Good day, everyone and welcome to the TriNet Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] And please do note that today's event is being recorded. I would now like to turn the conference over to your host Alex Bauer of Investor Relations. Please go ahead with your presentation.

Thank you, Operator. Good afternoon everyone and welcome to TriNet's 2018 fourth 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 third 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 first 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. 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 and uncertainties in 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 fourth quarter and full year of 2018 respectively, both of 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.

Thank you, Alex. Our very strong 2018 financial results highlighted our commitment to provide our clients with extraordinary human resources solutions. By executing our core strategy of targeting the right clients with the right vertical products at the right price, we delivered our value proposition and strong financial performance to our shareholders. In the fourth quarter, we grew GAAP total revenues 8% year-over-year to $917 million and we grew our net service revenues by 10% year-over-year to $225 million. Professional service revenues grew 6% year-over-year to $124 million. Professional service revenues in the quarter continued to benefit from our shift in client mix towards our white collar verticals and customers within mainstream that value our comprehensive solution. We also grew insurance service revenues by 8% year-over-year to $793 million, while net insurance service revenues grew 16% year-over-year to $101 million for the quarter. Net insurance service revenues in the quarter benefited from improved workers compensation performance. As a reminder a year ago, GAAP net income for the fourth quarter received a $0.56 per share benefit due to the Tax Cuts and Jobs Act of 2017. As a result, our Q4 GAAP earnings per share contracted by 57% year-over-year to $0.40 per share, while our Q4 adjusted net income per share increased 28% to $0.59 per share. For 2018, we grew GAAP total revenues 7% year-over-year to $3.5 billion and we grew net service revenues 10% year-over-year $893 million. We increased GAAP earnings per share by 6% to $2.65 per share. And we grew adjusted net income per share by 52% $3.02 per share. 2018 was not only a year of strong financial results. It was a year where we strategically invested in our business to drive growth over the long-term. Specifically, we completed the migration of our install base to…

Thank you, Burton. As we review the financials. I will focus on the GAAP and non-GAAP numbers were appropriate. During the fourth quarter GAAP total revenues increased 8% year-over-year to $917 million. Net service revenue increased 10% year-over-year to $225 million. We finished the fourth quarter with approximately 326,000 work site employees, flat year-over-year and up 2% sequentially. Average WSE count for the fourth quarter was approximately 322,000, flat year-over-year. Professional service revenues for the fourth quarter increased 6% year-over-year to $124 million. Professional service revenues benefited from improved pricing and our shift in client mix towards our white collar verticals and those main street clients who value our comprehensive solution. Insurance service revenues for the fourth quarter increased 8% year-over-year to $793 million and Net Insurance Service Revenues increased 16% year-over-year to $101 million. Net Insurance Service Revenues in the quarter benefited from continued strength in workers' comp and reduced administrative costs. Our fourth quarter GAAP effective tax rate was 31%. Our tax rate in the quarter was impacted by higher state taxes and the reduced benefit from text treatment of employee equity compensation. For the quarter our non-GAAP tax rate was 26%. As Burton noted, a year ago GAAP net income for the fourth quarter received $0.56 per share benefit due the Tax Cuts and Jobs Act of 2017. GAAP net income decreased 57% year-over-year to $29 million or $40 per share compared to $66 million or $0.92 per share in the same quarter last year. Adjusted net income increased 27% year-over-year to $42 million or $0.59 per share compared to $33 million or $0.46 per share in the same quarter last year. Adjusted EBITDA for the fourth quarter increased 2% year-over-year to $70 million compared to $69 million during the prior year period or an adjusted EBITDA…

Thank you, Richard. I would like to thank the entire TriNet team for a successful 2018. We have developed a unique go-to-market strategy and a customer experience that adds value to the verticals we serve. The per employee per month growth we realized in 2018 demonstrated both the value we provide our clients and the quality of our earnings, trends we expect to continue in 2019. For 2019, we are forecasting our adjusted EBITDA margin to expand by approximately 3% and our adjusted net income per share to grow between 11% and 15%. We have delivered a financial model, which is levered to WSE growth and we look forward to updating you on our progress throughout 2019. With that I'd like to turn the call over to the operator. Operator?

Thank you. [Operator Instructions] And today's first questioner will be Kevin McVeigh with Credit Suisse. Please go ahead.

Great, thank you. Hey, nice job. Hey Burton, I think you said in your prepared remarks that in the professional services segment you're seeing a benefit from kind of white collar customers, value in the services. Can you give us a sense of where you are in that process and how much further we can expect that in terms of maybe quarters just thinking about that over the course 2019 into '20?

