TriNet Group Inc Stock

Good day, and welcome to the TriNet's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] 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's Head of Investor Relations. Thank you for joining us, and welcome to TriNet's 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 or 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 for 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 our 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 2 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's path to sustainable growth will start with revenue growth as pricing outpaces a slowing rate of WSE volume decline. Then WSE 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 we'll continue to renew business, assuming the elevated high single-digit trend being felt across the market persistent.

With our pricing more in line with market trends, 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 to 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 and HR is most valuable when combined with judgment rooted in deep domain expertise and a strong service orientation, long-standing TriNet strength.

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. [indiscernible] has been a significant compliance and employee experience pain point for our customers and the broader SMB market. And with [indiscernible] 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 leads us prepared to onboard new PEO 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 4 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 5x more productive than our first-year reps, retaining and growing our senior reps is critical. Over the next 2 years, we expect this group to grow further as successful Level 2 and 3 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 focus on approaches that generate sustainable long-term improvement. We are heading into our busiest selling season with a sales force that has more experienced 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 RFPs 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 PEO 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 [ Bennet ] plan library to cover a wider array of price points and 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 are 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 China was recognized by time, Newsweek and U.S. News & World Report as a top workplace. We have asked a lot of our colleagues over the last 2 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 to TriNet's 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 WSE 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. An impact we expect to feel throughout the year. Exiting Q1, our WSE count was modestly lower than originally forecast and as we exit Q2, we are realizing modestly better insurance performance.

We finished the quarter with approximately 300,000 total WSEs, down 12% year-over-year and flat sequentially. As a reminder, total WSEs include platform users or those users who are accessing our platform as well as co-employee WSEs or those users receiving the full benefit of our PEO services.

We ended the second quarter with approximately 274,000 total co-employed WSEs 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 CIE, 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 forecast. CIE 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 forecast.

Professional service revenue continues to be impacted by lower co-employed WSEs. The outperformance relative to our forecast was due to firm pricing continued favorability 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 WSEs 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 4-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 farm costs, the adoption of biosimilars such as for [ HUMIRA and STELARA ] and the stabilization of GLP-1 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 2 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 2 points of our year-over-year improvement was due to the recovery of previously expensed insurance administrative costs incurred in the previous decade.

This onetime 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 cost 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 3 broad buckets: our distribution efforts, our benefits offerings and our service model.

These investments will incorporate AI throughout. Most of this incremental spend is related 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 500,000 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 favorability including our onetime 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 pool in benefits.

While they 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 million 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.

[Operator Instructions] The first question comes from Jared Levine with BB Cowen.

To start, Mike, I wanted to dig into in terms of the flat sales growth in Q2 despite some of the improvements in both productivity and I guess, retention of the most experienced sales reps there. 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 would be great. Thanks for the question. And we mentioned the -- you saw sort of decisioning get elongated at the -- and we talked about that with sort of the tail end of the first quarter, and that persisted into the first part of the second quarter.

And we've seen sequential month-over-month improvement as we work our way through 2Q and just kind of sitting here in July, we're encouraged with the results here, too. So it feels like to sort of see the momentum emerging.

To your point, it is good to see kind of our total rep staffing number inflect here again, where we sit in July and be back into growing that total number going forward. And the other piece, I think, I just 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 1Q, we talked about a 12% year-over-year increase in broker-driven RFPs now that's up over 50% growth as we close out 2Q in terms of the number of RFPs.

So is this a number of factors, these investments that we've been making in the Ascend program, the staffing program, retaining 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 still absolutely our target and expectation and that material here in the second half

Got it. And then 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 cafe. So are there any kind of onetime impacts in the second half that we should be aware of in terms of that comp? Or maybe is this just an element of conservatism? I guess, can you kind of help us understand kind of why that second half doesn't seem to suggest any improvement year-on-year in that.

Yes. Thank you for the question. If I think about our trajectory through the year. 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. .

We've talked about the drivers of the Q2 outperformance year-over-year, 4.2 of which is prior period development capability. The second is a onetime item. We've also talked about the fact that if you look at medical trends at this moment in time, they are persistently high.

Now we are seeing slight favorability in our book relative to what we had previously assumed when we set guidance. But I would say the trends remain in the high single digits as we have shared all along. So with that as a background, if I now think about the second half, there are a few things that are informing our guidance.

The first is our historical experience does suggest that we could see some lumpiness and volatility in our claims experience in the second half. And we are essentially factoring that in as we think about the guidance range. Recognize the guidance range, if you look at the change in guidance and anchor to the more favorable end of the guidance, that essentially accounts for a lot of the year-to-date capabilities that we have seen.

The other thing I would just remind you and everyone is we do see second half seasonality in ICR, and we expect to see that this year as well. And that is essentially based on utilization factors, the fact that deductibles are being met, pooling [indiscernible] all of that, we expect to see this year as well.

So that's sort of informing all of -- we have put all of that into our guidance as we have thought about our new updated improved guidance.

The next question comes from David Grossman with Stifel.

This is [indiscernible] for David Grossman, Mike, maybe 1 for you. Now that you've had some time to implement your go-to-market changes, and they're beginning to keep shape specifically in the broker channel. What's the resonating most with the brokers and leading to this kind of increase in RFPs? And yes. I guess let's just start with that.

Thanks for the question. And we are encouraged with the growth in the channel for really 2 reasons. One is the results that are emerging and the second is just the potential. So as we look at sort of where the RFPs are coming from and the amount of production on individual kind of local broker basis.

We know we're in a lot of ways just sort of beginning to scratch the surface a potential. And we talked about this 2 years ago, CEO is an underpenetrated market, but SMBs that get health care, 90% plus of them get it through health insurance brokers.

So what's resonating. I think it's boringly simple, but it's making sure that we put the right talent at the local level matched with the right broker producers, hence the need to sort of retain our senior people that you've got to meet expertise with expertise.

We've redesigned processes to make sure we're giving trusted adviser access to brokers as our standard operating procedure and including them in renewal discussions. It's making sure that you're putting dedicated client service personnel against not just customer by customer, but the broker block overall.

So there's no one factor, but it's really sort of thinking about the life cycle from prospecting quoting all the way through renewing a book of business where you're trying to really show up as a partner for these firms.

Great. And then just a follow-up on the retention you guys are seeing with total WSEs roughly flat sequentially and the improvement in retention, when should we expect kind of the WSE growth to start to trend positively. I know you said stabilized and then turn positive.

And then when a client does decide to leave where are they typically going? Is it getting brought in-house and a different solution. But if you could give some insight there, that would be great.

Yes, sure. I do think we've got good evidence here in 2Q on the progress we've made in putting a really firm foundation in place, getting like Mala was saying, the ITR back into our targeted range. Seeing retention increase nicely here in the second quarter, having our NPS at a stable and a really positive spot. So that firm foundation, I think, is really important to us.

And our next sort of mile markers revenue growth. So as this retention is improving, it slows the rate of decline in the WSEs. We continue to price as Mala said, for that high single-digit market-wide health care cost trend and that -- those pricing actions outpaced the WSE decline and the net is revenue growth.

And so we can sort of see our way to that the next mile marker and then following that, to your specific question is like, okay, now as we're capturing the full value of the growth investments that we talked about in the distribution, both our reps and channel in our benefits offering in our service proposition, the sum total of those investments is what turns the corner on the WSE growth.

And we're not in a spot like today to try to pinpoint the exact timing of that. But in terms of like the next couple of mile markers, it feels like quite comfortable there. So where do they go?

I mean, I think I've talked a little bit in the prepared remarks, it is very encouraging to see the health care reason, which typically means they're leaving us due to health care pricing. They're very often going into an open market solution of some type.

That as a reason is coming down. Also service as the reason per departure is coming down as we continue to invest in the NPS results that we're generating. I don't see any dramatic changes in the competitive landscape. We have a good robust set of competitors out there.

But in general, if it's health care, they're very often ending up in open market solutions and multi-vendor -- if it's a service related, that's where we might lose to another competitor.

The next question comes from Toby Sommer with Truist.

This is Tyler Barishaw for Toby. Sticking with the WSE growth, some slight improvement in the year-over-year rate in the quarter. How should we think about it in the second half? Should we expect a similar slight improvement on a year-over-year basis?

Yes. What I would say is, you said this in our prepared remarks, I would expect in the second half, a couple of things to happen, we do expect retention to improve on a year-over-year basis as we traverse through the second half. We saw that in and we expect to continue to see that as we go through the year.

And then the second thing I would say is, as Mike has elaborated in his prepared remarks, we are also looking for new sales to ramp as we go through the second half. So if you think about the drivers that are informing sort of behind your question, I would look for those 2 as we think about our WSE trajectory in the second half.

The next question comes from Kyle Peterson with Needham & Company.

Great. I wanted to start out on the ASO progress. It sounds like that is going well. But I guess maybe just a quick update, how is that progressing? -- relative to plan?

And any other feedback or thoughts on the traction you guys are seeing there so far?

Yes, absolutely. The ASO product is one we're quite excited about. And so to see continued double-digit growth here in the quarter. As we talked about a relatively small business in the scheme of things that we're looking to grow.

I would say it also presents a great opportunity for us to be thinking about innovation and where can we take different approaches to that market. So we're excited about the growth, I would say, equally excited about what we're learning in that market and how we can apply that learning to some different approaches over time. But yes, it remains something that we're quite focused on.

One other thing, when we had given our guidance at the beginning of the year, what we had talked about was a net headwind to our 2020 guidance in the range of $10 million to $15 million. As of now, we are tracking towards the more favorable end of that range.

Okay. Great. That is very helpful. And then as a follow-up, I wanted to dig a little more into the insurance profitability. Good to see the quarter and the outlook better. I guess kind impact. It sounds like some of the things that have been timing driven with some the inpatient procedures being down and it sounds like you guys are expecting kind of pharma costs not to, I guess, stay below forecast.

So I guess, how should we think about like how much of an impact was potential timing this quarter versus anything that are in the core that would be maybe a little more sustainable moving forward?

Yes. Yes. I would not characterize the favorability that we have seen in our performance both in the quarter and year-to-date as timing. What drove our improvement in cost ratio year-over-year and as well as versus our expectations is really 2 things.

One is the onetime benefit that we spoke about in our prepared remarks, that was about half of our year-over-year improvement. The other 1 really is prior year development favorability. And what I would say on that one is it's just really important to understand what that means. The way we work our insurance book is we monitor prior period development in our medical reserves as an indicator of emerging cost trends.

And in recent quarters, claims have developed more favorably, slightly more favorably than we had initially expected, and that obviously suggests that the underlying health care cost growth has been moderating relative to the assumptions that we had embedded when we built up our reserves.

So the important point is the favorable in margins that we are seeing behind the prior period development is consistent with the stabilization in health care cost trends. And I wanted to elaborate on this because what's important is the stabilization. It's still high.

Let's not forget that it's still in the high single digits, but it is stable. And so that is not timing. It is a trend.

The next question comes from Brendan Biles with JPMorgan.

Excited to hear all the talk about sales and selling motion. Two kind of quick questions on that. First of all, how are you retaining the sales folks, the high-performing sales looks to longer I think that's a great development, how sustainable is that? And then lastly, looking back on the fall selling season, kind of like preworn,What metrics are you going to use to define success? And how will you know that it's a very successful falsing season here?

Brendan, thanks for the question. On the retention of reps, I think pretty straightforward. One is making it a focus looking at things like incentives for sure, again, looking back probably 18 months ago, I think the revenue leadership team has done a very good job in investing in the front line and regional management teams and improving them as leaders and building a stronger culture there.

I think a lot of it is also making sure that we're providing good tools and good support. We spent a lot of time talking about how do you pull sales friction out of the process. We're really looking at that entire life cycle and saying, where can we improve our tooling, where can we make things easier where can we provide a second side of hand and for that, one of the exciting things that the team has done is as we're bringing new people into the Ascend program, they are assigned out to senior reps.

And so obviously, there's the mentorship advantage in junior people, but it also means that our Ascend folks are right there to out and to take some of the administrative work and keep prospects moving through the pipeline for the senior fosters a nice biotic relationship that's developed there.

So again, a lot of little things that contribute to just being able to tell a compelling story about why this is a fantastic place to build a sales career. And then in terms of success in the second half, for us, it's showing good strong year-over-year growth, which again is what we're anticipating here as we look at the pipeline and look at the investments that we've made in it.

We would love to continue to see the acceleration on the broker side. As our sales reps happen in total and some of the newer reps are rolling [indiscernible] production, you think it was very much targeting growth in our direct channel, which remains our primary go-to-market motion as well. So those are some of the things we're looking at.

The next question comes from Kevin McVeigh with UBS.

Great. I'll let [indiscernible] congratulate as well. I guess -- how are you thinking about, Mike, I guess, 2 things. It seems like the broker channel is going to more influence the revenue trajectory? Is that right? Help us understand where that's been historically, what you expect it to be in terms of contribution? And then with that, remind us what's the profitability of a new client as opposed to existing?

Great. And just to clarify, Kevin, is that last of broker versus direct question? Or are you saying -- or the question is just more like what's the first year of profitability for any channel?

Any channel. You've got a sales commission in there and stuff like that. So I think at this point, being you're going to see some nice momentum in that attrition improves initially and then just how you're thinking about that.

Yes. No, that makes great sense. So think of tied rough terms, about 1/3 of our new business coming in year-to-date is through the brokerage channel and that's growing. I would expect as the staffing clicks in -- we're making some targeted investments here in marketing to support as direct starts to move again in the right direction.

I would expect that direct will remain more than half of how we're acquiring you clients over the medium term as far as we can see. But again, think about it in terms of the mix at about 1/3 broker.

Yes, the business model is one where profitability builds with tenure, and that's both because of the cost of acquisition but then when you're a risk-taking PEO like we are, the reality it is, you're going to understand that risk a lot better and once you've been through, say, 2 renewal annual renewal cycles on the insurance products. that's going to put us in a much better place in terms of getting that price lined up really well with the risk.

So it really underscores why retention is so important, not only in driving volume growth, but in terms of the margins we're targeting in the business.

That makes kind of sense. And then I guess, Mike, if you can say whether next question when you think about AI within the organization, right, you can't do a call on that talking about AI.

But are you leveraging that to get better intelligence on existing clients? Do you think -- when you think about AI fully implemented, if it slows the WSE growth, which it might, I don't know if it will or not, there's probably offset maybe pricing maybe to move plans.

But how are you thinking about it as you implement it internally, both from a revenue perspective as well as from an expense?

Yes. Well, 6 question in before AI hit Kevin. So that's good. I think the -- what we're very excited about. I'll give you a very good simple use case. And so what our data and analytics team has done has built what we call a customer health score.

And what that does is it uses AI to monitor every single interaction that we have with anyone inside of any one particular client. And what we do is based on the sentiment of the type of transaction or service order, is it helps us kind of aggregate that into a collective score which not surprising quarterly really well to what ultimately would be the NPS and the retention.

So what AI is increasingly doing is enabling us to take all this what sort of transactional information and aggregated up to being a lot smarter and proactive in how we manage that client base. And ultimately, that helps us do a better job for our clients.

