments of the market that need to have benefits to compete. If you're a 12-employee group going out into the general market to procure health benefits, it becomes less and less tenable, and you need to find a company like TriNet that instead of negotiating with carriers with 12 employees, TriNet comes and negotiates on your behalf and brings hundreds of thousands of employees into that. So the ability to create strong cost-competitive benefit packages. Medical cost trend drives that demand. A big one, just you know, coming through the pandemic with remote work. Again, think about white-collar work. You've got a much more distributed workforce.
And why that's really important is, in general, when you think about managing payroll, tax withholding, but also compliance, with labor laws and regs, that becomes incredibly complicated if you've got, you know, 50 employees across 6-7 different states. How do you stay on top of that? So in general, the distribution of workforce alongside increasing complexity from a regulatory and compliance, those tend to be big, tailwinds to our business overall. And then when I think about TriNet, again, it's, for us, pretty simple, 3 kinda buckets that drive growth for us. The first is as demand gets created, new sales, and we've been fortunate to enjoy really strong sales growth over the last several quarters. First quarter, sales were up over 50%. Second is you gotta hold on to customers once you have them, so near record, 10-year highs on retention.
Again, the value proposition coming through and also our service proposition continues to improve. And then the third piece, and this has been a soft spot, for the industry and certainly for TriNet, and that is what's the net hiring that's happening within the customer base. And, you know, and Kyle could probably speak to it, but if you look back, you know, 8 or 10 years, the average net hiring in the verticals in the SMB market that we target, you know, is gonna run high single to low double digits. Over the last couple of years, that's been much closer to very low single digits for us. And so.
Yeah, I mean, just barely positive last year, and our forecast right now as we're looking out to the rest of 2024 is low single digit.
Yeah. So it's for us, we're focused on the things that we can really control, and so driving up new sales, driving up retention, getting to a point where new sales actually fully offset retention is a goal that we have for the midterm. And then as we believe hiring comes back into these verticals, that represents, you know, purely upside.
Great, you know, that that's helpful. Maybe we could dive a little more into, you know, the new sales numbers. The metrics have been, you know, really good. Seem to be definitely heading in the right direction on an ACV basis, but, you know, what's driven, you know, this move in sales productivity, whether it's sales productivity or.
Right, right.
Broader interest in PEO, like what, what's been the driver behind, you know, some of this ACV growth?
Yeah. So I mean, a couple different things, and you mentioned a couple. So one is, in our direct, which is our far and away the dominant way we go to market, the direct sales force, we've been adding capacity pretty steadily. And at the end of first quarter, I think mature sales reps on the direct side were up about 28% year-over-year. And then really important for us is making sure that not only do we have more salespeople, but they're of a high quality and the productivity of those salespeople is up. And again, in first quarter, the productivity increase was actually pretty commensurate with the increase in the number of reps that we had out there. So that ends up a big driver that we talked about.
If you think about revenue overall again, and, you know, improving the retention ends up being quite consequential. As we get sales and retention closer, those become big drivers for us. I think, having that capacity, having skilled productive sales reps is really important, particularly as, again, we've got some secular tailwinds that are creating demand at the top of the funnel. And then, you know, interestingly, the same actions that drive better retention for us, driving improvements in, like, Net Promoter Score, a lot of our business is referral-based, so as the service proposition really comes through, that helps to drive new sales as well.
Great, that makes sense. And, you know, you touched on this a bit, but, you know, about what your clients are seeing kind of in their net new hiring, I think you guys kinda dub it, you know, Change in Existing.
Right.
You know, what have you guys been seeing there? And maybe if you could talk a little bit, also, is the financial impact when, you know, CIE is better, you know, what's the incremental margin on, you know, some of that hiring look like?
Yeah, no, I'll let Mike take this and, and Mike can add on. But, you know, what we've seen in 2024, I mentioned 2023, pretty much flat on a on a full-year basis, no real significant net new hiring. As we moved into 2024, what we saw in January was worse than our expectations, so January was kind of a negative net down, net layoffs versus versus hiring. We saw modest improvements in February and March, and, you know, and that really looks to be continuing in the month of April as well, which is a great thing. So what we did is we adjusted our guidance to really we were probably closer to just below mid-single digit, and we adjusted it a point or two down from that, you know, to reflect that.
