Trinet Group, Inc. Q4 FY2024 Earnings Call

Hello, everyone, and welcome to TriNet's Fourth Quarter 2024 Financial Results Medium-Term Outlook. My name is Lydia and I’ll be your operator today. After the prepared remarks, there will be an opportunity for you to ask questions. I’ll now hand you over to Alex Bauer to begin. Please go ahead.

Thank you, operator. Good morning. My name is Alex Bauer, TriNet’s Head of Investor Relations. Thank you for joining us and welcome to TriNet’s fourth quarter conference call and webcast. I'm joined today by our President and CEO, Mike Simonds; and our CFO, Kelly Tuminelli. Before we begin, I’d like to preview this morning's call, which will be a bit longer than usual as we will provide a strategy update along with our earnings-related content and outlook. I will first pass the call to Mike for a few introductory comments regarding our strategy and medium-term outlook, as well as our fourth quarter and full-year performance. Kelly will then review our Q4 and full-year financial performance in greater detail and provide our 2025 financial guidance and outlook. Mike will then return to review in greater detail our strategy and medium-term outlook, including our value creation targets, leaving plenty of time for Q&A. Please note that today's discussion will include our 2025 full-year financial outlook, our medium-term 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 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 EBITDA margin and adjusted net income per diluted share. For a reconciliation 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 or will be available on our website or through the SEC website. With that, I will turn the call over to Mike.

Thank you, Alex, and thank you all for joining us today. It's a privilege for me to speak with you at this important time for TriNet, our customers, and our shareholders. I'll be celebrating my first anniversary with TriNet shortly. It's been an eventful year, and I've learned a great deal. While we've had to navigate a challenging environment with low customer hiring and elevated healthcare costs, it's given me the chance to see the strength of our business model firsthand. It starts with my thousands of colleagues, united around a strong sense of purpose: helping small businesses attract and retain great talent, gain efficiency, stay compliant, and focus on their core business. This team, enabled by a proprietary technology platform, provides the most comprehensive set of benefits and HR outsourcing services available in the market to SMBs. Having spent much of my career, before TriNet, working on just one part of this puzzle, employee benefits, I can tell you it is a beautiful thing to see it all come together in a seamless fashion, to see our scale put to work for the benefit of the small and mid-sized business. Our customers value our integrated approach so much that even when we need to raise prices, as we have because of healthcare cost trends, we still enjoy very strong retention and a high net promoter score. We have a strong, durable business. The current environment also helped highlight opportunities for us to improve. Some of these we addressed in 2024, including strengthening our insurance and revenue leadership, centralizing and improving our data and analytics capabilities, and removing lower value spend from our expense base. Some opportunities are larger, and they require disciplined choices on where to invest. As you know, we spent time last year on a rigorous strategic review. I'm excited to share the outcome of that review with you later in the call and outline how we're becoming a more focused company, how we will grow revenues, expand margins, and ultimately create value for our shareholders at a 13% to 15% sustained rate. 2025 will be a year of transition. We will work in a measured way to reprice our insurance cost ratio back into our targeted range and exit 2025 in a much improved position. While we expect strong retention, the size of healthcare price increases will modestly increase attrition and dampen new sales compared to the first half of 2024. We will also exit our SaaS-only HRIS business in 2025. While the technology acquired through Zenefits remains strategically important, HRIS is a market where we don't have a clear path to winning, and it has become a distraction from our core. Our guidance for 2025 reflects the transition TriNet is undergoing. Our goal this morning is to convey both the importance of this transition and what we believe is an achievable outlook for substantial shareholder value creation over the coming few years. With that, I will pass the call to Kelly to review our fourth quarter and full year performance, as well as 2025 guidance.