It helps us drive up that NPS and drive up retention, which is a big revenue driver for us. So whether it's helping our service teams be on the front foot, more proactive to drive retention, whether it's the AI that we're using to so like the right health care bundle in the fall selling season based on client preferences or whether it's trying an assistant that's helping today largely or [indiscernible] get answers to their questions any time today or not.

It's -- we're actually really, really excited about the impact that it can have, first and foremost, on us doing a better job for our clients, second growth and certainly the efficiency still.

Just a quick follow-up on these points. Is it affording the opportunity to make better decisions in terms of client selection upfront?

Yes, I would say that we're playing with some things on that front. I wouldn't look at you and say, hey, the new business that we're writing today is materially informed based on sort of insights driven by AI, but I think that's very possible use case for us down the road.

I do believe that the use of AI that we have in our sales motion we are giving tools to our salespeople when they are prospecting to be better informed about the clients that they are going after. And that makes them more effective and ultimately will result in a better win rate.

So it has both kinds of ancillary benefits and we are going to invest more into tools like that. just talked about use of AI in our benefits bundle. If you think about our use of AI on the customer service side, we've talked in our prepared remarks about TriNet's assistance. What's exciting about that is it actually allows us to upskill our police on the service delivery side because a lot of the calls are now being handled through TriNet's assistant.

So it all has direct and many indirect impacts, if you will, on revenue and efficiency and importantly, NPS.

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Simonds for any closing remarks.

Thanks, everybody, for joining today. Mala and I look forward to continuing the dialogue in person in many cases, over the coming weeks. And with that, Megan, we can conclude today's call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the TriNet Group, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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, and good afternoon, everyone. Joining me today are Irving Tan, WD's Chief Executive Officer; and Kris Sennesael, WD's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations which are subject to various risks and uncertainties.

[Technical Difficulty]

Good morning, everybody. Sorry for the technical [indiscernible]. My name is Alex Bauer. I'm Head of TriNet's Investor Relations. Thank you for joining us, and welcome to TriNet's first quarter conference call and webcast. I am 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 first quarter performance. Mall will then review our Q1 financial performance in greater detail, we 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 margin 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 our 10-K filing, which are available on our website or through the SEC website. Please also note that going forward, these filings may be released up to 48 hours after our earnings release. With that, I will turn the call over to Mike. Mike?

Thank you, Alex, and good morning, everyone. I'm pleased with our start to 2026. In the first quarter, the TriNet team kept our clients as our first priority, navigating a volatile business and geopolitical environment. For today's call, I'll start with our first quarter performance, then highlight the actions we're taking to drive growth; and finally, discuss the potential impacts of AI, a widely discussed subject during the quarter.

Our strong first quarter adjusted earnings per share up 25% over prior year reflect our disciplined approach to both repricing health fees and managing our expenses. Health fee repricing over the last year created a headwind for new sales and retention, including our January 2026 renewal, where attrition was about 2 points worse than prior year. Our pricing addressed both heightened medical cost trend and a cohort of underpriced business.

With our January renewals complete, all cohorts within our customer base are now priced in line with more historical practices. And despite the impact of our January repricing, we expect overall 2026 retention to be better than full year 2025. We're already seeing a tangible improvement here in the second quarter where attrition due to health pricing has already declined by 30%, a trend we expect to continue throughout 2026.

New sales grew modestly year-over-year in the first quarter. The increasingly volatile business environment pressured March close rates. For sales opportunities in the post proposal stage, we saw the time to close extend by about 15%. However, given pipeline visibility, our pricing position relative to the market and several sales initiatives that are coming online which I'll talk about in just a minute. We expect a solid full year sales growth for 2026.

On insurance, performance improved as we benefited from stable health cost trends and disciplined pricing resulting in an 84% insurance cost ratio. A feature of our model is our ability to quickly respond to changes in insurance outcomes. We responded quickly to rising cost trends, and we'll do so again if and when trends moderate. We remain disciplined on expenses, aligning the business to its current scale, automating processes and advancing our talent optimization strategy. As a result, we delivered strong earnings and profitability in Q1 and we believe earnings are now tracking to the top half of our annual guidance.

Our strong operating performance enables us to invest further in our products and services through acquisition, partnerships and internal build efforts, we're extending our value prop on issues our clients care about. These new capabilities, in combination with our investment in sales capacity, represent important steps in our return to sustainable growth.

During the quarter, we completed the acquisition of Cocoon, an industry-leading employee leave management application aligned with our compliance-first approach. Cocoon should integrate seamlessly into our platform and address a significant customer pain point. With an automated leave of absence solution, we expect improved NPS scoring and increased retention along with further competitive differentiation in our PEO and ASO offerings. Next, we announced partnerships powering TriNet Global and TriNet IT.

TriNet Global powered through our partnership with multiplier delivers global workforce visibility, compliance build workflows and localized support, enabling our clients to expand internationally with confidence. TriNet IT powered through our partnership with electric AI, embeds device and asset management into HR workflows, reducing IT effort, lowering costs and improving security. We remain on track to deliver our new benefit bundles, simplifying the buying process and aligning the right set of plans with client needs.

As benefit bundles are released during the second quarter, we expect to benefit from their impact during the fall selling season. Alongside these investments in our offering, we continue to invest in our go-to-market capacity. Our broker strategy is increasingly driving deal flow and sales opportunities. Broker RFPs grew by nearly 12% year-over-year in Q1, and we're seeing Q2 broker RFPs accelerate off that number. We improved our broker experience with automated trusted adviser status and enhanced renewal access. In addition, we grew our most senior and productive sales reps by 10% year-over-year in Q1.

Our ASCEND program graduates its first class, which will represent over 10% of our sales focus this fall. And with more than 100 trainees in the pipeline by year-end, we believe we can sustainably grow our sales force in 2027, both in terms of number and in terms of quality. In summary, we're improving our product, services and go-to-market capabilities. We've brought health fees in line with risk and increase the accuracy of our pricing processes going forward. As a result, we expect improved conversion rates on new business and higher retention rates in the client base.

We're moving quickly on numerous fronts, which is a testament to my colleagues across the company. Increasingly, their efforts are being enabled by investments in AI, which brings me to the last topic I wanted to touch on before turning things over to Mala. We certainly understand that AI is an important topic for all of our stakeholders, and we see AI's impact across 2 dimensions. First, its impact on TriNet's operation sales service model and second, the external impacts on our client base and industry.

Starting internally, this March, we launched TriNet Assistant, an AI tool giving our customers and colleagues access to our HR expertise whenever and wherever needed. Already TriNet Assistant is proving its impact. We just navigated tax season. Historically a period that sees a significant spike in inbound volume. Between March 31 and April 16, inbound volumes typically increase on average by 12%. TriNet Assistant successfully handled much of that demand driving a 6% reduction in inbound contacts through the busy period, delivering timely, accurate responses and improving overall service productivity.

TriNet assistant will continue to evolve, broaden and become more effective with increased utilization. Similar examples of AI have emerged in our product development processes where 30% of code and 50% of our test cases are now AI generated and moving directly into peer review for production deployment. Sales agents are supporting our prospecting, quoting and closing processes. AI is supporting our colleagues on client engagements, capturing notes, suggesting answers and automating correspondence.

As we have talked about on this call for the past few years, TriNet has operated with excellent client-facing technology, but many manual processes behind the scenes. The runway for AI to drive real improvement in client outcomes and efficiency is substantial, and we're excited about the capacity it creates for our colleagues to focus on what matters most, working directly with our clients. The ability to apply judgment, build relationships, manage risk is where my colleagues stand out and where I believe the resilience of our business model lies.

During the first quarter, there's been robust discussion about the long-term threats of AI. TriNet sits at the intersection of employers, employees and government where AI supports rather than replaces the human responsibilities we take on behalf of our customers, things like handling payroll, human resources, insurance, taxes, compliance and more. Our customers aren't just buying software or knowledge. They're transferring risk and liability to TriNet.

Further, they're buying real and human expertise to step in at high stakes moments, ensuring employees get paid when problems occur that health care coverage is there when needed and having someone in their corner when regulators inquire. As for AI's impact on SMBs, it's early and still very uncertain. We believe SMBs will be impacted differently across the various industry verticals. In verticals where AI adoption is highest, such as technology, client hiring has not changed materially over the past 2 years, suggesting AI is creating as much opportunity as it's replacing.

There also seems to be a growing correlation between AI adoption and faster new business formation as small businesses do what they always do, move quickly to innovate and take advantage of new opportunities. Rest assured that TriNet will be there to capture our share of this market. So in summary, AI is undoubtedly driving change, but given our business model, we see AI as a positive opportunity to serve more SMBs and serve them better.

Overall, we are off to a strong start, successfully navigating a difficult operating and business environment. Pricing is normalizing, expenses are managed and we're trending toward the favorable end of our 2026 financial guidance. We see significant AI opportunities across our operations and product and we are pursuing them. There's more work ahead but momentum is building, and we look forward to updating you as the year progresses.

With that, I'll pass the call to Mala. Mala?

Thank you, Mike. While the macro environment in the first quarter was uneven, TriNet's solid financial results were driven by disciplined pricing, better-than-expected insurance performance and strong execution. Over multiple cycles, we repriced our health fees in a disciplined and measured way. The impact on new sales and retention was considerable. I'm pleased to say that our trend plus price increases concluded with our January 1 renewal, and our retention outlook is improving.

Furthermore, in the first quarter, we saw health costs materialize lower than forecast, which, when combined with our disciplined pricing, drove improved ICR performance. Our discipline extended to expense management. We made difficult decisions in the quarter, which resulted in meaningful run rate cost savings. Expenses are increasingly aligned with the scale of our business, and capital has been made available for investment and for shareholders. As our acquisition of Cocoon shows, we have capital available for acquisitions, supportive of our product and services.

With that, let's dive into our fourth quarter financial performance in 2026. Total revenues were $1.2 billion, declining 5% year-over-year in the first quarter as expected. Total revenues in the quarter were supported by insurance and professional service revenue pricing, which were offset by declining WSE volumes. We finished the quarter with approximately 299,000 total WSEs, down 12% year-over-year.

As a reminder, total WSEs include platform users or those users who are accessing our platform as well as co-employee WSEs or those users receiving the full benefit of our PO services. We ended the first quarter with approximately 273,000 total co-employed WSEs, down 12%, largely due to the cumulative impact of our repricing actions. Retention improved in February and March as we expected. Our full year retention forecast remains on track. We see year-over-year improvements beginning in Q2 and lasting through Q4, supported by more normal health pricing distribution beginning with our April 1 renewal, a trend we expect to continue through the year.

Regarding customer hiring in the first quarter, [indiscernible] was slightly negative, better than our forecast. Professional Services revenue in the first quarter was $189 million, declining 10%, in line with our forecast. The largest impact to professional service revenue was from lower coemployed WSEs, which was offset partially by low single-digit pricing.

We saw continued strength from our ASO business. ASO ARR has doubled year-over-year, remaining on track to become a meaningful contributor to professional service revenue growth. We were also pleased with our success in upselling PO2 ASO customers and retaining PO customers in our ASO. As we expand ASO we expect this upsell and retention dynamic to increase in importance. And finally, the headwind from the change in reporting methodology for state tax-related revenue in 1 state, was offset by difficult to predict normal changes in other states. As a result, we no longer expect this to be a headwind to our 2026 professional service revenue.

Interest revenue in the first quarter was $14 million, a decline of 22% versus the prior year and in line with our forecast. The expected reduction of cash balances with certain tax credits drove the decline. Turning to Insurance. Insurance Services revenue declined 4% in the first quarter, primarily driven by lower overall WSEs offset by pricing. When divided by average co-employee WSEs, insurance service revenue grew 9.6%, reflecting our repricing efforts. Insurance costs in the first quarter declined by 9% year-over-year. And when divided by average co-employed WSEs, grew just 3.7%. As a result, our first quarter insurance cost ratio came in at 84% and over 4 points year-over-year improvement.

Half of our 4-point improvement was expected and the result of our repricing efforts. The other half of the improvement was attributable to favorable development from 2025. So our results were a little better than expected, but one quarter does not make a trend. We passed the prior year favorability into our full year outlook, and we are encouraged by the general direction of our ICR. In the first quarter, operating expenses, which exclude insurance costs and interest expense, grew by 6% year-over-year.

Operating expenses were impacted by a $14 million restructuring charge as we rightsize the business for its current size and executed our ongoing talent optimization and automation strategy, including AI implementation. For the first quarter, GAAP earnings per diluted share were $1.90 and adjusted net income per diluted share was $2.48. Our earnings were supported by strong cash generation. During the first quarter, we generated $186 million in adjusted EBITDA, representing an adjusted EBITDA margin of 15.2%.

We generated $149 million in net cash provided by operating activities and $123 million in free cash flow. Free cash flow benefited from the 2025 tax law changes and timing of cash tax payments. Our capital priorities remain investing in our business for growth. M&A and returning capital to shareholders via share repurchases and dividends.

The first quarter saw us leverage our strong cash generation and deliver on all 3. We returned $71 million to shareholders across share repurchases and dividends. We repurchased approximately 1.3 million shares for $58 million and we paid a $0.275 dividend in the quarter. Furthermore, we announced a 5% dividend increase to $0.29 per share. We also leveraged our cash generation to acquire Cocoon. Cocoon is an industry-leading leave of absence software suite, which addresses a key TriNet customer pain point.

From a financial perspective, Cocoon as a stand-alone product is expected to be modestly dilutive to 2026 adjusted earnings per diluted share and neutral to 2027 adjusted earnings per share. The primary benefit of the Cocoon acquisition will come from increased PEO client retention. -- product integration is expected to be completed in 6 months with TriNet reaping the full benefit in 2027 from an improved customer experience and more efficient workflow.

Turning to our 2026 outlook. We are reiterating our full year guidance. Revenue is performing in line with our forecast and our stronger than forecast Q1 insurance performance has had the effect of shifting our full year earnings expectations to the top half of our guidance range, assuming no significant uncontrollable event.

For 2026, we continue to expect total revenues to be in the range of $4.75 billion to $4.9 billion. Our professional services revenue guidance remains in the range of approximately $625 million to $645 million, and our ICR remains in the range of 90.75% to 89.25%. The -- as I discussed earlier, Q1 IPR outperformed our plan by about 2 points as a result of prior period positive developments from 2025. We do not expect to receive more benefit from the prior year. We believe it is prudent to maintain our full year range, and we acknowledge that our full year ICR is tracking to the lower half of our guidance range.

Our adjusted EBITDA margin stays in the range of 7.5% to 8.7% and GAAP earnings per diluted share are in the range of $2.15 to $3.05 and adjusted earnings per diluted share in the range of $3.70 to $4.70. In conclusion, I'm encouraged by our first quarter results. We remain disciplined with our pricing and completed our repricing efforts. Health costs came in lower than forecast in the quarter. and our strong first quarter has us tracking to the top half of our full year earnings guidance.

Finally, the macroeconomic environment does remain volatile, but we are optimistic on our future and remain prudent with our investment in that future. With that, I will pass the call to the operator for Q&A. Operator?

[Operator Instructions] And the first question comes from Jared Levine with TD Cowen.

