Earnings Call Transcript - TNET Q1 2020

Operator, Operator

Good day, and welcome to the TriNet First Quarter 2020 Conference Call. I would now like to turn the conference over to Alex Bauer with Investor Relations. Please go ahead.

Alex Bauer, Investor Relations

Thank you, Operator. Good afternoon, everyone, and welcome to TriNet's 2020 First Quarter Conference Call. Joining me today are Burton Goldfield, our President and CEO; Richard Beckert, our Chief Financial Officer; and Michael Murphy, our Chief Accounting Officer. Our prepared remarks were prerecorded. Burton will begin with an overview of our first quarter operating and financial performance. Richard will then review our financial results in more detail. Finally, Michael will provide our forward-looking guidance. We will then open up the call for the Q&A session. Unique to this conference call, the four of us are in 4 different locations, observing our COVID-19 shelter-in-place mandates. We will make our best efforts to have a Q&A session executed as seamlessly as possible. Before we begin, please note that today's discussion will include our 2020 second quarter and full year guidance 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 that are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict 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 non-GAAP net service revenues, adjusted EBITDA margin and adjusted net income per share. The impact from COVID-19 has led us to revise our forward-looking guidance. Our second quarter forward-looking guidance is especially impacted by COVID-19, leading to a wider-than-typical guidance range. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see our earnings release or our 10-Q filing for our first quarter, which is available on our website or through the SEC website. A reconciliation of our non-GAAP forward-looking guidance to the most directly comparable GAAP measures is also available on our website. With that, I will turn the call over to Burton for his opening remarks.

