TriNet Group, Inc. (TNET) Q3 2022 Earnings Report, Transcript and Summary

Good day and welcome to the TriNet Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [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.

Good afternoon. My name is Alex Bauer. I am TriNet's Head of Investor Relations. Thank you for joining us, and welcome to TriNet's 2022 third quarter conference call. I am 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 fourth 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 very pleased with our third quarter financial results. TriNet's clients once again persevered and managed through this difficult economic environment, which drove our third quarter performance. TriNet partners with the best SMBs in America to address business complexities such as cost containment and evolving regulatory environment and changing workforce dynamics. This relationship provides customers with a world-class HRAs platform, access to high-quality benefits and HR products and services generally unavailable to SMBs. As a result, we enabled this unique set of businesses to navigate the current business environment and succeed as they succeed TriNet, in turn, grows. During the third quarter, total revenues grew 8% year-over-year, in line with the top end of our guidance. The TriNet product is particularly relevant in an unpredictable economic environment as SMBs look for ways to convert fixed costs into variable cost models. These same SMBs are asking their employees to do more with less. They recognize that their employees value the TriNet products more than ever with respect to our access to benefits, and support for employees and their families. TriNet's vertical focus is unique in our industry and is a key element of our business and financial model. We are very disciplined in our customer selection by focusing on our core verticals throughout the United States. In economic environments like we are currently experiencing, we select the strongest of prospects with respect to their industries and their financial strength. As a result of this process, we believe we have the strongest cohort of customers in the SMB space. This allows us to deliver continued robust, predictable and repeatable financial performance. We, therefore, remain optimistic about TriNet's future and continue to invest in our long-term growth potential. We are integrating TriNet Zenefits while improving the overall experience of both our PEO and HRIS solutions. In the third quarter, our GAAP EPS increased 5% year-over-year to $1.22. This result outperformed the top end of our guidance. Our adjusted net income per share grew 25% to $1.64, also outperforming our guidance. Our third quarter earnings performance benefited from lower-than-forecasted insurance cost growth. I am pleased to announce that consistent with the value we place on our partnership with our customers, we once again anticipate launching an additional credit program in the fourth quarter. Kelly will share more information regarding this industry-leading program, which anticipates a return of capital to our customers. In response to the rapidly changing business environment, our customers are leveraging our unique trusted adviser relationship by requesting more products and services. I am pleased with the significant progress that TriNet team has made in reducing the cycle time with respect to delivering net new products to our customers. Last February, we acquired TriNet Zenefits, and I spoke about the impact of adding TriNet Zenefits to our suite of products, enabling us to offer a strong SaaS-based HRIS solution, along with our PEO solution. This HRIS solution provides an upgrade path for our large PEO clients as well as a product that appeals to a broader SMB TAM. TriNet delivers a differentiated offering with the HRIS product at one end of the barbell and the PEO at the other. TriNet Zenefits is an industry-leading low touch, easy-to-use software offering purpose-built for SMBs. TriNet's PEO is a knowledge-intense comprehensive offering, which leverages the co-employment legal construct. Between our two offerings and in response to customer demand, TriNet will continue to fill the gap with high-value products available to both our PEO and HRIS clients simultaneously. During the third quarter, we added two high-value product lines to address customer needs. We launched TriNet enrich and we acquired Clarus R&D. Clarus R&D is an industry-leading expertise-driven fintech solution for simplifying the R&D tax credit process for SMBs. This proprietary cloud-based software platform, coupled with deep subject matter expertise delivers its solution in an efficient and scalable manner, providing the leading technology and service offering at scale for SMBs and both to our PEO and HRIS clients is a core tenet of the TriNet value proposition. TriNet will be introducing Clarus R&D and this tax credit opportunity to all eligible customers. Adoption of this product could have significant positive financial impact on