Today we have TriNet. We have Mike Simonds, CEO, as well as Kelly Tuminelli, CFO. I guess to start off, to give the audience a bit of background on what TriNet does and a little history on the company, I think would be helpful here to start.
Yeah. Thanks, Jared. Thanks for having us. Kelly and I are delighted to be here. So TriNet is an HCM player that targets the small to mid-sized business market in the U.S. Full range of software services, as well as a PEO, and that is our dominant product line and much of the legacy of the company. We go after a pretty big market, as you know, Jared, so 60 million U.S. workers work in that SMB market. Something that's a little bit unique about TriNet is there's six vertical industries that we go after and target our technology, our benefits, and our distribution, and those represent a little bit over 20% of the U.S. workforce.
So the 60 million in total, you know, probably is more in the 15-20 million workers that we go after, and with about 350,000 worksite employees currently, it's an under-penetrated market for us, and we see a really big growth opportunity, for reasons I'm sure we'll talk about this morning.
For sure. And I guess to start off, a key question we get from investors is the demand environment. How would you characterize the current state of the demand environment for HR software and services in the SMB market?
Yeah, I'd say from a little bit, if you kind of look past, like, what's the long-term sort of structural changes that are... You know, how's that impacting demand? I would say, in general, it nets out to some pretty significant tailwind. So for us, if you think about what we're doing primarily is taking all the work that goes into managing the people side of a business and allow that SMB business owner, CEO, senior management team to really focus on their core, like what they're trying to do in the front office. And so what's making it more complicated to do it themselves are just basic things like remote.
You know, post-COVID, I think accelerated trends we were seeing before, so even a small employer with just, you know, a dozen or two dozen employees is likely dealing with multiple municipalities, multiple states, likely with remote work, which means understanding payroll, withholdings, and compliance. In general, you have more active legislators and regulators when we talk about employment law, leaves, paid leaves, all the things that go into just making it more cumbersome and complex to manage that workforce. And then one that certainly we're feeling the pain of right now as an industry is medical cost trend coming back from COVID, which in the short term, that's a little bit of headwind for us from a cost perspective.
But in the long run, it's central to our value proposition, is helping a small employer offer big employer benefits at big employer kind of cost profile. So actually, healthcare cost trend that we're seeing right now is driving demand for us, 'cause small employers are feeling like they need solutions, and bringing TriNet to their side of that negotiating table, I think is increasingly important.
That makes sense. And then in terms of that demand environment, you alluded to some of the smaller clients. Any difference broadly across that SMB spectrum in terms of demand environment, as well as the different industry verticals you serve?
Yeah. I mean, I'd say in general, Kelly, jump in here if you've got some thoughts on it. So six verticals, our largest is technology, and I'd say technology's been the vertical where we've seen the most, sort of, the least amount of net hiring or the change in existing in our customer base. So, you know, we actually saw slightly negative change in existing across the entire base. And in technology firms, particularly the larger technology clients that we have, we were seeing a contraction of the workforce there. And so we've seen that across tech, you know, broader than TriNet's client base. I would say a couple of things. One is, the demand for what we do on the new business side really hasn't abated.
So we saw a really strong first quarter sales growth over 50% in annual contract value. Tech was not far behind those type of growth numbers. So we're seeing a bit of resilience on that tech front, but amongst the verticals we target, I'd say that's where demand's been most depressed currently.
Yeah, just to hit on the point Mike made about change in existing or net hiring, our historical average has been in the high single-digit, low double-digit level, if you look at the last 10-15 years. What we saw in the first quarter was slightly negative, so negative net hiring. Last year, we saw a little less than 1% net hiring, but, you know, we've really closed... When you think about demand, the increase in sales, along with the improved retention of clients, has really helped kind of narrow that gap, where we are a little less reliant on CIE at this point in time.
Got it. In terms of CIE in this topic here, what do you think is needed to get back to more of a normalized hiring environment within your client base, or are there potentially more structural issues, such as mismatch in skills, that you might not see the same level of net client hiring that you've historically seen?
Yeah, I mean, admittedly, we're optimists, but you spend a lot of time with small businesses, and we're heading into the heavy selling season. So as I'm spending time with prospects that are evaluating the PEO or the software concepts that we're bringing to market, I do feel that there's a growing sense of cautious optimism. I don't sense dislocation from a structural point of view. I do think, you know, obvious things like a lower interest rate environment to help fuel financing, where people are thinking about expansion, you know, those kinds of things are ultimately gonna be very helpful, Jared. But I... You know, we bet on that SMB market. I think it's a driver of the economy, it's a driver of innovation, and we don't really see that abating.