To start, I wanted to double-click on the demand environment in terms of some of those sales cycles being impacted in the month of March, was there any kind of broad flavor in terms of industry vertical, more global clients or clients with significant customer concentrations in the Middle East in terms of that demand impact? Or was it fairly broad-based there?

Jared, it's Mike. Yes, fairly broad-based. We saw a little bit more as you move upmarket. Those tend to be a little bit elongated anyway, but that's where it was more sensitive. And again, it was good strong start to the quarter slowed or got extended towards the end of the quarter. And we're just going to kind of keep watching it here in the second quarter. But there's a lot -- as we look at the pipeline, the demand is strong. It may just be a bit of the decisiveness part.

Got it. And then I wanted to also touch on Taco here. So I guess, Mike, I guess, part 1 here. Can you discuss the revenue opportunity you see here, whether that's cross-sells with a separate SKU or overall platform pricing increases in the model. Can you just double-click in terms of that revenue contribution for FY '26 here?

Yes, absolutely. And just I would start by saying welcome to the Cocoon team that is likely listening in this morning. We are delighted to have a very talented group of colleagues join us in a really industry-leading product. We went out commercially and decided Cocoon would be the right fit for us and the discussion led to this strategic outcome. .

It's -- the primary benefit, as Mala had in her prepared remarks, is really about delivering better outcomes on these to our PEO clients first. And so teams are very heads down on integrating that into our client base. We know it's a significant opportunity in terms of improving our Net Promoter Score and ultimately, our retention. We've, as many on the phone would know, has just become increasingly complicated given a distributed workforce and a pretty active regulatory environment at the state and local level.

So excited about this as another nice investment in our strategy around driving up NPS and retention. We will, on the heels of that be putting it into our ASO offering as a managed service as well. I do think -- it's a high-demand service. So I do think it's going to be additive to what's already some pretty heady growth that we're seeing on the ASO side. And maybe Mala, I'll turn it to you on revenue.

Yes. Jared, I wouldn't go into further details on that. Just suffice it to say that the revenue contribution to this year is very, very modest. What we are more focused on, as Mike alluded to in his comments is really how do we integrate this product into our overall offering. And we are really looking forward to see the impact of that in improving our NPS and therefore, retention and really hope to capture that in terms of our revenue tailwind as we move into 2027 and beyond.

And the next question comes from Tobey Sommer with Truist.

This is Tyler Barishaw on for Tobey. Just going back to the Cocoon. Was this an opportunistic acquisition? And should we -- or should we expect TriNet to look to do more M&A throughout the year?

Tyler, thanks for the question. Yes, I would say -- we started with -- we knew this is something that our clients really wanted. And so we were out more from a commercial partnership opportunity that led to -- yes, I would describe it as a strategic opportunity for us. I would say, though, stepping back into the broader part of your question, we feel very fortunate to have such a strong franchise and such a cash-generative business that gives us a lot of flexibility. And our priority is to invest organically in our teams and in our technology to drive growth.

But inorganic is a lever that we can pull as well. And I'd sort of think of it across 3 pretty simple buckets. The first is capabilities and Cocoon falls into that. And there may be future opportunities. The SaaS market right now is a little bit depressed and there's some potentially some good opportunities there. I think of those on the relative small size like we've seen here with Cocoon. And then it's about scale and capability in first the PEO and then our small but growing ASO business. And is there an opportunity to bring in some scale there that also maybe matches up with a vertical or a geography where they've got strength and we've got a relative soft spot. So primary focus is organic investment in growth. But yes, where there are opportunities, we'd look for -- tend to be sort of small to midsize and bolt-ons.

Yes. The thing I would also add, Tyler, is -- as we have said before, we'll stay disciplined in terms of how any of these opportunities align with us both strategically but also importantly, in terms of its financial profile, we'll state disciplined on that.

Makes sense. And then just on free cash flow conversion, up to 66% versus 49% in the prior year quarter. Can you talk through solving the drivers of that improvement?

Yes. I'd point to essentially a couple of different drivers, right? One is you saw our adjusted EBITDA improved year-over-year. So that certainly has an impact. But the primary driver of our improved conversion is the fact that we had lower cash tax payments with the advantages we have from the one big beautiful bill. So that really is the primary -- the bigger driver of our improved free cash flow conversion. I would say even without that, even excluding that, we did actually improve our free cash flow conversion year-over-year slightly.

And the next question comes from Andrew Nicholas with William Blair.

This is Daniel on for Andrew today. I wanted to turn back to the strong outperformance on ICR in the quarter. And then extrapolating that forward, how we should think about the conservatism of the guide maintenance. I know you pointed toward the lower half there, but maybe you can dive deeper on what that means for the cadence of performance in the remaining quarters of the year.

Yes. What I would say, Daniel, is, as we explained in our prepared remarks, we saw a significant improvement in our year-over-year -- about half of that was expected. The other half of that really is from the favorable development pertaining to 2025. And just to double click on that, the driver of that is, as we went into the second half towards the end of the year, we saw some volatility in how claims ran off -- and we have considered that as we finished up the year.

As we moved through Q1 of this year, that actually plays favorably relative to what we had assumed and what our outlook was at the end of 2025. The reason I'm double clicking on that is I would say that is a onetime benefit that we saw in the quarter in addition to the favorability in year-over-year that we were already expecting. And therefore, think about the full year ICR as follows: the reason we said that we are tracking to the top, the more favorable end of our ICR guidance, the more favorable half of our ICR guidance is essentially passing through that benefit in prior period development that we saw in Q1.

I'd say on the base run rate, the rest of the performance, I would say, for now, we are keeping expectations as we had in our February guidance. It's still early in the year. As you know, and as we have found from our experience with claims costs things happen. And so we are keeping pretty close watch on it. And we will update our guidance and update you all as we traverse through the year.

Okay. Understood. And then maybe turning to the WSE front. It sounds like the first quarter decline was roughly aligned with expectations for the quarter. But can you help us frame when you expect to see the trough in WSE declines this year now that we've lapped the repricing actions and whether that's still yet to come? And if so, when? .

Yes, I appreciate the question, Daniel. I just would start by saying we absolutely see a real growth opportunity here, and that's our focus, particularly now that we've cleared a pretty big milestone for us with the January 1 renewal and having gotten all of our cohorts relatively in line. And so you take that -- you take what Mala talked about really good outlook for improving retention. That's our biggest lever as we go through the year. And as we think about the actions we've taken, we just talked about the benefits of Cocoon. We talked earlier about trying to assistant. The things that we are doing to improve the quality of our delivery and the value we're delivering to our clients. We see that retention improving and improving, and this is important in a sustainable way.

Second piece that we control is sales. We've talked about that. I'm actually really encouraged by the brokerage channel and the volumes that we're seeing coming through there 12% up in RFPs in the first quarter. Second quarter is building considerably higher off of that. And then just having -- keeping a really good tenured senior people and having our ascend well-trained folks coming out into the market this year and building -- by the end of the year, we'll have absolute capacity up in the low double-digit range year-over-year and have done that again in a sustainable, high-quality way.

So -- we're optimistic about -- just like with the retention, a year-over-year growth metric, which is encouraging to us. And so you take those 2 and put it together, Daniel, with the CIE expectation that we're just going to hold that very muted levels, and that gives us growing confidence that we can stabilize WSE count here for the balance of the year. And then as we look out from there ultimately drive growth but drive growth in a really sustainable way.

[Operator Instructions] And the next question comes from Kyle Peterson with Needham & Company.

This is Ross Cole on for Kyle. I was wondering if you could double-click on professional services a little bit for the quarter and then your outlook for the year. it seems like it came in about around what we expected for this quarter. Do you see this also reaching the higher end of the guidance? Or maybe you can just kind of walk us through how you're seeing this for the rest of the year.

Yes. Thanks for the question. As we said in our prepared remarks, professional services revenue declined year-over-year about 10%. And I'd say there are a few puts and takes in that, that I see sort of I'm watching as it plays out through the rest of the year. So obviously, it was heavily impacted by the 12% decline in volumes. But that was partially offset by low single-digit rate benefits that we saw in PSR.

I would say, if I think about how that played against our expectations, it was about in line with our expectations. The -- a couple of other components within that is One is we did expect some headwind for the year from our SUDA margins, that is essentially neutral that is relatively modest in the overall scheme of our overall PSR. It's essentially, the benefit is in the single-digit million range. So again, it's relatively modest.

And we have talked about ASO growth. ASO ARR, as we talked about in our remarks, actually doubled in the quarter. We are really pleased with the momentum we are seeing in it and if I look at our overall ASO revenue expectations for the year, also in line, it's coming in, in line with our full year forecast at this point in time. So if I sum it all up, what I would say to you is largely in line with our expectations with just a very, very modest speed on the SUTA piece because of the developments we talked about in our prepared remarks.

And the next question comes from Brendan Biles with JPMorgan.

First of all, like -- congrats on the results. Great to see the insurance cost ratio dynamics. I'd love to take an opportunity to just kind of step back and ask you to share your learnings over the last 2 years as it relates to this whole insurance price cycle change? And what gives you confidence that in future insurance price change cycles that TriNet will be more resilient?

And then my second question, if I could tack 1 on, too, is on the AI companies, new AI entrepreneurship. Just a little bit more about that market, how TriNet is showing up, the trends you're seeing in AI-related start-ups or start-ups that have been accelerated by. That would be great.

Thanks, Brendan. Two excellent questions. So I'll take the second one first. On the start-ups, like we hit earlier, it is pretty remarkable to see new business starts. And certainly, some of those are AI specific. And so we start to see those in our technology vertical and in markets that are really important to us. I would say that we typically will pick up start-ups a little bit later than in the cycle than when they're hitting like the BLS as a new business starts. So I'd be looking out, say, 6 months, 9 months, 12 months from now. Certainly, we're getting some good wins there. But I expect that that's going to build as we go through the year and get into 2027. As those firms scale to the point where there's enough complexity there that looking to a TriNet is going to make a lot of sense for them. .

And then on your first question, we think a lot about that one around what have we learned through this part of the cycle. And I'd start by saying, like at the end of the day, it's a risk-taking business. So there is always going to be fluctuations and outcomes. And I wish I could, but I could never sit here and tell you we've cracked the code there and have found a way to kind of eliminate that volatility. I think it is all about getting better at how you're forecasting, how you're assessing the risk and then how you're applying that insight at the client level through your new business and through your renewal processes.

And just I've been here a little over 2 years. One of the first things we did was really invest in our Insurance Services group. We brought in Tim Nemer, who has run actuarial and underwriting functions for some of the largest health care organizations on the planet. We've invested in further talent beyond that. We've actually gone through and redone our rating system. We've gone through and looked at how we present our health plan offer through the bundles. So all these factors go into just not fixing the problem and eliminating volatility but really sharpening our pencil and tightening that distribution curve.

And I will say from experience in other companies, when you go through a cycle like this, it is really difficult to be as disciplined as we've done it, and it kind of gets embedded in your DNA on a go-forward basis. So I think it's going to be important for us, not just that we've turned this corner, which I do believe we have on the in-force block, but that we work really hard to make sure that the business we bring in going forward is brought in a sustainable way.

And the next question comes from David Grossman with Stifel.

Mike, maybe you could just reflect given the repricing of the book and the kind of impact it's had on assuming the insurance markets are fairly efficient, where do these people go. If, in fact, you're now appropriately pricing to risk, where do those clients that are going when they leave .

Yes. David, obviously, we spent a good amount of time understanding why a client is leaving and then ultimately, wherever we can, understanding where they're going. And the probably unsatisfactory answer is there hasn't been a big change in the distribution of where clients are going. We have seen a big change in the distribution of why. And so we've seen -- and in Q1 is a good example, 2x the reason code for why people are leaving being due to help fee increases has grown to be a very significant amount of the attrition. And -- and that's pretty quickly reversed itself as we've gotten here to [indiscernible] in our outlooks going forward. So that sort of speaks to the why. .

[indiscernible] to your question it really does depend. -- down market, you see people going into the open market where they're finding more standardized plan design and rate structures is a better match for their particular risk. You do see some going into other PEOs. And the reality is different competitors have different rating approaches and they're just going to see risk a different way.

Upmarket clients may find that some sort of participating in the risk, so we see a little bit of people going into self-insured and level-funded type plans amongst some of the larger terminations. But it is a little bit distributed across that base. I guess, the last thing, David, is like -- you definitely see this -- the problem of what is now 2 years of elevated health care costs , we haven't seen in a long period of time. That is something that everybody has -- the carriers are dealing with it other PEOs are dealing with it. Everyone's got to deal with that same problem. It just leads to a lot more shopping and ultimately, it does drive some attrition.

So do you think if the kind of the health care cost dynamic improves. Do you think that becomes a net tailwind for people to reengage with PEO, just more generally speaking? .

I think that's a reasonable thesis.

Got it. Okay. And then just now that you've had a little time to kind of process the changes in your go-to-market strategy. As you think about the broker channel, and I know you gave some statistics on increasing our fees. What do you think is resonating most with the brokers specific to TriNet versus other alternatives that they may have.

I think the #1 thing is a really good broker cares, first and foremost, about the experience and the value their client is going to get. So where we can get repeated at that and where a broker has referred business in, they've seen kind of the quality of the delivery ultimately, that's our biggest and most important lever. And that's why it takes a little bit of time to build real sustainable momentum in the channel is you've got to prove yourself. But once you do, the leverage is pretty considerable. When you think about the penetration, 95-plus percent of SMBs get their health care through an independent broker or agent. It has a really nice scale effects once you get there. .

I think for us, a lot of it is just looking at our processes and including the broker appropriately as an adviser to their clients. So unlike perhaps some other referral channels, in general, take a health insurance broker they're going to want to stay connected at renewal time. They're going to want to have access to and be able to help their client and where we can do that and our teams can go shoulder to shoulder, again, that's building trust in the relationship and in the quality of the delivery. So I would have, and I'm excited to see the first step is they need to give you opportunities, and that's the RFP growth that we've seen, and that's really performing well.

The second piece is we need to get wins and get enough wins within the same relationships to sort of prove the value proposition. And that's kind of part of the story that we're at now.

Great. And if I could just sneak one more in for Mala. On, should we think about the expense rate going forward the 1Q results less the restructuring action is that $100 million of a good reference point for the balance of the year. .

David, I would just stay with the -- what we had said in February, right? We had said we expect our operating expense for the full year to be lower than prior year in the mid-single-digit range. And we are still staying with that as part of our overall expectations and guidance.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mike Simonds for any closing comments.

Thanks, everybody, for joining the call this morning. I hope you get a sense that we've had an important milestone, and we're starting to turn a corner here at TriNet. There is a real rhythm and consistency to the actions we're taking. It's gratifying to start to see some of those play through. A lot of work to do, and Alex and Mala and I look forward to keeping you posted getting out in a bunch of meetings over the coming weeks and months. And with that, Keith, that concludes our call.

Thank you. And as mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Good day, and welcome to the TriNet Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] please note, this event is being recorded.