these customers. Clarus R&D and TriNet share a culture of creating value and free cash flow for our customers. Given the uncertain economic environment, we believe that TriNet and Clarus Solutions will prove very attractive for customers and prospects alike. Since its founding in 2016, Clarus has secured approximately $250 million in tax credits for its customers. Combining these tax credits with our existing TriNet credit programs, nearly $500 million in savings will be returned to our customers by early next year. This does not include the approximate $1.9 billion in PPP loan forgiveness we helped TriNet customers secure. It should be apparent that TriNet is more than just HR. TriNet fills a critical role in the growth and success of our customers, which further deepens our partnership. A critical role that TriNet can play in their success is to leverage our expertise, scale and balance sheet to optimize cash flow for SMEs, which is a critical part of their growth and survival. To illustrate this, our customer notch said, TriNet has proven to be a valuable partner for Notch Inc. TriNet has helped ease our HR burden as our workforce has become more distributed across multiple states and countries. Beyond this, TriNet has also proven itself in the financial credit opportunities they provided. We participate in the business recovery credit program, which helped us more easily navigate the uncertainty during the early stages of COVID. TriNet puts our customers at the center of everything we do, which makes it so pleasing to hear notch describe the many ways TriNet has had a positive impact. We will continue to rely on our 30-plus years of working closely with SMBs. Our customers will inform our product road map as we add incremental value that they require. We will stay agile in this rapidly changing world. Through extensive collaboration with our customers, we were able to create TriNet Enrich, a new product. When the Supreme Court issued their Dobbs' ruling, we recognized an opportunity to create an innovative product to help business owners solve the unexpected problem of access to metal services for their employees. TriNet Enrich represents the best of TriNet's thought leadership, collaboration and innovation. Our enriched product line enables SMBs the opportunity to offer unique benefits not typically available to SMBs. TriNet administers the benefits for customers and manages all reimbursements and compliance. TriNet Enrich was initially launched with two products, Enrich Access, which allows TriNet customers to offer tax-optimized travel reimbursements for medical care; and Enrich Adopt, which offers reimbursements for expenses incurred during the adoption process. In September, we added a third product, Enrich Learn. Enrich Learn allows for tax-optimized reimbursements for expenses by SMB employees to advance their education. Additionally, in response to Hurricane Ian, we launched our fourth product as part of the Enrich product line, Enrich Disaster Relief. Again, Disaster Relief allows for tax-optimized reimbursements for expenses incurred by SMB employees impacted by a federally declared disaster. For example, SMB employers can now offer reimbursement for temporary living or home repair expenses as a result of a qualified event. This greatly reduces the stress and financial pressures for employees. Each of these Enrich products leverages the scale of TriNet to bring value-added offerings to SMBs, which are otherwise unavailable or difficult for an SMB to administer. While it is very early in the launch of TriNet Enrich, we are encouraged by the reception from customers. We believe TriNet Enrich will be one more avenue for creating customer loyalty and improving customer retention. In early September, TriNet held our industry-leading conference, PeopleForce, where SMB thought leadership was on full display. PeopleForce is an incredible branding event where we present relevant topical content to our customers and prospects. This creates a forum for our TriNet team to engage and positively impact SMBs. Our brand is strong and relevant. Just this morning, TriNet was named an honoree in Fast Company's 2022 Brands That Matter awards. PeopleForce also demonstrates the increasing role marketing plays in driving new business to TriNet. A significant portion of our new business leads in 2022 were generated and qualified by marketing. These were subsequently passed through our sales team, improving our overall sales effectiveness. We expect to further grow marketing's contribution to new business particularly as we finish the work to unify the top of our sales funnel across all of our HCM products. I look forward to discussing this further in the future. TriNet remains committed to identifying the right customers for our solutions. We will continue to innovate, creating value for our customers and in doing so, creating value for our shareholders. With that, I will pass the call to Kelly for a review of our financial performance and outlook. Kelly?