... Got it. And then with your 1Q earnings, your Insurance Cost Ratio, what you call your ICR, did come in a bit below your expectations due to health claims coming in above your assumptions. Can you discuss the trends you've been witnessing in 2Q so far, and how that compares to what you saw in 1Q?
Sure.
Yeah, happy to. Just a reminder for everyone, 'cause not everyone may know the TriNet story, but in the first quarter, we did mention that we saw elevated claims in January and February. We also didn't have a lot of information. We saw an improvement in claims in March, and but there was a major disruption of claims processor and pharmacy benefit manager through a cyberattack. So we didn't have a lot of confidence in March. We've now closed out April, and it tells us that, hey, our March pick was good, if not a little conservative, and our April claims came in line with the guidance range that we set, more towards the upper end. So we are seeing, but we are seeing a general cost trend going up, and we're expecting that.
We're putting that into our go-forward renewals as well.
Got it. Can you remind us what your fiscal year 2024 ICR guide assumed at the low midpoint, as well as the high end relative to what you witnessed in terms of 1Q?
You know, our, the change to our guidance, you know, where we brought it down just a point on our insurance cost ratio, or we brought the Insurance Cost Ratio up a point, that really reflected the experience we saw in first quarter and the uncertainty associated with the Change Healthcare results. Going forward, you know, one of the benefits, and then I'll get to answer your question, but one of the benefits of our model, Jared, is we do reprice a cohort of our book every single quarter. And so we're taking this emerging experience, and we're putting it into the next cohort's experience and how we expect that to emerge over the 12 months following their renewal. So, you know, what did we assume?
We assumed really at the low, mid, and high, there's going to be a range of outcomes, and that's really what that reflects. But we assumed that we would continue to see pharmacy costs grow in the double-digit range, health costs grow, you know, excluding pharmacy in the high single- to low double-digit range, and we're really anticipating that as we're thinking about our renewals going forward.
Got it. And then, given that the health portion of the book is the largest contributor, can you discuss over the medium term, you know, ignoring some of the noise in FY 2024, the margin you would expect to earn on, particularly on that health insurance side of the portion, in terms of that ICR?
Yeah. You know, health is the largest portion of our insurance cost ratio, but we don't currently break out the difference between health and workers' comp. But in average, on the medium and longer-term basis, we are targeting 88%-90% insurance cost ratio. We've obviously had the tailwinds of COVID over the last few years, where people really weren't utilizing the same level of healthcare that they had been historically. We've also seen provider pricing go up, as well as the cost of skilled nursing and medical supplies, and those are gauging into those cost trends. So, you know, we are still targeting that 88%-90% over the long term, but we do recognize there will be a little volatility in between.
Got it, and then I want to hit on the topic of new client sales. So it's been an area of strength the past year or so, where you've seen accelerating sales. Can you dig into what's driven that improvement on that PEO sales performance?
Yeah, sure. Maybe I'll take that one. So probably a few different things, Jared, but I would start with growing the sales force. So we knew we needed to make investments in the number of direct sales reps in the channel, as well as actually in the supporting enablement functions there. And we talked about, at the end of first quarter, I think around 28% growth in our direct sales reps and a productivity increase, and I think this is really important-
Mm-hmm
... that was similar in size to that increase in rep count. So capacity has been a big one. I think we continued to improve the targeting in our marketing approaches, so how we're constructing the funnel, making sure that we're going after, again, potential clients that are, we think our value proposition is gonna resonate most with. And then, in general, I do look back to as painful as the process is for repricing for current healthcare cost trends, the reality is, when the general market, small case commercial, is low double-digit increases, and you're a small employer, you need answers. And you're probably not getting it from the two or three small business pooled priced health carriers in your particular markets.
And so coming to a PEO, coming to a PEO like TriNet, that has multiple carrier relationships and is, and is taking some risk in negotiating options, I think that has been a tailwind in demand for us.
In terms of this increasing productivity, do you believe you can even drive it even further over the medium term? If so, how do you believe you can achieve on this?
Yeah, I, in general, I think I wouldn't predict quarter to quarter, but as I look at kind of where we are, I'm really encouraged with not just the quantity, but the quality of the salespeople. So we're continuing to look hard at the data and say: What can we do to refine our profiling, our selection approaches, our onboarding, our training? What can we be doing with our referral channels? As you know, we're beginning to invest in the brokerage channel as an alternative to help supplement that primary and direct go-to-market motion. So I feel like we're making some really positive steps, and honestly, we've got good runway to continue to improve that in the quarters and years to come.