Burton Goldfield, President and CEO

Thank you, Alex. Over the past two months, we have witnessed the immense consequences of COVID-19. Our thoughts are with those impacted by the virus as well as those affected by the subsequent economic fallout. TriNet Q1 financial results were strong, driven by volume growth and disciplined financial management. Before I go into additional detail around these results, I want to address our market and our response to these unprecedented times. As a leader in the small- and medium-sized business segment, we have spent the last 2 months guiding our 18,000-plus customers through this difficult time. We are providing invaluable consultation, feedback and direction in addition to our payroll, benefits and HR support. At the same time, we are focused on our colleagues and all aspects of operating our business. SMBs are critical to the U.S. economy. They generate nearly half of the U.S. gross domestic product while employing the majority of the workforce. SMBs are the innovators employing 43% of all scientists and engineers as well as the organizations that are providing 15% more patents than any other business segment. An example of one SMB innovator is Biodesix, a lung cancer diagnostics company. Biodesix is the first company to offer five noninvasive blood-based tests for patients with lung disease. Although virus detection has not been the focus of the company, the leaders of Biodesix felt compelled to leverage their technology and expertise to enter the fight against the corona pandemic. They are now testing for COVID-19, processing 1,000 test kits per day and providing results in 48 hours. I am proud that Biodesix is a TriNet customer, and just one of our many customers who have converted their technology and know-how to fight this pandemic. Our target market is these SMBs, which represent the backbone of our economy. Notably, small- and medium-sized businesses will be the key to our nation's eventual economic recovery. I am pleased with the impact that TriNet has achieved in support of our customers and their valued employees. There has never been a more important time for us to leverage our expertise, reach and scale in service of these amazing customers. TriNet's response with respect to the current pandemic began in mid-March as we instituted a shelter-in-place protocol. We focused our resources on guiding our SMB customers through the resulting economic dislocation and providing enhanced services. We quickly created and launched our COVID: TriNet Business Resiliency and Preparedness Center. This web-enabled resource serves as an efficient distribution center for all TriNet COVID-19 communications and content. It allows our customers as well as our noncustomer SMBs to access relevant and timely information. Over the past 2 weeks, we have seen, on average, just under 1,000 daily visits to the site. Our 7x24 customer service team has been crucial as it allows customers to reach out to us on their schedule to tap our expertise and resources. Since the beginning of April, the team has been logging on average of just under 500 COVID-19-related cases per day, roughly a 10% increase in our historic customer caseload. Two of the most frequent topics of inquiry have been assistance with the SBA loan applications and options around health care for their employees. The passage of the CARES Act, and specifically, the Payroll Protection Program administered through the SBA has been a key driver of customer inquiry. Our investment in infrastructure and specifically workforce analytics has paid off. It has enabled us to provide customers with timely and properly formatted payroll information necessary to complete the loan applications. Additionally, we are delivering the subsequent tracking of required payroll data under the terms of the PPP loans. We have also leveraged the COVID homepage to host a series of well-received, how-to vignettes, walking customers through the loan process. Thus far, just under half of our customers have accessed the relevant SBA loan data. As expected, customers have also been inquiring about options related to health care coverage. TriNet has proactively addressed this issue with improved access to affordable health care. We have actively communicated carrier plan changes, such as waived co-pays and cost sharing, lab testing, telemedicine and more to our customers. With respect to telemedicine, we have seen a doubling of visits without significant increases in wait times. We have also modified our sponsored plans to ensure we are best supporting furloughed worksite employees, and worksite employees that have moved to part-time employment. Finally, we are facilitating access to short-term medical plans for furloughed and laid-off workers, representing an affordable alternative to COBRA. With respect to TriNet Q1 financial results, I am pleased with our strong first quarter. These results reflect TriNet's return to growth, coupled with disciplined financial management. Notwithstanding these Q1 results, the economic environment has changed, and as such, Richard will go through these results in greater detail. However, I do want to highlight two items from Q1. Our net insurance margin and our average worksite employee growth. Regarding net insurance margin, we delivered 14% in the first quarter, largely due to health cost savings. We believe health cost savings will persist in the coming quarters due to the trade-off between incremental COVID costs and lower costs attributable to the decline in elective procedures and overall health utilization. It is important to once again state that TriNet prices to risk, the health cost savings we saw in Q1 and expect to see in the coming quarters are a result of an unexpected drop in health utilization rather than higher-than-expected prices. Should we generate a net insurance margin in excess of our annual historical experience, when health utilization returns, we will look to return any cost savings to the TriNet installed customer base. Michael Murphy, who will be our acting CFO upon Richard's departure, will later provide greater detail regarding our net insurance margin forecast. Turning to worksite employee count. In the first quarter, average worksite employee count grew by 8%. That growth was largely the result of effective customer service and our customer selection process, which drove improved customer retention. Our customer selection process and specifically our vertical focus, even during the current economic environment, continues to pay dividends. This focus is an important aspect of our business model and has resulted in our CIE metric having a lower correlation to changes in the U.S. unemployment rate. When compared with the broader SMB market, our installed base is overweight in attractive growth verticals, such as technology, financial services and life sciences. As such, our current worksite employee volume as of last week is in the range of 300,000 to 305,000 worksite employees, for a net attrition rate of 10% since March 31. We typically don't provide an intra-quarter volume update, but given the current circumstances, we felt it prudent to provide this data this quarter. During this period, our Main Street vertical has had an attrition rate twice that of our white collar verticals. Notably, the TriNet book of business is now nearly 80% in the white-collar vertical. To service these critical customers, TriNet moved decisively to protect and enhance our business. In mid-March, we executed our business continuity plan, and transitioned our team to a work-from-home structure. Within 1 week, TriNet was serving over 18,000 customers remotely. We successfully transitioned 97% of our workforce of almost 3,000 colleagues to effectively working remote. This is an achievement I am personally very proud of. Thank you to the entire TriNet team for successfully working remote while continuing your passion around our amazing customers and company. TriNet established a cross-functional control tower to address the changing regulatory and customer landscape as well as financial and operating constructs. In late March, we further strengthened our liquidity. Informed by our collective experience during the 2008 financial crisis, we felt it was prudent to maximize our already strong liquidity and draw down our revolving lines of credit. We now have over $700 million in cash available to us, strengthening our already strong balance sheet. Finally, we continue to prudently invest in our strategic initiatives, such as developing the modularity of our offering, automation and creating further efficiencies. In the long run, TriNet and our customers will benefit from these continued investments. TriNet's future is about attracting and retaining the right customers in our core verticals, a unique strategy in our industry that supported our momentum in the first quarter. Presently, our focus is on helping our customers navigate this complex economic and rapidly changing regulatory environment. We are united in our mission, which has never been more relevant, and we are playing a crucial role in helping our SMB customers survive COVID-19. With that, I will turn the call over to Richard for the financial review.