Thank you, Burton. TriNet's third quarter operating and financial performance once again demonstrated the durability and repeatability of our business model. Through three quarters of the year, we are positioned to finish 2022 strong. During the third quarter, our financial performance once again outperformed our guidance. We took significant actions to expand TriNet's value proposition across our HRIS and PEO product offerings by both acquiring Clarus R&D, and launching and expanding our TriNet Enrich product line. And once again, we generated strong corporate operating cash flow during the quarter. During the third quarter, total revenues increased 8% year-over-year to $1.2 billion, in line with the top end of guidance. Our third quarter growth in total revenues was driven by both insurance and professional service revenues. We finished the third quarter with almost 352,000 worksite employees, flat year-over-year with an average WSE count for the quarter of nearly 352,000, up 1%. Volume in the quarter was impacted by slower new sales growth as we remain disciplined in our customer selection, particularly as we guard against potential risks from an economic slowdown. Elevated WSE attrition concentrated in larger accounts when compared to the prior year; and finally, third quarter customer hiring, which slowed on a year-over-year basis to rate slightly below our pre-pandemic levels. Moving on to professional service revenues. In the quarter, professional service revenues grew 21% year-over-year to $189 million, beating the top end of our guidance by one point. The strong performance in professional service revenue was driven by an 8% increase from rate and a 3% contribution from mix as we saw a small shift towards our white-collar verticals. Mix also included one month's worth of Clarus R&D revenue, which was less than one point. TriNet Zenefits generated $12 million in HCM Cloud Services revenue, contributing approximately eight points to our year-over-year growth. Insurance revenue grew 6% in the quarter, reflecting both wage and health fee growth. This was driven by both volume and by a shift to more comprehensive plans when compared to the prior year. Our benefits participation rate remained strong. We experienced continued lower utilization during the third quarter, which drove our insurance cost ratio to 82.8% versus our forecasted range of 88.5% to 90% for the quarter. Coming into the quarter, we expected health utilization trends to increase throughout the third quarter. However, they did not increase to the level of our expectation. Furthermore, we are seeing a new WSE trend, specifically a reduction in enrollments of WSEs in the higher-cost TriState area, and we're seeing enrollment shift to lower-cost regions. Workers' comp was once again strong in the third quarter. Workers' comp revenue growth outperformed our forecast, driven by volume and wage growth while workers' comp cost declined year-over-year as a portion of our workforce has continued to work remotely. As a result of our strong performance, we are planning to launch another credit program contingent on the fourth quarter results. Turning to operating expenses. During the third quarter, expenses grew 30% year-over-year. The largest contributor to our growth in expenditures was the operation of TriNet Zenefits and its integration-related expenses. We also invested in service, technology, our product offerings as well as brand to continue to ensure our products and services are leading the industry. Finally, we experienced compensation-related expense growth reflective of recent labor cost adjustments. As we turn to a review of our earnings, we are once again pleased with our bottom line performance, especially as we absorb the incremental TriNet Zenefits operating expenses and investment. Ultimately, we view these investments as critical for delivering our unique product and services across the HRIS and PEO solutions. Our revenue growth, combined with our lower-than-forecast insurance cost ratio drove our strong earnings performance. We recorded a one-time $17 million mark-to-market adjustment as we have and are anticipating repositioning our invested assets in light of the current interest rate environment. Third quarter GAAP net income per diluted share increased 5% year-over-year to $1.22 or $0.56 higher than the top end of our guidance. Adjusted net income per diluted share in the third quarter was $1.64 or $0.56 higher than our original top end of guidance. We had $143 million of corporate operating cash flow during the quarter, continuing our strong trend. As a result, we ended the third quarter with $454 million in cash on our balance sheet. We feel very comfortable that we can continue