TriNet Group, Inc. Q3 FY2025 earnings call

Welcome and Transition

• Mike Simonds welcomes Mala Murthy as new CFO and thanks Kelly Tuminelli for her service.

Q3 Performance

• Q3 was a good quarter with financial and operating performance, allowing upward adjustment of full-year earnings outlook.

Strategy Progress

• Medium-term strategy: revenue CAGR 4%-6% and adjusted EBITDA margins 10%-11%. Progress on benefit repricing, efficiency, and cost discipline.

Volume Drivers

• CIE had normal summer seasonal worker exodus but on track for improvement. Retention on track to 80% but health plan pricing impacted attrition. Net Promoter Score at all-time high due to service investments. New sales down but quality of clients improving, with Q4 and January pipeline showing promise. AI-powered suite launched to enhance service model.

Margins

• Making progress towards 10%-11% adjusted EBITDA margin. Health plan increases per enrolled member ~10.5%, aiming to return insurance cost ratio below 87%-90% range in 2026. Operating expenses down 2% for third quarter, funding medium-term initiatives.

Total revenue in the third quarter was in line with plan. Full year 2025 total revenues are expected to be approximately $5 billion, near the midpoint of the guide. Professional services revenue declined 8% year-over-year in Q3 due to lower WSE volumes and discontinuation of a client level technology fee, but was supported by low to mid-single-digit pricing strength and stronger than expected HRIS and ASO revenue. Insurance revenue and costs each declined by 1% in the quarter, resulting in an insurance cost ratio just over 90%, flat to last year. Expenses declined by 2% year-over-year for the third straight quarter, driven by automation and workforce strategy.

Full-Year 2025

• Total revenue and professional service revenue near midpoint of range. Insurance cost ratio trending better than midpoint, adjusted EBITDA margin and adjusted EPS closer to top end of range.

2026 Outlook

• Confident in returning insurance cost ratio below 87%-90% range, with pricing aligning with market trends and improved service delivery.

• Persistently elevated health care costs impacting WSE volumes and client retention.
• Uncertainty around IRS processing delays affecting interest income from tax refunds.
• Competition in repricing and client acquisition impacting market share and growth.

Q: Just wanted to start by double-clicking on the ICR. Just wanted to clarify, were there any onetime impacts to your 3Q performance here? And then as you pointed to returning to that long-term ICR guide in FY '26, can you just go over some of the assumptions there?

A: Jared, it's Kelly. Onetimers, yes, really nothing notable in the quarter at all related to one-timers, Jared. On the assumptions for next year, we're going to stay pretty conservative about what health care trends is going to do next year. We think it's reasonable to assume health care trends a tick or two lower than what we experienced this year.

Q: In terms of the sales headcount there, can you just update us in terms of your expectations for ending sales headcount for FY '25 here? And then how you're thinking about at this stage FY '26 in terms of continuing to grow that headcount?

A: Yes, happy to do that. The median tenure of our sales force is increasing. We did slow down new rep recruiting early in the year but expect to start seeing absolute number grow in sales force next year as new trainees come on.

Q: I wanted to hone in on your comments around rate increases and pricing relative to competition. Is there anything that you could say either qualitatively or quantitatively on maybe just the magnitude of difference between the rate hikes that you're going out to market with -- or even with your existing client base with versus maybe what you suspect some of your competitors is having to do this renewal season?

A: Andrew, when you think about health carriers, nobody saw the acceleration in trend come including us. We're coming up on January 1 renewals being our last catch-up set of renewals. The gap is tightening as we head into 2026.

Q: Thanks for the early call, make sure to get extra cup of coffee here. But I wanted to start off particularly on some of the new logo pipeline. I know you guys mentioned attrition has picked up a little bit, it sounds like with some of the insurance pricing, which obviously is kind of a necessary thing, given the environment. It sounds like you guys are a little ahead of some of your competitors. So I just wanted to see if you guys had any thoughts on if you think there's an opportunity to maybe gain share or increase new logo sign-ups when as some of these other guys catch-up and push their own repricing through their books within the next, whether it's 6 to 15 months or whatever the cycle ends up being for them?

A: We appreciate the early start, Kyle. There's an opportunity as the pricing gap narrows and our broader value proposition shines through. We've got a greater percentage of clients advocating for us, double-digit growth in broker-driven RFPs, and a more tenured sales force.

Q: Before I ask my question, Kelly, I just wanted to congratulate you on a great tenure. First question from me. I wanted to ask if you could provide an update on what you're seeing on the ASO offering? It sounds like interest is tracking a little bit better than expected there, so figured I'd start there. And maybe as a quick follow-up to that question. Is there a different competitive set that you're kind of competing against at this stage for ASO or is it really just kind of converting existing HIS at this point?

A: Great question. We've done better than expected with ASO conversion rates. The competitive set overlaps with traditional PEO competitors and fragmented ASO market, but our technology and expertise set us up well.

Q: I just had 2 really quick questions. One is on the CIE commentary. Is growth, would you say, improving year-over-year? Is that less negative versus growth? I just wanted to clarify and make sure I'm understanding that correctly. And then secondly, as I look into 2026, if we remain in a stable environment, and we know that we have lower attrition, the gap in pricing is improving and CIE is improving, is there any reason to think that in a stable environment, WSEs won't grow next year?

A: Regarding CIE, it's on track for a small single-digit positive year-over-year, with less layoffs. On 2026 growth, we're on track for revenue growth reemerging as we get past the last catch-up renewal and work through 2026.