I'd 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'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, 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 fourth quarter and full year performance. Mala will then review our Q4 and full year financial performance in greater detail and conclude with our 2026 financial guidance and outlook. Please note that today's discussion will include our 2026 full year financial outlook, our midterm 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 margin 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 our 10-K filing, which are 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 this morning. 2025 was a challenging year across the SMB landscape marked by elevated medical cost inflation and muted hiring activity. Against that backdrop, I'm proud of how the TriNet team stayed focused on our clients and executed with discipline against our strategy. As a result of that execution, we delivered solid financial performance.

We finished the year at the top end of our earnings guidance and generated 16% growth in free cash flow. We significantly improved the quality of our pricing processes successfully completing a comprehensive health fee renewal across our customer base, strengthening our risk position heading into 2026, and we made meaningful progress against our most important initiatives improving client service, strengthening our go-to-market execution and driving greater operational efficiency.

We're making progress on what we control, repositioning TriNet for durable long-term growth and staying focused on our clients. And in an environment like this, health care inflation at levels not seen in more than 2 decades and the slowest hiring market since 2020 our clients need us more than ever. Yestronic typically delivers a mid- to high-teens ROI to SMBs by leveraging our scale and technology to lower HR and benefits expense. However, beyond cost, we help our clients manage risk while acting as a trusted adviser in a time of change, something an increasingly big number of our clients are dealing with today.

For example, we worked with one technology client, a sector dealing with significant disruption to help restructure their 160-person organization. We helped them reduce costs by more than 20%, flattened the management structure, prioritize critical skills and implement a compensation framework aligned with their long-term objectives. This is the positive impact TriNet can have on an SMB and while we can't control external headwinds, we are gaining momentum, adding new capabilities designed to bring in more clients and serve them longer.

The growth-focused investments we made in 2025 are beginning to take hold. Sales were up nicely in January, and we expect momentum to continue through 2026. Our broker channel is a long-term build but off to a strong start. We entered 2026 with 4 national partners and expect to add more over time. We've improved our quoting, service, technology and incentive alignment with our key partners. Health brokers contributed disproportionately to both our January sales growth and to our pipeline for the coming months.

Second, we invested meaningfully in our sales organization in 2025 with a focus on maturing and retaining senior sales talent. We're coming into 2026 with double-digit growth in tenured reps those with greater than 4 years of experience. One senior rep is more productive than 4 first-year reps, and as a group, they are critical for effective collaboration with successful brokers in each local market. To build a sustainable rep pipeline, we launched the ASCEND program in 2025, bringing recent graduates into an immersive training experience in Atlanta.

We are pleased with the results and excited about the first cohort entering the market aligned with the fall selling season. These new reps, combined with the growth in tenured reps, will result in nearly a 20% expansion in selling capacity later this year. Looking even further out, last week, we announced the expansion of Ascend to 6 regional hubs. This program is helping us attract motivated talent and better culture early and build long-term sales capacity. We're also seeing how this influx of AI-native talent is accelerating adoption of AI across our sales processes. While it doesn't happen overnight, we are excited about the sustainable way our sales force is being built.

Third, we are simplifying our PEO health plan offering through benefit bundles. We're increasingly presented prospects with streamlined, geographic and risk-adjusted bundles. Early feedback has been positive, and we expect momentum to build as the year progresses. Finally, ASO is now a core growth driver in 2026. After discontinuing our SaaS-only HRIS platform at the start of 2025, conversion rates to ASO exceeded expectations. We ended the year with more than 39,000 ASO users, average peplums of approximately $50, roughly 3x our SaaS only offering and stronger-than-expected new sales.

Having a successful ASO offering in our portfolio gives our reps and brokers more opportunities to grow their businesses when PEO may not be a fit. Of course, other major lever for client growth is driving improved retention. For us to return to our targeted insurance cost ratio in the current medical cost inflationary environment required a significant repricing effort. For 2025, our ICR was 90.8 slightly better than the midpoint of our guidance with year-over-year improvement in the fourth quarter. We addressed a cohort that had been significantly underpriced in 2023 and early 2024.

And while the repricing resulted in an increase to client attrition, I'm pleased to report that January renewals represented the final major true-up for this cohort. Remaining clients have now cycled through 2 renewals and are trending toward expected ICR levels in 2026. Looking ahead, barring a significant uptick in health care trend beyond the already elevated level, healthy pricing pressure will moderate. To give you some sense for this, in looking at our April 1 renewals, the percentage of clients receiving health fee increases above 30% declined by more than half versus Jan 1 renewals. This is a significant move closer to a normalized distribution.

With these catch-up renewals behind us, retention will increasingly be driven by strong capabilities and service quality. And here, we're making great progress. In 2025, TriNet achieved an all-time high Net Promoter Score. While encouraged by this progress, our ambition is higher. In the coming weeks, we will launch TriNet Assistant, an AI-powered HR tool, that enables customers to receive accurate immediate answers across a broad range of HR topics built on more than 30 years of curated expertise, this represents a meaningful advancement in how we deliver value.

Importantly, the assistant will be expanding and improving rapidly post launch. The foundational work has been laid with the right security and compliance layers in place. Over the coming quarters, we believe TriNet Assistant will become an indispensable tool for customers. Beyond AI, we are enhancing the client experience through strategic integrations. We plan to announce new capabilities in international employment, contractor management, IT provisioning and security and leave of absence, significantly expanding the value provided via the TriNet platform.

In summary, we have built real momentum with our people, partnerships and our platform investments. It's important to note that we are making these investments while remaining disciplined on expenses. We're exiting 2025 with expenses down 7% year-over-year and expect further improvement in 2026. We laid out our medium-term strategy a year ago with a base case that called for modest improvement in the macro environment over time.

We have not seen any improvement to date, resulting in pressure to our revenue expectations even as we've progressed to plan on margin improvement. Our guidance for 2026, based on our own data and benchmarked externally doesn't assume any improvement on health care cost trends or hiring. Instead, we will just stay focused on getting better doing the things we can control: go-to-market execution, improved value to clients, disciplined pricing and prudent expense management.

We've made difficult decisions in response to a challenging macro environment, choices that are making us a stronger, more disciplined, more client-focused company, a company that will generate good outcomes in 2026 with building momentum.

And with that, I'd like to ask our new Chief Financial Officer, Mala Murthy, to share more details on the quarter and the outlook for 2026. Mala is a little over 2 months on the job and has already made a positive impact while coming rapidly up to speed. Welcome, Mala.

Thank you, Mike. Our fourth quarter and full year financial performance reflected the difficult macro business environment we faced throughout 2025. Over the last 2 years, the U.S. economy has experienced high medical cost inflations and low job growth, and TriNet could not escape the impact of these factors. Entering 2025, a we committed to reprice our health fees, so pricing reflected the current cost environment and TriNet would return to its long-term targeted insurance cost ratio range.

We took these pricing actions to address a cohort that had been significantly underpriced. Although we were measured in our healthy repricing, spreading it over multiple cycles, it still required trend plus increases to our customers and the impact on new sales and retention was considerable. In the face of this challenging backdrop, TriNet stayed focused and disciplined in execution and deliver bottom line financial results at the top end of our full year guidance along with strong cash flow growth on a year-over-year basis.

As we look ahead to 2026, we expect the challenging SMB macro business environment to persist. New sales growth throughout 2026 and retention to improve as the year progresses. To lay out my comments, I'm going to first recap Q4 and 2025 provide the rationale for our 2026 guidance and conclude with initial thoughts on TriNet, 2.5 months in. With that, let's dive into our 2025 financial performance and 2026 outlook in greater detail.

Total revenues declined 2% year-over-year in the fourth quarter. And for the full year, total revenues declined 1%, in line with our full year guidance. Total revenues in the year benefited from insurance and professional service revenue pricing. Those gains were offset by declining WSE volumes. We finished the year with approximately 323,000 total WSEs, down 10% year-over-year. As a reminder, total WSEs include platform users, are those users who are accessing our platform as well as co-employee WSEs or those users receiving the full benefit of our PO services.

We ended the year with 294,000 co-employed WSEs, down 11%. Retention dropped to roughly 80%, down 5 points year-over-year with pricing cited most often as the reason for leaving TriNet. Our final outsized repricing for renewals was delivered on January 1. As we exit January, we expect our retention to improve. Regarding customer hiring in the fourth quarter, CIE growth was in line with our forecast.

And for 2025, we finished with a CIE rate in the low single digits, well below our historical average for the second consecutive year. Across our verticals, and specifically within our technology, professional services and name street verticals, we once again saw weakness in CIE. In this macro environment, SMBs remain reluctant to grow their teams. Interestingly, in our book, growth layoffs have also declined. Hiring just hasn't returned.

Professional services revenue in the fourth quarter declined 7%. For the year, professional services revenue declined 6% landing above the midpoint of our guidance range. Professional services revenue performance for the full year was driven by a mix of factors, including: first, the impact of declining co-employed WSE, partially offset by pricing that was in line with our expectations in the low single digits.

Second, very strong growth in our ASO business, which is an exciting opportunity for TriNet. Third, the discontinuation of HRIS that offset our ASO growth, resulting in a net $7 million headwind. This was better than our projections as conversion rates from HRIS to ASO were higher than expected and more HRIS users stayed on the platform longer. Finally, we discontinued a technology fee, which represented a $22 million headwind.

Interest revenue in the fourth quarter was $14 million, down $1 million, a decline of 7% versus prior year, reflecting recent interest rate cuts. For the full year, interest revenue was $67 million, up 5% year-over-year, benefiting from the unexpected timing and size of certain tax refunds, coupled with higher-than-forecast interest rates.

Turning to insurance. Insurance Services revenues declined 1% in the fourth quarter. Insurance Services revenue for 2025 was flat when compared with 2024. For the year, Insurance Services revenue per average co-employed WSE grew 9% as we passed through average healthy increases of over 9%. Insurance costs in the fourth quarter declined by 2% year-over-year, impacted mostly by lower volumes. For the year, total insurance costs grew 1% as medical cost inflation outpaced the decline in WSEs.

Our fourth quarter insurance cost ratio came in at 94%, a 0.6 points year-over-year improvement, and we finished 2025 with an approximately 90.8% ICR, in line with our full year guidance. In the fourth quarter, operating expenses, which exclude insurance costs and interest expense declined 16% year-over-year and for the full year declined 7%. Operating expenses benefited from our talent optimization and automation efforts.

For the fourth quarter, we had a $0.01 GAAP loss per share and we finished the year with GAAP earnings per diluted share of $3.20. Our adjusted earnings per diluted share was $0.46 in the quarter and totaled $4.73 for the year at the top end of our full year guidance range. Despite our challenges in 2025, a TriNet is a durable, strong cash-generative business. During the quarter, we generated $57 million in adjusted EBITDA. And for the year, $425 million, which represented an adjusted EBITDA margin in 2025 of 8.5% within our full year guidance range.

In the fourth quarter, we generated $61 million in net cash provided by operating activities and $43 million in free cash flow. For the year, we generated $303 million in net cash provided by operating activities and $234 million in free cash flow, which represented 16% year-over-year growth. Free cash flow benefited from improvements in working capital.

Our 2025 free cash flow conversion was 55% and a significant improvement when compared to our 2024 ratio of 41% and moved us closer to our medium-term target range of 60% to 65% free cash flow conversion. Over the course of the year, we leveraged that cash generation to fund dividends, purchase shares and reduce our outstanding debt. We paid a [indiscernible] dividend during the fourth quarter and will have paid $1.075 per share dividend in 2025.

During Q4, we repurchased approximately 1 million shares for $61 million. For the year, we repurchased approximately 2.8 million shares for $182 million. In total, during 2025, we returned $235 million to shareholders across share repurchases and dividends. In addition to the capital return to shareholders, we paid off the remaining $90 million balance of our revolving credit facility and exited 2025 with a debt to adjusted EBITDA ratio of 2.1x just above our targeted 1.5 to 2x range.

Turning now to our 2026 outlook. Our guidance reflects a range of broadly held forecasts on key variables such as CI growth and medical cost trends. We also assume economic conditions remain consistent with 2025 and our quarterly cadence of our financial performance should mirror that of 2025. For 2026, we expect total revenues to be in the range of $4.75 billion to $4.9 billion. Revenues are impacted by our lower beginning WSE base. We expect elevated attrition in Q1 due to our January renewal, the last catch-up renewal.

In 2025, we ended the year with approximately 80% retention. Attrition accumulated through 2025, driven by increasing health fees. In 2026, we expect retention to improve slightly overall. However, based on the schedule of our renewals, including our last catch-up renewal on Jan 1, we expect to see elevated attrition and a bigger drop in Q1 when compared to last year. With moderating healthy increases starting with our April 1 renewal, we expect improving attrition as we go through the year.

Early indications from our April 1 renewal are supportive of this assumption. We expect new sales growth to positively impact volumes in 2026 as our investments in go-to-market begin to pay off, and insurance pricing stabilizes in line with cost trends. The early indications from Q1 indicate that we are on track, and we are optimistic that new sales will improve year-over-year as we move sequentially through 2026.

On CIE, the midpoint of our guidance assumes a growth in the low single digits, similar to our 2025 experience, given persistent weakness in the SMB macro business environment. On interest income, we expect a $25 million to $30 million headwind when compared to 2025. We expect interest income to be impacted by lower interest rates in 2026 versus 2025 and by lower cash balances due to the declining amount of certain tax refunds. The timing of the distribution of those refunds also remain uncertain.

For Professional Services revenue, we are forecasting a range of approximately $625 million to $645 million. Here are a few drivers that are important to understand. First, our lower WSE forecast. We assume a modest single-digit price increase, which will partially offset these WSE declines. Second, we expect ASO services growth of double digits. A portion of the ASO growth is being fueled by a migration from our legacy SaaS HRIS business, which we expect will continue declining, posing a $10 million to $15 million headwind and offsetting the growth in ASO.

Finally, there was a change in reporting methodology for state tax-related revenue we record in one state, which will represent a headwind of about 1 point of PSR. This change is specific to a single state. In 2026, we are tightening our ICR guidance range by 50 basis points, reflecting our stronger actuarial capabilities and more stable cost trends. Underpinning our ICR guidance is our expectation for medical cost growth between high single and low double-digit rates, very similar to our 2025 experience.

Pharmaceutical cost inflation remains a headwind, with growth rates expected to be in the low double digits as GLP-1 usage continues, specialty drug utilization remains high and cancer treatments remain elevated. Our combined insurance cost ratio is expected to be in the range of 90.75% to 89.25%. The high end signals some improvement towards our target from 2025 with health cost trends still elevated, and the low end reflects further medical and pharma cost trend stabilization.

As a reminder, our historical quarterly ICR performance sees our Q1 performance on average 2 points better than our target and our Q4 performance 2 points worse. In 2026, we expect a reduction in reported operating expenses in the mid-single digits. I want to make one thing especially clear. Even while we drive further year-over-year decreases in operating expenses, we plan to reinvest a portion of the savings in our value creation initiatives.

For 2026, our adjusted EBITDA margin is forecasted in the range of 7.5% to 8.7%. We are forecasting stable adjusted EBITDA margins despite a decline in revenue due to lower ICR and OpEx discipline. GAAP earnings per diluted share are expected to be in the range of $2.15 to $3.05. And adjusted earnings per diluted share in the range of $3.70 to $4.70. Our capital return priorities remain unchanged.