Yeah. Thanks, Kevin. And I appreciate the comment. Clearly there are two things at play here. One is a mix shift towards the white collar business. But I would also say that there's been growth in new sales in the mainstream business with clients that value the entire value proposition. So we're seeing PEPM growth from our main stream customers as well as the core verticals that you were talking about. I think over time, my expectation is all the verticals that we're servicing may grow over time, but that mix shift that you're seeing right now will stabilize during the back half of the year.

And Kevin just to add, we've been pretty consistent on saying over time, we believe you should get to the high single digit, low double digit growth rate as you go outside of this fiscal year.

Got it and then any sense - it sounds like what the attrition levels were like in '18 verses '17 and what we can expect for '19?

Can you repeat the questions but I - sorry Kevin?

Yeah, sure. Sorry about that. Just any sense of how attrition has been trending over the course of '18 and what kind of rate we can expect in '19?

Sure. So we had elevated attrition due to the migration. And we knew that that was going to happen. And we talked about that on our last call. We also talked about in the fall of 2018 that we would see - although the migration is over, there's going to be a lingering effect of having the SOI migration ending for fiscal year and then the April timeframe that will be the last of anyone who wanted to stay on because of health. So that should be the end of that migration. And we should then be able to transition back to a more normal run rate, if you will, going forward on attrition.

And Kevin I - note I'm going to add that it's a great question. We believe we hit the inflection point April which is the decision point for our legacy SOI installed base medical renewal which as Rick said is the final hurdle on the migration and don't see after that any other key point and then we see the growth from there.

Got it and is there any way to think about the sensitivity of - from a revenue perspective what 100 basis points of attrition can mean to revenue if you were to frame that out?

It really depends. Every WSE is not the same. So if you've been through - a lot of attrition that you've seen is that the high end SOI where on a WSE they're lower PEPM, they tended to not have health they also tended to not necessarily see the total value that we provide. So as you see us refocus our efforts, that's part of why you see the PEPM come up. And so it's a little bit hard to answer that question in any one way, but I think what you're seeing is as attrition is abating you're seeing our PEPM pick up because our new sales are coming in at a higher PEPM that that let's leaving.

Got it, thank you.

Thank you.

And the next questioner today will be David Grossman with Stifel Financial. Please go ahead.

Thanks. Good afternoon

Good afternoon, David.

It looks like the businesses is evolving pretty much kind of as you had articulated and with that in mind, can you help us deconstruct a little bit some of the stabilization that you're seeing in the WSE count, helping us kind of understand what is kind of happening in the blue/gray business versus the white collar business? And since there's so much that it's changed in this business over the last 18 to 24 months, could you maybe give us an update on just how the WSE mix has changed from the last time you talked about it? I think it used to be a third of the business versus blue/gray, I'm just wondering how that's morphed over the last several quarters. ,

Right, so as Burton has said, we are seeing a - starting to see the uptick in the New Year, you'll start to see mainstream come back on as the larger percent than it was in 2018. That being said, it'll take a while for that to really see any meaningful exchange. As we ended 2018 we definitely have a higher percentage of white collars than in previous years. And also and more importantly, inside mainstream we have people that kind of take health and are people that see the entire value, so it's not just the price play and so therefore we're seeing a higher PEPM in both mainstream and the overall book of business.

So as we go into - as this year kind of progresses then and you start layering in more growth in the blue/grey business, should we - I assume that there'll be some dilution though to PEPM as that business ramps up, is that the right way to look at even though there have a tendency to take more than the old SOI book had taken in the past?

Dave that will probably happen more, going into 2020.

Got it, okay. And then in the context of the margins, including the insurance margins, can you walk us through just the puts and takes because I know workers comp has been a tail wind this year and I'm just curious just how much of a tail wind that's been. And I know Burton you talked about Starbucks you finally got the last kind of material weakness remedied. So you've got several moving pieces that could affect margins as well as OpEx spending, so perhaps this would be a good time to just refresh somewhat the major puts and takes are as we go through 2019.

Sure, Dave. So if you think about the workers comp book of business, as we re-price that to the risk it has allowed us on an ongoing basis to have a much stronger book of business for workers comp. If you think about it from maybe attrition of people that have been a trading, it was people who risk and us was what where we wanted. So some of them self-selected out and that was the decision. And when you move forward on the rest of the book of business and the way that we're looking at it, two things to really think about, we really expanded quite a bit in number of clients that we have. So that also helps see for you to demonstrate that you're seeing that mix happen in just of volume of new customers. When you go through the - into the actual margin, so now you're moving away from the insurance margin - into the overall margin of the company, as we had said on our last call, the Q4 was going to be elevated because of the things that we're investing. So we're investing in a lot of marketing and Burton can talk about the marketing efforts that we have, that we did last year that we have one way this year. And a lot of reengineering that we're doing in the company to streamline the business and have a better customer experience. That will continue that elevate through the first half of the year. And you really will start to see the benefits of that into the back half of the year and then into 2020. The last piece of that though, is as you're working your way down through the different elements, we overall have a much better command of the company. And I think the overall business model is, as you can see, is a margin that we're comfortable with and we're comfortable that going forward and as we start to reach the growth rate acceleration that just helps with the bottom line margin expansion.

