TriNet Group - Earnings Call - Q3 2020
October 26, 2020
Transcript
Speaker 0
Good day, and welcome to the TriNet Third Quarter twenty twenty Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. And I now would like to turn the conference over to Alex Power of Investor Relations.
Please go ahead, sir.
Speaker 1
Thank you, operator. Good afternoon, everyone, and welcome to TriNet's twenty twenty third quarter conference call. Joining me today are Burton M. Goldfield, our President and CEO Kelly Timinelli, our Chief Financial Officer, immediately following the filing of our third quarter Form 10 Q and Mike Murphy, our Interim Chief Financial Officer. Our prepared remarks were prerecorded.
Burton will begin with an overview of our third quarter operating performance. Mike will then provide a review of our third quarter financial results. Finally, Kelly will provide our forward looking guidance. We'll then open up the call for the Q and A session. Before we begin, please note that today's discussion will include our twenty twenty fourth 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.
Speaker 2
We encourage you
Speaker 1
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. In addition, our discussion today will include non GAAP financial measures, including our forward looking guidance for net insurance margin, adjusted EBITDA margin, and adjusted net income per diluted share. 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 third quarter, which is available on our website or through the SEC website. With that, I will turn the call over to Burton for his review of our operating performance and market environment. Burton?
Speaker 2
Thank you, Alex. I am extremely proud of TriNet's operating and financial performance during the third quarter. After navigating a difficult second quarter where we felt the full impact of COVID-nineteen, we entered the third quarter resolved to make the best of a challenging operating environment. Our customer base, operating model, and prospecting processes were all disrupted and still face uncertainty. We are responding to this uncertainty by doing what we are passionate about, putting SMBs at the center of everything we do.
Specific highlights since our last earnings report include, we realized strong WSE volume in Q3 and growth in our volume over Q2. This compared favorably to the broader economic environment and our own forecast. We implemented the industry leading recovery credit program and shared the program details with the first cohort of TriNet customers. It was greeted with widespread appreciation. And we hosted our first ever conference focused on small and medium sized business leaders, the TriNet PeopleForce conference.
In the face of COVID nineteen, we delivered strong financial performance due to a resilient customer base, which has been acquired through a verticalized go to market strategy and a unique business model that adds significant value across a wide range of strategic and operational issues facing small businesses in America. During the third quarter, GAAP total revenues increased one percent year over year, while GAAP earnings per share declined 38% year over year. Please note that our reported financial performance in the quarter includes a revenue accrual for our recovery credit program, which Mike will address later. The recovery credit program is our effort to share with our customers the excess cost savings we generated from underutilized health services primarily in April. Historically, our business model has been to assume a deductible layer for the majority of our health plans.
We are able to take this layer in part due to our strong balance sheet. Because of this plan construct, we had immediate access to the significant savings generated in April. Leveraging those savings, we created the recovery credit program, Our explicit effort to ensure a portion of these savings are used for the benefit of our customers, all within one year. Said another way, the recovery credit program ensures that those customers who are committed to us and our partnership have access to the savings when they need them most. We believe the recovery credit program represents the best usage of these savings.
Through this program, we are investing in the success of our customers rather than choosing to subsidize new customers or set low expectations for ongoing health costs. Importantly, the first customer cohort received notice of their recovery credit during the third quarter. These are customers whose contracts renewed with us on October 1. The preliminary response rates were very encouraging and indications for future retention are positive. We will be able to report on the full benefits of the program in 2021.
Despite the ongoing economic uncertainty, our third quarter was distinguished by stable volumes. We ended the quarter with approximately 321,000 WSEs down 3% year over year, but up 2% sequentially versus the second quarter. Our acquisition of Little Bird HR accounted for approximately 1% of incremental WSE volume in the quarter. We attribute our volume outperformance to our amazing customer base and our unique approach to customer selection. The installed base continues to be comprised of nearly 80% white collar workers, which thus far have withstood the impact from the pandemic better than our blue collar verticals.
Continuing a trend we saw emerge in June, our white collar verticals continue to add new employees throughout quarter, our installed base hired more net new WSEs than they did in the same quarter last year. The hiring was consistent across all of our white collar verticals with technology being the leader. Additionally, the overall return of economic activity across the country positively impacted our installed base and served to mitigate the lack of additional PPP funding. New sales remained challenged during the third quarter relative to last year. We continued to close net new business in the quarter, however, at lower volumes than last year.