to drive our growth priorities and prudently allocate our capital. For example, in the third quarter, we executed against our capital priorities through the acquisition of Clarus R&D as well as our investment in our product and services. We still have $184 million remaining in our share repurchase authorization, and repurchase will remain a capital priority for TriNet. Now with three quarters completed, let's turn to our fourth quarter and full year outlook. Our outlook combines three quarters of strong financial and operating performance with our fourth quarter expectations offset by our anticipated credit program. Given our lower insurance cost ratio year-to-date, we are anticipating the launch of a $50 million credit program contingent on fourth quarter health performance. Our credit program will be reflected as a reduction to insurance revenue, lowering total revenues and, therefore, increasing our insurance cost ratio. As a result, we are lowering our expected full year insurance cost ratio by one point. TriNet Zenefits remains on track this year to contribute gross revenue of between $40 million and $45 million, and we expect a modest contribution from Clarus R&D. We continue to execute appropriate core cost management as we invest in our TriNet Zenefits' integration and acquisition, and we expect to realize benefits from the rising interest rate environment on our cash balances and investment portfolio. Finally, our execution of our capital priorities through the repurchase of shares continues to support earnings per share as we are lifting full year EPS even with the impact from our new credit program. Turning to our fourth quarter 2022 guidance, we expect total revenue growth to be in the range of down 2% to flat year-over-year, four points lower as a result of the fourth quarter credit program. Said another way, it would have been up 2% to 4% without the credit program impact. We expect fourth quarter professional service revenue growth to be in the range of 7% to 10% year-over-year. Our fourth quarter professional service revenue growth outlook includes many of the same factors that have driven our growth to date. We are forecasting $11 million to $12 million of TriNet Zenefits' HCM cloud services revenue. We expect PEO customer hiring to continue, but at a slower growth rate than our historical average. And we will add incremental revenue from Clarus R&D. In the fourth quarter, we expect an insurance cost ratio of between 93% to 97% reflecting the impact from our anticipated credit program. Our fourth quarter estimate of GAAP net income per diluted share is in the range of negative $0.47 to $0.07 per share, reflecting the cost impact from the Zenefits acquisition, integration activities that are underway and the impact from the credit program. Controlling for the one-time impacts from the acquisition of Zenefits, we believe our fourth quarter adjusted net income per diluted share will be in the range of $0 to $0.50 per share. Regarding our full year 2022 guidance, given our strong financial performance through the first three quarters and our fourth quarter expectations, our revised full year guidance contains a few changes. We are forecasting our year-over-year total revenue growth to be in the range of 7% to 8%, down one point from our previous guidance due to the credit programs impact on insurance revenue. We are leaving our professional service revenue growth range of between 17% and 18%, unchanged from our previous guidance, reflecting the diversification of our professional service revenue and strength in pricing. We are now anticipating an insurance cost ratio of 85% to 86%. This is a one point improvement from our previous full year guidance, reflecting both our performance year-to-date on workers' compensation and health as well as our updated expectation for health utilization offset by the credit program. As we turn to earnings, we are adjusting our full year earnings guidance. We now expect our full year GAAP net income per diluted share to be in the range of $4.30 to $4.85, an increase of $0.19 at the midpoint. We are also raising our full year adjusted net income per diluted share guidance by $0.25 the midpoint to $5.90 to $6.40. In summary, TriNet has delivered strong financial performance and was a proactive allocator and deployer of capital in a dynamic year, which has seen us transition from strong post-pandemic growth to more uncertain economic conditions. We've continued to execute by investing in our products and services and making strategic acquisitions all with the intent to drive value for our customers while positioning us for future growth. With that, I will return the call to Burton for his closing remarks. Burton?