Thank you, Mike. Our fourth quarter performance reflected a continuation of many trends we experienced during 2024. While we saw some encouraging signs, business hiring remained slow as SMBs continued to navigate high interest rates and funding costs along with muted demand. While new customers value our services, these sales were down year-over-year as they were priced to reflect the elevated insurance cost environment. We also drove record retention for 2024 even as we renewed business at higher rates. Mike will spend more time going through our strategy refresh in detail, but a key reaffirmation from it was that our customers benefit from differentiated service coupled with purpose-built technology. Given this, we are narrowing and intensifying our focus on PEO and will exit the HRIS software-only business. The underlying Zenefits technology will remain the core of our digital transformation and the backbone of our nascent ASO product called HR Plus. This offering pairs our strong service model with our HRIS technology. We have scrutinized operating expenses, including staffing and our office footprint. This review led to a restructuring charge of $49 million related to exiting our HRIS business and capturing future savings. With that, let's dive into our financial performance in greater detail. Total revenues grew 1% year-over-year in the fourth quarter and for the full year, both in line with our guidance. Note that we have reclassified interest income as revenue as it's an integral outcome of our core business operations, which did not change the year-over-year revenue growth percentage. Total revenues performance for the year was largely driven by a consistent average number of co-employed WSEs, a low single-digit rate increase, partly offset by a shift in vertical mix which reduced average admin fees and benefit participation levels. Customer hiring remained low in our technology vertical, but we did see some pockets of improvement, most notably in financial services. We finished the year with approximately 361,000 total WSEs, up 4%. As a reminder, total WSEs include platform users who are accessing our platform as well as co-employed WSEs receiving the full benefit of our PEO services. We ended the year at 330,000 co-employed WSEs, down 2%. The decline in co-employed WSEs was largely the result of hiring within the installed base, remaining just over 1% for the year, and new sales just below total attrition. As I said at the outset, fourth quarter new sales performance came in line with our forecast while pricing new business appropriately for the current and expected health cost environment. Professional services revenue in the fourth quarter declined 4% largely due to lapping the 2023 rollout of an annual client-based technology fee. We are suspending this fee and do not expect to be charging it going forward. For the year, professional services revenue increased 1%. Our PEO revenue in the year grew 3%. This included a modest pricing uplift and the in-year benefit from the client technology fee, as well as a 19% decline in our combined HRIS and ASO revenue. As we exit the HRIS SaaS-only portion of the business, these revenues will decline meaningfully in 2025, partly offset by increased revenue from customers who buy ASO services. The cessation of the technology fee and the exit of the HRIS business are both included in our 2025 guidance. Insurance revenues grew 2% in the fourth quarter consistent with the year, health care participation rates within our co-employed base were slightly lower, partly offset by rate increases. Insurance revenue for 2024 grew 1%. We expect to see the benefit of our renewals on insurance revenues build throughout the course of 2025. Insurance costs in the fourth quarter grew 12% reflecting the trend this year of higher health cost inflation and utilization. Our normal seasonal pattern was slightly amplified as our pooling limits reset in October with more high-cost claims. The pattern of workers' comp claims was different this year than in prior years. For the year, workers' comp claims were generally in line with historical trends. Rather than being distributed across the second and fourth quarters, the benefit from favorable prior period developments this year was heavily weighted to the second quarter. This contributed to the higher insurance cost ratio this quarter. For the year, total insurance costs grew 8%. Our fourth quarter insurance cost ratio came in at 95% within our guidance range, and we finished 2024 with an approximately 90% insurance cost ratio, also in line with our updated outlook. Excluding our $49 million restructuring charge, operating expenses in the fourth quarter were down 1% year-over-year and down 2% for the full year. Total intangible impairments were $25 million, with the largest portion of that being $23 million from our decision to exit the HRIS software-only business. The other components of the charge include $14 million linked to rightsizing our onshore team to reflect efficiencies, as well as the opportunity to leverage highly-skilled global talent, $7 million related to site rationalization efforts, and $3 million mainly for outside support and other items related to these efforts. Of the $49 million charge, $17 million of it is cash. These actions collectively will allow us to sharpen the focus of our organization on our value-creating initiatives, unlock capital to reinvest in growth and better position the company to deliver enhanced financial performance over the medium term. We will continue to manage expenses tightly, and we expect