Good day, and welcome to the TriNet Third Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Alex Bauer, Investor Relations.
Please go ahead.
Thank you, operator. Good afternoon, and welcome to TriNet's 2021 Q3 conference call. Joining me today are Burton M. Goldfield, our President and CEO and Kelly Tuminelli, our Chief Financial Officer. Our prepared remarks were pre recorded.
Burton will begin with an overview of our Q3 operating performance. Kelly will then review our financial results. We will then open up the call for the Q and A session. Before we begin, please note that today's discussion will include our 2021 4th quarter and full year guidance 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, 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 ks 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, our 10 Q filing or a 10 ks filing for our Q3 and full year of 2020 reconciliations, respectively, both of which are available on our website or through the SEC website. With that, I will turn the call over to Burton for his opening remarks. Burton?
Thank you, Alex. TriNet's 3rd quarter operating and financial performance was once again exceptionally strong. This continues a multi quarter trend, which sets us up for a solid performance in the 4th quarter. On today's call, I would like to discuss 3 important topics. First, I am very pleased with our Q3 financial performance to which I will provide highlights.
Next, I will discuss positive factors to address systemic changes to the nature of work due to the pandemic. Additionally, ongoing legal And regulatory challenges impacting SMBs are efficiently supported using this model. And finally, I will highlight our inaugural environmental, social and governance report released this afternoon. This report provides visibility into the central role ESG plays in TriNet's corporate culture And how we consider the needs of all of our stakeholders. During the Q3, TriNet delivered a premier HR While the Bureau of Labor and Statistics recorded slowing job growth relative to expectations in the 3rd quarter, TriNet saw our customers add new hires at a rate substantially higher than our forecast.
Our operating and financial performance was highlighted by strong professional service revenues growth and Strong WSE volume growth. During the 3rd quarter, we grew total revenues When we compare our 2021 Q3 total revenues growth to that of the 2019 3rd quarter total revenues growth. Total revenues grew 18%. This comparison highlights the strong Underlying performance of TriNet's business throughout the COVID-nineteen pandemic. Professional service revenues delivered year over year growth of 24%.
The growth in professional service revenues was attributable to the following items: WSE volume growth, especially in our core white collar verticals, Technology, Financial Services and Life Sciences and strong growth Taken in Q3 of 2020, which did not repeat in Q3, 2021. Kelly will address these highlights later in greater detail. 3rd quarter GAAP Earnings per share grew 142% year over year to $1.16 per share. I am very pleased with our Q3 earnings performance. We beat our GAAP EPS guidance by $0.44 and when compared to our Q3 of 2019 GAAP EPS, A pre pandemic quarter, we grew our earnings per share by 49%, again demonstrating both our overall Growth and our growth in profitability throughout the pandemic.
During the Q3, We grew our ending WSE count 10% year over year to approximately 351,000 WSEs. This also represented a 3% sequential growth versus our 2nd quarter of 2021, demonstrating momentum across our business. This TriNet All time high ending WSE volume metric was the continuation of recent growth trends. Our customer selection process has resulted in a customer base comprised of dynamic to see strong hiring throughout the quarter. Furthermore, our Main Street vertical has finally recovered All of its lost CIE since the onset of the pandemic indicating further normalization in the broader economy.
Finally, sales contributed positively for the 2nd straight quarter. Our new sales growth focuses on our core verticals and is adding to our already strong and amazing customer base. Let's talk for a minute about the PEO industry in general. As we look to the future, The PEO construct is well positioned for continued share growth within the SMB space. Since the onset of the COVID-nineteen pandemic, PEO has played an important dynamic role, which has reinforced for me our industry's growth potential.
At the onset of the pandemic, PEOs aided business owners as together we navigated the economic uncertainty. Our ability to administer HR services from the cloud enabled customers to successfully transition Their workforces to fully remote. As the economy slowed, we walked our customers through workforce management. For example, helping them balance furloughs versus layoffs. As policymakers establish the PPP loan program, PEOs went to work assisting customers throughout the process.
In fact, according to NAPEO, The PEO Industry Association, PEO customers were 71% more likely To have received a PPP loan, which speaks to the industry's ability to help customers source and organize the information required for the PPP application. This is an excellent example of how scale and expertise from a PEO made a significant business impact At that critical moment in the COVID crisis. At a more macro level, the same recent polling by Napier found that the PEO customers are 82% more likely to have their business operations back to normal or better than before The COVID pandemic. As we look to the future and learn how to coexist with COVID-nineteen, New operational complexities have emerged for SMBs and we as an industry And TriNet specifically are well positioned to assist SMBs navigate these new complexities. Last month, at our 2nd Annual TriNet People Force Conference, one topic repeatedly discussed Was the emergence of hybrid workforces?
