Q2 2022 TriNet Group Inc Earnings Call

[music].

Good day and welcome to the Tri net second quarter 2022 earnings conference call.

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I would now like to turn the conference over to Alex Bauer head of Investor Relations. Please go ahead.

Thank you operator. Good afternoon. This is Alex Bauer head of Investor Relations. Thank you for joining us and welcome to try and it's 2022 second quarter Conference call I'm joined today by our CEO Burton M Goldfield, and our CFO Kelli to Minnelli.

Before we begin I would like to address our use of forward looking statements and non-GAAP financial measures. Please note that today's discussion will include our 2022 third quarter and full year financial outlook 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 uncertainties and changes in the <unk>.

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 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 C C, including our 10-K and 10-Q filings for a more detailed discussion of the risks uncertainties and changed since.

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, 10-Q filings or 10-K filing which are available on our website or through the SEC website with that I will turn the call over to Burton burden.

You Alex I am pleased to report they try next customers performed exceedingly well during the second quarter, which drove our ongoing strong financial performance. The current macroeconomic environment, perhaps counter intuitively is creating opportunities.

For Tri net the value of our solutions, which address regulatory complexity and geographically distributed Workforces is delivered independent of the current macroeconomic trends.

This is reflected in our performance for the second quarter. During the second quarter total revenues grew 9% year over year in line with the top end of our guidance. This growth in total revenues was driven by the install base our vertical go to Mark.

<unk> strategy is focused on dynamic smbs as a result of this customer selection, our install base continued to grow and thrive in partnership with Tri net during Q2.

Additionally, in the second quarter, we grew new sales double digits year over year, whether measured by a C V or ws fees. We are excited to build on this success throughout the second half the Tri net model enables our clients.

To effectively scale up and down as they navigate rapid changes in the global economy. This model becomes increasingly attractive for S. N B's as they look for ways to convert fixed costs into variable costs.

With health care utilization remaining below our estimates, we created and launched our 2022 credit program.

This enables us to return savings to customers, who helped generate them. The credit program, which is fully accounted for in our Q2 results had the effect of lowering total revenues growth in the quarter by approximately two points Kelly will go into more D.

Tail around this industry, leading program in the quarter, we maintained our expense discipline, even as we invested in Tri net zenna fits as a result, we generated strong cash flow and delivered robust earnings in the <unk>.

Second quarter, our GAAP EPS declined 1% year over year to one dollar and 35 cents. This result outperformed our guidance by 55 cents, reflecting both better volume and stronger insurance performance.

Our adjusted net income per share grew 10% to $1.72 outperforming guidance by 51 cents. We ended the second quarter with over 610000 users across our PEO and HCM platforms throughout.

The quarter, we kept our focus on execution and delivering the best possible service to our customers, we delivered financial performance in excess of our guidance. Our 2022 credit program is the third such program and our recovery credit.

It program series, we helped our customers navigate the increasingly difficult regulatory environment. We continued the integration of Tri Ed Zenna Feds and importantly, we began delivering on the promise of these two complementary product offerings.

Finally, we added two senior executives to broaden and deepen our leadership team positioning trying that to successfully execute on our strategic initiatives over the long term for years I have highlighted regulatory complexity as the secular.

<unk> supportive to Tri net a decade ago, the affordable Care Act expanded health care access trying it was they are helping our customers a veil themselves of the best health care for their employees Tri net was also instrumental to our customers as they navigated the government.

<unk> response to the COVID-19 pandemic Tri net help customers access P. P P loans and as importantly, navigate P. P P loan forgiveness.

We help customers access the employee retention tax credits and Additionally, we help facilitate that complex and ongoing transition to remote work Tri net has been there for our customers. Most recently last month's Supreme.

<unk> core Dobbs ruling represents another opportunity for Tri net to assist and advise our customers.

In the past I've, often spoke of the diverging regulatory regimes between federal state and local governments, historically, I always referring to diverging employment related law, but this latest ruling is not directly related to employment law. It.