our 2025 expenses to be lower than 2024, excluding the restructuring charge. We do anticipate some trailing restructuring costs in 2025 albeit much smaller than in 2024. Fourth quarter GAAP net loss per share was $0.46, and full-year GAAP earnings per diluted share were $3.43. GAAP earnings per diluted share were reduced by the restructuring charge. Our adjusted per diluted share, which excludes restructuring, was $0.44 in the quarter and $5.32 for the year. TriNet remained a strong cash-generative business in 2024 despite operating headwinds. For the year, we generated $279 million in net cash provided by operating activities and $201 million in free cash flow. In accordance with emerging accounting practices, we modified the presentation of our statement of cash flows by moving cash flows related to WSE activities from operating cash flows to financing cash flows. Net cash provided by operating activities now reflects what we previously provided within our MD&A as net cash provided by operating activities corporate. We generated $60 million in adjusted EBITDA in the fourth quarter and $485 million in adjusted EBITDA for the year. Over the course of the year, we leveraged that cash generation to fund dividends and repurchase approximately 1.8 million shares, deploying $219 million to shareholders. We also paid down $109 million of our revolving credit facility and exited 2024 with a debt to adjusted EBITDA ratio of 2 times at the upper end of our targeted 1.5 times to 2 times range. In 2025, our capital return priorities remain unchanged. We will continue to deliver value to shareholders by investing in our value creation initiatives, funding dividends and share repurchases, and maintaining an appropriate liquidity buffer. Now let’s turn to our 2025 outlook where we’ve made a few changes compared to last year. First, we are moving from quarterly to annual guidance to better align guidance with how we forecast and manage our business. There's seasonality in both how our customers buy and how our business performs, and we spend a disproportionate amount of time discussing the seasonality of our business, distracting from the long-term focus of profitable growth. Next, we're adding adjusted EBITDA margin as a guidance metric to help investors better understand how we are forecasting operating expense growth. For 2025, we expect total revenues to be in the range of $4.9 billion to $5.1 billion. Given the current economic backdrop, we are expecting slight volume decreases in 2025, resulting from three factors: one, our new sales assumption is down over 2024 with most of the decline occurring in Q1 due to our more prudent pricing approach, reflecting elevated health cost trends; two, we anticipate attrition moving up one to two points, but still below our previous historical norms as we place appropriate price increases with our existing customers; and three, we assume CIE growth to remain at low single-digit growth rates similar to 2024 levels. As the year progresses, we expect total revenues to grow as pricing firms. With the volume backdrop, we expect professional services revenues to range from $700 million to $730 million. The drivers of this range are: first, the overall volume decline, which has an approximately $35 million to $40 million impact on our 2025 revenues compared to 2024; second, the discontinuation of an annual per client technology fee, which contributed $22 million in revenue in 2024. This fee was introduced in late 2023 and charged again during 2024. We have discontinued it after assessing customer feedback; third, our exit from the HRIS business, where we expect SaaS-only revenues to decline as customers convert to ASO or transition to another partner. We expect this decision to reduce revenues by between $15 million and $20 million as we start building our base of ASO. Finally, we assume a modest single-digit price increase contributing $25 million to $30 million, partly offsetting the revenue declines I just mentioned. We expect our insurance cost ratio to be in the range of 92% to 90% as the year progresses, and we expect revenue to build and position us to exit 2025 with an improving seasonally adjusted insurance cost ratio. In 2025, we expect our adjusted EBITDA margin to be approximately 7% to 9%. Prudent expense management remains a key objective, particularly as we reinvest in value creation initiatives. We expect lasting efficiency improvements to come from the expense actions we are taking. The 2025 contraction in our adjusted EBITDA margin includes two short-term factors. First, the midpoint of our guided insurance cost ratio is above our targeted range of 87% to 90%. And second, we expect to carry our HRIS expense base through the wind down of that business before rightsizing those expenses. For those SaaS-only customers who elect not to move to HR Plus, we will continue to support them through 2025. Lastly, given the strong capital deployment for the last two years, our cash and investment balances are lower. We've also experienced an overall decline in rates from recent highs. Both those factors together have lowered the interest income we are expecting in 2025 versus 2024 by $25 million to $30 million. As Mike said, 2025 will be a transition year for TriNet as we become more focused on our core value proposition with more efficient operations. This brings our expected GAAP earnings per diluted share to be in the range of $1.90 to $3.40 and adjusted earnings per diluted share to be $3.25 to $4.75. With that, I will pass the call to Mike to discuss our value creation initiatives.