Richard Beckert, Chief Financial Officer

Thank you, Burton. As we review the financials, I will focus on the GAAP and non-GAAP numbers where appropriate. As Burton noted, we were quite pleased with our first quarter financial and operational performance, as it demonstrated our return to growth, paired with disciplined financial management. During the first quarter, GAAP total revenues increased 12% year-over-year to $1 billion, and net service revenues grew 13% year-over-year to $283 million. We finished the first quarter with approximately 337,000 worksite employees, showing 6% year-over-year growth. Average worksite employee count for the first quarter was approximately 336,000, an 8% year-over-year increase. Professional service revenues for the first quarter increased 15% year-over-year to $156 million. Professional service revenues in the quarter outperformed our forecast by approximately $10 million due to improved worksite employee retention, continued strong hiring from our installed base, and new sales. Insurance service revenues for the first quarter increased 12% year-over-year to $892 million, and net insurance service revenues increased 10% year-over-year to $127 million. The strength in net insurance service revenues was driven by lower Q1 costs, particularly in March. Our first quarter GAAP effective tax rate was 25%, higher than recent quarters, as we did not receive a benefit from the tax treatment of employee equity compensation. For the quarter, our non-GAAP tax rate was 25.5%. GAAP net income increased 44% year-over-year to $91 million or $1.31 per share compared to $63 million or $0.89 per share in the same quarter last year. Adjusted net income increased 41% year-over-year to $97 million, or $1.41 per share compared to $69 million, or $0.98 per share in the same quarter last year. Adjusted EBITDA for the first quarter increased 34% year-over-year to $145 million compared to $108 million during the prior year period, for an adjusted EBITDA margin of 51%. We closed the first quarter with total cash of $521 million. As Burton noted, we drew down the balance of our revolving line of credit for $234 million, and now have over $700 million in cash available to us between cash, cash equivalent and unencumbered short- and long-term investments. Working capital was $284 million in the first quarter versus $229 million in the fourth quarter of 2019. Through the 3 months ending March 31, 2020, we generated $119 million of positive corporate cash flow from operating activities, and used $401 million, primarily comprised of worksite employee-related payroll tax obligations. As a result, total cash outflow from operations was $282 million. We spent approximately $40 million to repurchase approximately 747,000 shares of stock in the first quarter. I will now turn the call over to Michael Murphy to provide our Q2 and updated full year guidance.

