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Trinet Group Inc  (NYSE:TNET)
Q1 2019 Earnings Call
April 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the TriNet First Quarter 2019 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, Investor Relations. Please go ahead.

Alex Bauer -- Executive Director of Investor Relations

Thank you, operator. Good afternoon, everyone, and welcome to TriNet's 2019 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 pre-recorded. 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&A session.

Before we begin, please note that today's discussion will include our 2019 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 maybe required by law, we do not undertake to update any of these statements in light of new information, future events, or otherwise.

We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings, for a more detailed discussion of the risks, uncertainties, and changes in circumstances that may affect our future results or the market price of our stock.

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 first quarter of 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 on our website.

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

Burton M. Goldfield -- President and Chief Executive Officer

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 million, and we grew our net service revenues by 14% year-over-year to $251 million. Professional service revenues grew 6% year-over-year to $136 million. Professional service revenues in the quarter continue 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 automations.

We also grew insurance service revenues by 9% year-over-year to $798 million, while net insurance service revenues grew 26% year-over-year to $115 million 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 end of 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 benefits 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 on-boarded 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 worked together to engage and quickly develop an automated solution that exceeded the customer's 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 9th, 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 mid-size 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 hard working 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 a review of our financials. Richard?

Richard Beckert -- Senior Vice President and Chief Financial Officer

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 million, and we grew our net service revenues by 14% year-over-year to $251 million. 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 million. 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 million, and net insurance service revenues increased 26% year-over-year to $115 million. 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 million or $0.89 per share compared to $54 million or $0.75 per share in the same quarter last year.

Adjusted net income increased 20% year-over-year to $69 million or $0.98 per share compared to $58 million or $0.80 per share in the same quarter last year. Adjusted EBITDA for the first quarter increased 18% year-over-year to $108 million, compared to $91 million 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 million and working capital of $226 million, versus $228 million and $221 million, respectively, in the fourth quarter of 2018.

During the first quarter, we generated $78 million of positive corporate cash flow from operating activities and used $220 million primarily comprised of WSE-related payroll tax obligations. As a result, total cash outflow from operations were $142 million. We spent approximately $38 million to repurchase approximately 783,000 shares of stock for the first quarter.

Turning to our second quarter and 2019 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 '19, we are forecasting GAAP revenue in the range of $3.7 billion to $3.8 billion, which represents year-over-year growth of 6% to 8%. We expect net service revenues in the range of $906 million to $933 million, which represents year-over-year growth of 2% to 5%. Adjusted EBITDA is expected to be in the range of $380 million to $390 million, representing a 42% adjusted EBITDA margin for FY '19. 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 second quarter of 2018, we had a very strong net insurance margin of 14.3% that is unlikely to be repeated in 2019. As a reminder, the 2Q 2018 margin benefited from $7 million in workers' comp favorable prior year development, the reversal of our flu reserve taken in the first quarter of 2018 and a realized favorable workers' comp and health experience.

Secondly, because we're accelerating the rollout of our marketing and brand campaign, OpEx will be elevated during the quarter. For Q2 2019, we expect GAAP revenues in the range of $923 million to $933 million, representing year-over-year growth of 9% to 10%, and net service revenues in the range of $211 to $226 million, which represents year-over-year minus 4% to plus 3% growth. Adjusted EBITDA is expected to be in the range of $70 million to $85 million 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'll return the call to Burton for his closing remarks. Burton?

Burton M. Goldfield -- President and Chief Executive Officer

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?

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from David Grossman with Stifel Financial. Please go ahead.

David Grossman -- Stifel, Nicolaus & Company, Inc. -- Analyst

Thank you, and good afternoon.

Burton M. Goldfield -- President and Chief Executive Officer

Hey, David.

David Grossman -- Stifel, Nicolaus & Company, Inc. -- Analyst

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, 12 to 18 months?

Burton M. Goldfield -- President and Chief Executive Officer

Yeah, David. Great question. So first of 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.

