TRINET GROUP, INC. Q2 2026 Earnings Call

Good day and welcome to the TriNet Second quarter 2026 Earnings Conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad to withdraw your question, please press star. Then two. Please note this event is being recorded. I would now like to turn the conference over to Alex Bauer, Head of Investor Relations. Please go ahead.

Thank you. Operator. Good morning. My name is Alex Bauer TriNet, Head of Investor Relations. Thank you for joining us, and welcome to TriNet second quarter conference call and webcast. I'm joined today by our president and CEO, Mike Simonds, and our CFO, Mala Murthy. Before we begin, I would like to preview this morning's call First, I will pass. The call to Mike for his comments regarding our second quarter performance. Mala will then review our Q2 financial performance in greater detail and comment on our 2026 financial guidance and outlook. Please note that today's discussion will include our 2026 full year financial 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 a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock. In addition, our discussion today will include non-GAAP financial measures, including our forward looking guidance for adjusted EBITDA and adjusted net income per diluted share for reconciliations of our non-GAAP financial measures to our GAAP financial results. Please see our earnings release. 10-q, filings or 10-K filing, which are available on our website or through the SEC website. With that, I will turn the call over to Mike. Mike. Thank you. Alex, and thank you all for joining us. At the midpoint of 2026. I'm pleased with the progress we've made on our priorities. We kept our focus on our customers and executing our strategy, resulting in higher retention, increasing sales momentum, prudent expense management, and improved earnings performance, positioning us to raise our full year earnings outlook. While the operating environment remains challenging, the team is striking the right balance on two important fronts. First, as we previewed last quarter, our health fee pricing work over the previous 18 months positioned us to renew customers at rates more closely aligned with market trend.

Going forward. We saw the benefit in Q2 with a balanced combination of insurance performance and significantly improved customer retention. Second, I'm encouraged by the balance we are achieving in continuing to invest meaningfully in growth and client service initiatives, while also managing expenses prudently. Looking forward to the second half. We believe TriNet is well positioned for continued improvement in operating and financial performance. We've made good progress on our margins and operating fundamentals. We're now increasingly focused on realizing value from our growth oriented investments. TriNet path to sustainable growth will start with revenue growth, as pricing outpaces a slowing rate of WSE volume decline. Then W s e volumes will stabilize and begin to grow. Driven by further improvements in retention paired with new sales increases, starting with. Pricing. We now have our insurance cost ratio back in our targeted range and will continue to renew business. Assuming the elevated high single digit trend being felt across the market. Persisting with our pricing more in line with market trend. Our service proposition is becoming the biggest determinant as to whether our SMB clients stay with TriNet and continuing to improve our retention rates is our second key to reestablishing growth.

Our primary KPI for customer service is the Net Promoter Score, and I'm pleased to report that in Q2, we remained at much improved levels, continuing a trend from last quarter. Overall attrition in the quarter. Improved by 36% year over year. Importantly, when we break this down to look at the drivers, we saw a 58% year over year decrease in attrition related to health fee pricing and a 47% year over year decrease in attrition related to service. We are encouraged by these improvements as our goal is to achieve and sustain long term retention at rates several points higher than our historical experience of about 80% success. In our view, requires pairing our people with industry leading technology. AI and HR is most valuable when combined with judgment rooted in deep domain expertise and a strong service orientation. Long standing TriNet strengths. On this score, we're pleased with the performance of TriNet assistant since its launch this spring. This AI capability is both delivering a strong improvement in our customer experience and freeing up capacity for our teams to focus on higher value work Thus far, 50% of customer initiated chat sessions have been addressed through TriNet assistant, resulting in lower service case volumes for our colleagues.