Hybrid work, defined as employees working part time on premise And part time at home is being normalized and held as an example of a permanent change in the future of work. For SMBs, this work construct introduces new operating complexities with respect to HR Services, Tax and culture. TriNet is well prepared to continue to assist SMBs In the transition to this new way of work with our multistate HR services, our focus is to ensure That our multi state, multi location customers remain compliant under the different state And local regulatory regimes. This move to hybrid work is spotlighting our services As the SMB market demands more of these services, as employees shift to working from home and the office, Often these locations are not in the same city and sometimes not in the same state. Furthermore, many SMBs are using the pandemic to reconsider their headquarter locations.
Each of these new trends introduce tax complexities among other challenges. Taken together, Resource constrained SMBs are facing significant obstacles to remain compliant. Additionally, when the headquarters change, medical plans, rates and carriers may change because many medical plans are determined by the state in which your headquarters resides. TriNet helps navigate this complexity. By enabling HR access from anywhere, TriNet is working with employers to keep employees connected.
Furthermore, through our robust benefits offering, Employers can demonstrate their appreciation for their employees. I look forward to the evolution of the U. S. Workforce and supporting them as they adapt to this new and incredibly exciting world. Turning to the topic of ESG, we released our first environmental, social and governance report this afternoon.
I have spoken in the past about our efforts to consider the interest of all our stakeholders. Through this report, our stakeholders will see the deep commitment made by TriNet to our work, Customers, colleagues, the environment around us and our shareholders. 2021 is the perfect time for our team to showcase the work we've done. We aim to provide a new level of transparency into how we operate and view our role with respect to all stakeholders As articulated in this report, we view our ESG report as a public report card to establish a benchmark, and we look forward to updating you on our progress against this benchmark. With that, I will now turn the call over to Kelly for a more detailed financial update.
Kelly?
Thank you, Burton. I'll review our Q3 financial results before discussing 4th quarter And full year 2021 guidance. Our 3rd quarter financial performance was strong. WSE volume growth exceeded projections And drove top line growth, health performance remained benign and our operating expenses came in line with expectations, which taken together Drove bottom line outperformance. During the Q3, total revenues increased 18% year over year, outperforming the top end of our guidance range by one point.
The outperformance in total revenues was driven by 10% year over year growth in ending WSEs and 9% year over year growth in average WSEs And continued high health participation by RWSEs. Once again, year over year growth in total revenues Included a 5% benefit from last year's accrual for the recovery credit program, which reduced revenues in the Q3 of 2020. This prior year accrual impacted both professional service revenues and insurance service revenues. Professional service revenues in the quarter grew 24% year over year, exceeding the top end of our guidance range by 4 points. This growth was driven by a few factors.
First, our year over year average volume growth of 9% reflected strong hiring. More than half of it came from our technology vertical. While the volume of hiring has moderated from last quarter, It was much more robust than we had predicted when we updated our Q3 guidance. We also again benefited from retaining our strong customers, but we are seeing this trending more in line with historical levels and anticipate that Continuing as we emerge from the pandemic. 2nd, professional service revenues benefited from an 11% growth in rate.
Similar to last quarter, rate growth saw a meaningful contribution from our efforts to achieve a minimum price with our smallest customers to align with the cost to serve those clients. We may benefit from this trend for 1 or 2 more quarters. For the Q3, our insurance cost ratio was 86%, outperforming our forecasted range for the quarter of 89.5 To 91.5 percent. The outperformance of the insurance cost ratio versus our estimate was largely due to two factors. First, the surge of the COVID delta variant early in the quarter once again reduced elective procedures, particularly in the Southeast.
2nd, we benefited from catch up contributions related to COBRA, which reduced Insurance cost ratio by approximately a half a point. Related to our operating expenses, We were roughly in line with guidance, but had some year over year shifts in our marketing spend given the timing of People Force in the Q3 this year versus Q4 last year. In addition to People Force, we invested in additional branding To support our Finserv preferred product launch and other brand awareness and lead generation going into our busiest selling season as well as had higher sales commissions. Our 3rd quarter effective tax rate was 25.2%. In the quarter, we saw higher state tax remittances offset by differences arising from employer related equity compensation.