Michael Murphy, Chief Accounting Officer

Thank you, Richard. Turning to our 2020 second quarter and full year outlook. I will provide both GAAP and non-GAAP guidance. Before I begin with our guidance estimates, I would like to provide some intra-quarter information we typically don't share as well as some of our assumptions to better understand our earnings guidance in light of COVID-19. As Burton noted, our current worksite employee volume is in the range of 300,000 to 305,000, representing a sequential net attrition rate of 10%. Our Main Street attrition is occurring at a rate twice that of our white collar verticals. Within our Main Street vertical, approximately 18% to 20% of our Main Street attrition is comprised of furloughed employees. Now turning to our guidance assumptions. It presumes that U.S. policymakers will continue to support employment by assistance to small businesses using legislation like the CARES Act and its Paycheck Protection Program until the economy reopens. We also assume shelter-in-place orders will gradually be lifted at different rates around the country as access to testing, tracing and therapeutic solutions broadens in the fourth quarter. Our volume, and therefore, our GAAP revenue guidance, is informed by 2 economic outlooks, both modeled in the shape of a checkmark. At the high end of range, we're assuming a steep economic drop, which we are currently experiencing, followed by a recovery beginning in late Q3 and growing steadily through Q4. At the low end of guidance, we are assuming the current economic drop worsens in the near term, and the recovery in Q4 is lower. 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. Our second quarter and full year net insurance margin guidance assumes that we will be significantly impacted by the timing and cost of health coverage as the pandemic prevents anything other than essential medical services from being provided. As Burton noted, should we generate an annual net insurance margin in excess of our historical experience, we will look to return these cost savings to our installed base. If we do see these cost savings develop, most of the benefits should be incurred in the second quarter before we begin to accrue for the return of these savings over time. As such, we expect to report significant timing differences in our health costs across the second quarter and the year. As a result, we are expecting our second quarter net insurance margin to be in the range of 19% to 23%. For the full year 2020, we are raising net insurance margin forecasts by approximately 3 percentage points. Now I'd like to set out our financial guidance. 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%. Turning to our full year 2020 guidance. We are revising our guidance lower. For GAAP revenue, we now expect the year-over-year change to be in the range of down 8% to down 3%, changed from our previous guidance of 10% to 13% year-over-year growth. We now forecast our net service revenue to be flat to up 4% year-over-year versus our previous guidance of 6% to 10% growth. Our full year 2020 adjusted EBITDA margin is now targeting a range between 38% and 39%, down from our original guidance of approximately 40%. GAAP earnings per share are now expected to be down 8% to down 1% year-over-year, lowered from our previous guidance of 4% to 12% growth. Adjusted net income per share is now expected to be down 3% to up 4% year-over-year, lowered from our previous guidance of 7% to 14% growth. With that, I will return the call to Burton for his closing remarks.

Burton Goldfield, President and CEO

Thank you, Michael. 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. Most importantly, I wish for your continued health and safety.

Operator, Operator

Today's first question comes from Tien-Tsin Huang of JPMorgan.

Tien-Tsin Huang, Analyst

Thank you for the detailed information. It's very helpful, and I'm still processing it. The net insurance margin guidance and plans to return the savings make sense. However, considering all the variables in your recovery assumptions, how do you intend to manage those savings and determine when you'll be in a position to return them? Could this potentially extend into 2021 when you have a clearer outlook? It seems like we might not have much visibility until after the third quarter or into the fourth quarter.

Michael Murphy, Chief Accounting Officer

There are many factors at play right now. In our guidance, we have taken into account the current COVID situation and even a more severe COVID scenario, considering the potential savings from the suspension of elective procedures and reduced service utilization. Additionally, workers' compensation adds to the uncertainty. We are uncertain about how this will unfold, but we expect to gain clarity on it before the end of the year. Once we have more information, we can decide when to reinstate it. We have implemented similar programs in the past.

Tien-Tsin Huang, Analyst

I trust that's the case. It looks like you had a good sales and retention trend going into mid-March. Given the change and the many moving pieces, the professional services revenue per employee is now 80% white collar, and things are evolving quickly. How do you think that will relate to worksite employee growth moving forward? How should we model the professional services line in relation to worksite employee growth?

Michael Murphy, Chief Accounting Officer

We anticipate a change in the mix for the full year, which we have factored into our projections, leading us to establish our annual range at between minus 3% to minus 8%. Our best estimate of that mix aligns with what was outlined in Burton's prepared remarks.

Tien-Tsin Huang, Analyst

Got you. Got you. One quick last one. Just your ability to protect the bottom line here. On the expense side, should things get worse or if it extends a little bit longer than what you're anticipating, how do you feel about the levers that you have available to pull on the expense front?

Michael Murphy, Chief Accounting Officer

Yes. We clearly have already pulled some of our initiatives and directed them to the COVID projects. We've also maintained our employee count to support our clients. We are being prudent on expenses right now, and we're comfortable we have the financial levers that we need to pull.

Operator, Operator

And our next question comes from Andrew Nicholas of William Blair.

Andrew Nicholas, Analyst

Just to start, maybe a higher-level question. I was hoping you could speak a bit to the ability of your sales force to sell new business over the past month or so. I would imagine not being able to meet with new clients face-to-face is a pretty big hindrance, and also the fact that I would imagine a lot of the SMB employees are focused on the day-to-day. So any other color that you could provide outside of what you said in the prepared remarks on the selling environment and kind of the outlook over the next couple of quarters would be helpful?

