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?

Thank you, Alex. I am pleased to report that TriNet's customers performed exceedingly well during the second quarter, which drove our ongoing strong financial performance. The current macroeconomic environment perhaps counterintuitively is creating opportunities for TriNet. The value of our solutions, which address regulatory complexity and geographically distributed workforces is delivered independent of the current macroeconomic trends. This is reflected in our performance for the second quarter. During the second quarter, total revenues grew 9% year-over-year in line with the top end of our guidance. This growth in total revenues was driven by the installed base. Our vertical go-to-market strategy is focused on dynamic SMBs. As a result of this customer selection, our installed base continue to grow and thrive in partnership with TriNet during Q2. Additionally, in the second quarter, we grew new sales double digits year-over-year, whether measured by ACV or WSEs. We are excited to build on this success throughout the second half. The TriNet model enables our clients to effectively scale up and down as they navigate rapid changes in the global economy. This model becomes increasingly attractive for SMBs as they look for ways to convert fixed costs into variable costs. With health care utilization remaining below our estimates, we created and launched our 2022 credit program. This enables us to return savings to customers who help generate them. The credit program, which is fully accounted for in our Q2 results, had the effect of lowering total revenues growth in the quarter by approximately 2 points. Kelly will go into more detail around this industry-leading program. In the quarter, we maintained our expense discipline even as we invested in TriNet Zenefits. As a result, we generated strong cash flow and delivered robust earnings. In the second quarter, our GAAP EPS declined 1% year-over-year to $1.35.…

Thank you, Burton. TriNet's second quarter operating and financial performance continued to demonstrate the power of our sustainable business model and result in cash generation. After a solid first half, we are positioned for strong performance throughout the second half of 2022. In our second quarter, our financial performance once again outperformed our guidance. We continue to highlight TriNet's value proposition through our combined HCM and PEO product offerings as well as our efforts to help customers navigate the operating environment post the Supreme Court's decision around the Dobbs' case. We launched our 2022 credit program, the third in our Recovery Credit program series, potentially returning as much as $25 million to a core group of customers who helped generate these savings. And finally, because of our operating model, our solid revenue growth, coupled with our disciplined cost management generated strong corporate operating cash flow during the quarter. Our second quarter achievements clearly demonstrated our commitment to serving our customers, employees, shareholders and the communities in which we operate. During the second quarter, total revenues increased 9% year-over-year to $1.2 billion, in line with the top end of our guidance. If we were to add back the impact from the 2022 credit program, total revenues growth would have been 11%, 2 points above the top end of guidance. The outperformance in total revenues for the second quarter was driven by 2 factors: volume, driven by WSEs outperforming our forecast as we once again benefited from strong hiring within our installed base and modest rate growth, benefiting both professional service and insurance revenues. We finished the second quarter with almost 358,000 worksite employees, up 5% year-over-year with an average WSE count for the quarter of over 351,000, up 6%. As Burton noted in his prepared remarks, volume benefited from continued hiring…

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.