Now, CIE is important to the model over the long term because as your employment pace grows, you can grow that without incremental acquisition costs. And as we think about, you know, the trade-off of retaining a customer that, you know, you're giving good service, that you can retain and extending that longer, it's very beneficial to the model. And as you retain those customers and you provide them the opportunity to grow, you know, each new incremental WSE is just additional upside without additional acquisition costs.
That makes sense. And, you know, maybe kinda sticking to some of the sales and retention and such, how should we think about, you know, attrition, in terms of kinda what is a baseline and how much of the attrition is, you know, factors within things you can control, whether it's a competitive loss or and how much of it is, you know, companies going out of business or getting acquired or things like that?
Yeah. We think of, you know, on average, our clients stay for approximately five years. So now certain verticals much longer than that, certain verticals a little bit shorter than that. Channel makes a difference as well, but sort of on average. So you can think of that as an average 20% attrition rate on an annual basis. We have been doing better than that lately in terms of what's controllable and what's not controllable. You know, you mentioned, Kelly, going out of business. You know, that's probably 3%-4% of our attrition on an annual basis overall. Maybe it'll tick up to 5-6, but it is a smaller component, and we really haven't seen much tick up lately, which is a really strong sign for the economy overall. You know, the other reasons, mergers and acquisitions.
So it's a little bit of a counterbalance to us right now because in 2021, going into 2022, we did see a tick up, particularly as clients had grown rather large. They got acquired, and, you know, it was uncontrollable attrition. You know, I'd probably put the floor of what we think the floor on attrition is roughly 14%-15%, you know, just on a regular annual basis.
Yeah, I think that sounds right. And indirectly, so if you think about, you know, sort of averaging, you know, high teens-low 20% range, we're sort of at the favorable end of that range right now. But I would agree with Kyle. I think there's things that we can continue to do that can help us, you know, shave a point or two, and for the reasons that Kyle talked about on CIE, retaining a customer ends up being extremely important to the economics of the model because of the cost to acquire and because when we have attrition, it skews to the larger part of the customer set. So holding on for another year means not just holding on to a customer, but a particularly large one.
That's helpful. And, you know, maybe we could, you know, switch over. I think your, your stock has recently had a bit of, bit of volatility. I think kinda people looking at, you know, insurance costs, I think, within, you know, historical ranges, but, you know, were a bit higher, you know, than the Street's model. So it maybe you could give some more color on, you know, what you guys saw there, kinda when those costs started to, to climb a bit and kinda how you guys have, you know, responded with whether it's, you know, risk mitigation or, or pricing.
Right. Well, I'll let Kelly speak to actions, but I guess I would just start by saying, insurance is a really important part of our model for the reasons that we talked about. So we do very much to invest in the resources to sort of really understand the benefits that we're bringing to market. We do take risk. That gives us access to carriers and plans. It also gives us access to data that we otherwise wouldn't have on a pure pass-through basis. So we see it as creating value for us, for our shareholders, for our customers to be, you know, deep into the benefits business.
And if you look back and agree, take the point I made on first quarter, but if you look back five, six, seven years with TriNet, there has been some volatility in the insurance cost ratio, but in no part of that period was it not still creating value for our customer and for our shareholders. So it's some volatility around some still very, I would say, favorable outcomes. And part of that is because we have a very sticky value proposition and the ability to make adjustments when we need to based on cost trend, which I think, Kyle, you could speak to sort of how we think about that here.
Yeah, no, and happy to do so, Mike. You know, back to your question, Kyle, on what did we see in the first quarter. January and February, we did see slightly elevated claims. What we were able to do at that point in time is we do reprice a cohort of our book every quarter, and our largest renewals are in October and January, which really make up about 65% of our book combined. Our smallest ones are in April and July, July being the smallest. So we modestly made an adjustment to pricing related to the July book, and you know, it gives us a little bit of runway to watch the claims develop.