These chat sessions include benefits, payroll and other workforce management related inquiries Moreover, customer satisfaction with TriNet assistant is strong and highlights growing trust with the experience. TriNet assistant is just one of several exciting AI projects designed to improve our customer experience, manage costs, and fuel our growth. We'll share more as these initiatives move into production. A second important investment in our client experience is our acquisition of cocoon. Leave of absence has been a significant compliance and employee experience. Pain point for our customers and the broader SMB market. And with cocoon, we addressed it with a best in class solution. I'm pleased to report that our integration is on track. Our first cohort of customers has migrated to the solution. Our second and third cohorts are expected to be completed by year end, which leaves us prepared to onboard new customers during our busiest time in January. The third ingredient in achieving sustainable growth is new sales In the second quarter, sales ended flat year over year with sequential improvement through the quarter. The challenges we encountered in March persisted into April before abating. Sales momentum has returned, leaving us encouraged as we look forward. We outlined several initiatives at the start of the year designed to improve our distribution and further differentiate our benefits offering, and we've made meaningful progress on both fronts.

First, we're doing a better job retaining our most experienced sales consultants. The total number of reps with more than four years of experience is up 7% year over year. As we've discussed, senior reps are our most productive, and we've seen that become even more true over time. The productivity of our senior reps improved by 13% year over year in Q2, and on average, they were five times more productive than our first year reps, retaining and growing our senior reps is critical. Over the next two years, we expect this group to grow further as successful. Level two and three reps graduate into their ranks. We created our ascend program to build a repeatable means of hiring, training and retaining sales professionals Feeding a much higher percentage of them into our senior rep ranks than was the case through our historical approaches. Our first ascend class of just over 20 reps moves into production in Q3, and as we have expanded our ascend program nationally, over 100 new reps have been hired into the program. We expect to send cohorts to graduate quarterly into production throughout 2027 and form the primary means by which we build a strong culture and sustainable sales talent.

Factory during 2025. We slowed our traditional hiring as we built out the Ascend program. This resulted in an overall contraction of the sales force in the second half of 2025, and the first half of this year. With our new recruiting, selection and training motions now rolling, new reps into production, we expect to show year over year increases in total sales consultants. In the current quarter, and we expect to see this growth continue. Finishing the year with approximately 20% more sales consultants than we finished 2025. Like each element of our strategy with our sales force, we focused on approaches that generate sustainable long term improvement. We are heading into our busiest selling season with a sales force that has more reps and is growing in absolute numbers, as well. A second element of our distribution strategy is our broker channel, which continues to demonstrate growth. This channel expands our distribution through National Broker partnerships with incentives for new sales and retention. At the end of Q2, the broker channel represented 32% of new sales, with RFP up a robust 54% year over year. While this channel is more competitive than direct sales, we believe that deeper broker partnerships should result in more broker generated leads aligned with our target customers.

Retention based incentives to brokers are critical for this alignment. Benefit brokers have deep expertise, and we know that benefits is a primary reason that our targeted clients come to the business model. TriNet is uniquely positioned here. Given our national scale and ability to take and manage risk. As the fall selling season comes into focus. Our insurance services team has introduced innovations to our health plan, offering First, we expanded our benefits plan library to cover a wider array of price points, and that invested in AI to match client needs around coverage and cost with the appropriate set of bundled plan choices. These bundles will be in market for our fall selling season. Second, in July, we launched our enhanced health plan pricing engine, creating a more structured, responsive and scalable pricing model. We believe the new health plan pricing engine will improve proposal quality, speed and consistency, strengthening broker and seller confidence and leading to greater stability in pricing over time. The combination of benefits, investments and added distributions underpin our confidence in growing sales through the second half of 2026. In summary, we believe we're progressing well against our growth plan at midyear, we are raising full year earnings guidance.

Our health plan pricing is better aligned with market trends Retention is improving and our focus on customer service, including the cocoon integration and application of AI, is delivering results. We are retaining our senior reps, expanding the sales force as our first ascend class joins the team entering the fall selling season with our benefits bundles and improved health plan pricing process Our performance this year and our improved outlook reflects our disciplined execution and meaningful progress. Having completed much of the work required to stabilize the business, we are focused on driving returns from the growth investments we've made. As a final note, earlier this week, we announced that TriNet was recognized by Time, Newsweek, and U.S. News and World Report as a top workplace. We have asked a lot of our colleagues over the last two years, and this sort of recognition reflects our colleagues dedication and our continued focus on building a strong culture. I know many of our colleagues are listening to this call, and I want to thank all of them for all they're doing to deliver these strong results and build our growth story in a high quality and sustainable way With that, I'd like to turn things over to Mala Mala.

