TriNet Group - Earnings Call - Q1 2019

Transcript

Speaker 0

Good day and welcome to the TriNet First Quarter twenty nineteen Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Alex Bauer, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to TriNet's twenty nineteen first quarter conference call. Joining me today are Burton M. Goldfield, our President and CEO and Richard Beckert, our Chief Financial Officer. Our prepared remarks were prerecorded.

Burton will begin with an overview of our first quarter operating and financial performance. Richard will then review our financial results in more detail. 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 twenty nineteen second 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, 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 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 non GAAP net service revenues, adjusted EBITDA, adjusted EBITDA margin and adjusted net income. For reconciliations of our non GAAP financial measures to our GAAP financial results, please see our earnings release or our 10 Q filing for our 2019, which are available on our website or through the SEC website. A reconciliation of our non GAAP forward looking guidance to the most directly comparable GAAP measures is also available our website.

With that, I will turn the call over to Burton for his opening remarks.

Speaker 2

Thank you, Alex. During the first quarter, we once again delivered strong financial results in line with our operating plan. The TriNet sales and services organization continue to successfully promote our value in the verticals we serve. Additionally, we are seeing the benefit from our investments in our platform, people and processes. In the first quarter, we grew GAAP total revenues 9% year over year to $934,000,000 and we grew our net service revenues by 14% year over year to $251,000,000 Professional service revenues grew 6% year over year to $136,000,000 Professional service revenues in the quarter continued to benefit from improved pricing and our focus on keeping our customers at the center of everything we do.

A key to our long term success is capitalizing on the current momentum and additional scale through improved processes and automation. We also grew insurance service revenues by 9% year over year to $798,000,000 while net insurance service revenues grew 26% year over year to $115,000,000 for the quarter. Net insurance service revenues were seasonally strong as revenues outpaced costs throughout the quarter. In the first quarter, our Q1 GAAP earnings per share grew 19% year over year to $0.89 per share, while our Q1 adjusted net income per share increased 21 to $0.98 per share. Finally, we finished the quarter with approximately 317,000 worksite employees, which puts us on track to deliver volume growth in the year ahead.

As anticipated in the first quarter, we experienced higher than normal attrition related to the platform migration. By the April, customer attrition will no longer be attributable to this migration. We offset this elevated attrition through improved new sales and continued strong hiring within our installed base. In the first quarter, we saw improvement in new sales as our team successfully sold TriNet's value into each of our six verticals: technology, financial services, professional services, life sciences, nonprofit and Main Street. For example, in our financial services vertical, we won the business of a boutique investment bank as the firm valued our comprehensive services.

We reduced the CFO's administrative burden, and we rationalized their HR business vendors to a single vendor and a single point of contact. Their employees are benefiting from our premium service and attractive benefit solution, which focuses on choice and price. Our Main Street product has matured and is beginning to deliver significant year over year growth in annual contract value. We target fast growing companies in this vertical. For example, we onboarded a drone manufacturer during the first quarter who needed to attract and retain talent as they rapidly expand.

Our benefits offering, platform accessibility and comprehensive services are helping to directly address these needs. Onboarding and training initiatives were high on the list of this customer's priorities. Additionally, for this manufacturer, workplace safety was a serious concern. Again, we demonstrated the value of our comprehensive solution by leveraging our risk assessment team to interact directly with the customer and help improve workplace safety. Beginning in February, we saw improved customer retention, which continued throughout the first quarter.

During the quarter, we instituted new analytics, which allow us to better engage our installed base. These analytics have improved our ability to anticipate and respond to any customer concerns. For example, in Q1, we retained a 120 plus person real estate management group after our analytics identified this customer as a retention risk. The customer relied on a unique approach to compensate its employees and was frustrated they were unable to integrate this process seamlessly with our platform. Our customer experience and technology teams work together to engage and quickly develop an automated solution that exceeded the customers' expectations.

