TriNet Group, Inc. (NYSE:TNET) Q2 2023 Earnings Call Transcript
TriNet Group, Inc. (NYSE:TNET) Q2 2023 Earnings Call Transcript July 26, 2023
TriNet Group, Inc. beats earnings expectations. Reported EPS is $1.49, expectations were $1.35.
Operator: Good afternoon. And welcome to the TriNet Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Alex Bauer, Head of Investor Relations. Please go ahead.
Alex Bauer: Thank you, Operator. Good afternoon. My name is Alex Bauer, and I am TriNet’s Head of Investor Relations. Thank you for joining us and welcome to TriNet’s 2023 second quarter conference call. I am joined today by our CEO, Burton M. Goldfield, and our CFO, Kelly Tuminelli. 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 2023 third quarter and full year financial outlook and other statements that are not historical in nature or 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-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 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 our 10-K filing, which are available on our website or through the SEC website. With that, I will turn the call over to Burton. Burton?
Burton M. Goldfield: Thank you, Alex. We drove strong financial results in the second quarter. I am pleased to report that we exceeded our key performance indicators with respect to new sales, customer retention, customer satisfaction and expense control. TriNet achieved financial results that were in line or exceeded our guidance by delivering differentiated solutions to our select verticals. We were rewarded in Q2 with annual contract value growth or ACV up 26% year-over-year. This represents a year-over-year acceleration in new customers, putting their trust in TriNet and adopting our solution in the second quarter. The Q1 trend where ACV growth was up 20% year-over-year has been surpassed in Q2. Over the past year, we have focused on enhancing our service capabilities.
Our enhanced service delivered a sizable increase in our Net Promoter Score or NPS. We are now forecasting a more than 4-point year-over-year improvement in retention when comparing fiscal year 2023 to fiscal year 2022. Additionally, customer net hiring or CIE was net positive in the quarter as June came in strong. Overall, I am pleased with our execution in the second quarter and our prospects for the remainder of 2023 and beyond. This momentum supports our confidence that TriNet offers tremendous value. As such, I am pleased to announce that our Board has authorized an incremental $1 billion to our already existing share repurchase program. You will hear more about this program from Kelly. Total revenues grew 1% year-over-year at the top end of our guidance, while professional service revenues declined 3% at the lower end of our guidance.
GAAP earnings per share increased 2% year-over-year, outperforming the top end of guidance by $0.42. Adjusted net income per share increased 1% year-over-year, outperforming the top end of our guidance by $0.34. We finished the second quarter with 334,000 WSEs, representing 2% sequential growth quarter-over-quarter. We are pleased with our second quarter sequential WSE volume growth. As noted earlier, we saw positive contributions from each of the underlying drivers to WSE volume growth including new sales, retention and CIE. We achieved strong second quarter new sales performance. New ACV grew 26% year-over-year, direct sales capacity increased materially based on hiring and improved sales rep retention. Our cohort of experienced direct reps grew 19% year-over-year.
We are benefiting today from this growth in capacity, but will benefit even more during the fall selling season as this trend of increased mature reps continues. The application of significant new technology is also adding to the trend of accelerated ACV growth. We are the industry leader with respect to applying technology across all our business functions and sales is no different. TriNet has always gone to market with our vertical strategy. However, technology is now helping us to refine our customer targeting process. We have deepened our understanding of our verticals through the application of our proprietary customer lifetime value analysis or CLTV. CLTV has provided our sales team with an improved prospect targeting roadmap based on highly specific attributes.
While CLTV gives us a deeper understanding of who our target customer is, our marketing team incorporated a number of machine learning tools to better understand the prospects intent to buy. Qualified leads are only passed to sales when intent to buy is strong. There is less wasted time by reps on opportunities that ultimately won’t close. The outcome is these leads closed at a very high rate. Additional efforts around optimization have led to positive results in terms of speed to quote and reduction in paperwork, which has created more time for sales reps to interact with prospects. We have found the prospects who understand the value of all our products and services upfront beyond just price have a higher propensity to buy and a greater CLTV.
Earlier this year we acknowledged that our sales capacity was constrained. We also said that our new sales would benefit this year and next from a maturing sales force. As we have passed the midpoint of 2023, I am pleased to say that we have made progress on both fronts. Our first half sales momentum and enhanced sales capacity allows us to forecast a second half year-on-year ACV growth rate that will exceed our already impressive first half growth rate. My added confidence in this momentum is bolstered by what we currently see in our July ACV performance. As of today, July is forecasted to be dramatically higher than last year and exceed our internal plan. Turning to retention. We are seeing a strong year-over-year improvement. The factors that drove strong first quarter retention performance continued into the second quarter.