As we generate cash throughout the year, we will continue to deliver to our shareholders by meeting targeted investments in our value creation initiatives to drive profitable growth, using our cash flows to evaluate tuck-in acquisitions, fund dividends and share repurchases while maintaining an appropriate liquidity buffer in line with our financial policy. The Board has authorized an increase in our share repurchase program, bringing the total available for repurchase to $400 million.

Finally, I want to comment briefly on the multiple medium-term financial scenarios that the company provided a year ago. Since then, the SMB macro business environment has shown little improvement. Our CIE remains below normal levels and medical cost trends remain high. The extent to which this weakness persists will determine how we perform vis-a-vis those financial scenarios. I will finish with a few thoughts on TriNet after 2.5 months as CFO.

First, I'm impressed with the TriNet team. My colleagues at TriNet are committed to putting our SMB customers at the center of everything they do. They believe in TriNet and are working hard to bring our medium-term strategy to fruition which will benefit all of our stakeholders. Second, I believe in the large untapped market opportunity. Between elevated medical cost inflation and divergent regulatory regimes across the federal government, states and municipalities, there is a huge opportunity for TriNet services.

Third, capturing that market opportunity requires more work. TriNet has a clear set of priorities for improving the customer experience, expanding our distribution footprint through channels and sales capacity growth, innovating and adapting our product to emerging technologies and customer needs and executing this in a financially disciplined manner. Our results in 2025 demonstrate our financial discipline in both the significant progress we have made in managing our insurance cost ratio and our OpEx.

Stepping into this company as CFO, I believe in our future growth opportunities, and I know that our sales, retention and business momentum will be improving through 2026 as we execute with focus and urgency.

With that, I will pass the call to the operator for Q&A.

[Operator Instructions] And this morning's first question comes from Jared Levine with TD Callon.

To start here, Mala, can you discuss your guidance philosophy, including how it might differ versus your predecessor here, just given it is your first earnings in the initial fiscal year guide here?

Yes. Thank you for the question, Jared. The way I think about our guidance philosophy is based on a few drivers. So let me go through it. The first is, obviously, we have to look at what is happening in the business in 2025 and how is the momentum in that business changing as we go through the year and how we exit the year, right? Because that's obviously what sets us up partly for 2026.

And if you look at the results we printed Jared, I would say to you, certainly, we have had WSE declines as we have articulated. However, if you look at the progress we have made, as we have gone through the year on ICR, that is an important data point in fact that we have considered as we have gone into 2026.

The second thing I would say is the OpEx discipline that we have shown all year is definitely something that also we are continuing to make progress on. And we can talk about the various drivers of that later on in the call. But that is also something that is informing as I think about guidance. And then most importantly, there are the drivers of our revenue as we exit '25 and going to '26 million. Definitely, we have talked about the different components that is driving our revenue momentum as we go into 2026 Jared, there is the last significant repricing that we have done in January that certainly has an impact on attrition early on in the year, therefore, WSE as we roll through the year.

For the second and we are pleased with our ASO growth that will continue to show momentum. The thing that we are absolutely focusing on with urgency is around executing all of Mike's priorities, right, whether it be go-to-market execution, whether it be retention, focus on NPS and continue to show pricing if that we have shown in 2025. So if I summarize it all, I would say, the way I'm thinking about the setup for guidance is around how we exit the year in terms of things we control.

Second is, what are we actually doing from an execution perspective on our various priorities and investments again, on the controllable side. And then, of course, we have been relatively transparent with you in our guidance assumptions on macro factors, exogenous factors between CIE and medical trends that candidly are informing the bookends of our guidance. So that is exogenous. We are going to continue to monitor that very carefully, but that is something that is absolutely informing our range of guidance.

Great. And then, Mike, in terms of bookings expectations for '26, I did hear you called out you expect to grow capacity at some point in the year, I think, around 20%. Is that a reasonable expectation for how bookings should grow for '26 in terms of what you're targeting? Or is there any kind of puts and takes with productivity impacts to also be mindful of? Just any color there would be helpful.

Jared. I appreciate the question. We did see sales improving on a year-over-year basis as we were kind of coming through that variance, the gap for the prior year closing as we went through '25. And it was very encouraging to see a very good January, an uptick over the prior year, and that's certainly our outlook. Like Mala said, I think on the things we control, and I say the two that really are going to drive volume growth are new sales and retention. We do feel like our line of sight is to growing momentum on both of those fronts.

So having stronger than we've experienced in recent years, retention of our senior folks. We've talked about a fourth year rep generated first year reps worth of production and pairing those up with our Ascend graduates that are coming in that bodes very well for us. So the exact percent growth is going to be a factor -- there a lot of factors that play into that, but the direction of travel is a positive one, having already started to post some growth here in 2026.

And the next question comes from Ross Cowen LLC.

I'll be asking on behalf of Kyle Pearson. I was wondering if you could talk a little bit more about insurance pricing and the impact of attrition in new sales?

Happy to help there. So we came into 2025 knowing that we had a pretty sizable need to move health fee pricing up. And I think it's important, there's really two factors there. The first, of course, is what's happening in the broader industry and the health care cost trend being quite elevated. So we needed to price forward for those expected cost increases.

The second, as we talked about, a pretty sizable cohort of business acquired in the '23, early '24 time period and knowing that we had priced that business too low and needed to catch up on that front. So those clients needed both the catch-up and the trend pricing on top of that. So as we took a measured approach but worked it through in '25 and as Mala said through the Jan 1 renewal here and -- we're encouraged that the health fee component of the ICR overall showed some improvement in the fourth quarter and in the guidance that we put out for next year, the midpoint shows some additional improvement there.

That pricing having completed the catch-up as we look to it's more encouraging that we've sort of done with the second part, and we can focus really on just pricing for what we think the aggregate increase that the whole market is being. So as we've communicated with clients, the 4/1 increases our next big cohort that comes online, we're encouraged by the receptiveness there and the competitiveness there.

We're encouraged by the retention projection we have on that 4/1 kind of much more sort of closer to normalized distribution of sort of the percent increase in health fees across our WSE base. And again, barring any sort of usual occurrence where the already elevated macro jumps, it feels like we're in a more in-line set of increases and therefore, improving retention through the year.

Great. Then also in terms of CIE, could you talk a little bit more about what you're seeing in terms of hiring trends?

Yes. When it comes to CIE, what we are seeing interestingly is at least in our book of business, hiring continues to remain suppressed. What we are also seeing is terminations and layoffs are relatively stable. So it's those kinds of factors that is informing our CIE assumptions embedded in our guidance for 2026. It's sort of in line low single digits, in line with what we saw in 2025. Thank you.

The next question comes from Andrew Nicholas with Fulmar.

The first kind of line of questioning here is just on retention. I think you said from 85 to 80 this year. But I think you also mentioned that quite a bit of that was tied to the price increases. I guess -- I'm curious, first, were the other kind of typical reasons for attrition relatively consistent year-over-year?

And second, is there any way to think about retention outside of kind of that mispriced cohort from '23 and '24. Just curious if you're seeing moderation outside of that cohort that we might be able to attribute to industry-wide terms?

Andrew, yes, exactly. I think you've got it. If you look at the attrition that we experienced. You can kind of look at it on 2 dimensions, sort of triangulated on if you look at the percent healthy increases that a client is seeing when you get to some of the outsized increases that are necessary for that cohort that is absolutely where we saw a higher percent attrition coming through.

The second thing we sort of used to get smart on reasons for termination is the offboarding survey work that we do. And we look at all those different reasons that you would expect and health fee, sort of pretty dramatic increase in health fee as a driver for the termination and again, correlating back to where that fee increase was more outsized. To your specific question, when you look at things like the value delivered through the platform, the service quality, we've actually, through the year, seen a very sort of heartening and consistent decline in those for term reasons.

And I think that correlates to the survey work that we do on Net Promoter Score and being at an all-time high last year. And so I actually think once you get through this catch-up component, keeping up with trend, that is absolutely a challenge, but that's a challenge that is everyone in the market is experiencing right now. And it feels like, again, as we look to and we look to the rest of the year, health fee will certainly be a big part of the conversation, but increasingly, the overall value proposition is coming to the fore.

And with the investments that we're making there and that's sort of the momentum we built around service delivery I think the team is executing at a pace that we've not seen in a while. That's very encouraging for us in terms of like how is the back half of the year, look, from a retention point of view.

Yes. If I add one comment to what Mike just said. If we think about the drivers of attrition, it is, again, something that we monitor actually fairly granularly what are the different reasons. Certainly, price was a very key factor over the last few quarters. We are already seeing encouraging signs of a significant reduction in price being quoted as the reason for the satisfaction as we look into Q2, et cetera.

And we already have some early visibility into that. So then it really comes down to the other usual factors that drive attrition, right? It is between their own business conditions, et cetera, which, as you know, are not a surprise given the macroeconomic uncertainties that persist, especially for SMBs. So I would say to you, if I think about price alone relative to all of the other factors, yes, in the surveys we do, it is showing improvement.

That's helpful. And then for my follow-up, I wanted to ask on the ASO services growth that you mentioned, I think double-digit expectations in growth for '26. Can you speak to the sources of that growth? How much of that is HRIS or SaaS-only clients transitioning there versus existing clients maybe upgrading into it or I should say, as they get larger moving to an ASO versus a brand-new client coming into the model via the ASO chain?

Yes. So the big driver of the growth in '25 was the conversion of that SaaS-only business. And as you always do, you have to set some set of assumptions that you put into your financial plan and ultimately, your guidance and -- but we were surprised to the upside on the rate of conversion into the ASO. And I think that sort of underpins a strategy here, which is really good technology with really good people providing service on top of it. As we look into '26, we largely will have completed very early in the year, the exit of the SaaS business.

And so the growth that comes into ASO as we work through the year is going to be obviously good solid retention, but the growth will come from new sales. And so seeing good, strong fourth quarter from sales, I think we like our pipeline here in the first quarter, it's still a relatively small contributor to the aggregate picture here for us by over time, we see this as a really good additional arrow in the quiver and a growth driver. It gives our reps a place to pivot to and the PEO may not be a perfect fit. And also as we build out relationship in the brokerage channel gives us more chances and a broader set of opportunities to build those relationships and open that channel up as well.

And the next question comes from Tobey Sommer with Truist.

This is Tyler Baris on for Toby. Could you discuss the assumptions that get you to the high end or the low end of your insurance ratio guidance?

Yes. So if we think about the insurance ratios itself, first thing to note is, we showed improvement in that ratio as we rolled through Q4 with -- as we noted in our prepared remarks, our Q4 ICR in particular, actually no better, more favorable on a year-over-year basis compared to 2024. As we think about how that informs 2026, we have essentially at our midpoint of guidance assumed a continuation of those trends.

And to be crystal clear, that is a testament to the capabilities that we have developed internally from an actuarial perspective and from a just a knowledge-based perspective about our book of business, about our plan. We are in a much different place today than we were a year-plus ago. And so that's what is informing our midpoint of guidance. As we have said, also informing the range is the fact that we expect medical trends to be similar to 2025.

What that means is on the medical side, we are talking about high single-digit inflation. On the pharmaceutical side, we are talking about low double-digit inflation. And that is informed by really greater utilization of specialty and cancer-type drugs that we are seeing in our book. In terms of the range: number one, we have tightened the range, right? So again, that reflects the growing grass and control we have on ICR and we have tightened the range relative to what we had in 2025 at the start of '25 by 50 basis points.

Where we land on that range is really dependent on how terribly medical trends do. If you think about the more favorable end of the range, that would assume better trends, if you will, from an inflation perspective. And if you think about the more unfavorable end of the range, it would assume that there is a depreciation.

Super helpful. And then on WSE growth in the quarter, can you discuss how it played out kind of on a month-to-month basis? Were any months better or worse than others? Was it consistent throughout the quarter?

Yes. That is not something we give you more color on from a month-to-month basis. What I would generally say is, if you think about the seasonality of WSEs, you will typically that to see early in the year in the first quarter, generally more of a decline in WSEs typically as they were off-board, but other than that, we don't really -- and then we ramp back up as we go through the year. But beyond that, we don't give you any month-to-month color.

What I would add is as we kind of sort of step back and looked at the whole year, like Mala was saying, we sort of look at the trajectory of our business when we're forecasting for the plan and for guidance for '26, it moved -- it oscillates a little bit around that low single-digit number, but we didn't see a discernible trend either month-to-month or quarter to quarter that would suggest it'd be a better pick, either more more favorable or less favorable as we went into 2026.

[Operator Instructions] And the next question comes from Andrew Pages with JPMorgan.

My first question, I wanted to ask about pricing. So Obviously, you're done with the catch-up period post January 1. So I wanted to ask, if you look ahead into the April cohort, how does your pricing look relative to your peers? Are there still peers that are catching up, so effectively doing both parts of the reprice, the cost trend plus catch-up? Or would you characterize the pricing environment is more in line with kind of how you're approaching it?

Andrew, I think you're exactly right. So we come through that catch-up period is very good to have that largely behind it for those cohorts, which, to your point, I don't want to go too far and the reality is like health care trend remains quite elevated, which is a challenge for our clients, and it's a challenge for us, and it's a challenge for the whole market.

I do feel as though the investments that we've made in our insurance services group, the processes we put in place has put us in a spot where the application of that sort of elevated set of expertise to our quarterly pricing process has us moving pretty quick relative to the rest of the market. And I think we saw that in the impact on some of our volumes, but also the stabilization here in 4Q and improvement in the ICR. Yes, I think it is a reasonable thing to say as we look forward to 4, I feel confident we're very much in line with the market. And to the extent there are players that have a little bit more catch-up work still to do, then that would position us favorably.

Okay. Great. Very clear. And just for my follow-up question, I wanted to know if you could -- I'm sort of characterize the drivers of the sales improvement you're expecting to see in '26 between broker channel, improving ref tenure and then, of course, the Ascend program?

Sure, absolutely. So they're all big contributors, some a little bit more in the immediate term, some a little bit more in the longer term. But I would say the brokerage channel is a little bit of a longer burn. We got onto that pretty early, even in early -- sorry, say, late '24 and through '25, and we're really starting to see the fructose investment. So in terms of like the impact in January and in our pipeline for first quarter, that's kind of an outsized contributor to our growth.

And be honest with you, I think we're just kind of getting started in terms of how deep we can go with the key partners that we've identified and then also find a few more key partners that are sort of well aligned to the kinds of clients and the kind of long-term relationships we're trying to build. I think there is nothing like keeping a really good experience for motivated.

I think the things we have rolled into the market this year, the new set of integrations that expand our capabilities, trying to add assistant. We're putting more things in the bag here for our senior folks. They're sticking with us here, and that's a big driver. The Ascend program, the last one you mentioned, that's actually going to be a nice contributor in the championship selling season this year, but that would be the longer-term investment for us, and we would see that growing certainly a contributor here in '26, but more so in '27 and the years beyond.

Great. And congrats again on the results.

And the next question comes from David Grossman with Stifel .

So I want to just go back to the WSE dynamic. I think I understand the algebra around the deceleration in '25 as a result of the repricing of the book. And since we have another kind of kind of retention below normalized retention dynamic in the first quarter. I guess I'm just curious. I know you don't want to guide to WSEs for the year, but I'm just trying to understand the magnitude of the divot that we faced in the first quarter and how that impacts the year.