Burton Goldfield, President and CEO

Yes. Great question. And obviously, sales will be difficult through 2020. And we're experiencing what I expect to be most sales in Q2 and Q3. From my vantage point, it has created a tremendous opportunity for us to have meaningful conversations with new prospects and existing customers. A lot of our business comes from the existing customers. And what we've done is invested in our marketing, particularly our branding, which has increased the recognition around TriNet, and TriNet's ability to have an impact on these small and medium businesses. Conversations we're having with prospects are much more detailed than they've been in the past. People have a little bit more time, and they are more interested in understanding all the dynamics of how TriNet is using scale in service of these small and medium businesses. The pipeline is growing, and I expect, as this trend evolves, and the COVID environment abates that these conversations will continue and give us opportunities in the future.

Andrew Nicholas, Analyst

Great. That's helpful. And then in terms of business mix, I appreciate you calling out about 80% being white collar now from a vertical perspective. Is there any more detail you can provide? I know you mentioned being overweight in tech and financial services and life sciences. Could you break out your exposure at that level? And then also a similar question from a regional perspective, obviously, it seems like certain regions appear to be a bit harder hit than others. So any color on regional exposure would be helpful?

Richard Beckert, Chief Financial Officer

This is Rich. Let's recap what we discussed. As of last week, we have between 300,000 and 305,000 worksite employees, which is down about 10%. We also mentioned that approximately one-third of those employees have been furloughed. We're supportive in helping our customers manage furloughs, and as the business starts to recover, it's easy to transition furloughed employees back to regular status. This situation is similar to employees taking a leave of absence. So, roughly one-third are returning to work, which is encouraging. In the hospitality sector, for example, the impact is more severe, with only about 20% of their workforce on furlough. Regarding regional data, we typically do not disclose specific regional information. However, within the tech sector, the impact seems limited to very small startups, and overall, the situation across our installed base reflects similar trends.

Operator, Operator

Our next question comes from Sam England at Berenberg.

Samuel England, Analyst

Just a couple for me. The first one, I just wondered with that customer attrition number that you gave, has that been accelerating throughout April? Or do you think we've sort of hit a steady state here for the time being after the initial shock sort of in mid- to late-March?

Richard Beckert, Chief Financial Officer

Our business is particularly influenced by payroll runs. While at a macro level, things seem consistent week to week, we've noticed some fluctuations tied to specific payroll cycles. However, we haven't observed any acceleration in these trends; they've remained relatively steady concerning payroll runs. Additionally, since our installed base primarily consists of white-collar workers and has fewer hotels, restaurants, and similar businesses, much of that aspect of our market has already unfolded.

Michael Murphy, Chief Accounting Officer

We expect that our attrition will continue through Q2, affecting both the top and bottom of our guidance range. If we reach the top end of our guidance, we anticipate a recovery in late Q3 and into Q4. However, if we are at the bottom end of the range, the recovery is expected to occur later in Q4.

Samuel England, Analyst

Okay. Great. And then the next one, I just wondered what assumptions you're making about the numbers of white collar worksite employees for H2, as clients potentially get back in the office, start revisiting cost bases, etc., given most businesses on the white-collar side probably haven't made too many adjustments so far to their workforce?

Michael Murphy, Chief Accounting Officer

Yes. We do not provide volume forecasts generally. The best way to understand this is to look at our GAAP revenue growth, which reflects our thinking on volume.

Operator, Operator

And our next question comes from Palmer Pawlusiak with Crédit Suisse.

Kevin McVeigh, Analyst

It's Kevin. This is a highly detailed situation, and it's quite dynamic. Can you provide insight into how you're viewing the progression of worksite employees on a quarterly basis? I'm trying to understand if we currently have between 300,000 and 305,000 employees. What do you anticipate that number will be in Q2, Q3, and for the rest of the year?