GAAP net income per share increased 142 percent to $1.16 Compared to $0.48 per share in the same quarter last year, exceeding the top end of our guidance by $0.44 And adjusted net income per share increased 134 percent to 1 $0.31 Compared to $0.56 per share in the same quarter last year, which also exceeded the top end of guidance by $0.44 So far this year, we have spent $94,000,000 to repurchase approximately 1,200,000 shares of stock and have over $264,000,000 of authorization remaining. We also generated $334,000,000 In corporate operating cash flows through the 1st 3 quarters of the year as a result of our strong operating performance Ending the quarter with $525,000,000 in corporate cash. Overall, performance in the 3rd quarter continued many of the positive trends. We saw merge in the first half, and we are positioned well for the Q4. Now let's turn to our 2021 4th quarter and full year outlook.
I will provide both GAAP and non GAAP guidance. For the Q4 of 2021, We expect total revenues growth of 12% to 14% year over year and professional service revenues growth to be in the range of 16% to 20% year over year. This guidance builds on our higher base of WSEs and reflects seasonal trends in sales and attrition. In the Q4 of last year, we accrued $24,000,000 in total For our 2020 recovery credit program, which reduced both 4th quarter 2020 GAAP total revenues And professional service revenues by 2%. Regarding our insurance cost ratio or ICR, We are expecting our 4th quarter ratio to be between 92% 94%.
An ICR of 94% Captures a diminishing impact from the COVID-nineteen Delta variant and a return to more normalized health utilization, while an ICR of 92% contemplates a continuation of the status quo. The overall higher insurance cost ratio range Also reflects our normal typical pattern of higher utilization in the 4th quarter as more participants have satisfied their deductible layers And our pooling benefits have reset. We expect 4th quarter GAAP earnings per share to be in the range of $0.17 To $0.40 per share, and we expect 4th quarter adjusted earnings per share to be in the range of $0.36 to $0.60 per share. Regarding our full year 2021 guidance, given 3 quarters of performance and our better than expected volume, We are raising our full year guidance. We are now forecasting our year over year GAAP revenue growth To be 11% to 12%, lifting the bottom end of the range by 1 percentage point.
With the strong growth to date and our 4th quarter outlook, our full year professional service revenues forecast Is now for 15% to 16% year over year growth, an increase of 1 point to the top end of the range. We expect our full year 2021 insurance cost ratio to be in the range of 86.5% To 87%, a 1 percentage point improvement to the top end of the range as revenues are expected to remain strong while utilization remains subdued relative to historic and expected future experience. With all of these factors taken together, We now expect GAAP EPS to be in the range of $4.20 to $4.43 We're up 5% to up 11% year over year. The new GAAP EPS range represents an increase to the top end of the range of $0.40 Adjusted net income per share is now expected to be in the range of $4.88 to $5.12 An increase of $0.42 versus our previous guidance and representing year over year growth of 10% to 15%. With that, I will return the call to Burton for his closing remarks.
Burton?
Thank you, Kelly. As a recap, Q3 was a very positive quarter for our company. We achieved strong growth in WSE volume, professional service revenues, Total revenue, PEPM rate and margin expansion. This continues a multi quarter trend, which sets us up for a solid performance in the 4th quarter. As we wrap up this call, it is important for me to reiterate how we continue to execute our strategy.
We target the right customers in our core verticals. We deliver a premier HR experience. We offer our customers outstanding benefits and we operate with integrity as described In our ESG report, I have always said complexity is our friend. As a result of the pandemic, SMBs are facing more, not less complexity. TriNet is well positioned to capture more market share in the coming months years to help SMBs address these complexities.
Finally, I would like to thank the entire TriNet team For delivering these results. With that, I will now turn it over to the operator. Operator?
If you are using a speakerphone, please pick up your handset before pressing the Our first question will come from Tien Tsin Huang with JPMorgan. Please go ahead.
Thank you, Burton and Kelly. I wanted to ask first on the WSE count on the volume side. Obviously, great results again there. Just trying to Think about that result in all of your comments Burton, especially around the PEO with the secular growth. So With the change in existing, I know the labor market is hot, especially in tech.
And I know you have the Recovery Credit program going on as So I'm just trying to understand how much of this is just hot market versus Something different you're doing from a tech perspective or a servicing perspective? And Also just to tack it on thinking about PEO in general, is there a risk that as some of these tech firms get larger that they may graduate Out of the PEO and same with the higher PPM rate in the down market, could that also cause an uptick in churn? Just trying to think about how to Go beyond the Q4 and into the midterm in terms of the WBC count. Thanks. Sorry, I had a lot there in one question.
No. Thank you, Tien Tsin. And it is a great question. It was an incredible quarter from my standpoint. The customers are Thriving in this environment and your question is a good one.