Over time, I expect to see improved retention as we further refine our processes. These are just a few of the many examples of how TriNet is working with a wide range of growing SMB enterprises to solve complex HR issues, enabling them to focus on growing their business. This impactful value proposition is important as we develop a world class brand. Last year, in our third quarter earnings call, I announced TriNet's new brand identity. On April 9, we launched the next chapter in our brand and marketing campaign, People Matter.

Our campaign places at its center TriNet customers who represent a cross section of American entrepreneurialism and celebrates our commitment to small and midsized businesses. The decision was made to invest in this campaign earlier in the year based on the success of the fall launch. It is anticipated that this second phase will continue throughout most of 2019. Through creative collaboration with distinguished artists, the campaign accentuates the human side of entrepreneurship. We are leveraging authentic, true to life depictions of real employees in their day to day environment, bringing important awareness and recognition to the hardworking and diverse people TriNet serves.

Additionally, an important aspect of the new brand campaign has been the complete redesign of TriNet's website to deliver a dynamic user experience for mobile and other devices. All of these efforts will upgrade and strengthen our brand identity to align with the impact we have on our customers in each of the verticals we serve. With improved brand awareness, we believe we can drive further growth over the long term. Now let me turn the call over to Richard for financials. Richard?

Speaker 3

Thank you, Burton. As we review the financials, I will focus on the GAAP and non GAAP numbers where appropriate. During the first quarter, GAAP total revenues increased 9% year over year to $934,000,000 and we grew our net service revenues by 14% year over year to $251,000,000 We finished the first quarter with approximately 317,000 worksite employees, flat year over year. Average WSE count for the first quarter was approximately 313,000, down 1% year over year. Professional service revenues for the first quarter increased 6% year over year to $136,000,000 Professional service revenues benefited from improved pricing and higher than expected WSE count as a result of our process improvement initiatives.

Insurance service revenues for the first quarter increased 9% year over year to $798,000,000 and net insurance service revenues increased 26% year over year to $115,000,000 Net insurance service revenues in the quarter benefited from strong revenues, which outpaced workers' comp and health costs. Our first quarter GAAP tax effect rate was 24%. Our tax rate in the quarter was impacted by the reduced benefit from the tax treatment of employee equity compensation. For the quarter, our non GAAP tax rate was 26%. GAAP net income increased 17% year over year to $63,000,000 or $0.89 per share compared to $54,000,000 or $0.75 per share in the same quarter last year.

Adjusted net income increased 20% year over year to $69,000,000 or $0.98 per share compared to $58,000,000 or $0.80 per share in the same quarter last year. Adjusted EBITDA for the first quarter increased 18% year over year to $108,000,000 compared to $91,000,000 during the prior year period for an adjusted EBITDA margin of 43%. Adjusted EBITDA was impacted by increased OpEx as we invest in our marketing and process improvement initiatives. We closed the first quarter with total cash of $251,000,000 and working capital of $226,000,000 versus $228,000,000 and $221,000,000 respectively in the 2018. During the first quarter, we generated $78,000,000 of positive corporate cash flow from operating activities and used $220,000,000 primarily comprised of WSE related payroll tax obligations.

As a result, total cash outflow from operations were 142,000,000 We spent approximately $38,000,000 to repurchase approximately 783,000 shares of stock for the first quarter. Turning to our second quarter and twenty nineteen outlook, I will provide both GAAP and non GAAP guidance. For our full year 2019 outlook, we are leaving guidance unchanged. As we said last quarter, we expect OpEx to be higher in the first half as a result of our focus on process improvements and our 2019 marketing campaign. Please note that the investments we are making today in our process improvements and marketing are intended to drive future growth.

Finally, we are seeing health costs with one carrier remain elevated. We think it is also prudent to hold our guidance to reflect this uncertainty. For FY 2019, we are forecasting GAAP revenue in the range of 3,700,000,000 to $3,800,000,000 which represents year over year growth of 6% to 8%. We expect net service revenues in the range of $9.00 6,000,000 to $933,000,000 which represents year over year growth of 2% to five percent. Adjusted EBITDA is expected to be in the range of $380,000,000 to $390,000,000 representing a 42% adjusted EBITDA margin for FY 2019.