So for example, if CIE stays relatively constant, which is I think the assumption of your guidance, are we going to have the same issue in '26 going to '27? Or is the go-to-market changes and improvements and efforts that you're making sufficient so that we wouldn't face the same dynamic in '27 as we're facing in '26, just algebraically, of course, looking at kind of the retention dynamic around the reprice side.

Yes, thanks for the question. We -- I think it's really important to start with the retention dynamic and the work that we need to do to both catch up on a couple of those cohorts and then also price forward for trend. And you know this, David, really well, but we're not talking about just a little bit higher than normal, but like in the last couple of decades, this level of sustained health care cost inflation is pretty unique.

So there's real work to be done there. It absolutely has impacted retention. We have signaled that we're sort of completing that with January 1, but I would -- I'm glad you asked the question. We are not trying to signal that there was an outside attrition event in January 1 relative to what we experienced in the back half of '25. It's just -- we just had a bit more work to do to get all the way through.

Then we focused on what we can control around growing new sales, the go-to-market pieces, experiencing growth in January, having a positive outlook here for the first quarter, having a lot of things coming online that gives us more optimism about the back half of the year, that is certainly going to be a contributor. I do think the retention for once is going to be better. I do think the barring a big change in the macro, I do think the health care pricing that we'll be putting out will be absent the catch-up component and very in line with the market.

All those things are really positive. So with a low and I think prudent CIE assumption like you were saying, that gives us growing confidence that we're slowing the decline of the WSEs and working our way back to growth. So I think really important, David, is like working our way back to growth in a sustainable fashion, putting things in place that we can go back to again and again and again and investing in keeping our reps, growing new reps that are sort of embedded in our culture, differentiating how we do benefits driving that NPS. I think these are things that are going to serve us well beyond 2026.

Right. So just kind of to wrap it all together, Mike, with -- if the macro environment does not improve, is it reasonable to assume that we won't have that grow-over issue in WSEs in '027 versus '26?

Yes. It's -- there's so much ground to cover between now and then it's probably not a question to say exactly what's going to happen, but our confidence is really quite high that the trend in general is going to be an improvement on as we go through '26.

And this concludes our question-and-answer session. I would like to turn the conference to Mike Simonds for any closing comments.

Thanks, Keith. Appreciate it, and I appreciate everyone taking the time to join us this morning. Hopefully, Mala and I have given you a good sense for the strong decisive actions we're taking to improve the areas that we control. And I think the growing momentum we've got on those fronts. So Alex and Mala and I will look forward to connecting with many of you in the coming weeks and months as we're out on the road. And with that, Keith, this concludes this morning's call.

Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

All right. I think we're good. Welcome, everybody, to JPMorgan's Ultimate Services Conference here in New York. I'm Andrew Polkowitz, payments processors and services analyst here. I'm happy to have on stage with me Mike Simonds from TriNet, President and CEO. Mike, thanks for being here.

Thanks for having me.

So figure to get started, big picture. So you've been in the seat for almost 2 years now, right? And there's been a lot of important strategic decisions that have gone on, particularly over the past year. So I'd love before we dive deeper into some of these topics. I would just ask, like, what are you most proud about in terms of both the progress and execution during this -- as you've described it as a transition here for TriNet?

Yes, absolutely. So I mean, I think for us, it was about taking a really good thorough and objective look at the business and the core of trying at the PEO and increasingly, the ASO business and just the opportunity for profitable growth there, feeling very good about it.

But you're right. We had to make some tougher decisions to really narrow the focus in to that -- to the SMB-focused PEO and ASO. We exited the SaaS-only business. We trimmed a couple of other segments at the same time. And I'm really proud of the fact that we built the plan as a team. We went through the organization and really tapped into a pretty remarkable talent base and then just the discipline to execute.

So as we kind of have marched through over the last -- laid out the plan here at the beginning of the year each quarter, just working really hard to sort of hit those milestones and we've been able to do that successfully.

That's great. And you kind of hit on my next question. So obviously, you've made a lot of investments in actuarial talent but also kind of refreshing your go-to-market strategy. And we'll talk later about some of the AI products that you guys have rolled out. So I wanted to ask, how are these changes showing up both in day-to-day execution, but then also how we could track impact in the numbers over the next handful of quarters?

Yes. So you mentioned one of the changes that we made early on was to carve out the insurance services group. We added some leadership talent. Tim Nimmer, who was running -- underwriting and actuarial group at Aetna came over. He's added a new Chief Actuary. We've invested a lot in the process and the application of data to that process. So -- where you see that showing up is kind of we laid out a guidance of 90% to 92% on the insurance cost ratio. Did it at a time where there's a fair degree of uncertainty in a sort of pretty rapid inflationary health care cost environment, as you know, Andrew.

And so coming through the year in a predictable fashion being where we wanted to be at this point in the year, looking forward to January 1 renewals, which is our last kind of big catch-up renewal on the health care side. And so the growing confidence there, I think, is starting to shine through in the predictability of results from an insurance cost ratio and from an adjusted EPS point of view.

And then the second piece is getting the revenues growing again. And so we sort of reaffirmed the midpoint of our guide. So again, we're pretty much on track from a revenue point of view. And I'm sure we'll talk about some of the initiatives and how those are meeting the market.

Okay. Great. And why don't we take a step back for a dive in. I always tend to get the SMB macro question out of the way early. So just kind of wanted to ask, from your seat, you obviously have a lot of data, a lot of businesses under your purview. So what macro trends do you see around areas like employment, wages, SMB new business formation and even the implications for TriNet's key verticals?

Yes, sure. So TriNet focuses on typically skews white collar, higher income, lower employee turnover vertical. So technology is our largest, financial services, very large life sciences. So historically, we would see net hiring in those verticals through the cycles of, call it, 8%, 10%. So these are high-growth entrepreneurial type businesses.

And we're really probably 2.5 years, Andrew, into pretty muted net hiring. If anything, we've seen -- we've talked about it on the last call, probably about 50 basis points improvement year-over-year in net hiring. Bright spots for us, the tech sector is one. A little more we've seen fewer layoffs in the small end of the tech sector than we had seen in the prior year. And financial services has actually held up really well as well.

Okay. That's good to hear. And I wanted to transition now talking a little bit about ICR range. And you've kind of communicated a few times that you have pretty good confidence in returning to that targeted zone. You called out the 90% to 90% to 88% over the long term, excuse me. And let's see, I had a few questions here.

But maybe to start, you suggested at earnings that you're expecting to track towards the lower or more favorable end for 2025. So I kind of wanted to ask -- are there any swing factors you would call out that kind of gets you to the higher low end or what informs your confidence there?

Sure. So we guided in 2025 to 90% to 92% insurance cost ratio. And like you said, we've run maybe a tick or two more favorable this year, and the outlook is to kind of finish to the favorable end of the range. We've actually spent a little less time trying to guide externally to what happens every quarter in insurance because I think inherently, there's just going to be just more volatility in every 90-day period

But when we step back and sort of look at 200 basis points different in the guide and sort of finding ourselves to the middle favorable end of that. I think it sort of speaks to just getting to a little bit more predictability for TriNet. So we'll see how the fourth quarter plays out. It's only a quarter of the year. We do -- like we take about $500,000 of risk per member and offload the remainder. And we reset that every year on 10/1. So that can introduce a little bit of volatility in the fourth quarter as well. And it's part of the reason it tends to be the higher -- highest ICR cost quarter out of the floor.

Got it. That makes sense. And yes, it's an interesting dynamic with the October 1, but also the fall selling and retention season is always very important kind of heading to that January 1 renewal period. So obviously, we're in the midst of that right now. We still have about 1.5 months to go. But I figured I'd ask the question just any comments you could give so far on how client conversations have been going? Obviously, you went through repricing a year ago. So it's not a totally new dynamic this time around. I just wanted to hear what you're hearing on the ground.

No, I think it's really important. It is the most wonderful time of the year, and it's because it's January 1, and a lot of small businesses make decisions around that Jan 1. A couple of ways I talk about it is, one of the beautiful things about this business model is it's so much broader than just the health insurance. So it's tapping into all the benefits. It's the workers' compensation, it's payroll, it's HR. So that breadth of -- it ends up being a very sticky relationship.

And in an SMB business, historically, TriNet's been around an 80% retention rate in these kind of high-growth markets. And our forecasts have us coming in right about at that level, maybe even a little bit better. In an environment where we're putting double-digit health fee increases. So I think that bodes well for us kind of getting back into the long-term range of 87% to 90%, probably to the top end of the range next year. But also kind of -- I think it underscores just how powerful this business model is and how much value we add to these SMBs.

Got it. Yes, I was going to ask about that later, but I'll jump ahead and ask. So you mentioned before you're tracking ahead of that 80% retention bogey despite it being a pretty challenging year from just a pricing setup. So maybe just to put a bow on this topic of pricing. I figured I'd ask the question, is there a way for you to contextualize how much -- or excuse me, how much churn this year is attributable truly to the elevated repricing versus more what's normal course SMB economy, that type of thing?

Yes. Yes. I think probably a couple of dimensions. So one would be where we were a year ago. And as you can imagine, we spend time with every client that's trading and talk through in that exit, what's the drivers of it.

A year ago, the fourth largest reason was health fees. That is now our single largest. If you took all the other reasons and set aside health fees, we're actually doing better this year on retention by a reasonable amount than we were a year ago. We've put a lot of work into the platform. An entire service delivery and we can spend some time on that.

But our Net Promoter Score, we've been tracking for about a dozen years at TriNet, we posted our highest that we've ever had in the company's history in a time when you're passing through big rate increases. And I think as we get through these January 1, it's really our last catch-up renewal that we need to do on the health fee side. As we get through that, I think that bodes well for retention as we work our way through '26.

Got it. That makes sense. And maybe just staying with the worksite employee side. So obviously, there's some mix dynamics going on where, obviously, the churn from pricing isn't friendly, but it comes out to higher margin, more margin-friendly customers. So thinking about the earnings power that comes from this repricing exercise that you're doing, is there anything that you could kind of share in the margin profile of, call it, the remaining base versus what's attriting or what you've had to attrit?

Yes. We're -- a couple of things, trying to price to risk on everything. So that's really important to come back to is we're looking at sort of the block factors and the individual experience factors at each case. So over time, you would anticipate and certainly is true to your question, the attrited runs typically at a lower margin. We're asking for bigger healthy increases for the ones that are attriting. So you could sort of see that as likely to be margin accretive over time..

I think the really good thing is like we price every 90 days, a cohort of our business, which is a little bit unique for us. So that enables us to kind of react pretty quickly as changes happen in the external environment and also to be a little bit more balanced knowing that we can work it through and kind of balance the retention with the margin improvement with each cohort as we go.

And kind of speaking to that balance, I wanted to ask on the competitive landscape because I know you guys were early to reprice last year, but it sounds like the industry has sort of caught up to where TriNet is repricing. So just I'm curious, is there any change that you've seen competitively, obviously, been in the industry for a long time, but even just versus a year ago?

Yes. Yes. And I think -- a couple of things. I -- sometimes it's just sort of circumstance, but I had come new into the role, so that's a fresh set of eyes. We carved out the insurance group, and we had some pretty talented people with a lot of experience with a fresh set of eyes. So I think that sort of broke the company out of sort of the regular routine.

And I think we did jump on the fact that it felt like trend was taking off and that we weren't adequately pricing for that. I think that it helped in the -- we kind of outlined at the beginning of the year that 2023, early 2024 new business. So I think we were on it a little quicker.

Like I said, we're kind of pricing through each cohort every quarter. So we're moving instead of on an annual basis every 90 days. So I think we're a little quicker up on that curve to catch it. And the reality is we're not facing anything unique at TriNet when it comes to health care cost claim trend. So I'm fully confident the market is going to get there.

But yes, I'd say as we're looking at the conversion rate, for instance, on new business as we've worked our way through the year, say, on direct PEO, that conversion rates improved. And I think it's indicative of kind of the market coming up.

Yes. Absolutely. A lot of our friends in the industry have been talking about the same dynamics. So it's been a consistent story. Great. So maybe to transition a little bit. You alluded to it before, but kind of exiting the HRIS business, investing in the ASO side. I know you've said that it's early, but demand has probably been more favorable than expected in the early days. So maybe just for those who are less educated on it, I kind of wanted to walk back around the strategic decision to exit HRIS, go into ASO and how it fits with the broader TriNet model.

Yes. I think at the end of the day, we sort of just looked at it and said, if you're looking for really good HCM software and you want to spend $8, $10 PEPM, there's going to be some really good, really focused options for you out there and really good competitors.

What I think makes TriNet special is strong proprietary technology with outstanding service layered on top of it and kind of the benefits and the HR expertise that comes with 30 years in the business. And so those are price points that are considerably higher. That's considerably more value that you're delivering. It allows our organization to really focus on what we do very well. So one of our key values is we always start with the customers.

So the first thing we did was if what you need is an $8, $10 PEPM software product, we identified good partners, set up the data feeds, made that as seamless as possible for customers. But -- and we made some assumptions about who would buy up the services into the ASO model, which think of that as kind of a 4x increase in the PEPM, so not insignificant. 4 to 5.

And yes, we've been surprised to the upside at the rate at which SMBs were interested. And so we've kind of taken some more steps to invest not just in the conversion, but in the new net logos coming in on the ASO platform. And I think that really helps us in the long run for two reasons.

One is being SMB focused, we're going to have some very successful clients that outgrow the PEO model, but the reality is they don't outgrow the whole model at the same time. They don't want to change their health plan and their payroll and their benefits administration.

So being able to unwind aspects of maybe down to an ASO is a really good way we can maintain a relationship and professional service fees on a go-forward basis. And then the other really important one is it puts another really viable solution into our sales reps portfolio.

And what we've learned over time is tenure is immensely important in this business. And so when you can bring other and in some cases, simpler product solutions to help sales reps get to success quicker? And maybe our master health plan or the co-employment relationship is not a good fit. You've got ASO to fall back on.

Got it. That's helpful. And maybe sticking on that topic around the sales force and just the funnel. So is there a different funnel that you operate with internally for getting kind of customers in the pipeline for ASO versus PEO or you look at it more holistically that this could be a candidate for either or, but let's figure it out together?

It's a huge part of our investment thesis is it's largely the same funnel. And so the work that we do, building the brand, generating top of funnel leads, the reality is we can meet our ASO growth objective several times over alongside the PEO objectives with just that top of funnel demand. And to be -- like we're baby steps in it right now. So we're encouraged. We'll get smarter, we'll get more sophisticated, but yes, it's largely the same funnel.

Got it. Okay. That's great. Maybe the last question I'll ask on this topic. You mentioned that there's opportunity on kind of what would be the traditional PEO graduation side to kind of keep some of your customers in-house. Is ASO also an offering that potentially could work for a smaller business that potentially you're not willing to underwrite yet, but you still like and they're still growing overall? So like -- in other words, is it like an above PEO and below opportunity?

It is. It is -- and I think that's been a big -- it's a big thing for us is the mindset prior maybe it was a little bit more binary like your're all PEO or you're nothing. And I think increasingly, it's like, hey, at the end of the day, PEO is a construct around co-employment, but the reality is it's a bundled set of services and product.

