Q3 2021 TriNet Group Inc Earnings Call
[music].
Good day and welcome to the Tri net third quarter 2021 earnings Conference call.
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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 <unk> 2021 third quarter Conference call. Joining me today are Burton M Goldfield, our president and CEO and Kelly to Minnelli, our Chief Financial Officer.
Our prepared remarks were prerecorded Burton will begin with an overview of our third quarter operating performance. Kelly will then review our financial results. We will then open up the call for the Q&A session. Before we begin. Please note that today's discussion will include our 2021 fourth quarter and full year guidance.
<unk> 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 piece.
These forward looking statements are based on management's current expectations and assumptions and are inherently subject to risks uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future except as maybe required by law, we do not undertake to.
Update any of these statements in light of new information future events or otherwise we encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks uncertainties and changes in circumstances that may affect our future results or the market price of our stock.
Hi.
In addition, our discussion today will include non-GAAP financial measures, including our forward looking guidance for adjusted net income per diluted share for.
For reconciliations of our non-GAAP financial measures to our GAAP financial results. Please see our earnings release, our 10-Q filing our 10-K filing for our third quarter and full year of 2020, reconciliations respectively. Both of which are available on our website or through the SEC web site.
With that I will turn the call over to Burton for his opening remarks Burton.
Thank you Alex trying to its third 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 fourth quarter.
On today's call I would like to discuss three important topics.
First I am very pleased with our Q3 financial performance to which I will provide highlights.
Next I will discuss positive factors impacting the PEO construct in general as well as Tri net specifically.
The PEO construct is particularly well positioned 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 Tri Nets, corporate culture, and how we consider the needs of all of our stakeholders.
During the third quarter trying it delivered a premier HR experience and our customers continued to grow dramatically as they have throughout the COVID-19 pandemic.
While the Bureau of Labor statistics recorded slowing job growth relative to expectations in the third quarter.
Tri net so are 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 Ws see volume growth.
During the third quarter, we grew total revenues, 18% year over year to $1.1 billion.
Additionally, when we compare our 2021 third quarter total revenues growth to that of the 2019 third quarter total revenues growth total revenues grew 18%.
This comparison highlights the strong underlying performance of Tri net business throughout the COVID-19 pandemic.
Professional service revenues delivered year over year growth of 24%.
The growth in professional service revenues was attributable to the following items.
<unk> volume growth, especially in our core white collar verticals technology financial services and life Sciences, and strong growth in P. E. P M right.
The percentage increase also benefited from a recovery credit program accrual taken in Q3 of 'twenty, 'twenty, which did not repeat in Q3 2021.
Kelly will address these highlights later in greater detail.
Third quarter GAAP earnings per share grew 142% year over year to one dollar and 16 cents per share.
I am very pleased with our Q3 earnings performance.
We beat our GAAP EPS guidance by 44 cents and when compared to our third quarter 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 third quarter, we grew our ending Ws seat count 10% year over year to approximately 351000 Ws sees.
This also represented a 3% sequential growth versus our second quarter of 2021 demonstrating momentum across our business.
This tri net all time high ending WSI volumetric was the continuation of recent growth trends.
Our customer selection process has resulted in a customer base comprised of dynamic and durable companies.
This was led by the technology vertical where we continued to see strong hiring throughout the quarter.
Furthermore, our main street vertical has finally recovered all of its la Cie since the onset of the pandemic, indicating further normalization in the broader economy.
Finally sales contributed positively for the second 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-19 pandemic PEO has played an important dynamic role, which has reinforced for me our industry's growth potential.
At the onset of the pandemic P E OS 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 balanced furloughs versus layoffs.
As policymakers established the P. P P loan program.
<unk> went to work assisting customers throughout the process.
In fact, according to Napier O 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 P. P. P 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 ne P. O found that the PEO customers are 82% more likely to have their business operations back to normal or better than before the COVID-19 pandemic.
As we look to the future and learn how to coexist with COVID-19, new operational complexities have emerged for Smbs and we as an industry and Tri net specifically are well positioned to assist smbs navigate.
These new complexities.