The other thing that happened in the first quarter that I'd just nod to 'cause some people may not be familiar with it, but there was a large pharmacy benefit manager, provider portal that had a cybersecurity attack. Because of that, our claims paid claims levels really weren't reliable. We weren't really sure if we had a full population of paid claims just given the disruption in a large payer portal. So, what we did from a reserving perspective is we took a look at it. We looked at historical trends, and we looked at recent experience as well as seasonality we would expect and analyzed, you know, and put up our reserves just using a per employee per month basis of our best estimate of incurred claims. We wanted to be conservative.
It's generally our approach to reserving overall and just didn't feel like the March paid claims was reliable even though they were lower than we saw in January and February.
That, that's helpful. And I guess have you guys gotten any update, or anything you guys could share on how, as you know, we've gotten a little further, a little more time, is there any update or timeline for when you guys expect to see how the claims will actually settle in?
Yeah, well, one, we just completed the month of April, so we've had an opportunity to look at paid claims coming through our April results. As we look at April and we have discussions with our individual carriers, the claims lags really do seem to have worked their way through the system for the most part. We'd always love more data, you know, and we'll always continue to monitor the data, but as, as we look at it, we believe we're by and large past any, you know, delayed claims and that you would have normal claims lags associated with that. That being said, when we finished the first quarter, we did update our guidance for insurance for, for the year. When we updated guidance, we, really reflected the first quarter results with not much of a change to the, the out three quarters.
As we're looking at April results, they are coming in a little bit favorable to the midpoint of our range.
Okay. Yeah, that's helpful. So yeah, I guess, obviously, it's just outside of, you know, any adverse changes, you know, from here, I guess you guys are feeling good based on, you know, some of the data that you guys have gotten in the last, at least the last few weeks, I guess. Is that?
I think Kelly said it well. It's something we stay on top of, and every month gives us a little bit more confidence looking at proceeding and sort of how the claims develop. But in general, as we're sort of seeing how March sort of ran out in April development, looking at the incurred to paid lags seems to be normalizing. It puts us in a pretty decent spot relative to the guidance we issued.
And I guess kind of sticking with the theme of, you know, insurance costs, I guess, what have been some of the areas where costs have jumped up a bit? I know there's been some noise, whether it's, you know, I think some people have cited whether it was, you know, GLP-1s or, you know, surgeries or, you know, pregnancy timings or things like that, I guess. You know, what have been some of the big drivers of, you know, some of the higher claims and.
Not too many.
Costs that you guys saw?
Not too many. Okay. You know, one thing I would say is we look at all cohorts of our business, so kind of every vintage, and we are seeing an elevated level of claims overall. It's both usage and cost. When we look at the combination of those, we're seeing healthcare, or medical excluding pharma up about 10%, and we're seeing, you know, and this is really the first couple months of the year, and we're seeing pharma up, you know, probably low teens. And, some of the areas that we're seeing, Kyle, are, you know, certain pregnancy-related type things. We are seeing continued use of GLP-1s, but we're not seeing a spike or an acceleration of that. And, you know, and we are seeing a little bit of sort of delayed catch-up from outpatient procedures.
I think maybe the thing I would add is just as we work with our carrier partners and, you know, get the benefit of the benchmarks back to their books. I'd say there's nothing that we're seeing in our experience that suggests that there's anything other than kind of the broad market true cost trend, which is important 'cause as we put price into market, to, to make sure we keep up with that cost trend, and we were putting that in at the same rate that we would see the, the kind of the whole time horizon.
The general rate, yeah. Good point.
You know, that, that's helpful. And maybe if we could switch over, you know, to capital return. I think that's been, you know, a big part of, you know, the TriNet story, at least in the last few years. You guys have been, you know, pretty active on, you know, share repurchase front, recently have started paying a dividend. How are you guys kinda thinking about deploying and, and returning capital to shareholders and, and balancing, you know, buybacks and, and dividends?
You want me to start, and then you want to follow up?
Yeah, sure.