Significantly,
Speaker 3
we
Speaker 2
have not yet returned to face to face sales calls. We are leveraging our installed base for referral business. Our close rates are higher when prospects are referred by our current customer base. Last week, we hosted the first annual TriNet PeopleForce virtual conference. TriNet PeopleForce is our forum to provide SMBs with real insights, thought leadership, and recommendations for the challenges they face.
Additionally, we highlighted the depth of the TriNet leadership team. This well attended event allowed thousands of SMBs, which included TriNet customers and prospects, to participate in discussions around critical issues facing their companies with a diverse group of business experts, public officials, and thought leaders. These speakers included former president George w Bush, former attorney general Eric Holder, former White House deputy chief of staff Mona Suffin, American pathogen preparedness expert, doctor Syrah Madad, and current TriNet customers who are achieving amazing results and so many others. Over a three day period, TriNet PeopleForce tackled key challenges such as business resiliency, diversity, equity, and inclusion in the workplace, health care including cost management and employee access, legislative updates and access to government programs and stimulus, and finally, an economic outlook for SMBs. Examples were given by speakers like Samantha Snaves around the challenges her company, Re three d, faces and TriNet's involvement in helping her company grow.
I am pleased that TriNet can leverage our market position, which has been gained over a thirty year period to provide this critical information for the benefit of our customers and the SMB community at large. The TriNet value proposition continues to resonate as demonstrated by events like TriNet PeopleForce. We are optimistic growth will return as the economic environment improves. Still, our outlook remains cautious until either a vaccine or improved therapies are generally available and economic confidence is restored or additional stimulus packages are approved, SMBs will face an uncertain fall and winter. Over the last two quarters, TriNet demonstrated its commitment to our customers by our enhanced service model, the recovery credit program, and the TriNet PeopleForce conference.
For our customers and prospects, TriNet represents a comprehensive, differentiated solution that is so much more than payroll, HR software, or access to benefits. We are passionate about our customer success. Specifically, we are using TriNet scale as one of the largest single employers in The United States to provide an always on service model with instant access to information and support for small businesses. Access to a wide variety of large group health and welfare plans not generally available to small businesses, and investments in technology that benefit currently and in the future. We believe this holistic approach, which is resonating in the market, will become even more valuable in the future as companies return to growth post COVID-nineteen.
Finally, I would like to formally welcome Kelly Tuminelli to TriNet. Kelly was appointed as our Chief Financial Officer immediately following the filing of our third quarter Form 10 Q. Kelly brings significant experience and insights with her insurance background and tremendous leadership skills. Over the past six weeks, I've enjoyed working with her as together we drive TriNet's growth and success. Kelly's addition represents a further strengthening of our management team.
And as such, I believe we are well positioned for growth as the economic environment improves. With that, I will pass the call over to Mike to provide a review of our third quarter financial performance. Mike?
Speaker 4
Thank you, Vern. During the third quarter, GAAP total revenues increased 1% year over year and professional service revenues declined 3% year over year. GAAP total revenues outperformed the top of our guidance range by 4%, a WSE volume outperformed with the mix of WSE's remaining at nearly 80% white collar workers. GAAP total revenue growth was driven by a 5% growth in total price or rate combined with 5% growth from a change in mix in WSCs, which is the proportion of WSCs in each vertical and the offerings that they enroll in. This was offset by a 4% year over year decline in average WSCs 318,000, which includes the impact of our acquisition of Little Bird HR and also a 5% or $48,000,000 reduction in revenue from our continued accrual for our recovery credit program.
Over the last two quarters, we have accrued a $104,000,000 for the recovery credit program and we continue to see net savings from the underutilization of health services broadly from what we reported previously. Net service revenues in the quarter decreased 2% year over year, outperforming the top end of our guidance range by 15 points. For the third quarter, we delivered a net insurance margin of 11% versus our Q3 guided range of 6% to 8%. The outperformance in net insurance margin during the third quarter was again driven by reduced health utilization and a change in the pattern of our expected incremental investments in our customers as a result of COVID nineteen. We saw two trends emerge during the third quarter.
First, while we saw a return to some normalization of doctor visits and outpatient procedures, excluding COVID nineteen services, the frequency of all services and notably inpatient procedures remain depressed. Overall, our utilization is at 98% of prior year volume. Second, we continue to see direct COVID health costs which totaled approximately 3% of overall health costs in the quarter. About half of these costs were attributable to testing. In addition, we have changed some of the value and timing of our commitment to reinvesting with our clients.