And so ASO represents a subset of what goes into the PEO model. But even within ASO, there's ways to -- maybe it's payroll help that you need more than benefit. So again, it sort of puts solutions in front of clients that, yes, sometimes they may just have less funding to put towards funding the HR support that they get, so they may start with something more basic and then grow over time. And then they may want to in-source as they get bigger and that allows them to unbundle on the other end.

Got it. So basically, it's improving the flexibility of the offering on both sides. Great. I do have some more questions. I should have said it upfront. We would love to take questions from the audience as well.

So we'll save time for that. But I wanted to talk about AI. So there's -- I'll break up my question for you, but there's sort of the AI impact inside TriNet and then outside of TriNet. So maybe let's start with inside of TriNet. You recently launched your AI suite, Personal Health Assistant, TriNet Assistant, your dashboard. Where would we expect to see TriNet continue to invest on the product side? And what are some of the areas that you're most excited about?

Yes. I mean there's opportunities everywhere, and we're in early innings, for sure. we did take three different AI-based solutions to market. I would actually tell you, though, that represents a pretty small fraction of our investment in AI. The majority of it has actually been in the data infrastructure.

So before I got here, frankly, starting to put the right data lake in place, pull data extracted from our application layer, make sure we were curating it and had good stewardship there. So even I think we'll see greater velocity, Yes, because the AI capability is getting hardwired into our product development life cycle, but even more so because it's enabled. We've got the data to be able to train those models. So I think it's everything from that top of the funnel and how do you move prospects 2 or 3 runs down that before the first salesperson needs to get involved.

I think it's data mapping to make the process of implementing a new client a lot easier. And then at its core, it's like what we do for customers is manage complexity. So the ability of AI to serve up the right answer for payroll tax withholding in the state of Wisconsin, being able to do that at the fingertips of a client versus involve a call in or a chat in. I think there's big experience gains and big efficiency gains.

Okay. Great. And then maybe let's flip the question around. So that's the AI impact within TriNet. I also get the question from investors, AI outside of TriNet. And specifically, it's a little bit of a macro question, but nobody really knows the impact of AI across the labor force longer term. Obviously, you guys work with lots of tech-forward companies. So the question actually comes up. Do you see any change to the normal CIE growth algorithm driven by AI? Obviously, with SMBs, SMBs tend to be a little bit more careful around laying off because it's hard to hire. So it's a difficult question to answer, but I wanted to throw that at you.

No, it's one -- it's a good one. I get that one a lot, but we have a lot of attention to it. I'd say a couple of things. One, we saw sort of this sort of current malaise around net hiring 2.5 years ago. So it was kind of predates where GenAI would be a big driver of that.

And if anything, like I mentioned, this year, we'll actually sort of forecasting to be slightly better on. Net hiring in our customer base than we were a year ago. So nothing sort of precipitous, I don't think. And then in conversations, admittedly, pretty optimistic crowd.

But in general, in the SMB market, tools that drive productivity and enable them to move faster is only going to elevate their growth ambitions in general, particularly the verticals that we play in. So I'm not saying at some point, a massive tech company isn't going to use AI to sort of manage their workforce down or slow their hiring.

I think in the entrepreneurs that I'm talking to and that we're talking to, I think it's a reason for optimism about their business broadly. And so -- and I guess the last one would be, you highlighted tech. That's the first place we win and said, hey, one of the most compelling obvious immediate use cases is building software, testing software, automating test scripts. And tech has actually been relatively recently more of a bright spot for us. So it's holding in there pretty well.

Got you. That makes sense. And we're at the JPMorgan services conferences, lots of people up in this stage talking about AI, but it's consistent. It feels like there's a lot of interest in driving productivity, but at least in terms of scale offerings, it's still early days as far as how that impacts the labor force.

I think that's right.

Great. I'll ask one more, then we'll open it up to the crowd. Cost containment has been really sharp this year, and that's been a theme. I wanted to ask about your capital allocation framework. We talked about some of your investments already and how you rank order, more organic investment, M&A, shareholder returns.

And then a question I've been getting from investors has just been like the right level of OpEx considering that you've been so careful as far as what's sort of the launch points into next year, even over like a midterm horizon OpEx growth?

Yes. Maybe I'll take OpEx and then we'll talk capital. A lot of questions priorities. I mean I'm here. I'm with you. So I'd say OpEx, yes, I mean, I think really good discipline from the team. Thinking hard about both technology investments and globalizing workforce, it's allowed us to sort of bring expenses actually down. I think that's very sustainable. I still think we have a lot of runway. AI is a big opportunity.

As we look forward, I do expect over the medium term, operating expenses will grow year-over-year. But we're pretty committed to being sure that there's two, three points of daylight between operating expense growth and revenue growth as that comes through. So as kind of the macro picture impacts that top line, we'll manage the bottomline or operating expense part kind of in lockstep.

And then capital allocation pretty straightforward. So like I said, these are great businesses. They're underpenetrated. They're growing and so investing in organic is a big deal for us. So that's the platform and technology that is definitely investments in our sales force and new broker channel.

Secondary is there inorganic opportunities? And I would say our third is shareholder friendly. That's something we're committed to at TriNet. And given where the market is and where TriNet stock is trading right now, that's a pretty high bar for us when we think about inorganic.

But yes, in general, it's still a fragmented market, both PEO and ASO. And to the extent they're made sense to do something on a tuck-in basis, that might be something. But in general, given where we are, it's a really clear bright line between driving to that 10% to 11% EBITDA margin improvement, getting revenue growth back up into that 4% to 6%. I think the team can sort of see the pathway to that. And I think for the most part, we're heads down and executing.

Okay. Makes sense. We have a little over 5 minutes left. Now it would be a good time. Any questions in the crowd. It looks like we have a couple..

I wanted -- it's tough from our seat to get like a sense for kind of the insurance risk pricing and kind of the edge you have. So could you just spend a little bit of time talking about that? You mentioned carving out the insurance services. I know your background, but maybe just a little bit more detail you can provide us around that and the edge TriNet has.

Yes, sure. So just real quickly, we broke it out and have invested in the talent. So we brought people in that come from health insurance and their background, pretty deep actuarial talent. So that's key. We look pretty sharp at our process and what we can do to improve there.

And so there is the construct that TriNet operates under, which is pretty unique in the industry. Most PEOs are a pass-through on the health insurance. And they're typically getting a renewal on their entire book once a year.

And so again, by in-sourcing that, having talent, both at the macro and at the case level and then putting a cohort through every 90 days. I think it just puts us in a spot never to be able to predict the future, but just to get our forecasting better and to move pricing to risk through that pipe more quickly.

I think what you would anticipate, like, okay, okay, what would I see in results if that's the case, what you see is, in times where health care cost inflation took off, what you'd see for TriNet is, we get quicker to predictability on ICR, and we would see constraints on growth, right? Because it's going to take the rest of the market a little bit longer, and that's exactly what's played here in 2025. So I hope that helps.

So there's a handful of dominant players in the PEO space. And then there's quite a number, as you said, fragmented players down below. Is there just too much industry capacity for this marketplace, particularly in a -- in an economy where the birth rate is pretty much hovering above zero?

Yes. Really good question. I think the very short answer is no, I don't think so. We -- the industry is -- it depends on where you look, Napo is a pretty good source. But we would estimate for our verticals, maybe 10% to 12% penetration. So I feel like there's still a lot of white space there

I do think the PEO as a construct is just a better way for small businesses to do their HR and to acquire benefits using buying scale. But it's an interesting concept around co-employment that for a lot of small businesses is unfamiliar. So what we observe is that there's concentrations geographically around the country, where it does get a little bit more saturated.

So part of the opportunity in terms of us investing in the brokerage channel is bringing kind of the network that spans the entire country, trusted advisers that can sort of speed up the familiarity cycle and ultimately, the sales cycle for us.

Maybe one other point that's interesting. The top 5 of us do have a decent sized share of the industry, but there's still 300, 400 small PEOs out there. And I think what's happening, Andrew, as we talked about, is just as technology improve and AI comes on, the ability for a local player to compete with historically on a bespoke, very sort of custom local service delivery model. Over time, that barrier gets higher and higher around the technology and what the workforce of today is starting to expect. So I would imagine that the consolidation that's happening out there is likely to continue down the road.

So I remember a few years back, I believe that TriNet took an approach to addressing the graduation issue in the business by verticalizing and hiring some specialists by verticals go after the law. The legal practice marketplace and a few others. Is that paying a dividend in terms of seeing some of those larger players, some of those larger employers be retained better? Or is it just kind of had an overhead expense issue as opposed to a real benefit issue?

Yes. I think knowing and understanding the client base is quite important. I'd say just three quick things. One is, yes, 100% graduation is an issue. I think the ASO product and the ability to unbundle health care and do things like that. I think it's got a lot of potential in starting to show some green shoots. I actually will tell you that the two biggest things we can do is get through the current health care pricing to drive retention north.

And then the second thing is we still see small and midsized forget graduation, clients that are trading because the service isn't quite what they expected or the value for what they're paying in professional service fees. And so this push to really drive Net Promoter and improve our service delivery, I think, is actually our biggest lever to keep retention moving up.

Great. Time has flown by. We have a little less than a minute left. I'll ask my last two questions together because I think they're a good way to close. So number one, we've enjoyed working with Kelly over the years, but obviously, you have Mala Murthy coming in. So I wanted to ask, number one, why she was the right choice to become the next CFO of TriNet. And then number two, just a closing question, why is TriNet such a good investment today? It's obviously been a choppy macro, but demand has seemed pretty durable. So I figured I'd ask these last two together for a final minute.

Well, it gives me an opportunity to say thank you to Kelly Tuminelli, 5 years as TriNet's CFO did a fantastic job and I think has done a lot with the investment community and things like with our outside audit and just the blocking and tackling that needs to happen.

And also, our open conversation allowed me to spend time at market, find Mala Murthy. We won't miss a beat on any of the blocking and tackling. And I think Mala comes with a sort of very commercial-minded and strategic skill set from her time at Pepsi and Amex and most recently, Teladoc. And so -- she is very excited.

She starts in a couple of weeks, and we are excited to have her. And I think Mala, like me, like hopefully, an increasing number of investors sort of see the opportunity here. It's an underpenetrated market. We're a top 5 share. I think we've taken the steps to be disciplined, refocus on our core, reprice the business, get the expense leverage and get growth going. And again, January 1 will be our last big catch-up, and then we kind of work through '26 with a lot of the capabilities we've been investing in starting to ramp up.

Awesome. All right. Thank you very much.

Good. Thanks for having me, Andrew. Appreciate it.

Yes. Thank you.

Good morning, and welcome to the TriNet Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Alex Bauer, Head of Investor Relations.

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 Third 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 would like to preview this morning's call. I will first pass the call to Mike, where he will comment on our third quarter performance and discuss our progress on our strategy and medium-term outlook. Kelly will then review our Q3 financial performance in greater detail. Please note that today's discussion will include references to 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 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 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. Mike?

Thank you, Alex, and good morning, everyone. We appreciate you joining us for the early start. Before discussing our third quarter results, I want to formally welcome Mala Murthy, who, as announced this morning, will become TriNet's Chief Financial Officer effective November 28, and I am sure is listening to the call this morning.

Mala previously served as CFO of Teladoc Health, and has more than 25 years of leadership experience, including business unit CFO for the Global Commercial segment at Amex, and FP&A, corporate strategy and treasury experience at PepsiCo. I'm excited to have her join at a pivotal time for TriNet as our results increasingly reflect a strengthened foundation and our focus is on generating sustainable growth. I know Mala looks forward to getting out and meeting you all over the coming months. I would also like to sincerely thank Kelly Tuminelli, our outgoing CFO, for her outstanding service and contributions to TriNet over the past 5 years. Kelly has played a vital role at TriNet during her tenure. She's been a consistent and reliable voice to shareholders and has been a great partner to me as I transitioned into the company.

I'm grateful for all her efforts and for her willingness to stay on as an adviser to me through the middle of March next year, supporting a seamless transition. Thank you, Kelly.

Now let's turn to the third quarter, which was a good 1 for China. I'm pleased with our financial and operating performance, allowing us to adjust our full year earnings outlook upwards and towards the high end of our 2025 guidance range. In the quarter, we made progress on several dimensions of our strategy. While overall market conditions remain difficult with persistently low SMB hiring and elevated health care costs in the areas we control, our execution is strong, our outlook is improving, and our confidence is growing as we work to reposition TriNet for long-term profitable growth.

As a reminder, our medium-term strategy objectives include total revenues achieving a compounded annual growth rate of 4% to 6% with our adjusted EBITDA margins expanding to 10% to 11%, which taken together will ultimately drive total annualized value creation of 13% to 15% through earnings growth supplemented by share repurchase and dividends.

During the third quarter, revenues were in line with our plan. And with just a quarter left in the year, we expect full year 2025 total revenues to be approximately $5 billion, near the midpoint of our full year guide. Our disciplined pricing and better-than-expected ASO sales have contributed to revenues in line with plan despite a decline in WSE volumes.

I recognize that while revenues being in line with plan is encouraging, investors will also have questions on underlying WSE volumes and when to expect a return to growth on this metric. Before talking through the components of volume growth, I'd like to make 2 points as context. First, we look at both the absolute number and the quality of WSEs in our client base. While volumes are down, we are quite pleased with the strong and increasing quality and profitability of our customers.

Looking forward, we feel confident we have the high-quality client base alongside other levers at our disposal to achieve value creation in line with our medium-term strategy. Second, our health plan pricing relative to the market is important context, partly because we had our own issues to fix, we moved earlier to address the escalating cost trend, taking a view that might initially have been thought to be conservative. That is that the escalated trend would not abate in the short term.

We now believe this assumption of persistent escalated trend is playing out as the prudent view, moving more quickly and aggressively with healthy increases, which proved to be in line with the general health care market, we believe put us ahead of some other PEO competitors. While this has clearly impacted our WSE volumes, we believe we are largely through the steepest part of the repricing and set up well for 2026.

Based on what we are seeing in our new business pipeline and hearing from brokers, the pricing gap appears to be tightening. With those 2 points as context, let's look a little deeper into our 3Q volume performance through the 3 drivers: customer hiring or CIE, retention and new sales. Kelly will go into more detail on CIE later, but specific to the third quarter, we saw the normal exodus of summer seasonal workers in September.

Even still, we are on track to see some overall improvement in CIE when compared with last year, albeit still at much lower levels than historical norms. On retention, while we remain on track to retain clients at or above our historical norm of 80%, we have seen a decline from prior year. It's worth noting that margins for terminated clients are considerably lower than for the overall client base. Further, in looking at our client exit research, it's clear that health plan pricing is the driver as it was cited as the #1 reason for termination, up from being the fourth largest reason cited a year ago.

Controlling for the impact of health plan pricing, attrition was down year-over-year. And indeed, we feel very good about our improving service delivery. More than a dozen years ago, we established the Net Promoter Score as our primary measure of success from our clients' perspective, and I'm happy to report that here in 2025, we've reached an all-time high in NPS. We believe there is a strong correlation between our investments and our service model and our strong NPS scores. On that front, we recently announced the launch of our AI-powered suite of capabilities, which harnesses our extensive HR knowledge and delivers tailored output for our customers, the evolution of our service model continues and AI will play a central role in this evolution.