We expect GAAP earnings per share in the range of $2.94 to $3.07 and adjusted net income per share in the range of $3.34 to $3.47 Before providing our second quarter guidance, please note that during the 2018, we had a very strong net insurance margin 14.3 that is unlikely to be repeated in 2019. As a reminder, the 2Q twenty eighteen margin benefited from $7,000,000 in workers' comp favorable prior year development, the reversal of our flu reserve taken in the 2018 and a realized favorable workers' comp and health experience. Secondly, because we are accelerating the rollout of our marketing and brand campaign, OpEx will be elevated during the quarter. For Q2 twenty nineteen, we expect GAAP revenues in the range of $923,000,000 to $933,000,000 representing year over year growth of 9% to 10% and net service revenues in the range of $211,000,000 to $226,000,000 which represents year over year minus 4% to plus 3% growth. Adjusted EBITDA is expected to be in the range of 70,000,000 to $85,000,000 for the quarter, representing an adjusted EBITDA margin range of 33% to 38%.

We expect GAAP earnings per share in the range of $0.49 to $0.62 per share and adjusted net income per share in the range of $0.59 to $0.73 per share. With that, I will return the call to Burton for his closing remarks. Burton?

Speaker 2

Thank you, Richard. I am particularly pleased with the solid start to 2019 and want to thank the TriNet team for their customer focus and dedication to the small and mid sized businesses we serve. We will continue to leverage the investments we've made in our platform, people and processes to drive new sales and strengthen the value we provide our clients. We are well on track in executing our operating plan and look forward to reporting on our progress as the year unfolds. With that, I would like to return the call to the operator.

Operator?

Speaker 0

Our first question comes from David Grossman with Stifel Financial. Please go ahead.

Speaker 4

Thank you. Good afternoon. Hey, David. Hey, Burton. So I know you've said in the past that ex the attrition in the blue gray business that unit growth is really tracking in line with your peers.

That said, are there any other factors beyond that headwind abating after the end of this month that gives you confidence that WSE growth will accelerate in the second half of the year? And things I'm thinking like are changes in your sales and marketing strategy, sales productivity or any other fundamental changes that have been made in the business over the last, let's say twelve to eighteen months?

Speaker 5

Yes, David. Great question. So

Speaker 6

first of

Speaker 5

all, I'm really pleased with the progress. We're accelerating our new sales growth, which is great. The PEPMs are higher, which I'm also excited about. And we are on track to deliver volume growth over the year ahead. So from my vantage point, we really feel pretty good by reconfirming the annual guidance.

And however, we are remaining disciplined in the go to market approach. So we're selling the right product at the right price to the right customers in each of the verticals. And as you know, we're going through that headwind and executing in a way that I feel pleased about.

Speaker 4

And is there anything, Burden, you can share about sales force productivity or anything about new sales that would help us normalize for the comparisons, etcetera, since last year? So it's been such an odd year.

Speaker 5

Yes. So I would say three things. One is we see new sales growth year over year. Second is, we have been and are very focused on developing and keeping the salespeople we have. And third is that we're hiring a lot of great people from the industries that we serve.

So I'm optimistic about the sales force.

Speaker 4

Great. So just as a follow on to that, again, since we've been in a somewhat nontraditional environment, at least for you specifically, when the business starts to grow again, how do you expect margins to trend once growth reaccelerate? Because like you said, you're making this huge investment in I mean, I can't remember what the way you labeled it, but basically creating efficiencies around the onboarding process. So do those investments really allow you to continue to expand margins even if you do start accelerating new client adds, which we haven't had, for example, over the last couple of quarters?

Speaker 6

Yes. Hi, David. So as you know, we won't talk about guidance outside of the year. But as you just articulated, it does allow us certain things. The investment that we have in improving the customer experience and enhancing our products and the marketing branding that we built the collateral in Q1 and the campaign really starts in Q2 and beyond now has really allowed us to refocus our efforts on the process improvements over time.