And in terms of that, increasing sales headcount, so improving retention of those reps has contributed to that growth. What has driven that improvement in terms of your rep retention rates?
... Yeah, I mean, a few things. I mean, I think every time we invest in supporting resources and enablement, it takes the lower value-added parts of the sales rep's job, and allows them to concentrate on the things that they're there to do, which is building relationship, being consultative, and closing deals. And in general, you know, most salespeople love to win. And so when you put them in a position that we've got our own proprietary technology, we've got a market that needs the offer that we're bringing, that's conducive to keeping people longer, giving them more reps, and building some of that competence that I think is going to pay dividends in the quarters and years to come.
Over the medium term, how much runway do you have to continue to drive increasing sales headcount? Are you coming close to, you know, diminishing returns or, you know, any kind of framework in terms of how much runway you have to continue-
Yeah
... to increase your headcount?
Yeah, great question. So, I actually, I'd say two things, Jared. So the first thing is, I really like the point that you're bringing up around productivity, because I think it's, it's way oversimplifying the problem to just say 10% increase in reps means 10% increase in sales, and, and productivity and quality of salespeople is really, really important. And that's something we're going to continue to get better and better at. So I agree with that point. And then in terms of just the absolute quantity, you know, we were ramping up our sales force through 2023, and so we were up in, you know, 28% in the first quarter in count. By the end of the year, you know, maybe we're up in the 20% range on a full year basis.
I think we've got an opportunity to do that again, potentially in 2025, depending on market conditions. But importantly, doing it with a really high-quality addition and holding on to our salespeople, because that productivity curve is a pretty steep one.
Got it. And then, Kelly, can you discuss any expected sources of margin expansion over the medium term, as well as any anticipated margin headwinds outside of potentially interest income?
Happy to, Jared. You know, when I think about what are the real levers of our business, obviously, we have already talked about the insurance cost margin or cost ratio, and I've given you kind of our views on the longer-term targets for that. That being said, I think we've got two real opportunities for margin expansion. One is professional services revenue, and as we expand products and offerings and capabilities, we have an opportunity to continue to expand that within our client base. And secondly, operating leverage.
And, you know, we have done a number of things as you know, when we grew our sales force, we took a real hard look at what we were spending in our back office and said: "We need to be efficient with the spend, and we need to be able to fund the growth in the sales force." We have opportunity to continue that path and really make sure that we're scaling the business appropriately and getting that operating leverage in our cross base.
Maybe one thing I'll just add to that, where Kelly was talking earlier, think about the change in existing. So like Kelly was saying, in a normalized environment, I think over the last 10-15 years, on average, our clients are net hiring, you know, 8%-12% kind of range, and we're now sitting at very flat to low single-digit type of range. And then think about the margin profile of an existing client, already been acquired, already has relationship management in place, all sort of client-level expenses are the same. It's good margin business that's coming in as CIE. And so as the employment net hiring environment improves, that's absolutely revenue growth for us, but it's revenue growth that's coming in with a very favorable margin profile.
Just circling up on that historical call, 8%-12% CIE, any notable differences based on that industry vertical exposure? I know tech is one of the largest. I assume that would probably be one of the higher growth areas, but how does that compare across your base, or has it historically?
Yeah, I mean, let me take a first crack at that, and then Mike can add any color that he wants to. Tech and life sciences have been our highest growing-
Right
... CIE and, and net hiring verticals just because of the pace that we've seen those companies grow. Obviously, that was a little bit of a turnaround on the tech side over the last two years, but, those have absolutely been our highest, highest, growing verticals. When I think about financial services, given the fact that we really cater towards small capital-providing firms, i.e., hedge funds, other things like that, in the- you know, mainly in the New York area, but across the, the U.S. as well, those don't grow as fast, but, you know, they, they love our offering, and we tend to keep them a really long time, so they're still very, very good verticals for us. And, and then really, we see lower growth in...
You know, while we've seen good growth in nonprofit over the last year, it tends not to grow at quite the same level as nonprofit, Main Street, and professional services are slower-growing CIE verticals.
Makes sense. And then in terms of some of your sales distribution strategies here, why would a broker selling health insurance want to partner with TriNet when you also can have health insurance as part of that PEO offering?