Thank you, Kelly, and thank you all for accommodating a longer call this quarter. I'm excited to share our strategy and medium-term outlook. I should also thank many of you for sharing your thoughts and questions with me over my first year. Many of you share my enthusiasm for our large market opportunity and TriNet's value proposition. You've also asked some very good questions about our lack of consistent growth, sustainability of margins, and the pros and cons of taking insurance risk. We undertook a thorough review of our strategy beginning last June to answer these and other important questions about our business. I'm going to walk you through the choices we've made, the data that underpins them and the positive outcomes we're targeting for shareholders, customers, and colleagues. Our plan targets three straightforward financial objectives: grow revenues, expand margins, and deliver on our capital management priorities. With disciplined execution, these actions support a value creation opportunity of 13% to 15% per year for our shareholders using 2024 as a baseline. I won't spend a lot of time on it now, but it is important to start with the strong position TriNet enjoys today. We serve over 15,000 PEO customers and 360,000 worksite employees, and we are the premium brand in the space, delivering the leading technology experience with a high-touch service model. Our market opportunity is large, and our industry is growing. 59 million people in the U.S. are employed by companies with 500 or fewer employees. PEOs serve just 7% of that market, and the industry is growing at 7.5% per year on a sustained basis. We believe this growth can accelerate as there are three major secular tailwinds for our business model. First, rising healthcare costs are a big issue that is not going away. We believe the scale and risk-taking in our model creates real value for SMBs; more on this in a moment. Next, over 40% of the SMB workforce is now full-time remote, which complicates the onboarding, benefit and administration of HR. Finally, the regulatory burden for the SMB with employees across multiple states increases the appeal of our value proposition. Against that backdrop of a growing industry and increasing SMB demand, TriNet's lack of consistent growth stands out. For us, it underscores the need for us to change. Our plan is to grow revenues at 4% to 6% per year over the medium term. We've identified concrete ways to further differentiate ourselves from competitors on product, direct sales, and in the brokerage channel. Note that our 4% to 6% revenue growth assumes customer hiring remains somewhat muted; I will touch on that more in a moment. Let's start with our benefits offering and address one of the important questions many of you have asked: why take insurance risk? Our benefits offering is enabled by our business model. We take insurance risk. This comes with advantages and disadvantages, particularly evident in the current cost environment. In our view, the positives outweigh the negatives over the long term, both for our customers and for our shareholders. Taking on risk affords us greater access to claims data and puts us at the table with our carrier partners when it comes to designing and pricing our offerings. However, leveraging data and carrier partnerships also requires investment in the right expertise and technology. On the people side, in mid-2024, we carved out our insurance services group reporting directly to me. We brought in a new head of insurance services and added outstanding actuarial talent as well. On the technology side, we are working to solve a long-standing problem at TriNet. Our benefits platform is efficient but rigid, with limited flexibility to tailor solutions to a customer's needs. For example, to hit a lower price point for a cost-sensitive customer, a primary lever has been discounting. Going forward, using the Zenefits technology and dedicated change teams, we're building the capability to efficiently tailor offerings. While most of our competitors do not take risk and pass through standard healthcare products and pricing, we are partnering with carriers to provide options that meet customers' specific benefit objectives. We are driving towards having our first wave of these new offerings in the market by our fall selling season. These options, paired with the strong enrollment, decision support and administration capabilities of our platform, will further differentiate us in the market. Our increasingly tenured salespeople and growing employee benefit brokerage channel will use that differentiation to drive new business, which is a good segue into changes we're making in our go-to-market approach. We grew our sales force by 14% in 2024 and plan to grow it modestly again in 2025, targeting underpenetrated geographies and experienced rep hires. We're also making changes to increase average tenure in our sales force. Given our expansion and some self-inflicted struggles we've had in recent years, our median tenure is just over 21 months, lower than that of our peers. A rep with four years of experience produces more than four reps in their first year at TriNet. Our strategy for keeping reps longer starts with leadership, and we were pleased to bring in a new leader with a proven track record in building strong, career-oriented direct and channel teams in the SMB market. We are redesigning our sales compensation and rewards programs to align incentives with longevity, investing in professional development, and building out physical offices to help strengthen our field culture and enhance collaboration. As we develop outstanding expertise in our sales team, our direct sales will benefit. Additionally, benefit brokers will be more likely to work with TriNet, preferring to refer their clients to tenured and experienced salespeople, and the opportunity in the benefit broker channel is significant. As I shared earlier, PEOs only serve 7% of the SMB market. In contrast, employee benefit brokers bring health care to nearly 70% or 41 million WSEs in the SMB market. The industry, including TriNet, has fluctuated between partnering and competing with brokers. Many of our peers own their own brokerages today. Moving forward, our priority will be to collaborate rather than compete. We're adding functionality to our platform to allow brokers access and insight on the clients they bring to TriNet. We are aligning incentives and establishing