This change reduced our anticipated recovery credit accrual in the period and contributed to a 1% improvement to each element of GAAP revenues and 1% improvement to net insurance margin. In the third quarter, we delivered an adjusted EBITDA margin of 32%, outperforming our expectations as volume strength drove revenue growth, health costs remain lower and OpEx remains constrained. We spent approximately $35,000,000 to repurchase 521,000 shares of stock in the third quarter. Our third quarter effective tax rate was 14%. In the quarter, we benefited from improvement in our state taxes and from the tax treatment of employee equity compensation.
Our per share results in the third quarter significantly outperformed our guidance and reflect the impact of the excess cost savings generated. GAAP net income per share decreased 38% to 48¢ compared to 78¢ per share in the same quarter last year. Adjusted net income per share decreased 31 percent to 56¢ compared to 81¢ per share in the same quarter last year. I will now turn the call over to Kelly to provide our fourth quarter outlook. Kelly?
Speaker 5
Thank you, Mike. I'm very excited for joining TriNet during this time, understanding the impact we can make on our client base. I'm particularly passionate about leveraging my background and prior experience to work across the organization to streamline enterprise pricing processes, enhance enterprise analytics, and enable a consistent 360 degree view of customer lifetime value, which I believe will be critical to TriNet's strategy and direction moving forward. Now let's turn to our twenty twenty fourth quarter and full year outlook. As Burton discussed, while we are pleased with the recovery in our WSE base driving strong volume performance, we remain cautious in our forward outlook.
The high end of our fourth quarter guidance reflects an environment where the nascent economic recovery continues with its positive implications for employment and consumer activity. The states imposed localized lockdowns where virus surges are being experienced rather than broad sweeping lockdown, and a stimulus package is passed in November. The low end of our range reflects an environment where the economic recovery stalls as we experience regional COVID case surges and related surge in direct COVID costs. Additional stimulus is delayed until much later in the fourth quarter, and bankruptcies increase as a cohort of customers finally capitulate to the difficult operating environment. In a low end, we anticipate that TriNet would realize lower revenues than last year, partially offset by reduced health care utilization even with higher direct COVID specific costs.
Our outlook reflects a recovery credit accrual totaling two to 3% of fourth quarter GAAP revenue. As mentioned in prior quarters, on a full year basis, we will experience significant one time benefits in net insurance margin from COVID nineteen, which we believe will not recur in 2021. Our recovery credit program extends into 2021, and we anticipate continuing to accrue over that period. We are not planning to further discuss 2021 net insurance margin or guidance today as we think it's important to evaluate the progression of COVID nineteen over the next few months. For the 2020, we expect GAAP revenue to be in the range of flat to up 2% as our strong third quarter sequential average WSE improvement boosts our fourth quarter above our prior forecast.
We expect our fourth quarter net service revenue to be in the range of down 27% to down 12% year over year. We expect our fourth quarter net insurance margin to be in the range of four to 8%, reflecting recovery credit accrual and incremental COVID costs, partly offset by suppressed health care utilization. We expect to realize an adjusted EBITDA margin range in the quarter of 8% to 21%. We expect q four GAAP earnings per share to be in the range of negative 13¢ to positive 19¢ or down 119% to down 72% year over year, and adjusted net income per share is expected to be in the range of breakeven to up 32 or down 100% to down 62% year over year. Regarding our full year 2020 guidance, given three quarters of performance, our better than expected volume, increased cost savings, and our fourth quarter guidance, we are raising this full year guidance.
We now expect to grow GAAP revenue in the range of up three to 4%, up from flat to up 1%, driven by the recovery in our average WSE count and consistent with our economic outlook. Net service revenues are now forecast to grow 8% to 11% year over year, up from flat to 5% growth. We expect our full year 2020 net insurance margin to be approximately 14%, tightened from our previous range of 12 to 14%. Our full year 2020 adjusted EBITDA margin is expected to be in the range of 43 to 44%, raised from our previous range of 38% to 41%. GAAP earnings per share is now expected to grow year over year in the range of 18 to 29% or $3.53 to $3.85 per share, raised from down 8% to up 9% year over year.