Yeah, I mean, in general, I'd say a couple of things. A broker is very likely to be looking at a smaller client and assessing what's the profit loss on that client itself. And so the same things, Jared, we were talking about as drivers to the PEO model, those are impacting the broker as well. So increasingly, a broker absolutely has to broker the health insurance, and that has become, you know, ever more complex because the cost of it. So multiple plan design options, higher deductibles, what kind of tax advantage savings vehicles you're gonna put in place? So just managing the benefits has become more complicated and therefore, more complex to the broker to service. The expectation that they're gonna bring technology has increased, benefit administration technology in particular.
So the average small broker has to be thinking about signing licensing deals with platforms, the implementation of the ongoing carrier interfaces to make sure that data is being remitted appropriately. They are increasingly the call that's made around compliance, hiring issues, you know, a new employee that just got hired in a different state, and what- how do I need to think about that? At the same time, healthcare commissions in the small case market have often been capitated or limited. So you've got limited low revenue growth, scaling cost expense. So I think a lot of brokers are looking for alternatives. So in the insurance brokering market, you see a lot of brokers turning to general agents and platforms.
We think that the PEO, again, for the right customer, is a superior value proposition to the client, so a broker who's looking to do what's best for the client. Also, from an economic point of view, given that we will take on the technology, the compliance, the HR, and the benefits from a cost point of view, and still create an attractive revenue stream for that broker. So there's, you know, just like small businesses, not all brokers are created equally. I don't, I don't think it's an opportunity for us across the entire channel, but again, for the right verticals and the right partners in that channel, we're pretty excited to explore growth there.
Are there any other channels outside of benefit brokers that you're increasingly leveraging or planning to potentially over the medium term?
Well, I think the vertical strategy, which again, is pretty unique at TriNet, affords a unique approach to channel as well. So if you're thinking about high growth, life sciences and high tech, the the venture capital companies, the private equity companies that have portfolios that are looking to get their founders, their management teams focused on growth, not on compliance and the complexity of HR, those are really important channels. And as we see consolidation in things like accounting firms in our professional services segment, you know, we do think that there's opportunity to build kind of corporate-to-corporate relationships that then can help us lever at the local level from a referral point of view. 'Cause at the end of the day, I mean, the value proposition for PEO is so strong, it's an awareness problem that we're dealing with.
And so when a prospect comes along, and it's coming from a trusted referral source, it just speeds the entire sales process along.
Makes sense. Then WSE retention FY 2023 was detailed as above historical levels and around record levels as well, while your most recent 1Q was at a record level. What, what has driven these improvements in retention rates?
You know, a couple of things. I mean, one, we would go right to is we've invested in improving the service model, and so our kind of North Star is we use a Net Promoter Score, pretty familiar. I'm sure it's everybody listening in. We've seen marked improvement in that, and I do actually think we have some room to go there as well. So just as we've solidified our staffing levels, I think changed some of our business processes to better fit what some of our clients are looking for, continue to, you know, knock off changes that we can make in our platform that remove some of the manual work that our customers have told us they'd like to get rid of. Those kinds of things are contributing, and that's quite helpful.
The reality is there, there's a little bit of a hedge in our business, where if your clients aren't growing quite as fast, we talked about CIE being depressed. Well, the reality is, if they're not growing quite as fast, that means they're not being acquired by larger firms at the same rate. You know, a tech firm that has explosive growth, maybe we acquired them with 12 employees. They're at 500, and they're being acquired. They're coming out of our business profile. So as net hiring's been a little bit depressed, that also means it's a little bit of a tailwind for retention, and I think that's a contributing factor as well.
For FY 2023, what was that mix that you would categorize as controllable versus uncontrollable, and how does that compare to historical levels?
You wanna take that one?
Yeah, I'll be happy to take that. You know, in terms of controllable versus uncontrollable, you know, I guess I'd take it up a little, a level and say that, you know, we probably consider, like, 12%-15% attrition as sort of a base-level uncontrollable generally. And it's gonna be a combination of, you know, high healthcare renewal risk-
Mm-hmm
... businesses going out of business, as well as, what am I forgetting, Mike?
M&A.
Yeah, M&A.
Bank-
M&A, exactly, bankruptcies, restructures and being acquired, and that's probably in the 12-ish% level. And, you know, in terms of controllable, then it's just doing a really great job, you know, from a customer relationship management perspective and making sure we're offering the right things to our customers and that we understand their changing needs.
Within that controllable mix, what's the primary driver? Is it a client going to another PEO or shifting off of the PEO model to call it an ASO or in-house software model?