Thank you, Kelly. The third quarter was highlighted by strong financial results and the progress we have made on executing our strategy. We are committed to our verticals, our customer selection process and our customers. And in doing so, we have the interest of all of our stakeholders at heart. We recognize that uncertain economic times are in front of us, and we believe that our customer base and business model has enduring value in such times. Operator?

[Operator Instructions] The first question today comes from Tien-Tsin Huang with JPMorgan. Please go ahead.

I want to thank you for all the details and it was a lot to get through. Just on the WSE growth -- and I understand, Burton, you're being more selective, that was clear. Can you continue to do that and post-positive growth in WSEs here? Is this a good level to consider? Or could we see some volatility in the short run as you go through that? That was my first question, and I'll ask my second together. Just on the rate side, the rate was a big contributor for the quarter here. What's the outlook on rates as you're focusing on this WSE focus? I'm curious together with rate, if we could see some volatility or less volatility in the retention.

Tien-Tsin, it's Burton, and great questions. So let me take the first question first. And look, as you know, over the last 14 years, I've built the Company for revenue growth and profitability. And this is not the time from my vantage point to take on customers that are not right in the middle of my swim lane and have a good potential for long-term growth. So it's a great question. I believe that there's an opportunity for wallet share along with market share, but I'll continue to guide towards growth in revenue, growth in earnings, and not focus directly on the WSE count. So, the short answer to your question is, I think there's a great opportunity to selectively grow the book. I believe that from a -- and you didn't really ask, but from a new sales side, the productivity is up on a per rep basis. But I'm going to continue to make sure the customers that come on board with TriNet are customers that see the broad value proposition that we offer and will stay with us for a long time. So, I'll turn the second question over to Kelly. And then after you have a follow-up, that would be great, too.

Great. Tien-Tsin, good to hear from you. Regarding the rate side, I think I did highlight that we've got an 8% growth in rate. Now rates contributed by a couple of things: one, price increases year-over-year, which is really low to mid-single digit. But also I highlighted, I think, large customer attrition. And as customers get larger, the price per WSE is a little bit smaller. So that is contributing somewhat to the increase in rate as well. Is that helpful?

It is. No, it makes sense. And then just, if you don't mind, just quickly on Zenefits. Any update there? It looks like I don't know if I have the customer or user numbers correctly, but it looks like it was down a little bit sequentially. I could be wrong there. I just wanted to clarify that. I did get a few questions on that.

Yes. Tien-Tsin, why don't I take that first, and then I'll say if Burton has anything to add. But the user count was down a little bit sequentially, but Zenefits is right on track with our revenue forecast overall. So it's early days. We've had it 10.5 months or so, and we're happy with the revenue forecast, and I expect it to be on track on a full year basis. But Burton, anything you want to add on Zenefits?

Yes, two more things, Tien-Tsin, good traction on moving PEO clients to the HRIS solution and vice versa. Still early days at the top of the funnel project I'm working on. And it's great software that we're enhancing every single month. So the releases have been strong.

The next question comes from Andrew Nicholas with William Blair. Please go ahead.

I wanted to start with a follow-up to Tien-Tsin's quick first question on WSE trends and the quarter-over-quarter trend specifically. I know you mentioned some slower customer hiring. Just wanted to clarify whether or not that is still positive net and in the aggregate. And then also, if you could flesh out your comments on -- what I think it was a comment on reduction enrollments of worksite employees in the TriState area. I didn't catch that fully. I want to make sure I understand what's driving that and what the potential ramifications are.

Yes, Andrew, it's Kelly. I'll be happy to take that. When I think about the -- let me think about the first part of that question there for a second because I want to make sure I started focusing on the TriState. Let me hit on TriState first. So TriState, that's just a trend that we've seen over time. I think it's consistent with the distributed workforce that we're seeing more people scatter and be part of our plans all over. From a sequential WSE perspective and hiring trends, we are seeing positive hiring. It's just really at a level -- in the third quarter, we saw hiring at a level that was slightly below kind of a pre-pandemic average. So, we are -- it's still positive. We still are forecasting positive hiring. We do think because the labor market has been pretty constrained just given the competition for labor that for the small and medium-sized businesses, they're still trying to retain and hold talent. So, we see it as positive, but just at a slightly slower rate.

And were there any kind of chunkier client losses quarter-over-quarter that led to it being flat? I know you've been on a pretty nice, sequential uptick here over -- since middle of 2020. So I just wanted to make sure there wasn't anything more sizable to call out that you had to grow over.

Well, what I would say, we did have fewer customers leave TriNet during the quarter, but unfortunately, there were a few larger customers that did leave TriNet overall. I am pleased with revenue growth and profitability. But as we're looking into the fourth quarter and actually even into January, we are seeing better, large company attrition or retention, rather. And January is looking positive versus last year. Hopefully, that's helpful.

That is. And then if you don't mind me asking one more. Just on the net margin, the insurance margin, another really good quarter. It's been -- I think, this year will mark the sixth straight year of 88% or better on the ICR. Just wondering now that you have kind of a more normal -- not perfectly normal, but a little bit more normal 2022, close to being wrapped up, if there's any different way for us to think about kind of the insurance margin expectation longer term, particularly as you're being highly selective on the client front? Just wondering, if you've considered a kind of a structural uptick there if we should build that into our models?

