All right. Next with us, we have the CEO of TriNet, Mike Simonds. First off, thanks for joining us today, Mike.
Thanks, Jared. Glad to be here.
For anyone in the audience, any questions during the fireside, you can submit them through the platform or email them directly to me at jared.levine@tdsecurities. To start here, for those not familiar with TriNet, can you provide a brief overview of the business?
Yeah, sure. So TriNet's been around 30-plus years. We provide payroll, benefits, compliance, HR support for small to mid-sized businesses, primarily through the PEO construct. So the idea here is we use our scale to bring those benefits and services to small companies, which allows them to go toe-to-toe and compete for talent with large enterprise companies. And it also, importantly, frees them up to run their business. We operate in a large and under-penetrated market. And I'd say a number of the big external trends, Jared, that you'd be really familiar with are quite constructive to the PEO model. So the current healthcare cost inflation, which I'm sure we'll talk about, it's painful in the short term, but it sort of underscores the value prop of a TriNet and of the PEO.
Small businesses need help as they sort of sort through that cost and the associated complexity, accelerated by COVID, but nonetheless, a long-term trend towards remote work, and so think about a small business having employees in two, three, four, five different states with different regulatory constructs that they've got to deal with. We're there to support them with the compliance and the HR support, so there's a lot of reasons to feel very bullish about the business and the market over the mid to long term. I have been here for all of about 10 months, as you know, and spent most of that time with colleagues and with customers and in the market, and there's a lot of energy around where this business, the good that we do for SMBs today and where this business can go over time.
Got it. And then let's touch on the demand environment here. So with your most recent earnings, you highlight a healthy pipeline growth year- to- date, but some elongation of sales cycles. Would you attribute this elongation of sales cycle to primarily based on your client and sales conversations?
Yeah, no, you're exactly right and as we look at sort of the funnel of just general interest in HR solutions or benefits or payroll, it's bigger than it's ever been at the top of that funnel and it's for the reasons that we talked about. I mean, small businesses dealing with the cost and the complexity and so the interest is there. As we get through the process all the way to potential close, we have seen that elongate and I think a part of that is a broader business environment, particularly in the SMBs, where we've seen a lot of caution around hiring, a little bit slow to hire, very thoughtful, I think, in general. Over the last two years, really, Jared, it's been a rebalance in the SMB market towards cash conservation and margin over growth as the number one priority.
And so when you think about the PEO, it's a large relationship with that SMB deciding to make that change from usually multiple vendors over to the PEO to do that with an annual contract. I think just at the margin, there's enough caution there that it's spread out and elongated that sales cycle. I think reasonable to believe that as that business market starts to improve, when that occurs, we could start to see that sales cycle coming back to historical norms and conversion rates at historical norms. And I think, honestly, there's some things we can do at TriNet too to influence that over time.
Got it. And then in terms of your pipeline for the PEO, how does that look like based on companies already on a PEO model versus using an in-house model currently?
Yeah, it's a quicker process. If already you've got a small business that is comfortable with the co-employment construct that's sort of implicit in the PEO model, you've got a one vendor to one vendor switch normally. So you do see it not be quite the same elongated. But for TriNet, the majority of our new business comes in native first-time PEO buyers. So for us, and it's not that we don't on occasion win from existing PEO providers, but we just sort of see that white space and see the opportunity to kind of create that differentiated value. So we tend to lean into the new-to-PEO space.
Got it. And just closing the loop on the demand environment, any noticeable differences in that demand environment based on employer size segment or even industry vertical?
Yeah, I mean, it's been pretty broad spread. I mean, I think in general, as you know, we tend to be overweight a bit on the technology, life sciences, financial services, and some of the typical kind of higher growth verticals. Those are the kinds of businesses that might be doing net hiring in a normalized environment in the high single, the low double-digit growth rate that's been muted to just basically almost about flat now. So I'd say in general, it's been the net hiring in that base in terms of consuming more and adding more WSEs has been a little bit repressed. But I mean, it's still encouraging.
I mean, the Bay Area here in San Francisco, we're still seeing the new business starts, and we're still seeing new small businesses in the tech and life sciences vertical come into TriNet, just perhaps not quite at the same rate.
Got it. And your competitor Insperity recently called out increased usage of some short-term discounting. Are you seeing that broadly across the market, or is that more so limited to a certain number of competitors?