Adjusted net income per share is now also expected to grow year over year in the range of up 20% to up 30% or $3.99 to $4.32 per share, raised from down 3% to up 14% year over year. Overall, we're pleased with the signs of economic recovery and the resilience of our business model and white collar vertical focus as well as the containment of costs associated with COVID nineteen. We do remain focused on the ranges to 12 comes for 2021 insurance cost performance given various ways in which COVID nineteen may cause WSU to delay preventative and nonurgent medical services as well as potential for a bounce back in utilization or additional direct COVID nineteen cost next year. With that, I will return the
Speaker 6
call to Burton for his closing remarks. Burton?
Speaker 2
Thank you, Kelly. I was pleased with our performance during the third quarter and in fact, our financial performance during the first March of this unique year given the significant disruptions that the pandemic has brought to our customers. Our clients are the small and midsized businesses driving America's growth. They are resilient. They hired during the quarter in greater numbers than during the same quarter last year.
The recovery credit program, TriNet PeopleForce, and all of our other initiatives are intended to best serve and retain our customers while driving profitable growth. As we look forward, I'm excited to work with Kelly and our broader leadership team. I am proud of the entire TriNet team and wanna thank them for what they do. This team has responded effectively during the COVID crisis. There is a tremendous desire by SMBs for guidance and partnership.
TriNet is passionate about this desire and uniquely positioned to fill this need. Operator?
Speaker 0
And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If And our first question today will come from Tien Tsin Huang with JPMorgan. Please go ahead.
Speaker 7
Hi. Thanks so much, Kelly. Welcome to the call. So I'll ask you the first question, if you don't mind. Just curious with you coming over with an insurance background, what attracted you to the to the TriNet business?
And any surprises on the on the quality of the book and how TriNet maybe can better engage with with the carriers that you're coming over from that side of it? I heard the the three sixty view on on LTV, which is interesting. So maybe there's something you can elaborate there, that would be great too. Thanks.
Speaker 5
Great. Tien Tsin, thanks. It's great to be at TriNet. You know, really what attracted me to TriNet is I think it's a tremendous growth opportunity, frankly. You know, when I look at the market and I see how, you know, from my perspective, how underpenetrated it is, I I think we've got a lot of of room there.
You know, it's it's hard to to call anything from an insurance perspective in this environment with with COVID nineteen because trends are not what you would expect from a normal trend perspective. So, you know, I I think it's you know, that that's kinda tough. You know, what I would say is, you know, with insurance insurance background, background, you you know, know, it's it's about looking at the data, looking at the the customers, the underwriting experience, etcetera, and and continuing to to evaluate that. But, know, TriNet, as you know, we price for risk, and we'll always continue to do that. Regarding a three sixty view of of customer lifetime value, you know, I I think the team has done a really good job at trying to understand customers.
I think in this environment, it's really played out in terms of focusing on white collar verticals, just given the fact that they were less impacted, by the COVID nineteen pandemic. But, you know, I I think, like anything, you know, we've been investing in process improvement, and I think we can continue to invest in, you know, our processes overall and really refine our view with data of what we think that longer term value from the customer customer is. So, you know, I'm six weeks in, so, you know, still still getting up to speed for sure. But but thrilled to be here and very excited
Speaker 7
Okay. Thanks for that. As my quick follow-up then, just on the full team, the recovery credit program, they gave a lot of info there and you rolled it out to the first cohort of TriNet customers. So given what you've learned so far, is there anything else you could share in terms of what the impact might be on improving retention as you roll out to the rest of the customer base here?
Speaker 5
Great follow-up question. I think in terms of the recovery credit and as we look forward, we've just got really early views. Like Burton mentioned, we've rolled it out to really the first cohort with renewals coming up in October. We're not going to really call, you know, the impact on 2021 yet because we really want to see as as you know, most of the renewals happen with the calendar year, and we really want to see that January performance before we give any further specifics on that. But we'd absolutely expect to give you more of an update on the fourth quarter call.
But it's the reception is favorable. I think Burton mentioned that in his prepared remarks that it's very favorable. Burton, anything you wanna add?
Speaker 2
Hey, Fin. Fin. How are you?
Speaker 0
Great. Not good
Speaker 7
to hear from you guys.
Speaker 2
Yeah. You know, it's great to hear from you as well. So what I would add to that being in the middle of it is the feedback from the recovery credit program really highlighted that we're invested in our customer success and that their success is our success. I believe in this customer base, as you've heard me say, over many, many years. And we will be part of the recovery, and we will help them recover.