Extends the complexity trend to health care by returning legislative decisions on reproductive rights to state jurisdictions. The Supreme Court has potentially created as many as 50 different regulatory environments for the governance of those rights.

This shift has huge implications for S N b's and their employees as approximately 50% of Americans access health care through their employers for example, smbs will find it difficult to provide equitable medical.

Care for their employees. This is especially the case, if the companies or their employees reside in different states with divergent laws Tri net has long understood the importance of choice and access and benefits as a fundamental driver.

For Smbs to attract the best talent, we are unique in the industry for offering unparalleled choice and access in benefits options for our Ws CS currently we have over 500 national and regional plans within.

In our single employer plans.

Throughout our industry, leading unique benefits offering tri net is helping our customers retain choice and access for their ws sees under diverging state regulatory regimes, but for Tri net this isn't enough people matter to us our customers are.

Ws sees our employees matter to us similar to our efforts around Covid Tri net remains the leader in providing advice and support to our customers and Smbs. However, advising customers is not enough for Tri net listening.

To our customers is just as important on the heels of the Dobbs ruling customers reached out to us for help.

They articulated the challenges of managing a geographically distributed workforce with unequal access to health care, regardless of your position on this ruling triad has and will continue to endeavor to provide equal access to health care.

Within the limits of the rapidly changing federal state and local laws, we have listened to our customers today only a month after the regulatory construct for health care across America changed.

I am announcing the launch of Tri net in rich.

This innovative industry, leading product line helps our SMB customers enrich their benefit offering importantly, tri net in Reg is available to purchase for new and existing PEO as well as triad Zen if its HCM customers.

Today, we are launching two offerings under Tri net in rich enrich access and enrich adopt these tri net developed proprietary products leverage our scale and healthcare domain expertise in rich access.

<unk> supports ws sees who need to travel to access medical services by covering travel expenses in rich adopt further supports ws see family planning by extending our second supplemental benefit for families seeking.

To adopt often the adoption process requires significant travel and out of pocket expenses enrich adopt will enable ws sees to cover travel needs as well as many other adoption related expenses that tri net enrich product.

Wine gives our customers a solution for providing their employees equitable access to medical care and family planning, while importantly, preserving anonymity for the AWS sees overtime, we will further extend that tri net in rates.

Product line to include additional supplemental benefit offerings that are requested by our unique customer base I look forward to updating you on this exciting new product line.

As we look forward beyond the current cycle, we are focused on business transformation and growth Tri net took several actions in the first half of 2022 to position us to successfully achieve both our acquisition of Tri Ed Xenophilia has.

Everything to do with driving our company forward in our product offerings and our technology. During the second quarter, we started to realize the promise of our diversified product offering we saw customers, who outgrew the tri net PEO migrate to our Tri net.

Zenna fits HCM platform.

And we saw customers who are experiencing increased complexity migrate from Tri Ed Zenna fits to our Tri net P. E O product historically as a customer transition from trying to add to their in house H C. M solution of choice Tri net supported.

Our customers and we celebrated their success ultimately however wing loss these customers with Tri net Zenna fits. This calculus is beginning to change one such example of a customer migrating from the Tri net PEO to Tri Ed.

<unk> is qualified qualified is the pipeline generation platform for revenue teams that use salesforce trying it is proud to have supported qualified through its rapid growth with a significant capital raise completed and strong future growth.

Prospects qualified decided now was the time to in house HR and seek an HCM solution.

After evaluating multiple HCM vendors qualified selected Tri net zenna fits for three key reasons first qualified found the Tri Ed Zenna fits family leave offering the most compelling in the marketplace.

In Tri Ed Zen, if it's third party API integrations, where the most appealing finally qualified valued the relationship and trusted Tri net to facilitate a seamless migration with qualified as move to Tri Ed Xenophilia, we will be.

Be there to support this amazing company long into the future.