joint go-to-market approaches. While building trust in this channel doesn't happen overnight, I'm excited about the momentum we've already established. As I noted earlier, our medium-term revenue forecast of 4% to 6% does not assume customer hiring returns all the way to historical norms. Our base case assumes a gradual ramp in CIE from low single digits to mid-single digits over the next few years. Should we see CIE above that, we would see upside in our overall revenue and margin improvement as well, given the low cost of acquisition and incremental servicing cost for CIE. Of course, we have leveraged many factors in our immediate control to improve margins, and next, I'd like to highlight two of the most important ones. The first is risk management and improving our insurance cost ratio. We are confident we can return our insurance cost ratio to our target range over the medium term. On this page, we provide our health cost ratio which excludes workers' compensation. As you can see, the healthcare issue is largely confined to business written in 2023 and the first half of 2024, representing 15% of our book. The remaining 85% of the customer base sits in the middle of our targeted range. Because our health cost ratio issue is confined, we do not have a systemic mispricing of risk. I am very confident we can manage our way back to our target range. We took meaningful steps with our October 1 and January 1 effective renewals and will continue to work through our customer base in a balanced way over the course of 2025. I fully expect to exit the year in a much better place relative to our target. In addition to the insurance cost ratio, another significant lever to drive margin improvement is operating expense. A few essential elements will move the needle. First, technology, especially investments in AI and digital, will lower costs while improving the customer experience. When I arrived at TriNet, we had already begun to reduce our significant tech debt, and we've accelerated those efforts. For example, we process over 2.5 million customer service cases per year. Over the medium term, we believe we can automate more than 20% of these interactions. Talent strategy is another crucial area. This is about having the right people in the right places for where our business is going and giving them the support and the tools to do their job efficiently. We expect the net effect of these efforts will help keep operating expense growth within a 1% to 3% range per year on average. Importantly, there will be a flywheel effect as we create efficiencies. We will not only keep overall expense growth in check, but we will also grow the share of operating expenses that go into new capabilities from 12% last year to between 20% and 25% in the medium term. This gives us the room to innovate and improve the value we bring to customers. Delivering on our growth and margin objectives will translate into strong free cash flow growth. Cash generation is one of the reasons we love our business model. Over the next few years, we expect to convert approximately 60% to 65% of adjusted EBITDA to free cash flow. That's cash we can reinvest in the business or return to shareholders as we've done in recent years, returning over $2 billion since 2020 through repurchases. Our capital allocation strategy remains largely unchanged. We will continue the dividend we initiated in 2024, and we expect it to grow with earnings over time. We expect to continue to repurchase shares. While we will remain opportunistic concerning M&A, we do not anticipate significant transactions in the medium term and believe our policy of returning 75% of free cash flow on average to shareholders remains a good target. Overall, we expect this plan will create compelling value for investors in the range of 13% to 15% per year on average. Our investments in offering and go-to-market will drive 4% to 6% revenue growth, and we will achieve 10% to 11% margins through strong insurance risk management and expense efficiencies. We believe we can convert between 60% and 65% of our adjusted EBITDA to free cash flow in support of our capital allocation strategy, which translates into 12% to 14% EPS growth and 13% to 15% value creation when you take the dividend into account. I'm mindful we are communicating our strategy on the same call that we're providing short-term guidance for 2025, which on most dimensions is below our medium-term outlook. I want to share a little more about the cadence of improvement to help you bridge from our 2025 guidance to our medium-term outlook. The changes we are making build momentum through the year and set us up to exit 2025 on an improved trajectory. Three primary factors are driving this. First is repricing. We began this effort in the second half of 2024, and it takes about four quarters for the full impact of repricing the 2023 and first half 2024 cohorts to be seen in the P&L. That means, we'll see some benefit of repricing in the second half of 2025, but more significantly in 2026 and beyond. Next is sales force productivity. It takes time to recruit and hire sales reps that meet our standards and get them fully up to speed. That said, we have large cohorts of salespeople entering their third and fourth years with TriNet and we expect this experience, along with benefit offering improvements, will begin to drive sales increases during the fall selling season with significant improvements for January 2026. Finally, the exit of the HRIS business lowers our revenue base by $15 million to $20 million in 2025, and while HRIS revenue dissipates relatively quickly, it takes longer to eliminate the expense as we will continue to service the solution through the complete transition of our customers. In 2025, there is a modest EBITDA margin drag related to this dynamic that will not persist into 2026. HRIS was a low-margin and shrinking segment on a pro forma basis. Fully exiting this business will be accretive to margins. In conclusion, I'd like to return to where I started this call. We are in the midst of a transition year here at TriNet, but I couldn't be more excited or confident in where we're headed. With our large growing market, strong customer value proposition, and a straightforward and disciplined strategy in place, we are well positioned to restart revenue growth, expand our margins, and create value for our shareholders. With that, we now look forward to taking your questions.