And, ultimately, this help coming at a very critical time in their existence has a significant impact on these stakeholders. So, ultimately, I believe all of our stakeholders will benefit from it, and it's a pretty unique program, which I'm excited about.
Speaker 7
Well said. It'll be interesting to see how how it goes. Thank you for the update. Think Yes. Exactly.
Speaker 0
And our next question will come from Andrew Nicholas with William Blair. Please go ahead.
Speaker 3
Hi, good afternoon. Hi, Andrew. Just a little bit of a follow-up. As we kind of look towards next year, and I know you're not giving guidance, but I did want to ask, just if we're in the unfortunate position of, you know, the country of facing another wave of COVID over the next couple of quarters and you experienced similar health care utilization and cost dynamics in the first half of next year. Would you expect to react similarly in terms of rebates or credit programs?
Or maybe just ask a different way, how would you expect your approach to change if faced with similar circumstances in 2021?
Speaker 5
Yes. Great question again. You know, we're really gonna watch the progression of COVID over the next three or four months just to be able to see where it's going and what we think is going to happen to health care utilization. Right now, we've not discussed anything further on that. And we'd obviously give you more updates as we see more experience develop.
But there's currently no plans at this point in time. Maybe I'll throw it back over to Burton as well.
Speaker 2
So Andrew, great question. This is a onetime program from our vantage point. I believe that the vertically oriented business model we're using, which focuses on attractive industries where our value proposition is particularly well suited, gives us an opportunity to help those customers succeed in this environment. But next year will be another interesting year, and we will help our customers achieve what they are trying to achieve in these verticals that we service.
Speaker 3
Great. That that's helpful. And then, as my follow-up, I was hoping we could just spend a little bit more time talking about the sales environment. You did obviously touch on it in your prepared remarks, but any more color on kind of how you're thinking about the pipeline, conversion rates, length of the sales cycle, and and any indications at this point? I know it's it's still October, but how how that might evolve over the next couple of months?
Obviously, you're getting into to peak selling season. Any any more color there would be great.
Speaker 2
Thank you. Abs absolutely. So what we're seeing is a lot of activity, deep conversations, but deferred decision making. Andrew, in the simplest form, what we're seeing is prospects are, frankly, more concerned about the front of the shop right now. They're concerned about staying in business.
While I believe we can help with that, it's difficult for them to make a back end change in the current environment. We're focused on servicing our customers, and we know there's a direct correlation between the customer sat, referrals, net new business, which should pay off over time. I think, ultimately, these opportunities to have the deep conversations will be meaningful as things reaccelerate in the future. Also talking a little bit about the PeopleForce conference. The feedback that we got was absolutely incredible both from the value that people got out of it, but also, equally importantly, the community that they felt around SMBs brought together by TriNet.
So I'm optimistic. I'm optimistic the economy will return. I can't give you that date, but I do believe we are investing heavily in making sure that these companies, do as best as they can in this particular environment. I'll share one comment that I got from PeopleForce, which was pretty personal, where somebody said your conference really helped my morale. I felt supported, and I felt someone actually understood the crippling pressure I've been under to maintain cash flow and keep paying payroll.
Thank you very much. So I do believe we're building a community, and we're gonna try to provide the thought leadership necessary to evolve out of this situation. But, again, as you said, it these are conversations, and the close rate, hopefully, will come back to normal once things get back to normal in the economy.
Speaker 3
Great. Thanks again.
Speaker 0
And our next question will come from Kevin McVeigh with Credit Suisse. Please go ahead.
Speaker 8
Great. Thank you, and congratulations on the results. I wonder can you help us bridge? You're very welcome, listen. It's a tough environment out there.
I guess the percent NIM you put up in Q3 versus kind of the range of 4% to 8% for Q4. Any sense of, you know, how much of that is the recovery pool versus higher expense? And and are there any other factors to consider? It's just a way to frame kind of some of that bridge from q three to q four.
Speaker 5
Yeah. Kevin, this I'll take that one. Know, a couple of things a couple of things that I'd remind you is really the seasonality that we face. So, you know, what I I mentioned in my prepared remarks that originally we'd assumed there would be somewhat of a surge in the third quarter, which we frankly didn't see.