Thank you Mike. I'm pleased with TriNet second quarter execution, which was characterized by disciplined pricing, better than expected insurance results, improved retention, prudent cost management, and solid financial results. Our focus remains on executing our strategy and returning our business to top line growth With that, let's dive into our second quarter financial performance. Total revenues were $1.2 billion, declining 5% year over year in the second quarter, impacted by lower volumes when compared to last year. Offset in part by insurance and professional service revenue. Pricing Q2 total revenues reflect the impact of our first quarter repricing efforts and impact. We expect to feel throughout the year Exiting Q1. Our WSC count was modestly lower than originally forecast, and as we exit Q two, we are realizing modestly better insurance performance. We finished the quarter with approximately 300 000 total. S down one. 12% year over year and flat sequentially. As a reminder, total S include platform users or those users who are accessing our platform, as well as core employed or. Those users receiving the full benefit of our services We ended the second quarter with approximately 274,000 total Co-employee down. 11%, largely due to the cumulative impact of our repricing actions in the first quarter.

Our full year retention forecast remains on track, and we expect to see year over year retention improve through the second half On C, historically, the second quarter is our strongest quarter. This year. We saw customer hiring consistent with what we saw last year. And in line with our forecasts. C didn't move backwards in the quarter, but we have yet to see it accelerate Professional services revenue in the second quarter was $159 million. Declining 8%. But outperforming our forecasts. Professional service revenue continues to be impacted by lower co-employee sees the outperformance relative to our forecast was due to firm pricing continued favorably in our reporting methodology for state tax related revenue and revenue from cocoon. Aso continued to perform in line with expectations. Interest revenue in the second quarter was $12 million, a decline of 33% versus the prior year. And in line with our forecast, as in the first quarter, the expected reduction of cash balances for certain tax credits drove the decline Consistent with our initial interest revenue guidance for the year Turning to Q2, insurance Services performance Insurance Service revenues declined 4%, primarily driven by lower overall SCS, offset by pricing, insurance costs declined by 8% year over year.

As a result, our second quarter insurance cost ratio came in at 86%. A four point year over year improvement in the quarter. We saw health cost trends stabilize in the high single digits, slightly favorable to our forecast and in line with broader trends in the quarter. We realized fewer inpatient procedures than forecast, and we experienced lower pharma cost inflation than expected On pharma costs. The adoption of biosimilars, such as for Humira and Stelara and the stabilization of GLP one usage kept cost inflation lower than forecast. We do not view our lower pharma cost inflation as a change in trend, given the probable future introduction of high cost drugs. Given how we've managed our risk over the last year. We realized approximately two points of year over year improvement in insurance cost ratio from favorable prior year development. Just as we did in the first quarter. The other two points of our year over year improvement was due to the recovery of previously expensed insurance administrative costs incurred in the previous decade This one time benefit was a small part of a larger recovery to which we were one of many recipients. In the second quarter.

Operating expenses, which exclude insurance costs and interest expense, declined by 1% year over year expenses in the quarter, included incremental cocoon costs, as well as other personnel related expenses. With our improved earnings in the first half, we have an opportunity to strategically invest in growth and efficiency in the second half. We are accelerating investments into three broad buckets. Our distribution efforts, our benefits offerings and our service model. These investments will incorporate AI throughout most of this incremental spend is slated for the current fiscal year Turning to earnings. Second quarter GAAP earnings per diluted share were $1.15 and adjusted net income per diluted share was $1.55. Our business remains a strong cash generative business, which supports our investment priorities and business execution. During the second quarter, we generated $128 million in adjusted EBITDA, representing an adjusted EBITDA margin of 10.9%. We generated $88 million in net cash provided by operating activities, and grew free cash flow by 18% to $67 million. Free cash flow benefited from disciplined expense management and better than forecast insurance performance. Our capital priorities remain reinvesting in our business for growth, M&A and returning capital to shareholders via share repurchases and dividends In the second quarter, we leveraged our cash generation to return $31 million to shareholders across share repurchases and dividends.