What I am seeing is that the ability to offer the high end benefits, The 401 ks, the flex spending accounts, the paperless onboarding, these customers, particularly tech customers, Our fighting for the scarce talent that's out there, the programmers, the strategy folks, and we're helping to get them on board. So I was as I said in my remarks, I am thrilled with the growth of the installed customer base. And I'm also happy with the net new sales. So all in all, in the verticals we are playing in, There is strong demand, I believe, for PEO in general and TriNet specifically.
Yes. No, it's been smart to go to those verticals for sure. I'll ask a quick follow-up then maybe to Kelly on the insurance Just if you don't mind on the insurance cost ratio, 92% to 94% guidance in the Q4, that's up 1 to 3 points over the prior year, but up quite a bit Sequentially, I don't think it's ever been up that much sequentially, but I know that Delta and everything else is unusual. So talk to us about the visibility There, why would that be up so much sequentially
versus interest?
Sure, Tien tsin. Yes, sure, Tien tsin. Happy to answer that question. Well, one thing I want Just to remind you is sort of the pattern we see seasonally. We typically see seasonal weakness in the 4th quarter because People have worked through their planned deductibles and our guidance just reflects that seasonality.
We also have our pooling limits On a per employer, per member basis that actually reset at the beginning of or at the end of October. And so really the I'm sorry, at the beginning of October. So Q4, we would have a reset of all those pooling limits. So anything over $500,000 we will be on the hook until they hit those pulling limits for high class claimants. I do believe that we'll see a normalization of healthcare utilization.
We were definitely under this quarter and we expect to see that regular normalization, But we don't necessarily contemplate a spike in it. Was that helpful?
Yes. Got you. Got you. Thank you. Good results here, guys.
Hey, thanks. Thanks.
Our next question will come from Kevin McVeigh with Credit Suisse. Please go ahead.
Great. Thanks. And let me add my congratulations as well. Hey, can you remind us In terms of vertical mix today, how much is technology versus maybe some of the other verticals? And then Where the average client size sits and as you have more of a distributed workforce, Does that change classifications of workers or the average PEPO per WSE?
Maybe just some components as What the new world looks like post COVID as opposed to prior as we think about the model? And then if you could maybe on retention, I know there's a lot there, but just How you're thinking about retention longer term as well?
Yes. Kevin, let me take that. This is Kelly. Hey, Kelly. In terms of tech, It is our largest vertical.
So when we look at all of our verticals, it is our largest. We don't give percentages, but it's our largest Single vertical. And when I think about the change in existing or hiring in the quarter, the net hiring was actually up About 7%. So just quarter over quarter, we saw a 7% increase in the tech vertical, just given the strength there. Average size of client, I think we're right around 21.
So it's still relatively small. You asked about a distributed workforce and does that change our pricing. We currently do not distinguish pricing based on the level of Distribution of our workforce at this point in time. And then on retention, I think that was your last Question and then I'll make sure I was responsive. But on retention, we are seeing people now focusing on the back end of the house.
They were during the period of deep COVID really not focusing on back office and trying to make sure they could keep their Business is surviving, but we are seeing a little more retention, but just really back to historical levels, I wouldn't say it's elevated.
Our next question will come from Andrew Nicholas with William Blair. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. Just the first one was just on kind of the success of the sales season to date. I know You're kind of getting into the heart of it if you aren't already there. And just was wondering what's driving some of that momentum.
Obviously, you've touched on a bunch of different valuable portions of the PEO construct. But is your sense now that win rates versus other PEOs are going up? Is it more about more awareness for the PEO model or just kind of any more color you can give on What's driving sales momentum specific to maybe industry adoption?
Absolutely, Andrew. So this is Burton. First, I believe the fall selling season is going well. So I'm excited about that. I believe we have the right approach To targeting our verticals, as we've talked about in the past, we do not run into other PEOs that often.
Over 50% of the quotes that we generate and those are quotes are not competitive directly against another PEO. So I can't speak for the other PEOs, but as I said in my opening remarks, I believe this is the perfect environment for PEOs because of that remote complexity, we're investing in new sales as we build this sustainable growth. From a TriNet standpoint, I continue to be excited about the work that Jonathan LeCompte and his team are doing. And I believe we're moving towards a sustainable vision of scaled new sales. So overall, I believe we're headed in the right direction.
To specifically answer another question you had, yes, I am a big believer in brand, Brand awareness and brand sentiment and people force, which we invested heavily in, help to promote that from a TriNet standpoint. But I also believe it helps raise the visibility of the PEO model for the 4 +1000000 business And have an opportunity to avail themselves of that model, whether it be with TriNet or another one of the PEOs out there.