Mike said we had about 2% lower utilization, we're at about 98% of utilization excluding COVID specific costs. So it's not anything unusual that we're thinking about in terms of the fourth quarter. But when you think about the 4% to 8% net insurance margin, I did mention where the recovery accrual would be between 23% of GAAP revenue. So if you project GAAP revenue, you can see what the impact on the recovery credit would be on net insurance margin. But I really view that more as seasonality than anything else, that we typically see better net insurance margin in the first quarter just given deductibles and things like that when people's health plan renew.
And then and it, degrades throughout the year as, you know, people burn through their deductible.
Speaker 8
That's helpful. And then just in terms of any thoughts on on the retention in the quarter? And then, you know, I know we're not talking about 2021 in particular, but, you know, with the recovery credit, all things equal, it should probably help the retention in in 2021. But is there any way to think about just the impact of recovered credits and and and the impact on on retention overall?
Speaker 5
Yeah. Let me throw it over to Mike to talk about retention in the quarter, and then I'll I'll give you a view going forward.
Speaker 4
So for the quarter, we saw that our attrition very definitely improved and therefore our retention improved. We don't give out that number. So in addition to that, we saw that our clients in the third quarter really followed the pattern that they had in June and all of the verticals returned to net hiring, particularly strong growth in net hiring in both techno excuse me, technology and, life sciences vertical. But as I said, all of them improved.
Speaker 5
Yeah. And and regarding the fourth quarter, you know, we would anticipate that the recovery credit does, you know, move the needle related to, retention. So we think we will have strong retention. You know, like we we said, we're not gonna really forecast 2021 or give you a view on 2021. But I do think that, you know, it it we'll see how January comes through.
But given all the indications we've got so far, it's definitely a good tool. And let me give it to Burton, any other remarks.
Speaker 2
Yes. I would just add that on the last call, we talked about the growth in June in hiring. The fact that that continued throughout the quarter was a very positive trend that, frankly, we had not, counted on in the guidance we've given.
Speaker 8
That's helpful. That's helpful. Thank you.
Speaker 0
Yep. And our next question will come from Sam England with Berenberg. Please go ahead.
Speaker 9
Hi, guys. Just a couple for me. The first one, you talked about how well the white collar side of is holding up. I just wondered how much variation you've been seeing between different industry verticals, and whether there's been any particularly strong or or weak verticals, from sort of a retention perspective? Also, any new customers or additions or WFE
Speaker 0
additions? Yes.
Speaker 4
So what we saw in the third quarter, as I said previously, was strong growth in technology and life sciences. And then we saw, although we saw some growth in hiring in professional services and in Main Street, it's not growing at the same rate. I would also say that that change in relative growth wasn't significant enough to really change the overall mix between white collar and the blue collar vertical.
Speaker 9
Okay. Great. Thanks. And then you obviously finished the quarter again with sort of strong balance sheet position. I just wondered how you're thinking about M and A, at the moment and what the M and A landscape looks like?
And I suppose more broadly, you know, how you're thinking about capital allocation priorities over the next sort of six to twelve months?
Speaker 5
Great. No. I'm happy to answer that, Sam. You know, regarding M and A, you know, we're definitely focused on it where the rates of return and cost of acquiring WSEs are attractive. We'll we'll pursue it in in those instances.
Also, where the strategy makes sense. I don't think our M and A approach is is changing that if there's geographies or verticals that we particularly like, we'll we'll pursue them, you know, or technology or or tuck ins. So the M and A really our approach towards M and A really hasn't changed. But in terms of capital allocation overall, kind of the first priority is organic growth. Second would be M and A.
And then thirdly, as we think about returning capital to shareholders, we'd obviously continue with our repurchase program. So that's kind of how we're thinking about it.
Speaker 0
And our next question will come from David Griffin with Stifel Financial. Please go ahead.
Speaker 6
Thank you. Good afternoon. Good
Speaker 2
afternoon, David.
Speaker 6
So, you know, you've given us some great information about, you know, kind of positive trends in hiring and, you know, retention, and then offset by what looks like a more challenging new sales environment. And I know you don't wanna provide any context or guidance for 2021, but can you give us any sense for how we balance those? Because, you know, the hiring sounds like it's going better than planned. You know, you've got the the credit in place to help with retention, but sales are off. And it's kinda hard to really get a sense for, you know, how we should think of relative waiting as we, you know, as we go into next year.