We repurchased approximately 500 thousand shares for $18 million, and we paid a $0.29 dividend in the quarter Turning to our 2026 outlook. We are adjusting our full year guidance to reflect our first half performance and updated 2026 forecast for total revenues. We are currently trending at or slightly below the midpoint of our current guidance range. Primarily due to lower insurance service revenues. Professional service revenue guidance is being raised, reflecting our stronger than forecast performance. Given the outperformance of insurance costs in the first half, we are improving our ICR range and raising both our adjusted EBITDA margin and earnings per share ranges. The improved ICR range includes most of the first half Favourability, including our one time recovery benefit in the second half. We expect normal ICR seasonality, which means second half ICR should be higher than the first half, driven by utilization patterns, deductibles being met and pooling limit resets While we have moved beyond our difficult yet necessary repricing efforts, health cost trends remain persistently high. As such, we will continue to price in the aggregate, targeting the high end of our long term 87 to 90 ICR range for 2026. Total revenues remain in the range of 4.75 billion to $4.9 billion.

While our professional services revenue range is raised to 647 to $663 million. We are improving our ICR range lower to 89.5% to 88.5%. Our adjusted EBITDA margin range is being raised to 8.5% to 9% GAAP earnings per diluted share are now in the range of $2.85 to $3.35, with adjusted earnings per diluted share raised to a range of $4.50 to $5.10. I'm encouraged by our second quarter results and the ongoing execution of our plan. We remain disciplined with our pricing as we navigate persistently high medical inflation and continue to make progress on our key strategic priorities Our year to date financial performance has enabled us to raise our full year guidance. We remain prudent with our investments while expanding margins year over year, and we believe we are better positioned for the second half. With that, I will pass the call to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two at this time, we will pause momentarily to assemble our roster. The first question comes from Jared Levine with TD Cowen. Please go ahead.

Thank you. To start, Mike, I wanted to dig into in terms of the flat sales growth in Q. Q despite some of the improvements in both productivity and, I guess, retention of the most experienced sales reps, I guess what drives the confidence to return to sales growth in the second half of the year here? Is that more so growth of the remaining base, or I guess some additional increases in productivity or headcount on that most experienced tenured cohort there? That'd be great.

Yeah. Good morning Jared, thanks for the question. And we mentioned the we saw sort of decisioning get along at the and we talked about that with sort of the tail end of the first quarter. And and that persists, persisted into the first part of the second quarter. And we've seen sequential month over month improvement as we worked our way through to. Q and, and just kind of sitting here in July. Encouraged with the results here too. So it feels like, you know, we can sort of see the momentum emerging. To your point, it is good to see kind of our total rep staffing number inflect. Up here. Again, you know, where we sit in July and, and be back into growing that total number going forward. And the other piece, I mean, I just would would highlight again is the growth in the broker channel has been very encouraging for us. So that's been a driver of this emerging momentum. So if you look at it in terms of the pipeline, at the end of one. Q we talked about a 12% year over year increase in broker driven reps. You know, that's up over 50% growth as as we close out to.

Q in terms of the number of reps. So there's just a number of factors. These investments that we've been making in the Ascend program, the staffing program, retaining the senior reps, getting the broker channel going, that sort of gives us a lot of confidence that the, full year growth that we talked about in sales is, is still absolutely our target. And expectation. And that means growth here in the second half.

Got it. And then Molly, I wanted to dig into the updated ICR guidance here. So at the midpoint of the range, if I kind of look at the second half, it doesn't seem to suggest any improvement year on year. I guess I would have expected some improvement just due to the repricing efforts. Are there any kind of one time impacts in the second half that we should be aware of in terms of that comp or, you know, maybe is this just an element of conservatism, I guess? Yeah. Can you kind of help us understand kind of why that second half doesn't seem to suggest any improvement year on year on that ICR Yeah. Good morning Jared. Thank you for the question., you know, if I think about our ICR trajectory through the year., you know, just let's start with the fact that, we have seen significant outperformance in ICR year to date, both in Q1 and Q2. As we said in our prepared remarks., you know, we've talked about the drivers of the Q2 outperformance year over year, four points, two of which is prior period development,