Thank you. Our first question comes from Jared Levine with TD Cowen. Please go ahead, your line is open.

Thank you. I guess just to start here, let's touch on the medium-term financial targets. Where are you defining in terms of duration for the medium term? And then can you discuss the underlying components of that 4% to 6% revenue growth between volume and pricing increases?

Yes, good morning, Jared. Thanks for the questions. It's Mike. If I just have a quick step back, we thought it was really important to give the market and investors a sense of not just where we're going to be in 2025, but as we look out over the coming years past that, what’s the rate of improvement that we see in terms of value creation? We took a little bit of time to lay out the plans and the steps we're taking as I have a lot of confidence in our ability to step through that. But when we thought about exactly naming the duration, we feel like we're going to learn a lot as we go through 2025. What's the exact rate of improvement on the controllables inside of TriNet as well as those external factors? We left it a little bit open in terms of the exact duration of the medium term. But I can tell you that, if you think about the elements of the plans, it gets to the second part of your question. Our confidence is a little bit different for reasons I think that are pretty intuitive. If I took the insurance cost ratio, our confidence is quite high there that we can manage that through our new business and renewal pricing over, say, the next three years back into the middle part of that targeted range. When we take a volume driver like CIE, our confidence is much less certain, given the plethora of aspects that can happen externally. We've put in there a very modest improvement, not all the way back to historical CIE norms, and we provided more transparency to the market by giving you some sensitivity analysis around that. So I think it bodes well in terms of your question; the repricing of insurance back into the middle of the range will be a substantial part of the revenue increase, but we also see volume, particularly as we get past 2025, starting to be a meaningful contributor over the long term.

Got it. And then in terms of the insurance cost ratio, can you give us an update on how those trends are looking? Did you see any further acceleration? I think on the prior earnings call, you pointed out a preliminary view for 2025 around 90% or so. The current guide you just provided right now is right around 91%. Is there anything different now versus last quarter in terms of this fiscal 2025 view?

Yes, it's a great question. We gave our best view about 100 days ago around where we thought 2025 was lining up and feeling like it's going to be relatively similar to how 2024 would end, and we sort of finished around 90%. We've put out guidance today that puts us just maybe 100 basis points to the midpoint of the guide this year. In general, I'd say not a lot of material change. There is just going to be a little bit of learning as we go through it. I want to take a step back here and say that, a year into my role, our insurance capability is meaningfully better. We've carved out that group; we've brought in strong leadership and actuarial talent. The granularity that we have on our forecast around medical cost, pharmaceutical cost trends, and where our customers are positioned relative to their risk is much better than it was a year ago. As mentioned in the prepared remarks, it's quite promising. I hope investors take comfort in the fact that we don't have a broad issue to solve for in terms of that insurance cost ratio. It's a confined part of the book, about 15%. Again, this builds confidence that we're just getting better and better at understanding how risk materializes and how we can manage it proactively.