David Grossman -- Stifel, Nicolaus & Company, Inc. -- Analyst

And-and is there anything, Burton, you can share about sales force productivity or anything about new sales that would help us normalize for the comparisons, et cetera since last year since it's been such an odd year?

Burton M. Goldfield -- President and Chief Executive Officer

Yeah. 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 sales people we have. And third is, we're hiring a lot of great people from the industries that we serve. So, I'm optimistic about the sales force.

David Grossman -- Stifel, Nicolaus & Company, Inc. -- Analyst

All right, great. So just as a follow on to that, again, since we've been in this somewhat non-traditional environment, at least for you specifically. When the business starts to grow again, how do you expect margins to trend once growth reaccelerates? Because, like you said, you're making this huge investment and, 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?

Richard Beckert -- Senior Vice President and Chief Financial Officer

Yeah. Hey, 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've had is improving the customer experience, and enhancing our products and the marketing, branding, we built the collateral in Q1 and the campaign really starts in Q2 and beyond now, has really allowed us to focus -- refocus our efforts on the process improvements overtime. And that allows us two things, one happier customers. So we're seeing the benefit in attrition, the back half Q1. It also allows us to see deficiencies, to your point, that we'll be able to leverage over time as we grow our volume.

David Grossman -- Stifel, Nicolaus & Company, Inc. -- Analyst

Got it. And just one last question really is on the professional services growth. I think you had mentioned it grew 6%, if I'm remembering right. That's similar to what we grew in the December quarter. 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 normalized, if you will, for that favorable mix?

Richard Beckert -- Senior Vice President and Chief Financial Officer

So, remember, the average in the quarter was down minus one, the rate (ph) goes up plus 2%, mix is up plus 5 %that balances to that 6%. But we're also seeing on top of that, it then allows us to really leverage our insurance plan around that. So we also a healthier tax rate, again mid-single digits. So that's multiple quarters in a row where the changes Burton said as well, as we've picked the right customers, they're buying a lot of our product. And this also is showing up in their change in existing or as 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 places 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.

Burton M. Goldfield -- President and Chief Executive Officer

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

Richard Beckert -- Senior Vice President and Chief Financial Officer

Yeah. So if you're looking at the professional service revenue grew 6% -- I'm sure, insurance service revenue grew 9%. Again, if you have the mix going on. The insurance costs only grew 7% in the quarter. So part of that is just we had a good experience where our revenues overachieved from what we saw from experience standpoint. We did, though, have a $5 million 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.

David Grossman -- Stifel, Nicolaus & Company, Inc. -- Analyst

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

Richard Beckert -- Senior Vice President and Chief Financial Officer

No problem. Thank you, David.

Operator

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

Timothy McHugh -- William Blair & Co. LLC -- Analyst

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, what do you see early in the quarter? And 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 (inaudible). In other word, should WSE count be down again sequentially in Q2 before we start to build from there?

Richard Beckert -- Senior Vice President and Chief Financial Officer

So as we said back in December or from the Q4. January will be elevated because that's when people who are going to be (inaudible) migration due to their true-up of last year's events and 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 the question on attrition. A lot of the work we have been doing on trying to get 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 (inaudible) into the concerned -- and Burton referenced a couple of those. It also has us being not just a -- doing a back and forth with our clients on issue they might have. It allows us to look forward and where we could 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 progressed throughout the course of the year, the OpEx has started to slow down in the back half because of the investments that we're making in the front half of the year, we'll start to abate.

Timothy McHugh -- William Blair & Co. LLC -- Analyst

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 is 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?

Burton M. Goldfield -- President and Chief Executive Officer

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 covered. 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

Timothy McHugh -- William Blair & Co. LLC -- Analyst

Okay. And then last question, there was a comment about healthcare costs elevated with one year carriers I guess results this quarter one and imply that. So at least the net insurance margin. So can you elaborate on what you're saying there and what's the potential impact ...