Yeah. So, great question. Really appreciate it. And yeah, I think, I think TriNet has established a reputation for returning capital. And the way we think about it and have talked about it very, very consistently is our first priority, is to fund growth. And like I said, I think this, this business model, particularly the environment that we're in, you look at these longer-term trends, the demand for what we do is just getting stronger. We create a substantial cost advantage for that SMB, help them manage their complexity, take things off their plate that are getting tougher and tougher for them to manage through a multi-vendor or software-only type solutions. And putting services software around this PEO co-employment construct, while it takes a while to get a prospect there, once you get them there, it is very, very compelling, and they will stick through it.
As you're creating that kind of value, this becomes a very cash-generative business for us. We see the opportunity to not only fuel our own growth but then also, you know, be transparent and aggressive about returning capital to shareholder and have established a track record of doing that. Maybe you can talk a little bit about the policy we use.
Yeah, no, I'd, I'd love to because, you know, it was really important for us in the middle of 2023. You know, for those of you that don't know the TriNet story, we did do a couple transactions that collectively bought back $1 billion worth of our stock. But as we were going out to recapitalize our balance sheet, we felt it was important to investors so that they understood what framework we were working within. And so the framework we laid out, of course, Mike just mentioned first, you know, invest in, in organic growth, and we'll continue to do that.
but secondly, make sure that with this cash-generative model that we're targeting, average return to shareholders of 75%, whether it's through M&A and, and value accretion in M&A or through capital return, we just instituted a dividend in the first quarter, announced it on our, our, fourth-quarter earnings call, and paid it in April. So, it's another tool we have in the toolkit. You know, as I mentioned, we bought over $1 billion worth of stock in 2023.
Right.
You know, I'd say the silver lining of a little bit of uncertainty around insurance performance and first-quarter guidance change is it gives us an opportunity to show that we will continue to deploy capital.
Great. You know, that, that's great to hear. And, you know, maybe thinking, you know, more about M&A, you know, Mike, I know, you know, you've been here a little bit a little while now but still.
Yeah.
Relatively new on the job. How are you kinda thinking about M&A? You know, what would you, you know, be looking for in kind of an ideal, you know, transaction?
Yeah. Well, and I think just kinda pick up on the same points that Kyle was making and get to your specific question. Is we generate a fair amount of cash. We can fund, and our first priority is the organic growth. And as I'm three months in as CEO of TriNet. And so as you can imagine, spending a lot of time going deep with our colleagues around the country, spending time with our salespeople, being in market with customers, with prospects, with channel partners. And I just think there is a lot of room for us to run, and we've got some very good things going on the organic growth. And I would be loath to sort of distract the organization from what I think is some really good ideas and momentum that's building.
When we get to M&A, I think I would be thinking more capabilities over larger, sort of block purchases. Again, I think the distraction risk on the latter has made the bar extremely high. I do think because of the relationship that we have with customers, there's opportunities to continue to think about new capabilities that can help us do more and grow revenue through that existing client base. But in general, I think I would think more of, like, in the course of business type small bolt-ons.
Great. And maybe we could switch gears and, you know, talk about, you know, technology and, you know, its role at TriNet. I think it does seem like you guys have, you know, invested quite a bit more in, you know, developing and building out a lot of your own tech, you know, versus, you know, some competitors probably do a little bit more of a partnership and third-party model.
Right.
But how do you guys kinda think and view, you know, the essential benefits of, you know, owning and developing and managing your own tech?
Right. Yeah, I think that is one of the unique things. So again, we tend to be unique in that we target a specific set of verticals. And then we feel pretty strongly that owning our own technology so that we can tailor our approach to the type of customer that we go after, not try to be everything to everyone is really important to us. And I think the, you know, you mentioned I'm sort of three months in. One of the things that I've learned in the time here, the Zenefits acquisition, very familiar with that company having been in the benefits business for a long time. I knew the technology was very good from a benefits enrollment administration point of view. I did not have an appreciation for how strong the payroll and associated servicing technology was, and it's quite good.