Got it. And if I could sneak in one more, are there any other potential strategic changes planned for the near term or the potential for additional strategic changes over the medium term?

I think we're in a good spot. As we talked about, we're fully cognizant that 2025 is a transition year, and our guidance reflects that fact. Our team, and I define 'team' broadly. As we went through this strategic review, a broad group of leaders engaged on this. We looked at a lot of different opportunities, asked ourselves tough questions, and questions that, frankly, many of you have been asking me over the last year and came out of it with a renewed sense of optimism around that SMB market. The value that we create with a comprehensive set of HR outsourcing solutions and just the tailwinds that we have for this business. So as we work our way through 2025, treating our customers extremely fairly in the HRIS business as we exit and upsell to ASO, I think we're in a great position with the right plan, the right set of businesses, and the right channels opening up to drive growth over the long term.

Great. Thanks. Good morning, guys. I know you all are shifting from quarterly to the annual guidance here, but I just wanted to see if you could give us a little bit of help here to think about the seasonality, particularly in the first quarter of this year. I know typically, that's a good quarter seasonally for insurance costs as some of these deductibles reset, but I know there's some repricing puts and takes. So I guess, is there any color you guys could give us on how this year's seasonality should unfold compared to historical levels, at least how you view things today?

Yes. Kyle, it's Kelly. I'd be happy to take that, and good to hear from you. As we think about seasonality, Mike mentioned a few things around what we're doing from a repricing perspective, which should put us in a great spot to end the year and jump into 2026. But we do provide some seasonal charts. While it has varied a little bit from year to year, the way that we think about it is roughly, if you pick a point on a full-year guide, the first quarter tends to be about 2 points worse and the fourth quarter tends to be about 2 points better. So it averages out that way. The other thing from a seasonality perspective is that part of our professional service revenue comes from processing unemployment fees, etc. The professional service revenue tends to be a little bit more front-loaded in the first quarter because of the varying state wage bases and other factors. So hopefully, that's helpful.

Okay. Yes, that is very helpful. And then as a follow-up, I just want to see how we should think about WSEs for the year. I know with the tech fee going away, last year’s tailwind is going to reverse this year. If you could remind us what that impact will be and how we should think about it, based on the CIE assumptions in the guide, that would be great.

Yes. It's a great question, and that probably is one of the bigger impacts on our overall professional service revenue guide for the year. We are anticipating WSEs to decrease year-over-year. It’s really a combination of a couple of factors. One, we want to ensure we're pricing our products based on the risk we see in the market right now. We are assuming a double-digit healthcare cost increase and want to make sure that we're anticipating that. So this will have a drag in the first quarter for sure. As we think about it, our CIE assumption is pretty similar to 2024. Like I said in the prepared remarks, we were up about 1%, a little over 1% in 2024, and we're not expecting much improvement over that. Then when it comes to attrition, we had a record year last year. It was great, a really good retention year. But we are anticipating that to tick up about one to two points, which obviously adds pressure on volume as well. This creates about a $35 million to $40 million headwind on professional service revenue for the year.

Hi. Good morning. Thank you for taking my questions. To begin, I wanted to clarify the medium-term plan. Should we consider that in terms of growth rates related to 2024 or 2025? I just want to ensure I understand correctly; I believe you mentioned 2024 as the baseline, but the choice between 2024 and 2025 will significantly impact the earnings growth compound annual growth rate.

It is 2024. Good morning, Andrew.

Thank you. I have a question about customer health. How have conversations with customers changed in the last couple of months? There are signs of optimism among small and medium-sized businesses, so I'm interested in any insights you might have from clients. Additionally, besides the improved financial services growth you mentioned, do you have any further details at the vertical level?

Yes, sure. I'd say the tone of conversation as I'm spending time with our customers and with our channel partners is markedly improved. Certainly, post-election, we saw that sense of understanding or belief that things could settle in and that we would be in a more business-friendly climate, and I think that's been the sentiment overall. That is materially different than where we were sitting a year ago, so there are reasons for some optimism. Our plan, as Kelly laid out, really doesn't bank on an increase in net customer hiring this year. The statistics reflect what's a very historical low for what is typically an important part of our business model. I think we continue to monitor all the verticals and we do see reasons for optimism in a few spots. However, when I look at it overall, it doesn't approach what we would expect from a net hiring point of view. This speaks less to anything that’s vertical in nature and reflects more general pressures concerning finance costs, new business starts, and the balance from venture capital and private equity around conserving cash versus investing in growth.