Singularity group as an example of a customer who migrated from Tri Ed Zenna fits to the Tri net PEO during the second quarter. The Singularity group is focused on building better leaders for a better tomorrow technology and its convergence are disrupting every part of society and commerce.

Creating an environment of both massive opportunity and risk.

Through our global network of chapters in partners Singularity works to connect the current and the next group of leaders to tackle these challenges.

Similar to other dynamic S. M B's as singularity continued its growth they desired or more complete HR experience signal arity transition from Tri Ed Zen if it's H T M to Tri net P E O for the following reasons Tri net bundled HR solution.

[noise] was attractive by bundling payroll HR and benefits trying it offers attractive value for easing the HR burden.

Additionally, singularity needed more HR assistance. This is a common customer need for growing smbs eventually more human interaction is desired as complexity increases tri ed's, leading customer service and HR.

Experts piece proved appealing we are excited to continue our relationship with singularity and contribute to their next phase of growth. The examples of qualified and singularity demonstrate try nets long term vision for positively impacting.

The S M B community at large.

As we move through the technology integration of our PEO and HCM products try and its ability to configure its product and service offerings will become more appealing and further demonstrate our industry leadership.

Finally during the second quarter, we broadened and strengthened our leadership team to help drive try nets long term digital transformation and strategy.

First Jay Venkat joined as our new Chief Digital and innovation officer. After a nearly two decade career at Boston Consulting group, where he led the technology media and Telecom practice next Jeff Hayward joined as our new Chief.

<unk> Technology Officer. He is an award winning global technology, and engineering executive who brings to Tri net more than 25 years of experience. Most recently, Jeff was senior Vice President of product engineering for airline solutions at Sabre.

I am very excited to have Jeff and Jay join Us I am proud to say that they step into circumstances, where their teams are talented and deep pairing. These two leaders with existing exceptional teams will continue to drive innovation.

And increase capabilities across the Tri net product and platform with that I will pass the call over to Kelly for her financial review Kelly. Thank you Burton, China second quarter operating and financial performance continued to demonstrate.

The power of our sustainable business model and results in cash generation. After a solid first half we are positioned for strong performance throughout the second half of 2022.

And our second quarter, our financial performance once again outperformed our guidance, we continue to highlight train its value proposition through our combined H C. N N P O product offerings as well as our efforts to help customers navigate the operating environment post the Supreme Court's decision around the Dobbs case, we launched.

Our 2022 credit program the third in a recovery credit program series potentially returning as much as 25 million to a core group of customers, who helped generate these savings and finally because of our operating model our solid revenue growth coupled with our disciplined cost management.

<unk> generated strong corporate operating cash flow during the quarter, our second quarter achievements clearly demonstrated our commitment to serving our customers employees shareholders and the communities in which we operate.

During the second quarter total revenues increased 9% year over year to $1.2 billion in line with the top end of our guidance.

If we were to add back the impact from the 2022 credit program total revenues growth would have been 11% two points above the top end of guidance.

The outperformance in total revenues for the second quarter was driven by two factors volume driven by Debbie lessees outperforming our forecast as we once again benefited from strong hiring within our installed base and modest rate growth benefiting both professional service and insurance revenues with.

Finished the second quarter with almost 358000, worksite employees up 5% year over year with an average ws he count for the quarter as over 351000 up 6% as Burton noted in his prepared remarks volume benefited from continued hiring in our installed base.

And double digit year over year growth in new sales.

We experienced ws see attrition in line with seasonal second quarter trends, we are watching trends closely as we anticipate slower economic growth as the year progresses did.

Due to our targeted approach to customer selection, we believe we remain well positioned to benefit from the growth of our current customers.

Now to drill down a bit unprofessional service revenues.

In the quarter professional service revenues grew 17% year over year to $182 million exceeding our guidance by two points. China's zenna fits performed in line with our forecast and generated $12 million in HCM cloud services revenue contributing approximately eight points to our year over year.

Growth the outperformance and professional service revenue was evenly split between volume outperforming our forecast and rate, which was again supported by a small amount of seasonal benefits in fees.