So I think, and I know, there's quite an opportunity for us to bring that technology into our core PEO offering more effectively. We are already starting to do that on the benefits side, and beginning to take the steps on the payroll side as well. You can start to see that actually in things like our operating leverage. So even as we're starting to see sales growing very rapidly, our expenses are growing at a very, very modest pace as we start to get that leverage. I honestly think we're just getting going with that, Kyle. So I think our opportunity as we do continue to see success in growing the business, getting ACV or new sales commencement with attrition, as we bring on the volume of customers, our ability to kind of keep expense growth in check is meaningful.
And then the compounding effect that comes from designing technology that helps us manage cost more effectively but also delivers higher quality and therefore better retention. So I think there's a flywheel here that's starting to spin, and it's not gonna be dramatic or overnight, but I think we've got a runway. And having our own technology in a PEO market that's very fragmented and by and large, you know, rents the technology, and it's common across the industry, I think we're in a really good spot.
Great. Yeah. And thinking about, you know, how growth should look like, I know we've been in kind of a challenging labor market, that especially in the white-collar segment. I think, you know, historically, there's been some industry research that's kinda suggested, you know, the PEO space kinda grows at a, you know, mid-single-digit, you know, clip. Is there any reason over, you know, the medium term that you guys can't grow, whether it's, you know, top line or, or on a WSE basis? You know, can you guys get that engine growing towards a, you know, mid-single-digit, 5%-7%, call it.
Yeah.
Growth rate?
Yeah. Like I said, I mean, we're spending time thinking about what the growth opportunities are and how do we really concentrate our effort, our investments, our tech development work against the biggest opportunities. We are certainly targeting growth rates that would clear the hurdle, Kelly, that you're talking about there. So we, we go into it as a team feeling like our proposition is strong and getting stronger. We're building out distribution capacity. Our brand is strong in the market. So certainly, that type of, of growth opportunity is, I think, quite recognizable.
Great. You know, that makes a lot of sense. I think we've covered a lot of ground here, but, you know, maybe, are there any aspects, you know, that we haven't, you know, talked about today, about TriNet that you think are, you know, misunderstood or common questions that you guys want to make sure, you know, the audience understands?
Well, you did a great job with questions. So you covered the landscape pretty well. I always think that's an interesting point about what's misunderstood. And that, and that's really on us to do a better job over time communicating. But I, you know, for me, I'd say two, two things that come to mind. The first is a little bit because of the noise with change in healthcare and the reserving and just a little bit of uncertainty around the insurance. I think what was lost in the shuffle potentially was how big a deal it is to our economics to have new sales commencement with attrition.
We're making real progress towards that, and it's just an important benchmark for us because, as Kelly said, as our clients begin net hiring again, that becomes it's almost like a loaded spring that's ready to go. So I would make sure that investors understood the power of our model through a pretty challenging part of the cycle, the performance here. And then the second would be on the insurance cost ratio. And again, I just would hit the point. I think at times, the investors can be a little uncertain about this insurance component, which feels unfamiliar. I would say just look at 4, 5, 6, 7, 8 years of history, and there is volatility, but the volatility is all around favorable outcomes.
And our ability to manage that risk, bring a differentiated benefit offering to market, is something that sets TriNet apart. And again, I do think medical cost trend for the industry is a driver, but particularly for a company like TriNet that leans in and is invested in it, I think it creates an opportunity for us to differentiate. And I think you're seeing that in both retention and sales results. So those would be two things that I would point to. I don't know if my CFO here has anything else that you would add.
Well, from a not really misunderstood but maybe an underappreciated portion, I would hit on a point you made earlier, Mike, which is, you know, as we invest in technology, as we invest in automation, as we go through certain digital transformation, I do think we've got the advantage of scale. And scaling our business while making sure we've got an efficient go-to-market, making sure that we're continuing to lower our, you know, per WSE cost to serve, and making sure that our overhead functions are really in check, to be able to grow that market, stay cost-competitive, and provide returns to shareholders.
Operating leverage.
Great. You know, that's super helpful. I think we've covered a lot of ground today. I think we can probably, probably wrap it there. But yeah.
Thank you.
Appreciate you guys for coming, and hope you enjoyed the live.