Good day, and welcome to the TriNet Second Quarter 2022 Earnings Conference Call. [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..

Thank you, operator. Good afternoon. This is Alex Bauer, Head of Investor Relations. Thank you for joining us, and welcome to TriNet's 2022 Second Quarter Conference Call. I'm 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 2022 third quarter and full year financial outlook and other statements that are not historical in nature, are predictive in nature or depend upon or refer to future events or conditions, such as our expectations, estimates, predictions, strategies, beliefs or other statements that might be considered forward-looking.

These forward-looking statements are based on management's current expectations and assumptions and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict and that may cause actual results to differ materially from statements being made today or in the future.

Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise.

We encourage you to review our most recent public filings with the SEC, including our 10-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?.

TriNet's bundled HR solution was attractive. By bundling payroll, HR and benefits, TriNet offers attractive value for easing the HR burden. Additionally, Singularity needed more HR assistance. This is a common customer need for growing SMBs. Eventually, more human interaction is desired as complexity increases.

TriNet's leading customer service and HR expertise proved appealing. We are excited to continue our relationship with Singularity and contribute to their next phase of growth. The examples of Qualified and Singularity demonstrate TriNet's long-term vision for positively impacting the SMB community at large.

As we move through the technology integration of our PEO and HCM products, TriNet's ability to configure its product and service offerings will become more appealing and further demonstrate our industry leadership.

Finally, during the second quarter, we broadened and strengthened our leadership team to help drive TriNet's long-term digital transformation and strategy. First, Jay Venkat joined as our new Chief Digital and Innovation Officer after a nearly 2-decade career at Boston Consulting Group, where he led the technology, media and telecom practice.

Next, Jeff Hayward joined as our new Chief Technology Officer. He is an award-winning global technology and engineering executive who brings to TriNet more than 25 years of experience. Most recently, Jeff was Senior Vice President of Product Engineering for Airline Solutions at Sabre. I am very excited to have Jeff and Jay join us.

I am proud to say that they step into circumstances where their teams are talented and deep. Pairing these 2 leaders with existing exceptional teams will continue to drive innovation and increase capabilities across the TriNet product and platform. With that, I will pass the call over to Kelly for her financial review.

Kelly?.

funding organic growth, capabilities and acquisitions, but ensuring we are managing our capital efficiently through opportunistic share repurchase. Now let's turn to our third quarter and revised full year outlook, which reflects a strong first half financial performance. We are lifting our full year adjusted EPS guidance by $0.88 at the midpoint.

This is due to our improved second half outlook and our first half outperformance, which was driven by continued above-average hiring by our customers, lower-than-forecast insurance cost ratio, appropriate core cost management, the rising interest rate environment on our cash balances and investment portfolio and the benefit of repurchasing shares.

We continue to expect TriNet Zenefits to contribute a gross revenue lift of between $40 million and $45 million this year. Forecasting our insurance cost ratio due to the impact of COVID-19 remains a challenge due to many factors that affect the measurement.

There are a number of uncertainties, including the timing and duration of the next COVID spike, the inflationary impact of provider and carrier costs and the extent and timing of increased elective procedures. Against this continually evolving backdrop, we are watching emerging trends and will evolve our thinking as information develops.

Given our first half performance and our current views on an improving second half, we are lowering our expected full year insurance cost ratio by 2 points. Now that we're in our third year of the COVID pandemic, we can share 1 observation, which we hope will provide better clarity in the variability of our insurance cost ratio.

In regions where we have a significant presence, when local COVID positivity rates climb to and exceed 15%, we have observed that health utilization in those regions declined more than offsetting our direct COVID costs. Thus, higher positivity rates generally have had the net effect of lowering our realized insurance cost ratio.

Turning to specific third quarter 2022 guidance, we expect total revenue growth to be in the range of 7% to 8% year-over-year and Professional Service revenue growth to be in the range of 18% to 20% year-over-year.

Our robust third quarter Professional Service revenue growth outlook includes many of the same factors that drove our second quarter performance. We are forecasting $12 million to $13 million of TriNet Zenefits HCM Cloud services revenue.

We expect PEO customer hiring to continue but at a growth rate closer to our historical average as the recovery wanes, and we also expect another quarter of year-over-year growth in our new PEO sales. In the third quarter, we expect health care utilization to be higher than our second quarter experience and within a typical pre-pandemic Q3 range.

As a result, we expect an insurance cost ratio of between 88.5% to 90%. Our third quarter estimate of GAAP net income per diluted share is in the range of $0.46 to $0.66 per share reflecting the cost impact from the Zenefits acquisition and integration activities that are underway.

Controlling for onetime impacts from that acquisition, we believe that our third quarter adjusted net income per diluted share will be in the range of $0.87 to $1.08 per share.

Regarding our full year 2022 guidance, given our performance through the first half, coupled with a refined view of the second half, we are making a series of changes to our full year guidance. We are now forecasting our year-over-year total revenue growth to be in the range of 8% to 9%, lifting the bottom end of our range by 1 point.

Given our better-than-forecast volume performance through the first half, we are narrowing our Professional Service revenue range to expected growth of between 17% and 18%, again, lifting the bottom end of the range by 1 point. We are anticipating an insurance cost ratio of 86% to 87%, a 2-point improvement from our previous full year guidance.

This improvement reflects both our first half performance in workers' comp and health and our updated expectation for health utilization. We recognize that this is very difficult to predict and will continue to monitor these trends very closely.

