Good day and welcome to the TriNet Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that 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 and welcome to TriNet’s 2021 third quarter conference call. Joining me today are Burton M. Goldfield, our President and CEO; and Kelly Tuminelli, our Chief Financial Officer. Our prepared remarks were pre-recorded. Burton will begin with an overview of our second quarter operating performance. Kelly will then review our financial results. We will then open up the call for the Q&A session. Before we begin, please note that today’s discussion will include our 2021 fourth quarter and full-year guidance, 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, our 10-Q filing or our 10-K filing for our third quarter and full year of 2020 reconciliations, respectively, both of which are available on our website or through the SEC website. With that, I will turn the call over to Burton for his opening remarks. Burton?

Thank you, Alex. TriNet’s third quarter operating and financial performance was once again exceptionally strong. This continues a multi-quarter trend which sets us up for a solid performance in the fourth quarter. On today's call, I would like to discuss three important topics. First, I am very pleased with our Q3 financial performance, to which I will provide highlights. Next, I will discuss positive factors impacting the PEO construct in general, as well as TriNet specifically. The PEO construct is particularly well positioned to address systemic changes to the nature of work due to the pandemic. Additionally, ongoing legal and regulatory challenges impacting SMBs are efficiently supported using this model. And finally, I will highlight our inaugural environmental, social and governance report released this afternoon. This report provides visibility into the central role ESG plays in TriNet’s corporate culture and how we consider the needs of all of our stakeholders. During the third quarter, TriNet delivered a premier HR experience and our customers continue to grow dramatically as they have throughout the COVID-19 pandemic. While the Bureau of Labor Statistics recorded slowing job growth relative to expectations in the third quarter, TriNet so our customers that new hires at a rate substantially higher than our forecast. Our operating and financial performance was highlighted by strong professional service revenues growth and strong WSE volume growth. During the third quarter, we grew total revenues 18% year-over-year to $1.1 billion. Additionally, when we compare our 2021 third quarter total revenues growth to that of the 2019 third quarter total revenues growth, total revenues grew 18%. This comparison highlights the strong underlying performance of TriNet’s business throughout the COVID-19 pandemic. Professional service revenues delivered year-over-year growth of 24%. The growth in professional service revenues was attributable to the following items. WSE volume growth, especially…

Thank you, Burton. I'll review our third quarter financial results before discussing our fourth quarter and full-year 2021 guidance. Our third quarter financial performance was strong. WSE volume growth exceeded projections and drove top line growth, hope performance remained benign and our operating expenses came in line with expectations which taken together drove bottom line outperformance. During the third quarter, total revenues increased 18% year-over-year outperforming the top end of our guidance range by 1 point. The outperformance in total revenues was driven by 10% year-over-year growth in ending WSEs six and 9% year-over-year growth in average WSEs and continued high health participation by RWSEs. Once again, year-over-year growth and total revenues included a 5% benefit from last year's accrual for the recovery credit program which reduced revenues in the third quarter of 2020.This prior year accrual impacted both professional service revenues and insurance service revenues. Professional service revenues in the quarter grew 24% year-over-year, exceeding year over year exceeding the top end of our guidance range by four points. This growth was driven by a few factors. First, our year-over-year average volume growth of 9% reflected strong hiring. More than half of it came from our technology vertical. While the volume of hiring has moderated from last quarter, it was much more robust than we had predicted when we updated our third quarter guidance. We also, again, benefited from retaining our strong customers, but we are seeing this trending more in line with historical levels and anticipate that continuing as we emerge from the pandemic. Second, professional service revenues benefited from an 11% growth in rate. Similar to last quarter, rate growth saw a meaningful contribution from efforts to achieve a minimum price with our smallest customers to align with the cost to serve those clients. We may benefit…

Thank you, Kelly. As a recap, Q3 was a very positive quarter for our company. We achieved strong growth in WSE volume, professional service revenues, total revenue, PEPM rate and margin expansion. This continues a multi quarter trend, which sets us up for a solid performance in the fourth quarter. As we wrap up this call, it is important for me to reiterate how we continue to execute our strategy. We target the right customers in our core verticals. We deliver a premier HR experience. We offer our customers outstanding benefits, and we operate with integrity as described in our ESG report. I have always said, complexity is our friend. As a result of the pandemic, SMBs are facing more, not less complexity. TriNet is well positioned to capture more market share in the coming months and years to help SMBs address these complexities. Finally, I would like to thank the entire TriNet team for delivering these results. With that, I will now turn it over to the operator. Operator?

[Operator instructions] Our first question will come from Tien Huang with JPMorgan. Please go ahead.