Michael Murphy, Chief Accounting Officer

Yes. As I mentioned to Sam, we don't really provide volume forecasts. I think the shape of our checkmarks or the guidance between a later recovery at the lower end and an earlier recovery at the upper end, combined with our GAAP guidance, is probably the best way to understand our thinking on that.

Kevin McVeigh, Analyst

Got it. That's helpful. And then is there a way to just think about how many worksite employees have COVID-19?

Michael Murphy, Chief Accounting Officer

So it's too early to tell right now. The data coming in from the provider networks is incomplete, and we typically only receive that data on a paid basis. We expect to see that in about 3 to 4 weeks' time.

Operator, Operator

And our next question comes from David Grossman with Stifel Financial.

David Grossman, Analyst

Just first off, sorry, I didn't catch all the guidance. Is there a chance you could just quickly run through the non-GAAP guide for the second quarter and for the year?

Michael Murphy, Chief Accounting Officer

Sure. So for the second quarter 2020, we've got adjusted net income per share to grow year-over-year in the range of 27% to 97%. And adjusted EBITDA for the second quarter to be in the range of 39% to 49%.

David Grossman, Analyst

Okay. And for the full year?

Michael Murphy, Chief Accounting Officer

For the full year, our adjusted EBITDA margin is targeting a range of 38% to 39%. And our adjusted net income per share is now expected to be down 3% to up 4% year-over-year.

David Grossman, Analyst

Okay. And your revenue was minus 8% to minus 3% for the year, right?

Burton Goldfield, President and CEO

Correct.

Michael Murphy, Chief Accounting Officer

Yes.

David Grossman, Analyst

Okay. Got it. Okay. Great. And I'm wondering if I could just go back to your comments about retention because I think you're talking about employee retention. Is that accurate?

Richard Beckert, Chief Financial Officer

This is Rich. No, we're actually talking about our worksite employee retention. And if you recall, we started about a year ago working on ways that we could improve customer satisfaction, anything from onboarding all the way through their first payroll run, and then supporting them thereafter. What we have found is starting in the back half of last year and now clearly through all Q1, we've had much better retention building every quarter. So we're pretty happy with how the retention has been. So January being the biggest single month, we had a very strong retention quarter.

David Grossman, Analyst

So if you still consider that 6% growth and 8% average, would you describe retention as the primary factor driving that year-over-year growth acceleration in the quarter?

Richard Beckert, Chief Financial Officer

In the quarter? In the quarter, that's true. Because you have January being such a large month of when people would normally leave the company because they try to tie that out with their annual between insurance and their payroll stubs.

David Grossman, Analyst

Got it. I don't know if you can answer this question, but as you consider the risk of bankruptcies, which is a concern in the small business community, what observations do you have regarding client attrition or retention compared to worksite employee retention? Do they appear to be tracking similarly?

Burton Goldfield, President and CEO

Yes. We wanted to provide some insight into the furloughs and the individuals leaving due to the pandemic. A third of those affected are being furloughed, which suggests an intention to rehire them and indicates that those companies are likely not facing bankruptcy. We only experienced one sizable company that failed due to the pandemic, and we were already aware of their financial difficulties prior to it. We had them on our watch list and had predicted they might not survive due to their issues. Overall, apart from the hospitality sector and similar areas which were significantly impacted, the white-collar business fared much better. There will be consequences, and as Mike mentioned earlier, there are varying degrees of impact, which he has already discussed.

David Grossman, Analyst

Right. So when you consider it, and although it might be too early to provide detailed insights, do you have any insight into how the few small businesses that received stimulus money are utilizing it?

Burton Goldfield, President and CEO

We have noticed that in some instances, they request a unique bank account for tracking purposes to ensure compliance. We assisted them in setting that up. The company produced numerous videos and telecoms to explain how it would work and what the regulations were. Many banks require this separation, and we accomplished that with them. While not everyone followed this approach, a significant number did, and we were able to facilitate all of that, which I believe was very beneficial for small and medium-sized businesses.

David Grossman, Analyst

Right. But have you seen any of the resources being utilized yet? Are they effectively retaining people, or are they simply financing it? What are they doing with it?