Yes, it's a great question, Andrew. I mean I think our philosophy has remained the same. So we still run a single employer plan for the benefits of all of our co-employees. We try to price to risk and to make sure that we're continually looking at that. And when we have had a benefit, we've shared that with our customers and kind of in line with our model. So our philosophy really has not changed there. What we saw from a trend perspective in the quarter is we did see most categories, frankly, of inpatient and outpatient go up year-over-year except maybe mental health, which obviously -- that's actually a really good sign given the increases in mental health costs that we saw during the pandemic. It just didn't go up quite to the level of our expectations. So, we're going to continue to watch it, but we are planning on prudent pricing, continued risk management disciplines and moving with trends as we see them evolve.

The next question comes from Jared Levine with Cowen. Please go ahead.

How would you characterize the overall demand environment? Are you -- are there any differences between the PEO demand environment versus more of the cloud side HCM?

That's a great question. On the PEO environment, as I said in the prepared remarks, we're seeing companies looking to go from a fixed cost model with a larger insight team to a variable cost model where they can attach a cost per employee, and that will adjust up or down, based on the demand over the next year or two. There's certainly some reticence in what's going to happen over the next 18 months, as I'm sure you understand. In the HRIS model, what I'm seeing is it is not growing as quickly. As Kelly pointed out, we still have positive change in existing in the PEO model. I don't have the exact numbers on the HCM model, but I can tell you it is growing less quickly than the clients on the PEO model. From an overall standpoint, the customer base remains strong. I think that the days of very rapid hiring are over for the short term, which, in some ways, helps from a retention standpoint, as Kelly mentioned a minute ago. So, overall, a pretty strong environment on both sides, and I believe the tale will be told early in the new year as new customers come on board and they finalize their business plans for 2023.

Okay. Great. And then any incremental color you can share on how those outsized large client losses impacted 3Q average WSE growth?

Yes, we don't forecast or really disclose the components of WSE growth, Jared, but I appreciate the question.

And then kind of quickly sneak in one more here on the sales…

Sure, of course, currently.

The staffing levels of the sales force including any differences between the PEO and Zenefits business?

They remain relatively stable. They are two separate sales forces. We have grown on the TriNet Zenefits side, the sales team over the last couple of months, and they're starting to get some great traction. As I said, the upgrades to the product have been exciting and notable, including integrations with third-party products. On the PEO side, what I can say, particularly about a very important fall selling season is that the pipeline is strong. The conversion rates are higher year-over-year. Marketing is being leveraged to enrich the qualified leads. But having said all that, I'm cautious about the broader environment, but I am certainly excited for January.

[Operator Instructions] The next question comes from Kevin McVeigh with Credit Suisse. Please go ahead.

Are you seeing any difference in the attachment rate in terms of the type of plans people are signing up for, whether it's changes in workers' comp or the type of insurance just given some of the macro sensitivity that we're starting?

Yes, Kevin, great question. We have seen -- nothing really notable, honestly. You know what, we have seen some employees as families change, et cetera, go to slightly richer plans, but not really a notable change yet. We would really expect to see that probably more as you come towards January and we have a larger chunk of open enrollment. Regarding workers' comp, just given the relatively benign situation we've been in with less people driving, et cetera, workers' comp pricing has actually been pretty good. So pleased with renewals we've been able to achieve within workers' comp, but nothing -- no real changes to our program overall.

Got it. And then, Kelly, I think you said the SaaS HCM was somewhere around $11 million, $12 million of revenue. Any sense -- I think that's what the guidance was if that was right. Any sense of how that scales for the full year? And then at some point, do you start disclosing that separately as a separate line item? And if so, when do you think that will be?