And that allows two things: one, happier customers, so we're seeing the benefit in our attrition in the back half of Q1. It also allows us to see efficiencies that to your point that we'll be able to leverage over time as we grow our volume.

Speaker 4

Got it. And just one last question really is on the professional services growth. I think you mentioned it grew 6%. If I'm remembering right, that's similar to what we grew in the December. So if you ex out the mix shift to the white collar business, can you give us a sense of just how revenue per client is trending when you kind of normalize, if you will, for that favorable mix?

Speaker 6

Right. So remember, the average in the quarter was down minus 1%. The rate was up plus 2%, mix is up plus 5%, that balances to that 6%. What we're also seeing on top of that is it allows us to really leverage our insurance plan around that. So we also saw a healthy attach rate, again, mid single digits.

So that's multiple quarters in a row where the change as Burton said it well, as we pick the right customers, they're buying a lot of our product and it also is showing up in their change in existing or what you would call same store sales. So these clients that we're focused on are doing well. The economy is helping them grow. As you know, that entire place is under tremendous pressure in order to find and attract people. And these guys are buying into the things that we can deliver to help them achieve their goal.

Speaker 4

Right. And just one follow-up to that, Rich. So the strong performance in net insurance margin, is outside your band, how much of that was attach rate versus experience or something else?

Speaker 6

Yes. So if you look at the professional service revenue grew 6% I'm sorry, insurance service revenue grew 9%. Again, you have the mix going on. The insurance cost only grew 7% in the quarter. So part of that is just we had a good experience where our revenues overachieved of what we saw from an experience standpoint.

We did though have a $5,000,000 favorable development from workers' comp. So those are the two things that drove that. And as you remember, the admin savings that we had over the last few years continues over time.

Speaker 4

All right. Got it, guys. Thanks very much.

Speaker 5

No problem. Thank you, David.

Speaker 0

Our next question comes from Timothy McHugh with William Blair. Please go ahead.

Speaker 7

Thanks. Can you elaborate a bit on the retention? I think there was a comment about retention improving in February going forward. So I guess, one, And what do you see early in the then secondly, you said I think it's through April is the last renewal for the kind of the legacy business that needs to be migrated. So what would be a reasonable do you in other words, should WSE account be down again sequentially in Q2 before we start to build from there?

Speaker 6

So as we said back in December or from the Q4, January will be elevated because that's when people were going to be leaving the migration due to their true up of last year's events. If April is the last time people who might have taken insurance, we're not going to guide to the WSEs going forward. So but what I can tell you, you asked a question on attrition. A lot of the work we have been doing on getting a better customer experience and a lot of the efforts that we've been spending starting in Q4 and will continue through the end of the first half of this year allows us to have much better headlights into the concerns. Burton referenced a couple of those.

It also has us being not just a doing a back and forth with our clients on issues they might have, it allows us to look forward and where we can really help them and gain the support of them. So it's been a very powerful message to our clients. I think what we would also tell you is as we progress throughout the course of the year, the OpEx should start to slow down in the back half because of the investment that we're making in the front half of the year will start to abate.

Speaker 7

Okay. And then just on the new sales environment, I appreciate basically the directional comment that it improved and it grew year over year the new sales behavior, but I guess grew as a wide comment. And so can you help us in any sense understand kind of the pace of new business growth relative especially given we're still working through kind of this attrition topic?

Speaker 5

So look, the new sales across all of our verticals was very strong. I'm pleased that Main Street is returning to significant growth in annual contract value. And across the board in the six verticals we are targeting, the ACV growth is there across all six of our verticals. So it's broad, it's widespread, it's to a set of clients that I covet. We're seeing strong growth in the change in existing.

And across the board, I am optimistic about the sales force performing well as we move forward.

Speaker 7

Okay. And then last question, there's a comment about healthcare costs elevated with one of your carriers. I guess results this quarter wouldn't imply that, so at least the net insurance margin. So can you elaborate on what you were saying there? And what's the Yes.