Thank you. Thank you. Burton and Kelly. I wanted to ask first on the WC count or on the volume side. Obviously, great results again there. Just trying to think about that result in all of your comments Burton just around the PEO with the secular growth. So with the change in existing, I know that labor market is hot, especially in tech. And I know you had the recovery credit program going on as well. So I'm just trying to understand how much of this is just hot market versus something different you're doing from a tech perspective or a servicing perspective and also just to tack it on thinking about PEO in general, is there a risk that as some of these tech firms get larger, that they may graduate out of the PEO and same with the higher PEPM rate in the downmarket? Could that also cause an uptick in churn? Just trying to think about how to go beyond the fourth quarter and into the midterm in terms of the WC count. Thanks. Sorry. I had a lot there in one question.

No thank you Tien Huang and it is a great question. It was an incredible quarter from my standpoint. The customers are thriving in this environment and your question's a good one. What I am seeing is that the ability to offer the high-end benefits, the 401k, the flex spending accounts, the paperless onboarding, these customers, particularly tech customers are fighting for the scarce talent that's out there, the programmers, the strategy folks, and we're helping to get them on board. So I was, as I said, in my remarks, I am thrilled with the growth of the installed customer base and I'm also happy with the net new sales. So all in all, in the verticals we are playing in there is strong demand, I believe for PEO in general and TriNet specifically.

Yeah, no, it's been smart to go to those verticals for sure. I'll ask a quick follow-up then maybe to Kelly on the insurance cost ratio. Just if you don't mind on insurance cost ratio 92% to 94% got into the fourth quarter, that's up one to three points over the prior year, but up quite a bit sequentially, I don't think it's ever been up that much sequentially, but I know that Delta and everything else is unusual. So talk to us about the visibility there. Why, would that be up so much sequentially?

Happy, to answer that question. Well, one thing I want to just remind you is sort of the pattern we see seasonally. We typically see seasonal weakness in the fourth quarter because people have worked through their plan deductibles and our guidance just reflects that seasonality. We also have our pooling limits on a per employee or per member basis that actually reset at the beginning of, or at the end of October. And so really the -- or I'm sorry, at the beginning of October. So fourth quarter, we would have a reset of all those pooling limits. So anything over $500,000, we will be on the hook until they hit those pulling limits for high class claimants. I do believe that we'll see a normalization of healthcare utilization. We were definitely under this quarter and we expect to see that regular normalization, but we don't necessarily contemplate a spike in it. It was that helpful.

Yeah. Got you. Thank you. Good results there guys.

Our next question will come from Kevin McVeigh with Credit Suisse. Please go ahead.

Great, thanks. And let me add my congratulations as well. Hey, can you remind us in terms of vertical mix today, how much is technology versus maybe some of the other verticals and then where the average client size sits and as you have more of a distributed workforce, does that change classifications of workers or the average pep home per WSE, maybe just components as to what the new world looks like post COVID, as opposed to prior as we think about the model. And then if you could maybe on retention, I know there's a lot there, but just how you're thinking about retention longer term as well.

Yeah. Kevin, let me take that. This is Kelly, in terms of tech, it is our largest vertical. So when we look at all of our verticals, it is our largest, we don't give percentages, but it's our largest single vertical. And when I think about the change in existing or hiring in the quarter, then that hiring was actually up about 7%. So just quarter over quarter, we saw a 7% increase in the tech vertical, just given the strength there. Average size of client, I think we're right around 21. So, it's still relatively small. You asked about a distributed workforce and does that change our pricing? We currently do not distinguish pricing based on the level of distribution of our workforce at this point in time. And then on retention, I think that was your last question. And then I'll make sure I was responsive, but on retention, we are seeing people now focusing on the back end of the house. They were during the period of deep COVID really not focusing on back office and trying to make sure they could keep their businesses surviving, but we are seeing a little more retention, but just really back to historical levels. I wouldn't say it's elevated.

[Operator instructions] Our next question will come from Andrew Nicholas with William Blair. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Just the first one was just on kind of the success of the sales season to date. I know you're kind of getting into the heart of it if you're aren't already there. And just was wondering, what's driving some of that momentum, obviously you've touched on a bunch of different valuable portions of the PEO construct, but is your sense now that when rates versus other PEOs are going up, is it more about more awareness for the PEO model or just kind of any more color you can give on what's driving sales momentum specific to maybe industry adoption?

Absolutely Andrew. So this is Burton. First, I believe the fall selling season is going well. So I'm excited about that. I believe we have the right approach to targeting our verticals. As we've talked about in the past, we do not run into other PEOs that often. Over 50% of the quotes that we generate, and those are quotes are not competitive directly against another PEO. So I can't speak for the other PEOs, but as I said in my opening remarks, I believe this is the perfect environment for PEOs because of that remote complexity. We're investing in new sales as we build this sustainable growth. From a TriNet standpoint, I continue to be excited about the work that Jonathan LeCompte and his team are doing, and I believe we're moving towards a sustainable vision of scaled new sales. So overall I believe we're headed in the right direction. To specifically answer another question you had. Yes, I am a big believer in brand awareness and brand sentiment and PeopleForce, which we invested heavily in helped to promote that from a TriNet standpoint. But I also believe it helps raise the visibility of the PEO model for the four-plus million businesses that have an opportunity to avail themselves to that model, whether it be with TriNet or another one of the PEOs out there.