As we turn to earnings, we're raising our full year earnings guidance reflecting our first half outperformance and our improved outlook for both revenue growth and our insurance cost ratio. We now expect our full year GAAP net income per diluted share to be in the range of $4.10 to $4.68, an increase of $0.79 at the midpoint.

We are also raising our full year adjusted net income per diluted share guidance by $0.88 at the midpoint to $5.60 and to $6.20, reflecting a strong first half financial performance and an improved second half outlook.

In summary, TriNet has delivered, delivered on commitments to customers, employees and shareholders and will continue to innovate with new products and programs like our 2022 credit program to drive value to our customers. With that, I will turn the call to Burton for his closing remarks..

Thank you, Kelly. During the second quarter, TriNet's dynamic customer base successfully managed through the difficult macroeconomic environment. This drove our strong financial performance. The economic environment, coupled with increased regulatory complexity is strengthening a secular trend for TriNet.

People matter to TriNet, and we will continue to be there for our customers, helping them to navigate this complex regulatory and post-Dobbs' health care environment. We are listening to our customers and understanding their needs.

By leveraging our scale and domain expertise, we built and are launching TriNet Enrich, an industry-leading product that helps SMBs offer health and family care solutions otherwise impossible for SMBs to access.

The addition of TriNet Zenefits is showing early promise as customers can see value in our complementary products as they move through their business cycles. Finally, I am proud of the TriNet team. They are mission-driven and putting our customers first. Thank you, TriNet colleagues. I am pleased with our second quarter results.

But more importantly, I continue with strong optimism for the future of TriNet.

Operator?.

[Operator Instructions] Our first question comes from Andrew Nicholas of William Blair..

I just wanted to start with kind of a big picture question on the health of the SMB market. Obviously, hiring within your installed base remained quite good.

But interested to hear what your conversations are like with clients and maybe with a specific focus on some of your bigger verticals, there's been a lot of headlines around hiring slowdowns in some of the bigger technology companies.

Obviously, that's not something that impacts you directly, but I'm just curious if you're seeing similar trends in the smaller end of the market. So just any high-level thoughts on the broader SMB ecosystem, that would be great..

Yes. Andrew, great question. This is Burton. We are still seeing significant elevated hiring in our core verticals, particularly in technology and life sciences. They are working hard to get net new employees on board, and they're trying to navigate the complexity that exists today.

So we have not seen the drop and we started in Q1, a little surprised about the veracity of hiring. It continued into Q2. And we're just not seeing that slowdown in the sectors of the small businesses that we are working with today. So there's not much more I can say.

I certainly don't know what the future holds, but these companies are still trying to hire and they spent a lot of time and a lot of money hiring these people. And I believe they're focused on delivering results and retaining the people they have..

I know you mentioned it in part of your answer to my question that the future is hard to predict, but I'm going to ask this question anyway, which is just sort of around the potential impact from a recession. Maybe not -- I mean if you can speak to how you'd expect trying to navigate that would be really helpful.

But I'm also just curious for the industry as a whole kind of looking back at the last recession, it actually seems like the PEOs were pretty resilient in the aggregate. And I'm just wondering if you'd expect a similar reaction this time around and maybe what the drivers are to that sort of resilience, that would be great..

Yes. I would expect a similar result, and there's a couple of big drivers. The first and foremost one is that the TriNet model is a variable cost model, and we are hearing folks talk about taking fixed costs and moving them into variable costs. And what I mean by that is you're paying on a per employee per month basis.

And at any time, if you should decrease employees, you don't pay the fee for that specific month. So the model is -- works particularly well in an economy that's highly variable. And of course, as you hire back, you have the pattern attached to each individual employee. So that's the first point.

I also believe that, as I've talked about on the earlier calls, this remote work is highly complex and the amount of overhead -- fixed overhead that it takes to manage that remote work is put on to TriNet and that helps reduce the overhead costs.

So we didn't have the remote work when it happened in 2008, 2009 at the same level, but we did see a move towards this type of model. And the last point I'd say is in 2009 and '10, I saw larger companies looking at the PEO model because they were headed in 1 direction, rapid expansion and then realized the cost savings moving to a model like TriNet..

And if I could just ask one more. I think one of the reasons for your -- maybe not conservatism, but caution or a wide range of guidance, Kelly mentioned the possibility of -- or the impact of provider and carrier cost inflation.

Would you mind walking us through kind of the puts and takes to that dynamic, both in '22, but also as we think about how that could affect kind of medium or long-term growth targets as well?.

Andrew, I'll be happy to. This is Kelly. As we're looking forward, we are seeing the potential as carriers renegotiate rates with providers, as providers are facing the same inflationary pressures as everyone else for costs to go up overall, we're watching it both from a utilization and an individual cost perspective.

But the thing I want to remind you is we do reprice our clients every single year to risk based on what our expected future medical cost inflation is going to be and their individual experience as well. So I'm not going to give you any specifics in terms of what we're seeing.

It does vary market by market, and it also varies as insurance carriers are renegotiating provider agreements as well. But every quarter, trying us out there repricing a cohort of clients based on the emerging information that we're seeing and their individual experience. So we've baked that in and we'll continue to evolve it.

It is difficult to predict. As I said, just given not knowing when the next COVID spike is going to happen.

One other thing though that unrelated to medical costs, Andrew, that Burton mentioned, and I just want to reiterate, so you make sure that your model reflects or understand -- you understand our guidance is, we have assumed that hiring slows down significantly, just given all the talk of a recession.

But to Burton's point, we have not -- we haven't seen it yet in our numbers..

[Operator Instructions] Seeing no more questions. This concludes our question-and-answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect..