Alex Bauer - TriNet Group, Inc. Burton M. Goldfield - TriNet Group, Inc. William Porter - TriNet Group, Inc..

Ato Garrett - Deutsche Bank Securities, Inc. Amit Singh - Jefferies LLC Stephen Hardy Sheldon - William Blair & Co. LLC George K. F. Tong - Piper Jaffray & Co..

Good day and welcome to TriNet's Third Quarter 2016 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. I would now like to turn the conference over to Alex Bauer, Investor Relations. Please go ahead..

Thank you, operator. Good afternoon, everyone, and welcome to TriNet's 2016 third quarter conference call. Joining me today are Burton M. Goldfield, our President and CEO, and Bill Porter, our Chief Financial Officer. Burton will begin with an overview of our third quarter operating and financial performance.

Bill will then review our financial results in more detail. Bill Burton and I will then open up the call for the Q&A session.

Before I hand the call over to Burton, please note that today's discussion will include our Q4 guidance and other forward-looking statements, such as predictions, expectations, estimates, strategy, or other information that might be considered forward-looking.

These forward-looking statements are subject to risks, uncertainties and assumptions that may cause actual results to differ materially from statements being made today. We do not undertake to update any of these statements in light of new information or future events.

We encourage you to review our most recent public filings with the SEC for a more detailed discussion of these risks and uncertainties 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 outlook for non-GAAP net service revenues, adjusted EBITDA and adjusted net income.

For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see the company's earnings release available on our website or through the SEC website.

A reconciliation of our non-GAAP forward outlook to the most directly comparable GAAP measures is not included because material items that affect these measures, such as the timing and amount of insurance service revenue and insurance costs in the case of net service revenues and the income tax impact and number of shares granted in market price needed to quantify stock based compensation expense, in the case of adjusted EBITDA and adjusted net income, are not ascertainable at this time without unreasonable effort and/or cannot be reasonably predicted.

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

Ambrose, Passport, SOI and Accord. We completed the migration of Ambrose in Q1. And during the third quarter, we completed the Accord migration. We are now operating just two platforms, with our SOI platform scheduled to be migrated in 2017. Our technology platform is a critical enabler of our advanced products.

It allows us to offer a multitude of industry-specific solutions in a very scalable manner, while delivering frequent enhancements that benefit all clients. We believe that by listening to our clients and offering tailored products that solve their critical needs, we can continue to grow in our targeted verticals.

With that, I'd like to turn the call over to Bill for our financial review..

Thanks, Burton. As we review the financials, I will focus on the non-GAAP numbers and go into the GAAP numbers where appropriate. During the third quarter, net service revenues increased 20.6% year-over-year to $161 million, exceeding the high-end of our guidance range by $6 million.

So, WSE count was $333,778, up 6% year-over-year and up 2.6% since the end of the second quarter. Professional service revenues for the third quarter increased 11.1% year-over-year to $110.5 million. The increase was mainly attributed to our increase in WSEs and an increase of 5% in average revenue per WSE.

Net insurance service revenues for the third quarter increased 48.4% year-over-year to $50.5 million. The increase in net insurance service revenues was the result of our repricing efforts and claims activity tracking to our trend forecast.

Total adjusted EBITDA for the third quarter increased 47.3% year-over-year to $45.4 million, compared to $30.8 million in the same quarter last year. Adjusted net income for the third quarter increased 56% year-over-year to $20.8 million or $0.29 per share, compared to $13.3 million or $0.19 per share in the same quarter last year.

Our GAAP effective tax rate was 38.4% for the third quarter and our Q3 pro-forma tax rate was 42.5%. Our lower tax rate during the quarter was primarily due discrete benefits for disqualifying dispositions of previously non-deductible stock-based (14:55) compensation and prior year state income tax adjustments.

During the third quarter, we generated $35 million in operating cash flow and spent $11.2 million on CapEx, representing 7% of net service revenues during Q3. We spent $27.3 million to repurchase approximately $1.3 million shares of stock during the third quarter.

We finished the third quarter with total cash of $160.6 million and working capital of $105.7 million. We ended the third quarter with total debt of $472.5 million, representing a debt-to-EBITDA ratio of 2.7 times trailing 12 months' EBITDA.

Turning to our outlook, we expect our fourth quarter net service revenues in the range $165 million to $170 million, which represents growth of 12% year-over-year. Adjusted EBITDA in the range of $50 million to $55 million, and adjusted net income in the range of $24 million to $27 million or $0.33 per share to $0.37 per share.

Based on our performance through the first three quarters of the year and our fourth quarter outlook, we are raising our net service revenue range to $638 million to $643 million, adjusted – raising our adjusted EBITDA range to $180 million to $185 million, reflecting a forecasted adjusted EBITDA margin of 28% to 29%, and tightening our adjusted net income range to $84 million to $87 million, or $1.16 per share to $1.20 per share.

And now, I'll turn the call back over to Burt..