Right and did you say 300 basis points of year-over-year EBITDA margin expansion in 2019? Did I get that right?

Yeah.

Okay. And the last question, it really is for you Burton and just I think, Richard has touched on this, but can you explain to us we started with one sales strategy and model and we evolved that kind of after the first year or two. And just wondering now with all these transitions largely behind you, can you just update us on what you're thinking about in terms of go-to-market sales force ads and productivity. I know you don't want to give specific numbers on kind of guiding the number of people, but anything you can do to help us understand what those investments that you're making are and when do you expect them to start manifesting themselves in bookings and revenue.

Yeah, and you know I love talking about this subject. So what I can tell you David is that we invested in sales headcount which grew double digits in 2018. Second, as we've talked about in the past I'm very focused on keeping the new salespeople and developing them into highly productive sellers. One indication is that we grew our client base in 2018, 14% year-over-year in clients to 16,900 approximately, clients on the book of business. So we're selling broadly within the verticals that we're starting to penetrate. I think we're in the early stages of seeing - we have incrementally increased productivity between '17 and '18, but I believe there's much more to do there as we start to understand the verticals and focus on those verticals in each of the geographies. So I am optimistic about the growth of those new - of the sales force and those new sellers becoming productive and ultimately the go-to-market strategy is very unique by focusing on these verticals and I believe it will pay dividends now that we have better insight into our business and our service models.

And so how did retention in the sales force trend in 2018 than on a year-over-year basis?

So that's a great question. The new sellers are staying which was the concern that I echoed a year ago, but I want to see them pass the one year mark and get highly productive in their second year. But early indications are good with the new sellers that we're hiring.

Alright, got it. Thanks very much.

Thank you

[Operator Instructions] Our next questioner today will be Tim McHugh with William Blair. Please go ahead

Hi, good afternoon. It's actually Trevor Romeo on for Tim. Thanks for taking my call. Just wanted to ask, so we've seen strong results lately from just about all the PEO companies we follow. Just wondering your thoughts on the broad PEO market growth and the competitive landscape? Are you seeing any signs of increased competition? Or do you think there's still a lot of room for strong PEO demand to kind of lift all boats in the market?

So thanks for the question. My belief is there's strong demand for PEO. It's been more widely accepted. The PEO model is or the PEO companies are investing in marketing like we are. The construct is a phenomenal construct to service small and medium businesses. And my belief is you're seeing an expansion of the market opportunity not an incremental competitive threat, but a good opportunity for all the PEOs that can deliver the value to those small and medium businesses.

So Trevor, remember, we still only see - even last quarter about 25% of the time another PEO will wear out competing. So it's a very much still a wide open market. So to answer your question, Burton said, with a very tight economy, it's a very powerful tool for small and medium businesses to be able to provide the kind of HR and insurance and it allows them to compete against others. And I think they're seeing that and we're getting the benefit from that.

Okay, great. And maybe just to follow up on that. I think one of the things you've talked about in the past is a lot of people just kind of don't know that the PEO business exists. I know you're investing heavily in marketing and you just said that other PEOs are investing in marketing. Have you seen any indications lately that sort of awareness of the industry is increasing?

I actually believe that. I was on the phone earlier today with a prospect with 200 employees in three states and he stated - and they're growing quickly. He stated that he had never in the past considered the PEO construct doing it in house and now he's convinced that he's going to go with one of the two PEOs that are being competed for right now.

Okay, great. And maybe just one more, so we've seen some consolidation in the PEO sector over the last couple of years let's say and your balance sheet's pretty strong at the moment. Could you maybe just talk about how aggressively you might look for acquisitions? And would you think about accelerating buybacks if you don't end up doing any deals in the near future?

Well, as you know, we just received that we're allowed to expand to 300 million from a share buyback. And that's definitely to offset dilution that we're doing opportunistically. We also believe that where we are versus our peers is undervalued, so we think this is a good time for us to be in the market for share buyback. That being said, our number one thing is to reinvest in the company and then it would be M&A activity. M&A activity is kind of frothy right now. So whether or not we find a particular target that we think fits our needs and wants then we will address that. We constantly have our dealer rater out there. So it's not as if we're not in the market. We haven't found something that fits into our portfolio.

Great, thank you very much for the color.

And this will conclude our question-and-answer session as well as today's conference call. Just want to thank you all for attending today's presentation and you may now disconnect your lines.