Good afternoon. And welcome to the TriNet Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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. My name is Alex Bauer, and I am TriNet’s Head of Investor Relations. Thank you for joining us and welcome to TriNet’s 2023 second 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 2023 third quarter and full year financial outlook 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, 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. We drove strong financial results in the second quarter. I am pleased to report that we exceeded our key performance indicators with respect to new sales, customer retention, customer satisfaction and expense control. TriNet achieved financial results that were in line or exceeded our guidance by delivering differentiated solutions to our select verticals. We were rewarded in Q2 with annual contract value growth or ACV up 26% year-over-year. This represents a year-over-year acceleration in new customers, putting their trust in TriNet and adopting our solution in the second quarter. The Q1 trend where ACV growth was up 20% year-over-year has been surpassed in Q2. Over the past year, we have focused on enhancing our service capabilities. Our enhanced service delivered a sizable increase in our Net Promoter Score or NPS. We are now forecasting a more than 4-point year-over-year improvement in retention when comparing fiscal year 2023 to fiscal year 2022. Additionally, customer net hiring or CIE was net positive in the quarter as June came in strong. Overall, I am pleased with our execution in the second quarter and our prospects for the remainder of 2023 and beyond. This momentum supports our confidence that TriNet offers tremendous value. As such, I am pleased to announce that our Board has authorized an incremental $1 billion to our already existing share repurchase program. You will hear more about this program from Kelly. Total revenues grew 1% year-over-year at the top end of our guidance, while professional service revenues declined 3% at the lower end of our guidance. GAAP earnings per share increased 2% year-over-year, outperforming the top end of guidance by $0.42. Adjusted net income per share increased 1% year-over-year, outperforming the top end of our guidance by $0.34. We finished the second quarter with 334,000 WSEs, representing…

Thank you, Burton. In the second quarter, TriNet successfully navigated the evolving economic environment and delivered strong operating and financial results. In the areas of our business we control, we once again performed very well. We accelerated new sales growth, we kept more of our customers longer and we remain disciplined in our expense management. As Burton said, our visibility into Q3 indicates a continuation and acceleration of these trends. Given this performance and outlook, we believe that our company has been undervalued. I will be wrapping up my third year as TriNet’s CFO in the fall, and during that time, I have gained deep insights around our cash flow forecast, the predictability and strength of our financial performance and the levers used to manage and grow our business. I also believe our shareholders and bondholders place a high importance on transparency with respect to our financial policy or philosophy, capital structure and our deployment of capital. While our financial priorities have not changed, this is a good opportunity to reiterate our priorities and provide some additional granularity on guidelines to our investors. First and foremost, we will always prioritize investing in organic growth. We will maintain an appropriate cash buffer, as well as capacity under our credit facility to ensure prudent access to liquidity if and when necessary, for business operations. We will manage our balance sheet efficiently with an approximately 1.5 times to 2 times adjusted EBITDA leverage target, still leaving open the opportunity to vary outside from time-to-time. When that happens, we will always have plans to bring into our targeted range within a reasonable window of time. And on average, we intend to return at least 75% of free cash flow annually to our shareholders or deployed to accretive M&A. With this philosophy in mind, I…

Thank you, Kelly. We are seeing momentum across our business despite the challenging economic environment. We are keeping more of our customers for longer. Our sales organization is delivering a strong year-on-year growth rate in new ACV that continues to accelerate in Q3. And we are encouraged by our customer hiring while still early we are starting to see some positive indications that CIE may begin to normalize. We believe our stock represents significant value when compared to our long-term outlook. I am particularly pleased that our Board has authorized an incremental $1 billion to our already existing share repurchase program. I look forward to reporting to you on Q3 results in the fall. Operator?

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

Hi, Tien-Tsin.

Hi, Burton. Good to hear from you. Always appreciate the time and the updates. Just I guess I will ask as always on volume, if that’s okay, Burton and Kelly. Just on the -- Burton, you talked about retention improving 4 points and the change in existing, it sounds like it’s turning, tech is getting a little bit better, clearly, you are focusing on sales and productivity. So can we expect volume growth to improve from here from what we saw in the second quarter. Just curious what’s implied if you give some direction on that, that would be great?

So great, Tien-Tsin, as you said, I am pretty excited about the new ACV up 26% year-over-year. Retention is great, it’s starting to get to the all-time lows. So I do believe that MPS [ph]. The average speed to answer and everything else we are doing from our great service team is working. So the answer is, yes, from my standpoint. I expect you to see continued WSE growth and I was obviously pleased with the 2% growth quarter-to-quarter and I am hoping to see additional growth in Q3 and Q4. But I will let Kelly give her perspective on that.

Yeah. And Tien-Tsin, I will say, the guidance does assume sequential WSE growth as we go throughout the year. It’s a combination of all the things Burton talked about, strong new sales, good retention for the rest of the year and modestly positive CIE.

Perfect. Thank you for sharing that. Just on the -- my follow-up then maybe going through your prepared remarks, Kelly, just thinking about visibility maybe between the professional services outlook, which I think you lowered by a point, you explained that and then the ICR by 1.5 points and you are working through from the prior period development as well. I am just trying to get a sense here in terms of conservatism versus visibility across those two lines, what’s being factored in there?

It’s a great question. On professional service revenue, it really is just our best estimate based on the volumes that we are seeing right now. Regarding the insurance side and insurance costs, like I mentioned, we are seeing increased provider cost inflation. So we are doing our best to assume what that looks like into the future. No crystal ball, but things are coming in kind of as expected from an overall utilization perspective. Not really much more than that, really. It’s pretty straightforward.

Okay. Yeah. It’s good. Just coming in as expected is the comment I was looking for. So thank you for the time.

Thanks, Tien-Tsin.

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

Hi. Good afternoon.

Hi, Andrew.

I wanted to first ask -- hi, Burton. First question I wanted to ask is on sales force growth. I think you said experienced reps are up 19% year-over-year. Just wondering, first of all, how you are kind of define that. And maybe what’s driving that growth, is it people that you hired late last year that are getting into a more productive state, is it adding new reps in an environment that’s maybe easing a little bit from a talent perspective? Just kind of overall thoughts on sales force headcount growth and some definitional questions there?

Great question, Andrew. So it is directly related to two things. One is retention and the second is the maturation of the sales force. That calculation is based on being here at least six months where they start to deliver results for us. So you are seeing reps staying longer and we are -- they are not aging out and leaving, and you are also seeing some of the hiring we started last year, obviously, once they pass at the six-month mark, they become part of that equation. So look, I talked early in the year about the fact that capacity was well below what my expectation was. Under new sales leadership with some of the actions we have taken around optimization of both the marketing and the sales process. We are seeing that come to root [ph] in terms of not only ACV, which is important, but also in capacity as we move forward.

Great. That’s helpful. And then for my follow-up, I wanted to check in on Zenefits. I think last quarter, you mentioned onboarding or launching the integrated open market product. Just wondering how that’s going. And then also within that question, it looks like the average HCM users declined quite a bit year-over-year, anything to call out there?

Yeah. So again a really good question. The Zenefits platform is doing very well as our core platform for the next-generation. The integrated open market or IOM solution is in the market. It’s still a small percentage of the revenue, but we are also looking at variants of other products leveraging the ben admin capabilities that Zenefits brought us, as well as their core platform. So, ultimately, my goal was to be breakeven in 2024. We are well into achieving that goal and we are hoping to be able to build the barbell out so we will be able to attract and retain more of those customers. But the primary focus right now is building and developing on the Zenefits platform for the next-generation to frankly leapfrog some of the technology in the market today.

Yeah. And Andrew, one thing I would just add to that on the hiring, your comment on the users is, we are seeing in the HRIS platform some of the similar dynamics in the customer base and customer hiring. So the first half hiring definitely was pressured similar to the PEO side.