Yeah, and I always wanted a good practice to steer clear of commenting too much on other players in the industry. But in terms of what we're seeing, it's a competitive market. It's a pretty normalized market. I would say for TriNet, there are two major components in terms of the pricing. The first is for the insurance, and obviously, that's the predominant share of the total cost of ownership to come to TriNet. And the second piece is the professional services revenue. And in general, as we add value into how we are servicing our customers and the kind of resources we bring to bear, we've been able to get some decent annual rate increases on that PSR.
When you're in the kind of elevated healthcare cost inflationary environment that we're in right now, that bigger chunk of the ticket, we talked about low double-digit healthcare cost increases with our 10-1 renewals or January 1st renewals are another big cohort. We're a little bit higher in terms of the increases there. We do want to be thoughtful about asking too much of these small business customers all at the same time. So I'd say we've been a little bit slower to increase price on the professional services fees because we're trying to be supportive of the small businesses they're dealing with a reasonably challenged economic environment.
Got it. And that's one thing I do want to touch on in terms of professional services fee. So historically, TriNet would increase those annually at a mid-single-digit rate. Do you foresee a different approach with pricing here over the medium term on the professional services fee? Sounds like you're below that currently in terms of not at the same historical levels, but is there any reason that would prevent you from returning to close to mid-single- digits over the medium term?
I think that's a reasonable assumption over the medium term. Again, in the short term, we're still getting increases year over year on those professional services fees, but to your point, not to the same degree as we sort of try to strike the right balance for those SMBs. And I would say just even over the mid-term, we don't take that as a given, right? We think hard about, okay, what are we doing with our service model and with our technology platform that's going to add incremental value to that SMB customer so that it's a good trade-off for them over time. Really strong retention is a huge driver of the economics of our model. And so, yeah, I mean, I think that's a reasonable midterm aspiration, and I think we got to go earn that by continuing to invest in new capabilities.
Got it. And then healthcare costs within your insurance business coming in above forecasts have weighed on your insurance cost ratio this year. The company is adjusting pricing of these plans with clients during the renewals to account for these higher costs. What actions are being taken or planned to improve on your ability to forecast costs and price plans accordingly to reduce this volatility of your ICR?
Yeah, really good question. And it is sort of this interesting situation where in the short term, we've got a rapid acceleration through 2025, really, sorry, through 2024, really actually starting in the tail end of 2023. And in the short term, that's painful for our customers. That's painful for TriNet as we pass those cost increases through. But like I said, in the mid to long term, it's very supportive of the model that TriNet is bringing scale to help those small businesses deal with the issue. So it's constructive over time. In the short term, it's a real challenge for us to really balance the right level of price increases. To take a step back, Jared, you know this really well, as TriNet takes risk. And we participate.
We do have constructs from a reinsurance point of view in place that help us kind of manage that risk in a collar. While other players in the PEO market treat the insurances as a pass-through, we think by taking risk, one, we're paid for taking that risk, and two, it gives us flexibility in the market, and so you asked the question, what steps are we taking, and for us, we're leaning into that strategy to take risk on the insurance side because we think with the right investments in the expertise, in the data, and in the process, we can create differentiated value for that SMB customer, so one of the first things I joined back in mid-February pretty quickly, what we've done is consolidated all of our data and analytics functions across all of TriNet.
We've significantly increased the investment, and that's we understand what's happening with our carrier partners with claims data. We're building that into more disciplined and responsive renewal and new business pricing, helping our clients with plan design selection and the like. We brought in Tim Nimmer, who was Chief Actuary, Head of Underwriting and Pricing for Aetna previously, new Chief Actuary, and we'll continue to sort of invest into our insurance and benefits expertise. So in the short term, it's a bit of a headwind for the industry and certainly for TriNet. I look at it as a real opportunity for us as we continue to just get better at managing that risk and giving differentiated offers to our clients over time.
Got it, and a key focus here of investors we speak with is as we look past these headwinds starting in 2026, is your ability to at least achieve the midpoint of your long-term ICR guide. Can you talk about why ICR could remain near the high end of the range here as we look to 2026 and you kind of lap these headwinds?
Yeah. We talked a little bit with third- quarter earnings. We think about the ICR, which includes our health insurance as well as workers' compensation with healthcare being the primary driver. We think about a long-term range in that 87%-90% insurance cost ratio. We think that's a good spot for us, and it's a good spot for our clients to be in. When we reforecast Q4, we were looking at a total year that was sort of right around the high end of that range here in 2024. As we work to reprice the business over the course of the coming quarters, we felt like we could get to a spot where that upward trend could be leveled out and start to improve.
And so I would anticipate, again, if our assumptions are right, we'll come out of 2025 in a much better spot than where we sit going into the year. But the average for next year from an ICR being relatively consistent with this year's ICR average was the guide that we gave after Q 3 .
Got it. And then you have messaged your intentions of wanting to differentiate yourselves with your insurance offerings. Can you explain what you mean by this? Is this more so having the most options available or the best pricing? Just kind of clarifying what you mean by this messaging.
Yeah, sure. I mean, there's a lot that goes into putting the right benefits plan in front of a client and ultimately in front of their employees, and I think over time, TriNet's done a pretty good job with that, having leading carriers in each of the markets geographically that we're trying to serve. Healthcare, as you know, delivery and network is very much a local business, so I think we've got a good foundation to build on.
I think what we realized too is that we can do a better job curating the set of choices and to use kind of our pretty extensive database to understand, given a client, what the business is that they're in, where they are in their life cycle, what their priorities are, how do we help them in terms of putting the right benefits in place and the right choices in front of their employees so that they're getting kind of the maximum perceived value for price points that make sense for their bottom line, and I think at the end of the day, Jared, it's not about being poor and then being amazing at that. I just feel like it's such an important line item, and because we take the risk, we've got a bit more flexibility.
And with the talent and the technology that we're investing in, it feels like we're better today than we were a year ago. And I feel quite confident a year from now we'll be materially stronger in terms of those sets of options and how compelling it is to that customer even at renewal or a new prospect that's evaluating TriNet.
Got it. And the key investor question we also get is how to think about average co-employed WSE growth over the medium term and the underlying pieces to get that. Historically, TriNet is pointing to mid- to high-single-digits WSE growth. Is that still a realistic target here? And what would that require from a net client hiring perspective to achieve on that?
Yeah, no, it's a really good question. And certainly, when we look at the industry over an extended period of time, that's a reasonable growth range for the number of worksite employees. And that's certainly something that I believe is achievable for TriNet in the mid and long term. I think in the short term, as you know, the basic kind of component parts are what's the retention of your customers, the number of SMBs that came into the year, how many are with them through the entire year. And we're quite fortunate. 2024 is shaped up to be a record retention year. I think on that particular dimension, I like our chances to be above our historical range on retention, but probably to come back a little bit towards that historical range because of the healthcare price increases that we're putting through.
That certainly is a priority for us to get the ICR back into the targeted range. The second component piece is you've got that customer for the year. How much net hiring are they doing? And like we talked about, in a normalized environment, you'd certainly expect to see high single- digits, if not low double digits. And now we're two years running of basically flat to very, very low single- digits. And I'd probably be in a different line of work if I could perfectly predict what was going to happen with the economy, but certainly the tone is a positive one as we look to 2025. But we're going to sort of build our business plans around a conservative case like we've seen over the last couple of years and certainly take the upside if our clients start to reengage in net hiring.
And then the third piece is the new customers that you're bringing in. And I'm pretty excited. As you know, we've expanded the number of sales reps about 15% year over year. And what's interesting about the model is the breadth of the relationship for a PEO, taking on your payroll, your HR, compliance, benefits, workers' compensation. It is a beautiful business model, and it makes for a very durable client, but it is also a pretty complex sale at the end of the day. And again, we're going mostly after folks that are native to PEO. And so when you think about that, it's not just having 15% more sales reps. We have to do a better job of keeping sales reps over time because the tenure and the productivity of sales reps are heavily correlated. And it's really not even linear, Jared. It's kind of an S curve.
You don't get a lot of production in the first year or two. As you get to 36 and 48 months, magic really starts to happen, and you sort of hit that steep part of the curve, and we've been building out our field force for 12-18 months now, so we're just starting to get to the place in 2025 and certainly through 2025 and into 2026 of not just more salespeople, but more productive, more tenured salespeople that can really sell a pretty complex value proposition into the market, so at this point, we would love to see that new sales covering our attrition and having the net hiring be all upside.