Yes. The only thing I'd add to that, Andrew, is that regarding the verticals overall, when I look at it on a full-year basis, I mentioned the bright spot in financial services, which is probably in the mid-single-digit level for CIE year-over-year, even though the total was just over 1%. In tech, we saw significant declines last year, and it appears to be leveling off and slightly positive this year for 2024.

Right. Great. Thank you. And if I could squeeze one more in, just on the guidance, specifically related to ICR guidance. Can you walk us through how you're thinking about the top and bottom-end of that guidance? What drives you to each, and maybe provide some context on general conservatism? Because it sounds like versus a couple of months ago, utilization trends haven't changed meaningfully. I want to make sure I understand the risks to performance and if there is any risk to falling below the lower end of that guide. Thank you.

Sure. I would say it's essential to emphasize that we are performing better compared to last year. The data we’ve collected, the discipline in the process, and the people managing those processes all provide growing confidence. The 92% is our best point of view. As we reviewed incurred claims data over the last several months, we found it to be encouraging. It's materializing in ways that are quite consistent with our assumptions that we put into the guide and our pricing plan. To address your specifics, the drivers towards the top end of the range would be continued acceleration in trends regarding healthcare cost inflation. However, that’s not what we’ve seen over the last several months, which is a positive indicator. We would need to notice changes in the rate increase or other factors which would push us towards the favorable end of that guide.

Thank you. Good morning. I would like to take a higher-level perspective on CIE as we look beyond 2025. Is it still realistic to expect that your WSE growth will match that of your larger peers in the market, considering the differences in your business models? Despite the significant improvements you have made and those that are still forthcoming, I want to ensure that my expectations align with your business model.

Yes, thanks for the question. I think if you look at CIE, the data illustrates the trends clearly over a 10-year period. There is volatility to that. But it is reasonable to assume that CIE growth that sits somewhere in the high singles to very low double digits is a feasible long-term assumption. We've elected to build into our medium-term outlook a gradual reversion towards that into sort of the mid-single-digit range and provided some sensitivities for both improvement or decline in that. I believe the systemic reasons for expectations are clear for the targeted part of the SMB market. However, we do not want to bet on a full reversion at this time. The other piece, which you and others have questioned, is about new sales and the growth of the customer base. I am very enthusiastic about the work underway with our revenue team, and we’re on the path to revamping our sales dynamics.

Okay. So structurally, there's a limitation there when you consider the differences in the models.

No, I really don't believe that. When we think about just back to the medium-term guide, this is a fantastic business model, and it's durable. There’s real growth as we begin to reprice this business in a thoughtful manner back into the targeted range. I also believe there's upside potential on our retention over time as we invest in our delivery model with technology. When we layer in volume growth, again focusing on the controllable factors on new sales, it tells me that the less dependent we are on CIE to achieve sustained, predictable growth, the better job we're doing at TriNet.

Right. So just the point about new sales growth, you raised two points in your prepared remarks: conversion of HRIS to the ASO model and channel partners, which you've talked about quite a bit. Could you quickly walk us through what impact that could have on your business overall, given this model is distinct from the PEO model and how that flows through to the financials if that business gains momentum?

Yes, we're excited about the possibilities there. I'll be honest with you, David, at times, I think we do ourselves a little disservice by tying our brand too tightly to the PEO name. The reality is we are high-value-comprehensive HR outsourcing. Whether that’s through traditional PEO products or unbundling some insured products and assisting customers in sourcing those on the open market, we see it as a flexible continuum in the market for high-value services. We are enthusiastic about incorporating more flexibility through our processes and technology. I believe ASO could play an exciting role here. Let me thank you all once again for taking the time to join us this morning. I know Kelly, Alex, and I will be spending time with many of you over the coming weeks to continue the dialogue. Thank you, Lydia, for your help this morning. With that, we'll conclude the call.

Thank you. This concludes our call today. Thank you for joining. You may now disconnect your lines.