Insurance revenue grew 8% in the quarter again, driven by volume wage and healthy growth in <unk>.

<unk> revenue growth in the quarter was reduced by two points as we contributed $25 million to the 2022 recovery credit program recognizing the partnership we have with our clients and rewarding those that help generate the cost savings.

We experienced continued lower utilization during the second quarter contributing to an improved insurance cost ratio of 83, 8% versus our forecasted range of 87, and a half to 88, 5% for the quarter. This facilitated our launch of our 2022 credit program.

Our third in as many years as.

As we said on our first quarter earnings call health utilization did recover towards the end of the first quarter and also increased during the second quarter, but not to the level. We had anticipated in our forecast. This trend is likely benefiting from participants being cautious uncertain medical procedures given their recent spy.

<unk> in the Omagh crime variant B, a five <unk>.

During the quarter, we did see provider in pharmaceutical costs accelerate and we believe that this is a trend that will continue.

Similar to last year's program. The 2022 credit program is partially contingent on future performance. For example should second half utilization rates spike beyond our forecast we will use the reserves set up in this program to offset a spike up to $15 million.

Finally, the recipients of the program will be those who helped generate the savings and who remain committed to training for the long term. Please note with respect to our insurance cost ratio Workers' comp was very strong in the quarter.

Workers' comp revenue growth outperformed our forecast driven by volume and wage growth all workers' comp costs declined year over year as a portion of our workforce has continued to work remotely the workers comp cost dynamic is again consistent with our mix of white collar workers as well as continued remote work for a significant.

Fortune of our WSI population turning to operating expenses during the second quarter expenses grew 27% year over year.

The accelerated growth in expenditures was driven by two factors first the inclusion of Tri net benefits and integration related expenses was the largest contributor to the incremental growth in expenses and second we experienced compensation related expense growth reflective of current inflation in labor market.

Dynamics are.

Our actual expenses in the quarter were slightly lower than our expense forecast due to the timing of head count and benefits integration related spend.

As we turn to a review of our earnings we're pleased with our performance, especially as we absorb the incremental tri net benefits operating and transaction related expenses.

Burton described we are on track and encouraged by the early returns on our investment, especially regarding our expanded value proposition.

Our outperformance in revenue growth combined with our lower than forecast insurance cost ratio and expenses drove our strong earnings performance.

Quarter GAAP net income per diluted share declined 1% year over year to one dollar and 35 cents or 55 cents higher than our guidance adjusted net income per diluted share in the second quarter was $1.72 or 51 cents higher than our original guidance.

We bought back $33 million of stock during the quarter at an average price of just over $80 per share and we have 184 million remaining in our share repurchase authorization.

We ended the second quarter with a healthy corporate cash balance benefiting from our continued strong results.

Our capital priorities remain the same funding organic growth capabilities and acquisitions, but ensuring we are managing our capital efficiently through opportunistic share repurchase.

Now, let's turn to our third quarter and our revised full year outlook, which reflects a strong first half financial performance.

We are lifting our full year adjusted EPS guidance by 88 cents at the midpoint. This is due to our improved second half outlook and our first half outperformance, which was driven by continued above average hiring by our customers lower than forecast insurance cost ratio.

Appropriate core cost management, the rising interest rate environment on our cash balances and investment portfolio and the benefit of repurchasing shares.

We continue to expect Tri net benefits to contribute Aggress revenue left between 40 and $45 million this year.

Forecasting our insurance cost ratio due to the impact of COVID-19 remains a challenge due to many factors that affect the measurement.

There are a number of uncertainties, including the timing and duration of the next COVID-19 spike the inflationary impact of provider and carrier costs and the extent and timing of increased elective procedures against this continually evolving backdrop, we are watching emerging trends and will evolve our thinking is.

Information develops.

Given our first half performance and our current views on an improving second half we are lowering our expected full year insurance cost ratio by two points.