Last month at our second annual Tri net 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 tag.
Tax and culture.
Try and it is well prepared to continue to assist smbs in the transition to this new way of work with our multi state HR services.
Our focus is to ensure that our multistate 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.
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.
Tri net helps navigate this complexity.
By enabling HR access from anywhere Tri net 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 Tri net 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 in our company.
While we are pleased with our progress we know we have more work to do to reach our ideals 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 third quarter financial results before discussing fourth quarter and full year 2021 guidance.
Our third quarter financial performance was strong.
WSI volume growth exceeded projections and drove top line growth hub.
<unk> performance remained benign and our operating expenses came in line with expectations, which taken together drove bottom line outperformance.
During the third quarter 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 Ws, CS and 9% year over year growth in average Debbie lessees.
And continued high health participation by our Ws seats.
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 third quarter of 'twenty 'twenty.
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 four 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 that came from our technology vertical well.
While the volume of hiring has moderated from last quarter. It was much more robust than we had predicted when we updated our third quarter 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.
Second professional service revenues benefited from an 11% growth in rate.
Similar to last quarter right 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 one or two more quarters.
For the third quarter, our insurance cost ratio was 86% outperforming our forecasted range for the quarter of 89.5% to 91.5%.
The outperformance of the insurance cost ratio versus our estimate was largely due to two factors.
The surge of the Covid Delta variant early in the quarter once again reduced elective procedures, particularly in the southeast.
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 that had some year over year shifts in our marketing spend given the timing of people forced in the third quarter this year versus fourth quarter last year.
In addition to people force, we invested in additional branding to support our fin serve preferred product launch and other brand awareness and lead generation going into our busiest selling season as well as had higher sales commissions.
Our third 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% to $1.16 compared to 48 cents per share in the same quarter last year exceeding the top end of our guidance by 44 cents.
And adjusted net income per share increased 134% to $1.31 compared to 56 cents per share in the same quarter last year, which also exceeded the top end of guidance by 44 cents.
So far this year, we've spent $94 million to repurchase approximately 1.2 million shares of stock and have over 264 million of authorization remaining.
Also generated 334 million incorporate operating cash flows through the first three quarters of the year as a result of our strong operating performance ending the quarter with $525 million in corporate cash.
Overall performance in the third quarter continued many of the positive trends we saw emerge in the first half and we are positioned well for the fourth quarter.
Now, let's turn to our 2021 fourth quarter and full year outlook.
I will provide both GAAP and non-GAAP guidance.
For the fourth quarter 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 Ws CS and reflects seasonal trends in sales and attrition.
In the fourth quarter of last year, we accrued $24 million in total for our 'twenty 'twenty recovery credit program, which reduced both fourth quarter 2020, GAAP total revenues and professional service revenues by 2%.
Regarding our insurance cost ratio or ICR, we are expecting our fourth quarter ratio to be between 92% and 94% an ICR of 94% captures a diminishing impact from the COVID-19 Delta variant and a return to more normalized <unk>.
Nation, 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 fourth quarter as more participants have satisfied their deductible layers and our pooling benefits have reset.
We expect fourth quarter GAAP earnings per share to be in the range of 17 cents to 40 cents per share and we expect fourth quarter adjusted earnings per share to be in the range of 36 cents to 60 cents per share.
Regarding our full year 2021 guidance, given three 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 one percentage point.
With the strong growth to date and our fourth quarter outlook, our full year professional service revenues forecast is now for 15% to 16% year over year growth an increase of one point to the tap into the range.
We expect our full year 2021 insurance cost ratio to be in the range of 86.5% to 87% a one percentage point improvement to the tap into the range as revenues are expected to remain strong while utilization remains subdued relative to historic.
And expected feature experience.
With all of these factors taken together, we now expect GAAP EPS to be in the range of $4.20.
To $4.43 or up five up 11% year over year.
The new GAAP EPS range represents an increase to the tap into the range of 40 cents.
Adjusted net income per share is now expected to be in the range of $4.88 to $5.12, an increase of 42 cents versus our previous guidance and representing year over year growth of 10% to 13%.