Great, thank you. And then maybe as my follow-up a different way to ask an earlier question was just around kind of the top end of what size category would be, amenable to a PEO structure. I'm just wondering, given all the complexity around regulatory restrictions and working remote, making it all the more complicated, is there an argument to made that companies could potentially stay within the PEO construct longer given how much more complex it is, or do you feel like that the top and of this range is still pretty steady relative to pre-COVID?

It's a great question. I believe that it raises the top end that would stay with a PEO. It really depends on the complexity. As we've talked about in the past, it's not necessarily the absolute number of workers. It's the number of states that they're in. It's the number of divisions, whether they have different operating models in different states. So all in all, I believe that they will stay longer based on this complexity. The average size of our clients is rising. I don't have the direct analysis. Part of it is that we're focused on the bigger clients now, but I can tell you that I am actively working on multi hundred person deals to come into TriNet today and I'm working on more of those than I have in the past.

Great. That's really helpful and if it's all right if I can squeeze one more for Kelly, just in terms of the insurance margin guidance that is not incorporating any clawback of kind of recovery credit for $25 million, correct.

That's a great question. You are absolutely right. Given our expectation of insurance costs, we think we're well above the hurdle that would clawback out of it.

[Operator instructions] Our next question will come from David Grossman from Stifel. Please go ahead.

Thank you. Good afternoon. I think this maybe came up earlier, but I just wanted to make sure I understood. When you look at the growth of the portfolio, do you have any visibility into the same store growth versus new sales? Kind of give us just a sense of how that's trending this year.

It's a good question. We don't provide that level of visibility, but I would say most of the growth during the quarter really was hiring versus net new.

Okay. And, and is that, do you think just unique to kind of where we are in terms of pandemic, the recovery and all that stuff, or do you see any signs in terms of your sales activity date that we may see that trend kind of change a little bit as you go into next year, just based on the pipeline and what your sold today?

Yeah, it's a good question, David, obviously with a large installed base and the growing change in existing that has an outsized impact on the all-time high WSC count. I don't want to take anything away from new sales because I now have two quarters in a row where they're up year over year. So I think it's just a phenomenal customer base. And the other thing which I said in the opening remarks, which I think is kind of cool is Main Street has recovered completely from the pandemic lows. So the WSC count in those customers is back to where it was pre-pandemic. So this is a much broader recovery at this point through TriNet lens across all of our verticals. And now I can tell you that every vertical is either flat or up from the beginning starting point of 2019 before the pandemic.

Good. And just maybe just a corollary to that last comment because I had another question just about professional services. So, it looks like professional services, kind of flattish sequentially and similar up a little bit from the first quarter. So is that kind of that mix shift back to Main Street? Is that why that number is staying relatively flat and revenue per or professional services revenue for WSC is coming down off those kind of highs that we saw in the first quarter? Is that the phenomenon going on there?

Well, David, I guess the way I think about it is, last quarter we had some pretty extraordinary bonus payments and a few other one-time things that I think I talked about on the call that drove the PSR are on a per WSC or per average WSC base a little bit up and said, I wouldn't really expect that to continue. We still are seeing a little bit of benefit from rate as we put some minimums in, on our individual clients, smaller clients, just to align with the cost to serve those smaller clients. But I think it's more the fact that I'd highlighted some unusual last quarter that really aren't recurring quite at the same level this quarter.

Great. And then just one other question, Burton, maybe you could address this, that, yeah. You talk a lot about trying to enhance the offering that will keep people longer and that makes perfect economic sense for this model. Just wondering, do you have any different thinking, on the kind of more entry level of the market where you can offer a simpler product without taking insurance risks and you can kind of take the element of scaling out of the equation or that risk, that you could incur when you take on a smaller customers. Just, curious if you have any thoughts at the lower end of the market?

Absolutely David. So we are strategizing on both of those, meaning the smaller end of the market, as well as they grow larger, to keep them longer because obviously at that point the opportunity to help them is very important to us. So what I would say is it's all around the insurance construct and the PEO construct and from an insurance standpoint, at some point being able to support our clients other than trying at 11 on non-single employer plans makes sense. I'm not announcing anything here today, but that makes sense. And on the smaller end, being able to support those clients in a model that allows them to on ramp to the TriNet PEO model also makes sense. So we're exploring all of those things, but I will not take my eyes off of the core customer base that is supporting us in this growth that is trying it. So bunch of things to come. We have some great ideas for the first half of next year and stay tuned, but I am really thrilled with the customer base we have and the opportunity we have. We are not seeing a lot of changes in the environment from a competitive standpoint. And we're going to continue to execute exactly as we talked about for quite a while now.

This concludes our question-and-answer session, which also concludes today's conference. Thank you for attending today's presentation. You may now disconnect.