I think made some progress here in 2024, but given the priority of healthcare repricing, I think it'll be a little bit of time into the midterm before we're able to get to that new sales covering attrition.
Got it. And double-clicking on the sales force and the investments you've made there in growing headcount, how much runway do you think you have left to continue to grow that sales force based on the existing verticals you serve in geographies you're in?
Yeah, and maybe just picking up on the last part of that question first, because I think it is really important. TriNet isn't the right answer for every SMB out there. So our targets tend to be SMBs that have growth aspirations. They tend to be ones that really are looking to have low and keep low employee turnover. They tend to value benefits. You can sort of see that in their plan design selections and their funding choices. And so one of the things that I think is really attractive about this market to investors is that, one, it's untapped and underpenetrated, and there's constructive trends. But two, you've got scaled competitors that compete differently. And we're going after, again, those primarily higher wage, lower turnover SMBs. We do overweight technology, financial services.
Increasingly, we're finding some blue-collar segments, particularly around things like the trades where there's a shortage of supply, which means incomes are going up and benefits are going up. And so we see a lot of opportunities on those fronts over time. And in general, getting into those segments a little bit more deeply and opening up some geographic markets where we're underpenetrated, those are probably the pockets where we'll add additional sales reps over time. But I do think of the two, adding more reps or driving up retention and productivity, I think it's the latter that's going to have the biggest impact on our growth.
Got it. And then in terms of that productivity, can you help scale in terms of the mix of tenured reps within that sales force and kind of what you might be targeting in terms of that mix of tenured reps over the next few years to see that, I guess, so we can kind of visualize that potential benefit to sales productivity as you have an increasing mix of tenured reps?
Yeah, and as you would expect if you just do the math, when you're growing a lot of capacity, then your average tenure is going to come down as you're doing that growth and adding a bunch of newer reps into your sales force. And that's kind of the spot that we're in. So if you sort of think about real ramp-ups in productivity at 36 and 48 months, our average tenure is below that. And the good news is it's a pretty simple math equation. You take care of these people, you make sure that they have good opportunity and something differentiated to sell. You make sure you get probably the number one is that you've got great local leadership in place that are developing folks and helping them be successful. And you're going to see that productivity and that tenure come through.
But we're short of where we would want that average tenure to be because of the growth that we put into the field force.
Got it. And what have you seen during your primary 4Q and 1Q health enrollment periods when it comes to health insurance participation rates? Is the elevated pricing increases impacting this at all?
Yeah. And as you can imagine, our October 1st is the one where we were first most reflecting kind of the accelerated cost trend we're seeing in the external environment. So most important, obviously, is the macro retention. So are people willing to pay the low double-digit increases? And we were really encouraged with that October 1st renewal cohort. And like we talked about after Q3, we need to be communicating renewals to our January ones pretty early in the process. And again, we were seeing good and in-line responses from the renewals that we were putting out on that front. Within that, to your point, there's two things you can see. WSE is opting out of healthcare, and our participation rates in healthcare have actually held in pretty well.
A little bit down, tick or two, but certainly well within kind of the historical norm of what we'd expect to see and not outsized given the increases. The second is you do see some WSEs buying down, so they might look to manage that cost, so they're going to buy down to higher deductible plans and things like that, and they do actually a little bit. I actually maybe would have expected a little bit more. We saw a little bit of a shift there, but nothing too dramatic.
Got it. No, that makes sense. And in terms of WSE retention, you are now pointing to expecting record WSE retention for FY 2024 after posting record retention FY 2023. How much of this improvement FY 2024 do you attribute to clients not wanting to switch vendors versus your investments in service and product?
Yeah, I mean, it's hard to split it out, but we do spend time on when we do have customers. Two things was we spend time surveying and understanding why customers stayed with us. And then when we do lose customers, understanding why they made the choice that they did. And in general, I think we have certainly seen our primary metric is Net Promoter Score. And so we've seen a really nice improvement over the most recent two years over where it was three years and four years ago. So I think that's certainly a contributing element to it. I think another piece of it is, like you said, the same things that are slowing down a sales cycle for new business is also helping you from a retention point of view.