With that.
I will return the call to Burton for his closing remarks.
Yeah.
Thank you Kelly as a recap Q3 was a very positive quarter for our company.
We achieved strong growth in WSI volume.
Professional service revenues.
Total revenue P E P M right.
And margin expansion.
This continues a multi quarter trend, which sets us up for a solid performance in the fourth 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.
Tri net is well positioned to capture more market share in the coming months and years to help smbs address these complexities.
Finally, I would like to thank the entire Tri net team for delivering these results.
With that I will now turn it over to the operator operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Tien Tsin Huang with Jpmorgan. Please go ahead.
Thank you Vicki you burn and Kelly I wanted to ask first on the.
On the WC countered on the volume side, obviously, great results again, they're just trying to.
Think about that result in in all of your comments burden, especially around the PEO.
The secular growth so.
With the change in existing I know the labor labor market is hot especially in tech.
And I know you had the recovery credit program going on as well. So I'm just trying to understand how much of this is.
<unk> hot market versus you know.
Something different you're doing from a tech perspectives or or a servicing perspective.
And.
Also just to tack it on thinking about <unk> in general is there a risk that as some of these tech firms get larger.
They may graduate out of the PEO and same with the higher P. P. M right in the Downmarket could that also cause an uptick in churn just trying to think about how the.
Go beyond the fourth quarter and into the midterm in terms of the WC count sorry, 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's a good one what I am seeing is that the ability to offer the high end benefits. The 401K the flex spanning a.
<unk> the paperless on boarding these customers, particularly tech customers are 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 Tri net specifically.
Sure.
Yeah, no it's been smart to go to those verticals for sure.
I'll ask a quick follow up and maybe to Kelly on the <unk> cost ratio, just Vito myeloma insurance cost ratio of 92% to 94% guidance in the fourth quarter, that's up one to three points over the prior year, but up quite a bit sequentially.
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 why would that be up so much sequentially.
<unk>.
Versus history, yes.
Sure Tien Tsin happy happy to answer that question well one thing I want to just remind you is sort of the pattern. We see seasonally we typically see seasonal weakness in the fourth quarter because people have worked through their plan deductibles in our guidance just reflects that seasonality. We also have.
Our pooling limits on a per employee or per member basis that actually reset at the beginning or at the end of October and so really the or I'm sorry at the beginning of October So fourth quarter, we would have a reset of all those pooling limit so anything over $500000, we will be on that.
Up until they hit those pooling limits for high class claimants.
I do believe that we'll see a normalization of health care utilization, we were definitely under this quarter and we expect to see that regular normalization, but we don't necessarily.
Contemplate us Viking was that helpful. Yes got you.
Got you. Thank you good results here because.
Hey, 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, you know how much is his technology versus maybe some of the other verticals and then where the average client size sits in U.
As you have more of a distributed workforce does that change classifications of workers or you know the average pepam per WSJ, maybe just some components as to you know.
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 theres a lot there, but just how youre thinking about retention longer term as well.
Yes, Kevin let me take that this is Kelly.
Hey, Kelly in terms of tax it is our largest vertical so when we look at all of our verticals. It is arent largest we don't give percentages, but it's 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 seven.
So just quarter over quarter, we saw a 7% increase in the tech vertical just given the strength there and 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 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 on retention. We are seeing people now focusing on that the the back end of the house.
They were during the period of deep Covid really not focusing on on back office and trying to make sure. They can keep their businesses surviving but we are seeing a little more.
Retention, but just really back to historical levels I wouldn't say it's elevated.
Thank you.
Thanks, Kevin.
Again, if you have a question. Please press Star then one our next question will come from Andrew Nicholas with William Blair. Please go ahead.
Hi, Good afternoon, Thanks, Hey, Andrew My question.
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 are aren't already there and just was wondering what's driving some of that momentum obviously, you've touched on a bunch of different.
<unk> portions of the PEO construct but it is your sense now that win rates versus other PEO is are going up.
Is it more about more awareness for the PEO model or just kind of any.
Any more color you can give on.
What's driving sales momentum specific to maybe industry adoption.
