Disclaimer: this article is independent commentary on TriNet’s recent earnings release on April 28th. All statistical information contained within this article is public knowledge. The information contained within this article should not be construed as investment advice. As with any investments, material risks should be evaluated prior to investing. The commentary section of this article is solely the opinion of the author and should not be construed as advice.
Opening
Recently discussed in our article titled PEO Industry Statistics 2019 – Part 2, we discussed the potential impact of COVID-19 on the PEO industry. As outlined in the Growth Outlook section of that article, we noted TriNet Group (TriNet) as the first of the major players to have their earnings release for Q1 of 2020. While Q1 encapsulated only a small duration of the quarantine, we look to publicly traded PEOs for some insight into the affect of the shutdown on PEO financials.
If TriNet’s first quarter is any indication, the future may look brighter than expected for PEO financials. TriNet posted an impressive first quarter, both from an earnings per share (EPS) and revenue growth perspective. While Q2 will paint a more accurate picture of the true impact of COVID-19 on PEO revenues, TriNet most certainly entered Q2 with a strong head of steam from Q1. Moreover, TriNet’s guidance for Q2 is on the low end of the range we projected for the industry which is positive for the organization.
Fast Facts
According to the Seeking Alpha report, analysts expected TriNet’s EPS to be $0.91 per share and projected net revenue for Q1 of $244.12m. TriNet’s actual results were EPS of $1.41 per share with Q1 net revenues of $283m ($1.05b in GAAP revenues). This equated to a positive earnings surprise for EPS and revenue of 55.75% and 15.93%, respectively.
Material Information/Comments from the Earnings Call
The following insights were pulled from TriNet’s earnings release call on April 28th, 2020.
WSE Growth | Client Count | Client Segmentation
According to Burton Goldfield, CEO of TriNet, the average WSE count for Q1 grew by roughly 8% from the previous quarter. TriNet is currently serving around 18,000 SMBs, 80% of which are in the white-collar sector.
WSE Growth | AEBITDA Growth
Richard Beckert, CFO and SVP, stated that the company served an average of 336K WSEs in Q1 (8% year over year increase). Beckert also stated that AEBITDA increased year over year for Q1 from $108m to $145m, or by 34%.
Current WSE Count | COVID-19 Impact | Client Segmentation Attrition
Michael Murphy, TriNet’s CAO, echoed an earlier comment from Burton by stating that the current WSE count, as of last week, was between 300K and 305K, which represented roughly a 10% attrition rate due to COVID-19. He added that their “Main Street” vertical is experiencing attrition at twice the rate of their white-collar verticals. Main Street attrition is around 18% to 20% from the impact of COVID-19, whereas white-collar attrition is closer to 10%. He went on to state that TriNet has modeled a high and low scenario regarding the future growth outlook, as it pertains to the impact of COVID-19.
Michael stated:
“In both cases, we have assumed new sales will be low in the second and third quarters before recovering in the fourth quarter. The slope of the second half economic recovery will determine the strength of our fourth quarter new sales.”
Q2 Forecasts
Michael went on to provide guidance as it relates to the upcoming Q2 performance:
“For the second quarter of 2020, we expect GAAP revenue to be in the range of down 11% and down 5%. And we expect net service revenues to grow in the range of up 7% to 27% year-over-year. We are forecasting an adjusted EBITDA margin range in the quarter of 39% to 49%. We expect Q2 GAAP earnings per share to grow year-over-year in the range of 20% to 96%, and adjusted net income per share to grow year-over-year in the range of 27% to 97%.”
SMB Impact | TriNet Value | Growth & Financial Management
Burton concluded the earnings statements with the following comments:
“The SMB segment is enduring significant economic dislocation, and TriNet remains here to help. Our value proposition is especially compelling as we are leveraging our scale for the benefit of our customers in ways independent SMBs struggle to mimic.
I am pleased with our first quarter results. These results reflect TriNet’s return to growth, coupled with disciplined financial management. We remain focused on our business, and we have taken the necessary steps to ensure we can thrive on behalf of all of our stakeholders.
Finally, I want to say again, a special thanks to my TriNet colleagues. I am awed by your ability to navigate this uncertain and changing environment. I am proud of how you’ve remained focused and kept our customers at the center of everything we do.”
About TriNet
TriNet provides extraordinary HR expertise tailored to thousands of small and medium size businesses (SMBs) throughout a wide range of industries across the U.S. By giving these businesses access to advanced payroll services, premium-level benefits, and risk mitigation & compliance consulting—all delivered through personalized service and a comprehensive technology platform—we free them from the complexities of HR to focus on what matters most: their incredible people. | www.trinet.com
TriNet 1-Month Stock Trending
TNET 1-month stock trending as of 5/11/2020 (with earnings release date marked)
Independent Commentary by Rob Comeau
Rob Comeau is the featured Author of www.netprofitgrowth.com
TriNet came in stronger with Q1 results than I anticipated. Their revenue growth was strong due to new business adds and reduction in client attrition. Moreover, their EPS was materially higher than most analysts’ forecasts. Their guidance for Q2 provided some insight into how COVID-19 is affecting their organization and may be affecting other PEOs with comparable macro client segmentation. As they stated, their white-collar business has experienced roughly a 10% reduction whereas blue- and grey-collar business has doubled that (18% to 20%). This is in line with what we were illustrating in the Industry Revenues section of that article, as illustrated below:
Excerpt from our Industry Statistics Article
Industry revenues are down year to date in 2020. While we don’t have specific statistics on these numbers to date, every conversation I’ve had with various PEO ownership teams state that revenues are down between 10% and 30%. Depending on the macro client segmentation, certain PEOs have been affected more than others. Blue-collar centric PEOs have likely felt the greatest hit as many of their clients are not currently operating. Grey-collar focused PEOs have felt the hit as well, especially those focused on hospitality. White-collar focused PEOs have experienced a dip, though likely not as great as blue- and grey-collar PEOs. Furloughs and layoffs will be drivers to a reduced year over year revenue change in 2020. The duration for how long the pandemic lasts will determine the severity of revenue reduction for the industry. Considering that roughly two-thirds of the industry’s macro client segmentation is contained within white-collar centric businesses, the industry may weather the storm slightly better than some other human capital industries.
As a leader in the industry, TriNet’s solid first quarter is encouraging. Moreover, their guidance for Q2 remains positive, as they are forecasting a 10% reduction in Q2 which is on the low end of our previous projections. As we’ve believed, and TriNet has stated, the duration of the quarantine will play a major role in the rebounding of revenues.
Insperity is the next major player to release earnings on May 5th, followed by BBSI on May 6th. Insperity is largely focused on white-collar business whereas BBSI is predominantly concentrated on blue-collar. It will be interesting to see how these two companies have performed in Q1 and what guidance they provide for their outlook on Q2.
Author
Rob Comeau is the CEO of Business Resource Center, Inc., a business consulting and M&A advisory firm to the PEO industry. Rob is the featured Author and Founder of this PEO online publication. To contact Rob, you may email him at rob.comeau@biz-rc.com. You may view Business Resource Center’s offering at www.biz-rc.com.