Creative Collage Of Business Team Working On Project And Stock Markets Data On Trasparent Screen, Financial Statistics Layered Over Man Using Laptop For Trading On Forex, Panorama
Our customers benefited from our industry-leading service experience, which is evidenced by our outstanding first contact resolution and average speed to answer and is reflected in our NPS score. We continue to offer value-added services that are differentiating the customer experience. We are now raising our 2023 customer retention forecast to reflect a 4-point year-over-year improvement in retained WSEs. It takes the effort of over 3,000 TriNeters every day to help our SMB customers navigate the complexities of running a business in today’s world. I want to take this opportunity to thank the amazing TriNet team. Moving to CIE. In the second quarter we saw customer hiring turn positive for the first time since the third quarter of 2022. In Q2, all but one of our verticals saw net hiring.
The exception was technology, which was modestly negative, yet improved over recent quarters. Tech companies with fewer than 50 employees net hired in Q2. We saw a broad net positive CIE result from this specific smaller company cohort. However, the trend of larger tech companies contracting their workforces persisted during the quarter, albeit at a much slower rate than Q1. We are encouraged by the net hiring growth we saw in the second quarter. However, we remain conservative in our customer hiring outlook throughout the rest of 2023. Our conservatism is based on the uneven performance we have experienced over the past four quarters with respect to CIE. Before I pass the call over to Kelly, I want to reiterate, TriNet had a strong second quarter where we exceeded our KPIs with respect to new sales, customer retention, customer satisfaction and expense management.
We are well positioned for the balance of the fiscal year 2023. Kelly?
Kelly Tuminelli: Thank you, Burton. In the second quarter, TriNet successfully navigated the evolving economic environment and delivered strong operating and financial results. In the areas of our business we control, we once again performed very well. We accelerated new sales growth, we kept more of our customers longer and we remain disciplined in our expense management. As Burton said, our visibility into Q3 indicates a continuation and acceleration of these trends. Given this performance and outlook, we believe that our company has been undervalued. I will be wrapping up my third year as TriNet’s CFO in the fall, and during that time, I have gained deep insights around our cash flow forecast, the predictability and strength of our financial performance and the levers used to manage and grow our business.
I also believe our shareholders and bondholders place a high importance on transparency with respect to our financial policy or philosophy, capital structure and our deployment of capital. While our financial priorities have not changed, this is a good opportunity to reiterate our priorities and provide some additional granularity on guidelines to our investors. First and foremost, we will always prioritize investing in organic growth. We will maintain an appropriate cash buffer, as well as capacity under our credit facility to ensure prudent access to liquidity if and when necessary, for business operations. We will manage our balance sheet efficiently with an approximately 1.5 times to 2 times adjusted EBITDA leverage target, still leaving open the opportunity to vary outside from time-to-time.
When that happens, we will always have plans to bring into our targeted range within a reasonable window of time. And on average, we intend to return at least 75% of free cash flow annually to our shareholders or deployed to accretive M&A. With this philosophy in mind, I am pleased to announce that the Board of Directors has increased our share repurchase authorization by $1 billion, resulting in a total authorization of approximately $1.4 billion. Subject to market conditions, we would anticipate executing on up to $1 billion of that in 2023. A repurchase program of this size will require incremental financing and given our strong financial performance, as well as current market conditions, we believe we are well positioned to execute on incremental financing during the third quarter.
Finally, related to our capital return to shareholders, we are formally exploring the implementation of a recurring dividend in 2024 as another tool to meet our overall capital strategy. We believe that these steps combined with our expected operational and financial performance will help achieve the valuations warranted for our business. Now let’s turn to our financial review of Q2 and outlook for the remainder of the year. In the second quarter, total revenues grew 1% in line with the top end of our guidance. Total revenue in the quarter was supported by pricing and health participation rates, but offset by the year-over-year decline in volume. We finished the second quarter with approximately 334,000 worksite employees, down 7% year-over-year, but up 2% sequentially.
Second quarter WSE volumes were lower year-over-year, largely due to the cumulative impact of lower CIE in the last half of 2022 and first half of 2023, which did not offset our normal client attrition. That said, we did experience CIE growth in the second quarter, particularly the month of June, which exceeded our recent experience. As Burton noted, we continue to see strong customer retention and we are now forecasting a more than 4-point improvement year-over-year. Taken together, these were the underlying drivers of our sequential WSE volume growth. Professional services revenue declined 3%, in line with the lower end of our guidance driven by our overall decline in volumes. Insurance revenue grew 1% year-over-year due to continued strong participation and annual inflationary rate increases offsetting our overall volume declines.