Speaker 6

We have one of our national carriers that has shown that it's been elevated and we wanted to make sure that we get another quarter under our belt. It should come back around for the actuaries, but we want anything that's prudent for us to assume that that might not come back around. So we are keeping our guidance intact and it has an impact in Q2. So the costs are slightly elevated compared to the other carriers. We're not seeing that.

So it's a one carrier event and we believe that that will happen.

Speaker 7

Okay. And the impact is we didn't really see any Q1, but there's going to be that's impacting Q2 more so.

Speaker 6

Correct. They're still going through their deductibles, right, in the first quarter. That's the historical level where you wouldn't start to see it. It would really start to happen in Q2 and beyond. We're just being mindful just like last year when we saw the flu epidemic.

We think that's the prudent thing to do. Okay.

Speaker 7

All right. Thank you.

Speaker 0

Our next question comes from Tien Tsin Huang from JPMorgan. Please go ahead.

Speaker 8

Hi, thank you. Good afternoon. So the retention in February, you mentioned the analytics tool helping as well as the conversion platform conversion helping. How big a deal of it is the new analytics tool? Are you just beginning to see the benefits of that?

Just I understand the platform conversion piece. Just curious how much more there could be from the analytics side?

Speaker 6

So as I said earlier, we're moving beyond just a call center that handles people's issues that they might have. And we're now moving beyond that and looking at customers in the back half of the year or into Q1 of next year. By having that kind of insight and dialogue, we're really seeing some very positive effects from that. And we believe that there's a whole process change of which Burton talked about one, which was the analytics. So we have a different team we reorganized and yes, we believe that will continue out over time.

Speaker 8

It? Just

Speaker 6

at the beginning of this year to really start to see it and we think that will build momentum as we go.

Speaker 8

There a way go ahead, Burton, sorry.

Speaker 5

No, hey, sorry, Vincent. So the big difference is we're looking out six months to be really honest. Have much more process centric view. And in the past, we've had clients say, well, if you would have gotten to me a couple of months ago, I would have started the process. So the process centric approach to the retention is starting to bear fruit.

We're just in the beginning of it. I just really like the results because when we're able to identify and solve problems, we retain the client. So I really believe that it has an opportunity to have a significant impact, but we're really in the early stages of figuring out what the true outcome will be. But the bottom line is getting to clients six months in advance, understanding what some of the issues are is making a difference today.

Speaker 8

Understood. If we can go back and think about just or isolate just the conversion, the platform conversion piece, is there can you look back and give us some estimation on the impact to attrition or retention?

Speaker 6

What I would just tell you is we're not going to give out that number. Okay. It was a headwind in the quarter, but

Speaker 8

we

Speaker 6

are very specific about that once January finished, we actually saw a positive uptick going forward. It did tamp it down so that the average was a minus one. If you saw the ending was a plus for the quarter, so that could give you an idea of how the second two months in the quarter behave.

Speaker 8

Okay. Less one

Speaker 6

from And

Speaker 5

the big news, Tien Tsin, is you will no longer hear me talk about the migration as a reason for attrition as of the April. We are done.

Speaker 8

Yes. No, I wasn't trying to trick you guys into giving me a specific number. Was just trying to better understand sort of how that ebb and flow now that we've moved beyond it, it sounds like. Last one, just on the professional services line. Think David asked it already, just the all the different pieces here.

Is it more likely that we could see the spread widen on professional services fees versus worksite employees? Or could that normalize closer to unit growth given some the benefits you've seen from mix and what have you in attach rate? Thank you.

Speaker 6

Remember long, long term out, you'll start to see more of a remix back to more Main Street as a percentage. It will take a while for that to really change the book of business as you can imagine because we have a large book. That being said, even inside Main Street though, we are seeing that we have a higher attach rate and the customers that we're focused on, we're very happy with that group. And as we said earlier, you're also seeing our same store sales are doing pretty well and that includes the mix.

Speaker 8

Thank you.

Speaker 0

At this time, there are no further questions. This will conclude the question and answer session as well as the conference. Thank you for attending today's presentation and you may now disconnect.