Make sense. Thanks to both of you.

Thank you.

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

Thank you. I just want to clarify in terms of the professional services revenue guide here, what drove reduction given 2Q CIE was previously expected negative but you came in positive here?

Yeah. Jared, this is Kelly. Let me take that one. We did not assume the full quarter CIE to be negative last quarter. So we were slightly below our CIE expectations. I think the clarification is, April and May were pressured, June came in better than expected. So June looked very, very positive as we saw intern, seasonal workers, things like that come on Board and we are very encouraged by the trends we see there, but we did see softness in April and May. So really cumulatively, when I look at the full first half and really looked at the rest of the year, we are being cautious on CIE for the rest of the year, just assuming very modestly positive due to the fact that it’s been so uneven month-to-month.

Got it. And then in terms of the current pricing environment for PEO clients, is more discounting required to make that ROI more attractive for prospective clients currently?

Yeah. We -- our pricing process is very similar. From a Zenefits perspective, we price to risk. On the professional service revenue side, everyone is taking a little bit longer to make decisions in this environment for sure. We have run specials from time-to-time. But I do think that we have gotten really great adoption. So we are sticking with our tenants. When you look year-over-year, our rate contribution to professional service revenues was low single digits. So kind of low-to-mid single digit is the range that we saw.

Got it. And if I could sneak in one more, are you still expecting around $50 million for Zenefits for FY 2023?

It might be a little bit pressured from that. But I think the big point to rotate on is that, I think, we had $11 million in the quarter. So if you just think of that from a run rate perspective, obviously, that would be very difficult to hit the $50 million on a full year basis. But what we are doing is we are trying to manage the cost side of the equation so that we are hitting that breakeven by 2024.

Got it. Thank you.

Thank you.

[Operator Instructions] The next question is from Kyle Peterson with Needham. Please go ahead.

Hi.

Welcome, Kyle.

Thank you. Good afternoon, guys. Thanks for taking the questions here. I wanted to start on professional services, looking at kind of the midpoint of the 3Q and the 4Q guide, it seems like you guys are expecting a little bit of a dip in 3Q and then some improvement in the fourth quarter, at least looking at things on a year-over-year basis. So I just wanted to get some more color on what’s driving the strength? Is that some of the momentum and better trends that you guys saw in June or is there anything else in terms of the pipeline that maybe you guys want to call out that and gives us a little bit of comfort in the 4Q growth trajectory?

Well, Kyle, probably the biggest thing driving it when you are looking year-over-year is if you think about 2022 we had really strong hiring in the first half of the year and then it slowed down pretty precipitously particularly in technology and that’s where we saw the biggest pressure. So that is really driving. The cumulative CIE impact is really what’s driving the pressure just that along with normal levels of attrition as well. But what I am looking at and you will see that the guide does include sequential growth in professional service revenue and that’s really what I think we are trying to build on is really that sequential momentum.

Okay. On the buyback and great to see the authorization upped by a pretty substantial amount. I know you guys bought back a fairly modest amount, I think, you said $9 million in the prepared remarks this past quarter. But just wanted to get some color on how you guys are thinking about capital return moving forward, I guess, just given, like, did you pause the buyback at any point during the 2Q, during some of the regional banks volatility or how should we think about the run rate of share repurchases, excluding maybe something that might be a bit larger and require external financing like you referenced?

Yeah. No. Great question. And I guess the way I would look at what we did in second quarter is we were very, very thoughtful about the best way we needed to reshape our capital structure. We brought the Board of Directors along and evaluated the advantages and trade-offs associated with the options. And I think the announcement of our intention to buy back an additional $1 billion and get $1 billion done by 2023, obviously, subject to market conditions is, it actually achieves the scale and is in line with what we -- what the financial policy I laid out.

Great. Make sense. Thanks, guys. Nice quarter.

Thanks.

This concludes our question-and-answer session and the conference has also now concluded. Thank you for attending today’s presentation. You may now disconnect.