So if you've got a little bit more caution in that SMB market, their willingness to make a change, usually they've grown and they're going to strike out on their own because growth has been a bit muted in our customer base and because the lean for big change has been a little bit, again, more muted. I think that's probably been a bit of a tailwind as well. But as I look at it going forward, I think we've got some work to do on the healthcare insurance pricing like we talked about. That'll temper retention a bit, but still, I think stay above historical norms.
I think on the service that we deliver to customers, and I spent time with all colleagues today on a call, actually talking about our roadmap. I still think there's a lot of things we can do here at TriNet to improve service delivery quality, deal with some of our still manual processes. Our people are amazing, but we still ask them to do too many transactional things. And so I think there's things that we can do to improve that customer experience. I think that'll help us with retention over time.
Got it. And you guys have done a solid job of managing expenses to partially offset ICR headwinds while still investing in the business. I guess ignoring ICR, what expense line item do you see the greatest opportunity to drive additional margin expansion over the medium term here?
It's kind of interesting. We really see it across the board in how we run the business. So we're increasingly looking at our unit costs around the cost of acquisition, our unit costs around servicing both the client and at the WSE level. And we're looking at our indirect and overhead costs, again, on a per unit basis just to give us a good proxy for how we're getting smarter each and every quarter and each and every year. And so I think we still see the opportunity this year. I think, like you said, disciplined expenses. I think as we look forward, there's still opportunities to show good discipline on the growth of expenses while shifting more dollars and more talent from how we run the business to how we invest in change.
And those investments are going right into our distribution team and the brokerage channel, our benefits offering, and our ability to kind of manage risk and provide differentiated offers to clients. And then reinvesting back in the technology to deal with those manual processes to modernize, to put our AI use cases to scale, all things that I think can help improve outcomes, help improve growth, but also fuel our investment engine and our roadmap.
Got it. And historically, TriNet with its PEO has focused on six verticals. Do you see the opportunity expanded in new verticals over time?
Yeah, and you're exactly right. Six verticals. I think that's been really helpful and constructive for us. Like I mentioned, I'd say the two places that we see opportunity, and we'll talk more about this as we get into 2025. One is it turns out it's a little bit less the vertical. The vertical ends up being, in some cases, a proxy for an underlying sort of customer need and behavior, and if you go down one click to what's that underlying customer need or behavior, it is, like I was saying earlier, it's where people are competing for really top and scarce talent, and they're competing with that when you see that in terms of the kind of turnover levels that they're targeting for their business, the benefits that they're offering, the funding level of those benefits, and we really actually see those in some unexpected places.
And so I mentioned there are some pretty decent-sized swaths of the blue-collar market where you see growing demand, you see supply that's not going to be replaced by AI or offshore. And so those kinds of firms have great growth prospects. They care about their people. And I think TriNet's got a nice value prop for them. So I do see pockets of opportunity to expand a bit.
Got it. And then can you discuss the progress you've achieved today with the rollout of your ASO offering as you've kind of shifted more from just a pure PEO to more of a diversified HCM vendor? Now, are these clients that are primarily switching internally from your HRIS or PEO business, or are these actually net new clients that you're targeting with that ASO offering?
Yeah, no, you're exactly right. And we're actually pretty excited. And it speaks a little to your prior question about not just different verticals, but different types of clients where the current TriNet PEO may not be a perfect match for any number of reasons, one of which might be the insurance risk associated. And so what we've learned is that we are at our best in terms of our client satisfaction, our retention, and our overall kind of quality and efficiency when we put technology and service together. And ASO gives us a really, I think, interesting, and we're learning, but interesting opportunity to test increasing levels of services and support on top of really strong technology. So it is not a big driver of our P&L today.
But as we think about over time, the size of our funnel, people that are interested in TriNet, and how at the end of the day, you're converting a relatively small % of a very massive funnel into PEO, we think that in that is a lot of potential TriNet customers that may, again, not be a great fit for co-employment and PEO, but that are looking for a real amount of service support and technology. So it's one to watch, and we'll talk a little bit about it in 2025. But over time, that unbundling of the co-employment and being able to still show up with a strong service and tech offering is an interesting one for us.
Great. We are at time here, but appreciate you joining for us as well as everyone in the audience today.
Thanks for having us, Jared. Really appreciate the conversation.