Burton M. Goldfield -- President and Chief Executive Officer

Yeah. One of our national carriers that that has shown 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 -- I think it'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 were slightly elevated compared to other carriers who're not seeing that. So it's a one carrier event, and we believe that that will happen.

Timothy McHugh -- William Blair & Co. LLC -- Analyst

Okay. And the impact is -- we didn't really see any in Q1, but there's going to be well less (ph) impact in Q2 or so?

Burton M. Goldfield -- President and Chief Executive Officer

Correct. We're still going through the deductibles, right, in the first quarter. That's the historical levels 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.

Timothy McHugh -- William Blair & Co. LLC -- Analyst

Okay, all right. Thank you.

Operator

(Operator Instructions) Our next question comes from Tien Tsin Huang from JPMorgan. Please go ahead.

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Hi. Thank you. Good afternoon. So, the retention in February, you mentioned the analytics tool helping as well as the conversion -- pipeline conversion helping. How big a deal is the new analytics tool? Are you just beginning to see the benefits of that? Just -- I understand the pipeline conversion piece. Just curious how much more there could be from the analytic side.

Burton M. Goldfield -- President and Chief Executive Officer

So as I said earlier, we're moving beyond just a call center that handles people's issues that they might have. 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 dialog, we're really things and very positive effects from that and we believe that there's a whole process change of, which Burton talked about one, which will be analytics. So we have a different team, we've reorganized, and yes, we believe that will continue out over time. Just ...

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Is it ...

Richard Beckert -- Senior Vice President and Chief Financial Officer

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

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Is there a way ...

Burton M. Goldfield -- President and Chief Executive Officer

Can I ...

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Go ahead, Burton. Sorry.

Burton M. Goldfield -- President and Chief Executive Officer

Yeah. so the big difference is we're looking out six months to be really honest. We have much more asset-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 that's the process-centric approach to the retention is starting to bear fruit. We're just in the beginning of it, I just really in light, the results because 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 the clients 6-month in advance, understanding what some of the issues are is making a difference, today.

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

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?

Burton M. Goldfield -- President and Chief Executive Officer

Tien Tsin, (inaudible) we're not going to give out that number.

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Okay.

Burton M. Goldfield -- President and Chief Executive Officer

But yeah, it was a headwind in the quarter, but we're very specific about that once January finished, we actually saw a positive uptick going forward. It didn't temper down, so that the average was a minus 1. As we saw, the ending was a plus for the quarter.

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Yeah.

Burton M. Goldfield -- President and Chief Executive Officer

So that gives you an idea of how the second -- two months in the quarter behaved.

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Okay. Last one for me.

Burton M. Goldfield -- President and Chief Executive Officer

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

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Yeah, yeah. No, I wasn't trying to tricky you guys into giving me a specific number.

Burton M. Goldfield -- President and Chief Executive Officer

No.

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

I was just trying to better understand sort of how that ebbed and flowed now that we've moved beyond it, it sounds like. Last one, just on the professional services line. I think David asked it already, but just the -- all the different pieces here, is it more likely that we could see the spread widen on professional services fees versus more standard plays or could that normalized closer to unit growth given some of the benefits you've seen from mix and what have you and attach rate? Thank you.

Burton M. Goldfield -- President and Chief Executive Officer

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 could imagine, because we have large book. That being said, even inside the Main Street, though, we are seeing that we have a higher attach rate and in the customers that we're focused on, we're very happy with that. And as we said earlier, you're also seeing our same-store sales are doing pretty well and that includes the mix.

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

Yeah. Thank you.

Operator

(Operator Instructions) 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.

Duration: 34 minutes

Call participants:

Alex Bauer -- Executive Director of Investor Relations

Burton M. Goldfield -- President and Chief Executive Officer

Richard Beckert -- Senior Vice President and Chief Financial Officer

David Grossman -- Stifel, Nicolaus & Company, Inc. -- Analyst

Timothy McHugh -- William Blair & Co. LLC -- Analyst

Tien Tsin Huang -- J.P. Morgan Securities LLC -- Analyst

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