Insurance costs grew 2% year-over-year and included positive prior period development in both workers’ compensation and health. As a result, our insurance cost ratio was 84%, 3 points lower than the high end of our guidance and slightly higher year-over-year. Although we saw some favorable prior period development and help this quarter, we are also observing health cost increases particularly in pharmacy costs and in-facility outpatient procedures. Utilization rates or the number of medical visits or pharmacy scripts were in line with our overall forecast and represented more normalized pre-pandemic utilization rates. With respect to workers’ comp, this quarter’s prior period development related to a true-up of experience for prior accident years and was the main contributor to the outperformance.
Turning to operating expenses. We continue to focus our incremental spend on supporting new sales and customer service and we did so while effectively managing all of our general and administrative expenses. Overall, operating expenses grew 7% in the quarter in line with our plan. Interest earned from our investments and operating cash continued to benefit from the current interest rate environment. During the quarter, we generated $20 million in interest income. The positive prior period development across workers’ comp and health, expense management and higher interest income translated to solid earnings performance. In the quarter, we earned $1.38 in GAAP net income per share, exceeding the top end of our guidance by $0.42 and we earned $1.74 in adjusted net income per share, exceeding the top end of our guidance by $0.34.
During the quarter, we generated $86 million of corporate operating cash flow and ended the second quarter with $482 million in corporate cash on our balance sheet. The sequential decline in our cash was driven by a $295 million repayment of our credit facility, which occurred in April. On the capital allocation front, we repurchased $9 million or approximately 162,000 shares during the second quarter. Now I will turn to financial guidance starting with Q3. Given our second quarter volume performance led by lower CIE, positive new sales and improved retention, we are forecasting third quarter year-over-year total revenues to be in the range of down 1% to flat. We expect professional service revenue to be in the range of down 2% to up 1%. We expect our insurance cost ratio in the range of 89% to 87.5%, reflecting both the seasonality of our insurance performance and increasing health cost inflation.
Our third quarter estimate of GAAP net income per diluted share is in the range of $0.93 to $1.16, while our third quarter estimate for adjusted earnings per diluted share is in the range of $1.25 to $1.50. This year-over-year decline in our earnings per share estimate is primarily driven by our expectation for higher insurance cost ratios in the quarter, as well as year-over-year cumulative decline in CIE and resulting volume impact. Now turning to our full year financial guidance. Regarding total revenues, we are leaving our guidance range unchanged with full year total revenues forecast to be up 1% to 2%. For professional service revenues, given the cumulative impact from lower CIE in the first half, we are lowering our range by 1 point.
The impact from lower CIE is being partly offset by higher retention and sales volume leading to full year professional service revenue growth in the range of flat to up 2%. Turning to our insurance cost ratio. We are lowering our full year ICR by 1.5% to 87% to 85.5%. Through the reduction of our forecasted ICR, we are passing through the second quarter outperformance in workers’ compensation and positive prior period development in health. We are forecasting normalized health utilization and we are factoring in higher health cost inflation across both provider and pharma prices. The change in interest rates and the shape of the yield curve is driving an increase to interest income to approximately $70 million for the year. As a result of these changes, coupled with our disciplined expense management, we are raising our GAAP net income per diluted share forecast by $0.90 at the midpoint to a new range of $4.93 to $5.71.
Regarding our adjusted net income per diluted share guidance, we are raising the range by $0.78 at the midpoint to $6.25 per share to $7.05 per share. Please note, as it relates to our interest income and earnings per share guidance, we have not included any pro forma impacts from incremental share repurchases or debt issuance. We have included an assumption around adequate share repurchase in order to offset the dilution from stock compensation consistent with our prior practice. To wrap things up, we are encouraged by the improving trends in our business through the first half of 2023. While the uncertainty in the economic environment has been difficult for us and especially our customers, we remain focused on servicing these customers with excellence and continuing to deliver on our commitments.
Now I will turn it to Burton for his final remarks. Burton?
Burton M. Goldfield: Thank you, Kelly. We are seeing momentum across our business despite the challenging economic environment. We are keeping more of our customers for longer. Our sales organization is delivering a strong year-on-year growth rate in new ACV that continues to accelerate in Q3. And we are encouraged by our customer hiring while still early we are starting to see some positive indications that CIE may begin to normalize. We believe our stock represents significant value when compared to our long-term outlook. I am particularly pleased that our Board has authorized an incremental $1 billion to our already existing share repurchase program. I look forward to reporting to you on Q3 results in the fall. Operator?
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