Yes. We want to really get a full year of TriNet Zenefits under our belt, and we'll evaluate disclosures, but I definitely appreciate the suggestion and idea around giving it a different type of visibility. I'm super excited about the acquisition of Clarus R&D as well because that definitely brings more value to our PEO and HCM customers. Anyone that creates intellectual property or does new things can actually access that. So, it goes beyond tech and we're super excited about that. But haven't made a decision around the disclosures, but we'll keep you posted on that.

Great. And could you remind me, was it $11 million the revenue? Was that what you're modeling for the fourth quarter, is that right?

Yes, I think I said, on a full year basis, we're still in the original $40 million to $45 million range from a full year perspective for the 10.5 months. And what I disclosed in the prepared remarks were $11 million to $12 million for the fourth quarter.

Next question comes from David Grossman with Stifel. Please go ahead.

So I'm wondering if I could just ask a couple of follow-up questions to a couple of questions that have been asked already. The first one was I know you talked about the different factors that impacted WSE growth in the quarter. And just going back to the attrition, the client attrition, without getting into the numbers, what drove that? Were these clients that just termed out because of size, was it clients that had told you last year, they would be leaving and it just happened in the back half of the year? Just trying to understand the fundamental dynamic behind that?

David, it's a great question. We work with our clients very closely as we look at, hey, what the right opportunity is for them. I wouldn't say there's any one reason. Every client has a different reason for leaving a PEO model. I do not believe this was really a switch to PEOs. It was truly a going in-house for the most part. And sometimes it has to do with international workforces and large growth as well. At the end of the day, I do think fourth quarter is looking a little bit stronger from a large customer retention perspective as well as January.

Right. And the retention credit, Kelly, I think you said $50 million. So is that all -- is that 100% of that impact in the fourth quarter? Or do we start -- do we see impact, just on an accounting basis, in the first and second quarter of next year as well?

Yes, David, we have designed the program. So, all of that will reduce fourth quarter insurance services revenue. So, it's all a fourth quarter hit, and it would be distributed in the beginning of 2023.

Got it. And then if you listen to what the payers are saying, they're anticipating passing through inflation kind of 2021 in 2022 inflation next year in terms of premium. So is that the way to think about it for you guys in terms of rate for the insurance business that we would expect your rates to go up commensurate with the kind of 6%, 7% rate increase that the payers are talking about?

What we're -- we are absolutely getting input from each of them. As you likely know, they negotiate rates with their providers kind of on a rolling basis, and we don't have visibility into the individual provider negotiations, but usually they sign three year contracts, and they expire over time. So we're getting insight from them with what we expect medical cost inflation, and then that's really what we build into our rate table. But as we do price to risk, we also evaluate changes in the composition of each individual client as we set the renewables rates too.

Right. But on a same-store basis, on a same risk basis, like-for-like, we would expect higher than normal rate increases on the premiums. Is that a fair statement?

We will try to turn it with our expected future claims costs and medical cost inflation. So I think the numbers that you mentioned that the payers are saying is pretty much around what our expectation would be.

Got it. And then, Burton, I think you said that new sales per rep were up, but you were cautious about kind of the macro environment. I'm just trying to reconcile those comments to kind of understand. We're at the end of October, right, kind of towards the tail end of the sales season here. So just trying to kind of better frame your comments and just to understand what that says about bookings going into next year?

Yes. Good question, David. So activity is up, close rates are up, the pipeline is strong, but they also have to get closed. So they're not -- we're certainly not done for January. I'm optimistic about January as a selling season particularly juxtaposed against what's happening in the installed base as far as I believe that the large customer attrition is abating, they're not growing at the percentage they used to. So overall, I'm optimistic for January, but I need the signed contracts in-house to make that a reality, but bottom line is good pipeline and good momentum.

Got it. And just one last kind of cleanup question here. On Clarus R&D, any -- is it a material revenue contributor? Or is this small dollars?

Yes, David, I'll take that one. For the month that we owned it -- so we closed Clarus R&D on September 1, we recognized about $1 million in revenue. So as you would expect, the ERTC tax credits are going to roll down a little bit. We have more of an opportunity with our PEO book and offering them solutions. So I really expect about that level on a monthly basis.

So a $12 million annual run rate. Is that a fair number to use?

Yes.

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