Speaker 5
Yeah. Let me take it, and then I'm gonna pass it to Burton to give, you know, a a view on, you know, just his view at a very top level on the environment. But in in terms of you know, I I think he said it well in his prepared remarks when he said, that, you know, the back office is a little bit not the priority at this point in time. And so, you know, we're also saying it's not the priority, which is helping retention as well. So, you know, I I think we've been pleased with the net hiring that that we got in the quarter, and the high end of our guidance for for fourth quarter seems modest on that hiring as well.
The low end would assume, you know, that really, that that some of those companies, just can't make it through the environment given worsening COVID and and lack of of stimulus till very late in the quarter. But, you know, I'm I'm gonna throw it to Burton to give you more perspective on sales and then conversations going on.
Speaker 2
Yes. So, David, three things I would point out. One is you know very well that I've been maniacally focused on the verticals that we serve, and the community that we're involved in appears to be doing better than the overall SMB community. So I'm very pleased with that aspect of our business. I also believe the fact that we've narrowed down to these communities, we're able to give them better service and be more focused on helping them in these difficult times.
As you're aware, complexity is our friend here, and I believe that the overall situation is allowing our full service solution to show very, very well. I think tangentially is this issue of deferred decision making. There is a significant amount of activity. There is a significant amount of business interest as we saw from the PeopleForce conference. How to handicap that will directly, correlate to what happens in the return of the economy.
So for me, it's a timing issue. It's not a matter of if. It's a matter of when, and I simply don't know how to handicap that. What I do know is by helping our current customers, by having them grow and be retained by TriNet, I have a burden at hand that can grow my business while the recovery of
Speaker 4
the new sales takes place.
Speaker 6
Got it. And just for historical context, my recollection is that you had some kind of program in place, maybe not exactly what you have in place now back in 2018. And a, am I remembering that correctly? And if I am, can you help us, remember what the impact was on retention from that program?
Speaker 2
Mike, could you help out with that?
Speaker 4
Sure. In, 2017 at the end of 2017 into 2018, we did have a fee credit program that represented less than 1% of the revenues. And we learned a lot from that program, and we we learned a lot about how our customers see these kind of programs, and we learned a lot about the structure and how we, want to the timing of when we give these amounts to them. So I would say that this is quite a different program, in its simplicity of design, in the amount we're giving to each customer and how it's more meaningful, and how we're approaching the conversation with them. So whereas we we got some reward from the prior program, we see the effectiveness of this one being very different.
Speaker 0
Got it. And then, David,
Speaker 2
the the the answer is I'll be excited to give you the results at the end of, you know, for the end of the year for the program in the next, you know, earnings call. So we will know at that point in a much more definitive fashion. As as I said in the prepared remarks, I'm really pleased with the feedback and the uptake. But as you say, in the end, the retention, particularly the start of 2021, is a significant issue, and I believe we're addressing it in the absolute proper manner. We didn't take these dollars and put it towards new sales.
We are rewarding our customers.
Speaker 6
Right. And then just one last thing, just really more on kind of the ability to expand geographically. How does something like the pandemic impact the carriers' willingness to work you know, with a new PEO in a new geography, or is it really no change at all? Does it really not have any impact?
Speaker 2
Yeah. I I'm not real focused on the other PEOs to tell you the truth, so I'm not sure I could answer the question, David. I am and Well, I I ask.
Speaker 0
Yeah. Yeah.
Speaker 6
Think yeah. It's really directed at you. I'm just wondering whether yeah. Whether, you know, the current environment, you know, may make a carrier more likely, you know, to engage with you in a new geography or whether it really has no no bearing at all?
Speaker 2
I don't think I I would say from, my experience, it doesn't have a bearing, especially with the amount of plans that we have. I'm not looking for massive expansion into new plans, and our scale provides, you know, a tremendous you know, that scale is tremendous. I think it's a good question for the carriers, but I just don't know the answer to that. We have a great relationship with our carriers. As you know, we're, we're a large, partner to many of those.
I'm dealing directly at the very senior levels, and I haven't heard anything like that.
Speaker 6
Alright. Good enough. Thanks for your thanks for your answers. Appreciate it.
Speaker 0
Thank you, David. Good luck. Yeah. And ladies and gentlemen, this will conclude our question and answer session and also today's conference. We'd like to thank you for attending
And at this time, you may now disconnect your lines, and have
Speaker 4
a
Speaker 9
great day.