Now that we're in our third year of the Covid pandemic, we can share one observation, which we hope will provide better clarity and the variability of our insurance cost ratio.

In regions, where we have a significant presence when local COVID-19 positivity rates climb to and exceed 15%. We have observed that health utilization in those regions decline more than offsetting our direct COVID-19 costs.

Thus higher positivity rates generally have had the net effect of lowering our realized insurance cost ratio.

Turning to specific third quarter 2022 guidance, we expect total revenue growth to be in the range of 7% to 8% year over year and professional service revenue growth to be in the range of 18% to 20% year over year.

Our robust third quarter professional service revenue growth outlook includes many of the same factors that drove our second quarter performance.

We are forecasting $12 million to $13 million of training Xenophon HCM cloud services revenue, we expect P O customer hiring to continue but at a growth rate closer to our historical average as the recovery Wanes and we also expect another quarter of year over year growth in our new.

P O sales in.

In the third quarter, we expect health care utilization to be higher than our second quarter experience and within the typical pre pandemic Q3 range. As a result, we expect an insurance cost ratio of between 88.5% to 90%.

Our third quarter estimate of GAAP net income per diluted share is in the range of 46 cents to <unk> 66 cents per share, reflecting the cost impact from this benefits acquisition and integration activities that are underway.

Trolling for onetime impacts from that acquisition, we believe that our third quarter adjusted net income per diluted share will be in the range of 87 cents to.

To one dollar and eight cents per share rigs.

Regarding our full year 2022 guidance.

Given our performance through the first half coupled with a refined view of the second half we are making a series of changes to our full year guidance.

We are now forecasting our year over year total revenue growth to be in the range of 8% to 9% lifting the bottom end of our range by one point, given our better than forecast volume performance through the first half we are narrowing our professional service revenue range to expected growth of between 17 and 18%.

Again lifting the bottom end of the range by one point, we are anticipating an insurance cost ratio of 86% to 87% a two point improvement from our previous full year guidance. This improvement reflects both our first half performance in workers' comp and health and our updated expectations.

Patient for help utilization, we recognize that this is very difficult to project and we'll continue to monitor these trends very closely.

As we turn to earnings we're raising our full year earnings guidance, reflecting our first half outperformance and our improved outlook for both revenue growth and our insurance cost ratio. We now expect our full year GAAP net income per diluted share to be in the range of $4.10 to $4.

And 68 cents, an increase of 79 cents at the midpoint. We are also raising our full year adjusted net income per diluted share guidance by 88 cents at the midpoint to $5 60.

To $6.20, reflecting a strong first half financial performance and an improved second half outlook.

In summary, Trina has delivered delivered on commitments to customers employees and shareholders and we'll continue to innovate with new products and programs like our 2022 credit program to drive value to our customers.

With that I will turn the call to Burton for his closing remarks. Thank you Kelly during the second quarter Tri net dynamic customer base successfully managed through the difficult macroeconomic environment. This drove our strong financial performance the economic environment couple.

With increased regulatory complexity is strengthening a secular trend for tri net people matter to Tri net and we will continue to be there for our customers, helping them to navigate this complex regulatory and post Dobbs health care environment.

We are listening to our customers and understanding their needs by leveraging our scale and domain expertise, we built and are launching tri net and rich and industry, leading product that helps smbs offer health and family care solutions otherwise.

Impossible for Smbs to access. The addition of Tri Ed Xenophilia is showing early promise as customers can see value in our complementary products as they move through their business cycles. Finally, I am proud of the Tri net team they are Mitch.

<unk>, driven and putting our customers first thank you try net colleagues I am pleased with our second quarter results, but more importantly, I continue with strong optimism for the future of Tri net operator.

Thank you.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

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At this time, we will pause momentarily to assemble our roster.

Yeah.

Our first question comes from Andrew Nicholas of William Blair. Please go ahead.

Hi, good afternoon, thanks for taking my questions.

I just wanted to start with kind of a big picture question on the health of the SMB market, obviously hiring within your installed base remained quite good but interested to hear.