Richard Beckert, Chief Financial Officer

The majority of it has to go towards payroll, so that's the answer.

David Grossman, Analyst

Right. Okay. So we haven't then seen it. I guess what I'm trying to understand is have we seen the impact of the stimulus money yet on the worksite employee retention? Or is it too early?

Richard Beckert, Chief Financial Officer

We're just starting just within the last week or so.

David Grossman, Analyst

Okay. And then in terms of hospitality and travel, I know it's embedded in. And did you say that now Main Street's 20% of revenue? Did I hear that right?

Richard Beckert, Chief Financial Officer

It's drifting down to that area, correct.

David Grossman, Analyst

Okay. How big should we think kind of now that we're into this? How big is hospitality and travel now?

Richard Beckert, Chief Financial Officer

It wasn't significant, just at the low single digits of the installed base, so it was never a major component. It's important to remember when we transitioned through the SOI migration and adjusted pricing based on risk, many who were seeking affordable insurance moved on. Therefore, we already experienced that challenge for numerous sectors that are currently struggling due to the pandemic. As reflected in our PEPM, our book of business has increased, which is evident in our annual renewals. The renewals tended to be more concentrated around Main Street, which left more frequently than the white-collar sectors.

David Grossman, Analyst

Got it. One last thing regarding sales and backlog conversion. For the business you sold last year that was expected to contribute in the March quarter, did the majority of that new business come in as planned during the larger seasonal quarters of March and June for onboarding new clients, or was a significant portion deferred?

Richard Beckert, Chief Financial Officer

No. That all came on as planned. The only deferral that we saw was really the very tail-end of March as a pandemic was starting to really surface. There were some transactions where people wanted to do more of a wait and see.

David Grossman, Analyst

Got it. As you consider your sales cycle, Burton, could you share your thoughts on how we should view the timeline for impacting 2021 if the situation doesn't improve and sales remain somewhat depressed?

Michael Murphy, Chief Accounting Officer

So we are still working on ensuring that our sales force is well-trained and productive. As I mentioned in the guidance, we are expecting a very challenging Q2 and Q3. Our focus remains on long-term investments and carefully and prudently expanding the sales force over time.

David Grossman, Analyst

At what point in the year does it become challenging to sell for the upcoming year? Are new clients starting throughout the year, so it doesn't significantly impact things? I'm trying to understand when 2021 could become particularly difficult due to challenges in getting people to make decisions.

Burton Goldfield, President and CEO

So David, I've never seen anything like this before, obviously. The model is showing tremendously well with the existing customers. The ability to get referrals will be better based on our ability to help these customers survive. The pipeline is growing, but I don't know what the drop-dead day is going to look like as far as impacting 2021. Conversations are meaningful. People are talking on the phone. The marketing campaign is working as expected. The branding campaign, I've been absolutely thrilled with. So we'll just have to wait and see. This is the data we have today, and we're trying to be as transparent as possible.

Operator, Operator

And our next question is a follow-up from Tien-Tsin Huang from JPMorgan.

Tien-Tsin Huang, Analyst

I just had one longer-term question for Burton, if you don't mind. Just your thoughts on demand for outsourcing and PEO once we move beyond the pandemic, which hopefully sooner rather than later, but just your thoughts in general about how structurally demand might change for PEO services?

Burton Goldfield, President and CEO

Yes. Tien-Tsin, obviously, I'm focused on TriNet and not the overall industry. But as I've said, I'm really proud of the ability to use scale to have an impact on these small and mid-sized businesses. And this is across the board. It has to do with information. It has to do with digesting and disseminating legislative information. It has to do with the loan process. It has to do with the insurance, both for existing worksite employees as well as furloughed or worksite employees that have left. So I am optimistic about the ability of TriNet to have an impact on its existing and future clients. I'm particularly thrilled with the way the TriNet team has switched to this issue and addressed it meaningfully for the customer base. So it's hard to tell. But obviously, the variable cost model of a PEO may be looked at as we move forward in this particular situation.

Operator, Operator

And ladies and gentlemen, this concludes today's question-and-answer session and today's conference. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful evening.