Thank you, Bill. I am very pleased with our third quarter results. We delivered strong financial performance. We successfully completed the repricing of medical insurance for our entire installed base. We launched TriNet technology, our third vertical product, and today, announced the launch of TriNet Financial Services, our fourth vertical product.

We completed the consolidation of one of our two remaining legacy platforms and are scheduled to migrate the final existing legacy platform in 2017. I am optimistic about our market positioning and long-term growth, given the size of our market and our ability to effectively deliver on the needs of our clients.

I look forward to sharing our progress with you. This concludes our formal remarks, and now I'd like to turn the call over to the operator for questions..

We will now begin the question-and-answer session. The first question comes from Ato Garrett of Deutsche Bank. Please go ahead..

Thank you for taking my questions and congrats on the solid results today..

Thank you..

Looking at – I really appreciate the explanation that you gave around your new target for your total sales reps for the year. But then when we start look at the WSE growth for the third quarter relative to the other quarter this year, it seems like it slowed down a little bit.

Just – can you talk about whether that was consistent with your strategy on your sales team or if something else happened there, a dozen (19:07) more measured intentional target growth rate for your WSEs in the quarter..

Yeah. So great question, and thanks for that. As we've stated in the past, we're focused on the profitable revenue growth and not as much on WSE count. We had 19% year-over-year revenue growth to-date, coupled with the increased markets and to directly answer your WSE count question.

Frankly, the increased medical pricing created a headwind during the last 12 months. So, with the normalization of pricing and our emphasis on the vertical product, I expect a long-term targeted growth rate in the mid-teens on the revenue side.

So I'm pretty optimistic, this was an incredibly busy year Ato (20:00) this point and I think we're in a good position moving forward..

Okay, great, thanks. And then also the net insurance revenues, that does look well – look really good this quarter.

Can you just talk a little bit more – I know with effect that (20:15) you did complete the repricing, I think, that's clearly a benefit to that, can you talk a little bit more on the client experience, whether that you set us back on trend, but is there any way to kind of catch that in terms of your previous quarters' experiences?.

Sure, Ato. This is Bill. So, the net insurance is really a combination, as you said, of our pricing efforts, continuing to gain attraction, and the normalization of our claims experience. So when we look at claims, we did see and continue to see our large claim activity continuing to come down, and we've seen foreign estate (20:54) pretty much in line.

And we've seen our run rate medical claims picking up slightly within our trend. So effectively, claims are on trend, the pricing is, as we expect, with the pricing increase.

So a little extra color, we're looking at MLR that's sitting kind of in the 87% (21:13) range, which is close to where we're targeting at and we're continuing to make progress as we have indicated on refusing our admin costs, which allows us to continue to provide the right pricing and still provide the right returns..

Great, thanks. And last one from me, just any particular areas that you want to call out for strength, being that (21:39) result, just any end markets or client groups that were really contributing to that whether on the industry basis or geographic basis? Thanks..

Nothing in particular I'd call out, I think we see strength particularly around our new products. And I would continue to expect as we rollout those new vertical products or continuing to add value, and I'd see some additional strength coming from those contributions. And then I would add to that Ato, that tech was pretty strong this quarter.

And I'm pretty excited about getting the tech product the more (22:16) into the market. So if I – I would not be surprised that coming back to you and saying that was particularly strong as we move forward because additionally – the early interest is really strong. It was a good quarter without that product intact and I think it may continue..

Great. Thanks again and congrats on the quarter..

Thanks..

The next question comes from Jason Kupferberg of Jefferies. Please go ahead..

Thank you, guys. Thank you for taking the question. And so, where the medical claims, also the insurance cost – by the way, this is Amit Singh for Jason Kupferberg.

So will the insurance cost stay right now, at around 92% of total insurance revenue, as you see the medical, large medical claims normalizing? Is that a good level to think of for the insurance cost going forward?.

I think, as we continue to move forward we'll see an additional quarter now, so we're moving into our final quarter of the repricing. So we did roll those prices out, but we'll see some continued benefit coming into the first quarter based on our Q4 results.

So I think it's a good trend, but I do expect over time we'll probably see some slight pickup in the insurance side, based on trend continuing on claims and slight improvement in the pricing element..

Okay, great. And then, one of the earlier questions about WSE growth slightly – the growth rate, year-over-year, slightly coming down. So, as you look at your overall revenue growth, I know you're not providing 2017 guidance right now.

But could you be – the earlier you speak about, like the 15-ish percent organic revenue growth, mid long-term, with the WSE growth coming to sort of mid to high single-digit, could you still drive revenue growth of 15-ish percent organic beyond 2016?.

Yes. So I think the focus here is on revenue growth – we think our long-term model in the mid-teens really has just based our ability to execute on this large market opportunity we have.

And it's going to be a combination of the right product with the right value, and volume will clearly be an element of that in terms of WSE, but it's not going to be the end element. It's a one driver of many that I think we can result in just getting mid-teens' growth over the long-term..

All right. Thank you very much..

The next question comes from Tim McHugh of William Blair. Please go ahead..

Hi, it's Stephen Sheldon in for Tim, thanks for taking our questions. First, can you provide some more detail on the sales head count at the end of the third quarter? I mean, did you essentially shut off hiring and the decline was almost entirely due to voluntary and involuntary turnover.

Can you just provide some detail on the change there?.

Yeah. I think that's the greatest estimate. (25:30) As we put in the leaders of each vertical, they step back and reassess the market. I think it's important to understand that we do deep dives into each of these verticals on a national basis.

And I have tasked them with capturing a percentage of the TAM, the total addressable market, on a national basis. I frankly don't care if it comes out of California, New York or Des Moines, Iowa.

So, as they assess the national opportunity for each of these verticals, they have changed the locations, shut off the hiring, analyze their teams, but that the items that go into this include the total addressable market in each of the specific cities they're looking at.

It includes the business complexity and what problems they solve in each region. It includes our current benefits' offering and whether that resonates, and where that stands in that specific market. And frankly, what problems are solved in each of those verticals and how they can most easily create a frictionless service to build their business.

So they have come in with their own vision, and they are in the process of executing on that. But it is absolutely fair to say, for the most part, they shut off hiring, did their assessment, took their new roles, and they're hiring at this point..

If we look at the current sales rep base, would it be fair to say that the current base, it's kind of – basically that the people that either left, whether it's voluntary or involuntary, were the less productive sales reps so that you have a more productive base at this point?.

Absolutely..

And then just one another, just on, I guess, stepping back, I think one of your competitors talked about some hesitancy in hiring within their client base during the quarter.

Did you see anything similar within your client base? And then, I guess, how is that normally (27:42) within the third quarter, but how has that kind of trended if you look into October?.

We haven't seen any dramatic changes in the hiring for installed base, I think, it – during the year, clearly it has not been as robust as we've seen in 2015, but it's been fairly steady. It is slightly different in the verticals, each of the vertical higher, slightly different, based on their own needs.

But, in generally, (28:11) technology has continued to hire. And across the installed base, we are seeing growth that I would still see as single digits, but there's still growth that I think has been fairly consistent..

The next question comes from George Tong of Piper Jaffray. Please go ahead..

Hi, thanks, good afternoon.

Can you talk about how much effective pricing in medical increased by, relative to claims cost, on a year-to-date basis?.

It's a good question, George. I guess as I just look at the quarter and I just don't have the total. For the quarter, we saw a 2% spread, right? So we saw revenue growing 2 percentage points higher than cost. And as we had talked, I think, last year, as we went into pricing, we were targeting to get about 200-basis-point improvement.

So I'd say we're starting to realize that now that we're three quarters of the way in based on our pricing. So that's what we've seen. And then when we file the K, you'll able to see the full nine-month comparisons..

Right.

And in the two-point spread, can you break that down into claims costs versus actual effective of pricing?.

Yeah, trend is pretty much coming in as we had expected to be, so it really is the effect of the additional pricing..

At any way you (29:56) quantify that, I guess, is it sort of 700 bps pricing, 500 bps claims costs..

Well the spread, maybe I'm not completely understanding, but the spread really is when we've increased our pricing a couple hundred basis points higher than our medical trend. And so that's what we're realizing. And that's what it took to effectively get us to the point where we are today.

So, if trend is at 7% (30:21) and pricing is at 9%, (30:22) and that's where we're seeing the 200 basis points being realized..

Okay, yeah, that was the – the 7%, 9% (30:30) spread was what I was going for.

And then based on your 2016 experience, so far, how do you expect to adjust pricing in 2017?.

Well, our pricing is pretty much going to be aligned with our trend now for medical as we've already made the adjustment, and that's coming in effectively high single-digits, which is one of the things that's being received well by our installed base..

Got it.

And then lastly, can you discuss how you think about sales rep growth beyond 2016 and how that compares versus your long-term, mid-teens revenue in WSE growth targets?.

Hey, George I think we'll provide a little bit more on beyond 2016 when we get into our outlook for 2017 on the Q4 call.

But as I mentioned earlier, I think our target growth model of mid-teens will have a combination of product that has more value with price, with the ability to continue to add, as Burton said, selective sales teams into the verticals where they're most needed, based on the opportunity in that TAM and the availability of the new products.

So we'll be surgical about it, but we do think there's a big opportunity. So you will see us grow, but we're going to do it in a very thoughtful manner..

And George, just add to that, this is Burton. If you step back for a moment, I believe this is a huge market opportunity. And by delivery, in this vertical product and technology strategy, we can make this more of a strategic purchase by these SMB owners.

And I think it will drive market adoption, longer-term growth, and that's what differentiates us from the overall competitor. So, I am looking for increase productivity from my reps as the solution takes hold.

I am looking for increased margins on these products as the value delivered through things like H-1B visas, as the value delivered through things, including performance management, including the workflow associated with the hiring of new candidates to increase the price point and hopefully increase the margin.

So it's about a strategic purchase that is a longer term issue than somebody going to a company to get benefits or payroll..

Got it, very helpful. Thank you..

Yes, thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..