Our biggest competitor is going in-house, and so as clients have grown, you know, that's really the motion that we see is a new HR leader is hired, and that HR leader, you know, wants to bring it in-house, provide a differentiated benefit offering. But I mean, that's a good transition point, Jared, into one of the reasons that we bought the Zenefits business is the technology will, over time, allow us to provide a little bit more flexible benefits experience, and just HR experience with more API-friendly technology, that we can plug in different types of offerings that can hit that more differentiated business proposition for them.
And speaking of your competitors, has there been any change in the competitive environment on your PEO business the last year or so? Are you seeing increasing discounting or more competitors involved in bakeoffs? Anything different there?
I wouldn't say anything dramatically different. I think, retention rates for us, I mean, we're always gonna start there when we think about the competitive environment. And, like we've talked about, they're at or near sort of record levels, so we're feeling good about the value prop and how it's resonating. You know, I do think, like Kelly was talking about, the reality of healthcare cost trend in the broader environment is one that, you know, small case commercial being in the low double digits up into the mid-teens, say.
When you're seeing those kinds of increases broadly across the market, I think that it's gonna put pressure on the system, and I think put a lot of players in a spot where they're gonna need to sharpen their pencils because, you know, CFOs are looking hard at those kinds of cost increases. So I think this will be an important selling season for us as we go through. Our mantra is to price on a sustainable basis. At the end of the day, we're gonna be disciplined. We're gonna do our best to kind of look forward. We think our clients really value that consistency and predictability, and so we're gonna do our best job through that, and we'll see where the market is.
I suspect, you know, given what we're seeing in healthcare cost trends and hearing from our carriers broadly, that the whole market is moving, you know, pretty rapidly in that direction, and that doesn't disadvantage, you know, TriNet as we go through these renewal cycles and the new business selling season.
Perfect. Any questions from the audience? All right, another one I have here: "Can you discuss the progress on your ASO offering, including any quantification on the scale you've achieved there so far?
Well, when I think about ASO, so we did... You know, it, it's still nascent for us. So associated with our HRI
S technology solution, we have added a services layer. It seems to be resonating very, very well in the market. We have hired a bunch of people to support it, and, it's really just getting up to scale on it.
Yeah.
But I think it is resonating well in the market. It's just not a big contributor for-
Yeah
... earnings yet.
I'd say not material. I would say, just, Kelly, just building on your point, it's like what we're learning pretty quickly is just the importance of services to wrap around the technology. And so you can get the technology to be in a really good place, and it can do a lot of the functionality. The reality is, I think the complexity of managing your people processes is outpacing the technology in and of itself, and you have to put people that are dedicated to it to wrap around it.
How does the typical size of one of those clients compare to your PEO or Zenefits offering, or is it pretty comparable?
I think today it's actually pretty comparable, and that's part of the learning. And, you know, right now it's not material to results, so we can really think about smaller end. Is it a good pipeline into the PEO? We can think hard about, is it a good... Like Kelly was talking about it, there's- there are services that we could preserve, perhaps past the co-employed PEO relationship-
Mm-hmm
... and maintain, you know, some degree of service and connectivity to those clients. So it's early days, but today the size is pretty similar.
Got it. And then customer support has been an area of investment in recent years. Can you discuss what you've done there in terms of the customer support function and any intentions over the medium term?
Yeah, I think that's, that is a really important thing, and we talked a little bit about the improvement in NPS, or Net Promoter Score, and again, having some room to go there. A lot of that has been about making sure that customers feel like they've got a place to go to, including a person that they can go to, but the reality of also being able to get questions answered really, really quickly through calls and through chat. And so investing both in, for those that are interested, the dedicated support, but then having the center support right behind it. Elevating our staffing and our process, combined with some technology, to get those service levels to a spot where... We were looking at it yesterday in an operating review.
It's sort of 11 seconds speed to answer, first call resolution rates that are, you know, 96%. And so we're kind of really leaning in to be sure that people know that when they've got questions, they've got an issue, that we're gonna be there for them. I really do think over time, like Kelly was talking about, that is one of our levers from a margin point of view, is getting scalability further into our business model. And, you know, our first few use cases with AI have proven to be helpful to us. I mean, give you a sense, chat for many of our customers has become the dominant way that they're working with us versus the phone. I think that represents real opportunity to pair language and decisioning models together. So I think over time, that's...
We've made some investments, and over time, I think we're gonna get both quality and scale benefits.
Perfect. With that, we're at time. Thank you for joining us today.
Great.
Thanks, Jared.
Thank you.
Appreciate it.
Appreciate you having us.