Great. Thank you. And then maybe as my follow-up, a different way to ask An earlier question was just around kind of the top end of what size category would be Amenable to a PEO structure, I'm just wondering given all the complexity around regulatory Restrictions and working remote, making it all the more complicated. Is there an argument to be made that Companies could potentially stay within the PEO contract longer given how much more complex it is? Or do you feel like The top end of this range is still pretty steady relative to pre COVID?
It's a great question. I believe that it raises the top end that would stay with the PEO. It really depends on the complexity. As we've talked about in the past, it's not necessarily the absolute number of workers, it's the number of states that they're in, it's in the number of divisions, Whether they have different operating models in different states. So all in all, I believe that they will stay longer based on this The average size of our clients is rising.
I don't have the direct analysis. Part of it is We're focused on the bigger clients now, but I can tell you that I am actively working on multi 100 person deals to come into TriNet today. And I'm working on more of those than I have in the past.
Great. That's really helpful. And if it's all right, if I can squeeze one more in.
Absolutely.
For Kelly. Just In terms of the insurance margin guidance, that is not incorporating Any clawback of kind of recovery credit for $25,000,000 correct?
That's a great question. You are absolutely right. Given Our expectation of insurance costs, we think we're well above the hurdle that would claw that back.
Great. Thanks a lot. Appreciate it.
Thanks, Andrew.
Our next question will come from David Grossman from Stifel. Please go ahead.
Thank you. Good afternoon.
Hey, David.
Hey, Burton. I think this maybe came up earlier, but I just wanted to make sure I understood. When you look at The growth in the portfolio, do you have any visibility into the same store growth versus new sales? Kind of give us just a sense of how that's trending this year?
It's versus net new.
Okay. And is that do you think just unique to kind of where we are in terms of Pandemic, the recovery and all that stuff or do you see any signs in terms of your sales activity to date that we may see that Trend kind of change a little bit as you go into next year, just based on the pipeline and what you've sold year to date?
Yes, it's a good question, David. Obviously, with the large installed base and the growing change in existing, That has an outsized impact on the all time high WSE count. I don't want to take anything away I think it's just that it's a phenomenal customer base. And the other thing, which I said in the opening remarks, which I think is kind of cool is Main Street has recovered completely from the pandemic low. So the WSE Count in those customers is back to where it was pre pandemic.
So this is a much broader recovery at this Going through TriNet's lens across all of our verticals and now I can tell you that every vertical is either flat or up from the beginning starting point of 2019 before the pandemic.
Good. And just maybe the Just a corollary to that last comment because I had another question just about professional services. So it looks like professional services kind of flattish sequentially and Yes, similar up a little bit from the Q1. So is that kind of that mix shift back to Main Street? Is that Why that number is staying relatively flat and revenue per or professional services revenue per WSE is coming down off those kind of highs that we saw in the Q1.
Is that the phenomenon going on there?
Well, David, I guess the way I think about it is, Last quarter, we had some pretty extraordinary bonus payments and a few other one time things that I think I talked about On the call that drove the PSRR on a per WSE app per average WSE base a little bit up and said I wouldn't really expect That to continue. We still are seeing a little bit of benefit from rate as we put some minimums in on our individual, Individual clients, smaller clients, just to align with the cost to serve those smaller clients. But I think it's more of the fact that I'd highlighted some unusuals last quarter that really aren't recurring quite at the same level this quarter.
Great. And then just one other question. Burton, maybe you could address this that you talk a lot about You know, trying to enhance the offering that will keep people longer and that makes perfect Economic sense for this model. Just wondering, do you have any different thinking on the kind of more entry level of the market where You can offer a simpler product without taking insurance risks. So you can kind of take that the element of Scaling out of the equation or that risk that you can incur when you take on smaller customers.
Just curious If you have any thoughts at the lower end of the market?
Absolutely, David. So we are strategizing on Both of those, meaning the smaller end of the market as well as the as they grow larger to keep them longer because Obviously, at that point, the opportunity to help them is very important to us. So what I would say is it's all around the insurance Construct and the PEO construct. And from an insurance standpoint, at some point being able to support, our clients Other than TriNet 11 on non single employer plans makes sense. I'm not announcing anything here today, but that makes sense.
And on the smaller end, being able to support those clients in a model that allows them to on ramp So the TriNet PEO model also makes sense. So we're exploring all of those things, but I will not take My eyes off of the core customer base that is supporting us in this growth that is TriNet. So bunch of things to come. We have some great ideas for the first half of next year and Stay tuned, but I'm really thrilled with the customer base we have and the opportunity we have. We are not seeing a lot of changes In the environment from a competitive standpoint and we're going to continue to execute exactly as we talked about for quite a while now.
Thanks,
which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.