What your conversations are like with clients and maybe with a specific focus on some of your bigger verticals, there's been a lot of of headlines around.

Hiring slowdowns in some of the bigger technology companies, obviously, that's not something that that impacts you directly but I'm just curious if youre seeing similar trends.

And in a smaller end of the market.

So just any any high level thoughts on.

The broader SMB ecosystem that'd be great.

Yes, Andrew Great question. This is Burton we are still seeing significant elevated hiring in our core verticals, particularly in technology and life Sciences. They are working hard to get net new employees on board.

And they're trying to navigate the complexity that exists today. So we have not seen a drop and we started in Q1, a little surprised about the veracity of hiring it continued into Q2.

And we're just not seeing that slowdown in the sectors of the small businesses that we are working with today. So there's not much more I can say I certainly don't know what the future holds but these companies are still trying to hire and they've spent a lot of time and a lot of them.

Money hiring these people and I believe they are focused on delivering results and retaining the people they have.

Great. Thank you that's helpful and I know you mentioned in part of you answered my question that the future is hard to predict.

But I'm going to ask the question anyway, which is just around the potential impacts from a recession, maybe not I mean, if you can speak to how you expect trying to navigate it that'd be really helpful. But I'm also just curious for the industry as a whole kind of looking back at the last recession, it actually seems like.

With <unk>, we're pretty resilient in the aggregate and I'm just wondering.

If you would expect a similar reaction this time around and maybe what the drivers are to that sort of resilience.

That'd be great.

I would expect a similar result, and Theres a couple of big drivers. The first and foremost one is that the they trying at model is a variable cost model and we are hearing folks talk about taking fixed costs and moving them into variable costs and what I mean by.

That is you are paying on a per employee per month basis and at any time. If you can decrease employees you don't pay the fee for that specific months.

The model is works, particularly well in an economy that is highly variable and of course as you hire back you have the path on the attached to each individual employee. So that's the first point I also believe that as I've talked about on the earlier calls this remote work.

Work is highly complex and the amount of overhead fixed overhead that it takes to manage that remote work is put on to try that and that helps reduce the overhead costs. So we didn't have the remote work when it happened in 2008 2009 at the same level, but we do.

I'd see a move towards this type of model.

And at the last point I'd say is in 2009 and 10 I saw reward your companies looking at the PEO model because they were headed in one direction rapid expansion and then realize the cost savings of moving to a model I tried.

Interesting thanks.

And if I could just ask one more I.

I think one of the reasons for you or maybe not conservatism, but caution or a wide range of guidance.

Kelly mentioned, the possibility of or the impact of provider and carrier cost inflation.

Would you mind walking us through kind of the puts and takes to that dynamic.

Both in 'twenty, two but also as we think about how that could affect kind of medium or long term growth targets as well.

Andrew I'll be happy to this is Kelly.

We're looking forward.

We are seeing the potential as carriers renegotiate rates with providers as providers are facing the same inflationary pressures as everyone else for costs to go up overall, we're watching it you know both from a utilization and an individual cost perspective.

But the thing I want to remind you is we do reprice our clients every single year to risk based on what our expected.

Future medical cost inflation is going to be and their individual experience as well. So you know I'm not going to give you any specifics in terms of what we're saying it does vary market by market and it also varies.

Insurance carriers are renegotiating provider agreements as well, but you know every quarter trying us out there a repricing of cohort of clients based on the emerging information that we're seeing and their individual experience. So we baked that in.

And we will continue to evolve it is difficult to predict as I said, you know just given not knowing when you know.

The next Covid Spike is is going to happen one other thing, though that are unrelated to medical costs, Andrew but that Burton mentioned and I just want to reiterate so you make sure.

That your model reflects our understand that you understand our guidance is we have assumed that hiring slows down significantly just given all the talk of a recession that Tim Burton's point, we have not yeah, we haven't seen it yet in our numbers.

Thanks, so much.

Thanks, Andrew.

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