Absolutely Andrea 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 peo's that often over 50% of the quotes that we generate in those or quotes are not competitive directly against another PEO. So I can't speak for the other <unk>, but as I said in my open.
Remarks, I believe this is the perfect environment for <unk> because of that remote complexity.
We're investing in new sales as we build this sustainable growth from a tri net standpoint, I continue to be excited about the work that Jonathan Komp 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 tri net standpoint.
But I also believe it helped raise the visibility of the PEO model for the four plus million businesses that have an opportunity to avail themselves of that model, whether it be with tri net or another one of the PEO is 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.
What.
Size category would would be.
<unk> PEO structure I'm, just wondering given all the complexity around.
Regulatory restrictions.
Restrictions and working remote making it all the more complicated is there an argument you made that debt.
Companies could potentially stay within the PEO contract longer given 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-19.
It's a great question I believe that it raises the top end it 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 ran it and the number of divisions, whether they have <unk>.
Operating models in different states.
So all in all I believe that they will stay longer based on this complexity. The average size of our clients is rising I don't have the direct analysis part of it is that we're focused on the bigger clients now, but I can tell you that I am actively working on multi.
<unk> hundred person deals to come into Tri net today and I'm working on more of those than I have in the past.
Great. That's really helpful. And then if it's all right if I can squeeze one more absolutely.
Kelly just.
In terms of the.
Insurance margin guidance that is not incorporating any clawback of kind of the recovery credit for 25 million correct.
That's a great question you are absolutely right given our expectation of insurance costs, we think we're well above above the hurdle that would claw that back.
Great. Thanks, a lot I appreciate it.
Thanks, Andrew.
Again, if you have a question. Please press Star then one.
Our next question will come from David Grossman from Stifel. Please go ahead.
Thank you good afternoon.
David.
Hey, Burton.
I think that 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 sales kind of give us just a sense of how that's trending this year.
It's a good question.
We don't provide that level of visibility, but I would say that most of the growth during the quarter really was hiring versus not net new.
Okay.
And is that do you think just unique to kind of where we are in terms of the 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.
No trend kind of changed a little bit as you go into next year.
Just on the pipeline and what Youre soldier today.
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.
The all time high WMC count I don't want to take anything away from new sales because I now have two quarters in a row, where theyre up year over year. So.
I think it's just 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 WMC count in those customers is back to where it was pre pandemic. So this is a much broader recovery at this point through Tri net <unk>.
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.
Great and just maybe the.
Just a corollary to that last comment because I had another question just about professional service sure. So yeah. It looks like professional services kind of flattish sequentially in <unk>.
Similar up a little bit from the first quarter. So is that kind of that mix shift back to main street is that why that number is staying relatively flat in red.
Revenue per professional services revenue per WMC is coming down OXXO is kind of highs that we saw in the first quarter is that the phenomenon going on there.
David I guess the way I'd think about it is you know last quarter, we had some pretty extraordinary bonus payments and a few other onetime things that I think I talked about on the call that drove the P. S. R. R.
For WMC App per average WSB 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 and.
On our individual.
Individual clients smaller clients just to align with the cost to serve that smaller clients, but.
I think it's more of the fact that I had highlighted some unusuals last quarter that really arent recurring quite at the same level this quarter.
Great and then just one other question for maybe you could address that you talk a lot about.
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.
The kind of more entry level of the market where.
You can offer a simpler product without taking insurance risk and can kind of take that.
The element of scaling out of the equation or that risk.
You could incur when you take on.
Smaller customers just 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 <unk>.
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 Tri net 11 on non single employer plans make sense I'm not announcing anything here today, but that makes sense and on the smaller end being able to support those clients and a model that allows them to on ramp to the Tri net PEO model.
Also makes sense. So we're exploring all of those things, but I will not take my eyes off of our core customer base that is supporting us in this growth that is tri net so a bunch of things to come we have.
Some great ideas for the first half of next year and stay tuned, but I am 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.
Quite a while now.
Thanks.
Thanks sure Thanks, Jamie Yeah.
This concludes our question and answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.