Turning to new sales. Sales were down in the quarter, though we are encouraged by the quality of new clients added. Looking ahead to the fourth quarter, we expect improvement in our year-over-year performance, and we're excited about the January pipeline as well with strong contributions from the growth investments we've made. We continue to improve the retention of our senior most productive reps and a median tenure of our team continues to improve.

At the same time, we've revamped our recruiting and training programs and have restarted our hiring with more confidence these new reps will reach productive status. Our preferred broker program, which is comprised of 4 national partners is currently in market. As a reminder, a feature of this program is the alignment of targets for new sales and retention as well as building out dedicated quoting sales and service teams.

This program is already generating a growing share of our RFPs increasing our optimism for Q4 and 2026. We're also in market with our first set of benefit bundles, which seek to simplify the offering, streamline the sales process and better align cost and plan design needs for our clients. It's increasingly clear that simplified benefit offerings will be an important part of our growth equation. So on revenue overall, we believe we are building the foundation for predictable and sustainable growth.

On margins, we're making progress towards our 10% to 11% target. The 2 key levers for improving margins are getting back into our long-term insurance cost ratio range and managing operating expense growth. The third quarter saw us again, realize health plan increases per enrolled member of approximately 10.5%. This is the cumulative increase after plan design buy-downs, which clients use to manage fee increases and also has the effect of reducing risk to TriNet.

Looking forward, we're increasingly confident in our ability to return the insurance cost ratio back below the top end of our long-term range of 87% to 90% in 2026. And while also allowing for more moderate and predictable pricing for our client base. On operating expenses, for the third straight quarter, we saw a year-over-year reduction, down 2% in 3Q. And -- the drivers of this performance remain the same, the application of technology to our business processes and continued talent optimization.

With our expenses and pricing levels well managed, free cash flow is improving, which enables us to return capital to shareholders consistent with our history. In the third quarter, we repurchased stock and paid dividends totaling $45 million. In conclusion, we have a high-quality client base that is increasingly advocating for TriNet. We have a talented and engaged colleague base and an increasingly broad set of marketplace partners. We're making progress on our growth and margin expansion initiatives and delivering against our financial objectives. Momentum is clearly building here at TriNet.

With that, let me pass the call to Kelly for her review of our financial performance. Kelly?

Thank you, Mike. Before I jump into discussing the quarterly results, I do want to mention a few things about our leadership transition. My 5-plus year tenure at TriNet working with our dedicated group of colleagues who always put our customers first, has certainly been a highlight of my career. The entrepreneurial spirit of TriNet is unmatched, and it has been an honor to help move the company forward on many fronts, including a focus on capital management.

I have confidence in the management team to finish 2025 strong and make significant progress towards the medium-term strategy and shareholder value creation announced last February. I will remain on board as an adviser to help support the team as they work through the year-end process.

Now let's jump into the third quarter results. During the third quarter, we demonstrated continuing progress on benefit repricing and a focus on efficiency and cost discipline, resulting in a quarter that puts us at the top end of our annual EPS guidance. Total revenue in the quarter was down 2% on a year-over-year basis. Total revenue performance in the quarter reflected our decline in WSE volume, but was supported by prudent benefit repricing, putting us back in line with the general cost trends in the health care market.

Interest income and pricing strength in professional service revenue also supported total revenue performance. Similar to our second quarter, interest income was higher than originally forecasted, driven by increased balances attributable to the timing of certain tax refunds. The timing of these refunds remains intermittent and difficult to predict, particularly given the processing delays at the IRS.

As we've continued our repricing focus, volume remained a headwind for revenue. We finished the quarter with approximately 332,000 total WSEs, down 7% year-over-year and 302,000 coemployed WSEs, down 9%. During Q3, we saw a continuation of many of the trends we've experienced in 2025. Attrition was elevated when compared to the last year due to our repricing efforts and new sales were down as our pricing reflected higher health care observed trends.

CIE was flat to last year and a net negative in Q3 due to the offboarding of seasonal workers. Note that even with this, CIE is slightly higher than last year on a year-to-date basis by approximately 0.5 point. Our year-to-date improvement has been driven mainly by the tech vertical, but we've also seen strength in hiring in financial services. This modest year-over-year improvement in CIE is in line with the guidance we laid out at the beginning of the year.

As Mike indicated, we expect to see an improved year-over-year comparison for sales execution in the fourth quarter, and our January pipeline is benefiting from our growth initiatives. We've also been quite pleased with the high-quality customers we have added. Furthermore, our January cohort represents our last outsized renewal, and it's our view that our pricing is increasingly aligned with claim trends and competition. Professional services revenue in the third quarter declined 8% year-over-year, largely due to 2 main reasons: lower WSE volumes and the discontinuation of a specific client level technology fee of which we recognized $5 million in Q3 of last year.

As the technology fee was largely fully recognized in revenue through Q3 of 2024, beginning in the fourth quarter, it will no longer be a significant negative prior year comparison. Professional services revenue was supported by low to mid-single-digit pricing strength and stronger than originally forecasted HRIS and ASO revenue. On an absolute basis, HRIS fees and ASO revenues, including those resulting from HRIS conversions, decreased slightly year-over-year as the company transitions away from a SaaS-only solution.

However, our ASO conversion rates continued to exceed initial forecast, indicating ongoing demand for our services. And because of our ASO pricing framework at $50 to $75 PEPM, this strong demand partially mitigated the impact of reduced PEO volume. Insurance revenue and costs in the quarter each declined by 1%, resulting in an insurance cost ratio, just to touch over 90%, which was about flat to last year and slightly better than our embedded guidance. We attribute our improved performance to 2 items: our continued pricing discipline and stabilization in health cost growth rates, albeit at elevated levels when compared with historical trends.

While we're pleased with our pricing discipline, we do acknowledge the adverse impact it has had on both retention and new sales in 2025. On retention, after the successful implementation of our January 2026 renewals, we believe that the catch-up will be behind us, and our pricing will be aligned with health insurance pricing trends moving forward. On new sales, we believe that our pricing in the fourth quarter and fall selling season are already aligned with the market's perception of current health care pricing levels. Each bodes well for continued improvements in 2026.

Turning to expenses. Expenses in the quarter declined by 2% year-over-year. Our continued disciplined expense management is driven by further automation and our workforce strategy. I would like to reiterate that with a portion of the savings we realized, we funded our medium-term strategic initiatives, which are intended to drive growth, improve our customer experience and implement process efficiencies. We I continue to be impressed by the improvements our colleagues are making on the items that will truly matter to our customers.

Third quarter GAAP earnings per share was $0.70, and our adjusted earnings per diluted share was $1.11. Our earnings were supported by continued improvement in our cash flow. In the quarter, we generated $100 million in adjusted EBITDA, representing an adjusted EBITDA margin of 8.2%. Through 3 quarters, operating activities generated $242 million in net cash and $191 million in free cash flow. Our free cash flow conversion now stands at 52% and is in line with our 2025 plan.

Our capital return priorities for 2025 remain consistent. We aim to deliver shareholder value through continued investment in our value creation initiatives, funding dividends and share buybacks and maintaining a suitable operating liquidity buffer. In the quarter, we paid a $0.275 dividend per share, representing a 10% increase year-over-year and repurchased approximately $31 million in stock, bringing total capital deployment to $45 million.

For the year, we've deployed $162 million to shareholders or approximately 85% of our free cash flow ahead of our annual target of 75%. With the improvement in our financial performance, we continue to move closer to within the top end of our targeted leverage ratio of 1.5 to 2x EBITDA.

Now let's turn to our 2025 outlook. With just 1 quarter remaining and the benefit of 3 quarter performance we wanted to provide a little more color as to where we're falling within our annual guidance range laid out in February. Given some of the volume impacts, offset by other favorability in 2025, we expect total revenue and professional service revenue to both come in near the midpoint of our originally stated range.

Our insurance cost ratio is trending slightly better than the midpoint. Altogether, this is bringing our adjusted EBITDA margin to the top half as well as our adjusted EPS closer to the top end of our originally disclosed range. In conclusion, we performed well in the third quarter, executing our medium-term initiatives, remaining disciplined in our pricing and prudently managing our expenses. While the operating environment remains challenging, especially for our customers and prospects, we are optimistic that our efforts to enhance our offerings are being received well in the marketplace.

We believe that efforts to drive profitable growth, efficiencies and to return us to our targeted insurance cost ratio by 2026 are all on track. I'm proud of the continued execution by our dedicated colleagues, and I know our team is going to finish the year strong.

With that, I'll pass the call to the operator for Q&A.

[Operator Instructions]

The first question comes from Jared Levine with TD Cowen.

Just wanted to start by double-clicking on the ICR. Just wanted to clarify, were there any onetime impacts to your 3Q performance here? And then as you pointed to returning to that long-term ICR guide in FY '26. Can you just go over some of the assumptions there? Does that assume there's any kind of deceleration in health care cost trends there?

Jared, it's Kelly. Happy to respond. Regarding the ICR...

Yes. I mean I think I'll take the second one, Kelly, first. On the assumptions for next year, we're going to stay pretty conservative about what health care trends is going to do next year. I think we've talked a little bit on this call that we saw about 4 quarters of very stable, albeit elevated trend. We started to see some of the shorter duration analysis show a little bit of improvement. We think it's reasonable to assume [indiscernible] margin just a tick or 2 lower than what we sort of experienced this year. But nothing that isn't already reflected in some of those duration curves overall. And then I think the first question was just about.

Onetimers Yes. Yes, really nothing notable in the quarter at all related to one-timers, Jared.

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

Yes, happy to do that. And the strength of our sales force, the productivity and tenure. As you know, Jared, is a big part of the investments we're making in growth. So in terms of tenure, I actually start there, we continue to see the median tenure of our sales force increase. We see turnover at the 3-plus years of experience in -- particularly over 48 months, our most productive reps be at or below historical loans. And that's really, really important as we're taking that kind of quality of salespeople through the selling season and into 2026.

We did slow down, as you know, new rep recruiting early in this year as we really revamped that process. We've retooled -- we are doing experienced rep hiring, but also some rate out of college hiring to help sort of build a stronger culture and hopefully a longer tenure in that team. And that pause in the aggressiveness of hiring means we've got a smaller in aggregate, albeit more experienced sales force at the moment.

I do expect that as those new trainees come on in 2026, we'll start to see the absolute number grow in terms of the sales force next year.

The next question comes from Andrew Nicholas with William Blair.

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

Andrew, I think we sort of tried to hit it in prepared remarks, but I think in general, when you think about health carriers out there, managed care, nobody saw the acceleration in trend come including us. We also had happened to be leaning in for about 6 quarters in terms of more aggressive and lower new business and retention pricing. So the timing wasn't good. We had some issues on our front that sort of it compelled us to move pretty quickly and pretty conservatively when it came to pricing.

And I think at this point, that proves fortuitous for us. We're coming up on January 1 renewals being last sort of our last kind of catch-up set of renewals. In terms of the magnitude of the difference, I wouldn't think -- it doesn't need to be sort of a massive gap to be consequential just given the absolute cost of health care today in the small case commercial market.

So I wouldn't quantify the number, but I would say the evidence is sort of pointing towards when we look at what we see in our pipeline, what we're hearing from our channel partners, kind of our most recent pretty good October sales month here sort of points to what that gap being through most of the year, tightening up here as we get to the end of the year and as we head into 2026.

Understood. And then maybe just a higher-level question on client decision-making. It's been a choppy year for SMBs broadly with liberation Day and tariffs and kind of all the uncertainty around that part of the market. Just curious what you're seeing in terms of business optimism or hiring plans or maybe just business owners' willingness to make budget decisions or HR decisions in this environment, whether or not there's any change in that relative to the past couple of quarters?

Sure. Happy to do it. And I'm sure Kelly will have a couple of thoughts on what we're seeing maybe by vertical on the CIE front. I would say high level, actually, we sort of have seen a little bit of settling in when I'm talking to clients and prospects. Like you said, there was a lot of optimism at the very beginning of the year, and then there was an ament amount of uncertainty and I think some of the uncertainty has now become a little bit the new normal and people are just sort of realizing we are where we are.

And they are making decisions I'd say because health care costs have been so challenging for the market in total, that what we're seeing a little bit is health care being pretty central to the PEO buy decision and people wanted to line that up around the January 1 start. So we see some things that we normally would see in November, December getting pushed to January 1 and a little bit just health care-specific dynamic, maybe a little bit of a slow in the buying process.

But in general, I'd say it's a pretty resilient small business client base that we're seeing in our verticals and CIE isn't where we would want it to be, but it does look like we're on track to see a bit of improvement this year. over the full year last year. Kelly I don't know if you have anything to add?

Yes. I mean the only thing I would add, Andrew, to Mike's point, about 0.5 point better on a year-to-date basis related to CIE. But when you kind of pull the covers apart on that, what we're really seeing is there's less layoffs. So it's not that there's more people hiring, but there are less layoffs than there had been in the past. And was a bright spot for us, though, when we looked at most of our CIE growth has really been year-over-year in tech and financial services.

[Operator Instructions] The next question comes from Kyle Peterson with Needham.

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

Yes. We appreciate the early start, Kyle, on the extra cup of coffee. I think there is a little bit of an element. We've talked about it for a long time here at TriNet about repricing on our cohorts on a quarterly basis. I think over the last 4 quarters or so for the reasons we've talked about, we're probably a little bit quicker and a little bit more conservative to move those prices on the health side up. We do look at our pricing on new business and a cohort of our renewals every 90 days or so.

So I think it's both the aggregate level and then the pace at which we put that pricing through tends to be a little bit quicker maybe the average market participant. And I think it's a reasonable assumption to say that while we certainly aren't forecasting a big falloff in health care claim cost trends, we are seeing that tail down just a little bit. And I think we can be responsive to that over the next 12 to 18 months, maybe a little bit quicker than the average market participant. But I think really what that does is as that gap to the market narrows and we get in a position there where the broader value proposition can just shine through a little bit brighter.

And for me and I think for the team here, the fact that we've got a greater percentage of our clients advocating for us. You saw the kind of record high on the NPS. The fact that double-digit growth in broker-driven RFPs that channel is really starting to open up. We've got a more tenured sales force our biggest 4Q wins so far actually is a benefit bundle proposition to a large employer that had a very distributed workforce, and we were able to to bundle up the benefits in a way that sort of met pair need for simplicity and hit a price point that made sense to their budget.

So I think there's a bit of an opportunity here relative to pricing, but I think ultimately, it's just about kind of clearing the decks. So the investments we're making in growth really can really come through.

Okay. Fair enough. That's good color. And then I guess just a follow-up on interest income. I know that's been a big swing factor, and it's been pretty resilient this year. I know there's some timing impacts and rates maybe haven't come down as fast as originally thought. But I guess, how should we think about that line item moving forward, especially just given some of the timing shifts on tax returns, it seems like rates are going to drift down some, but then you guys should be building cash too. So I guess like what's a good run rate for for that line moving forward? And how should we be thinking about the impacts of the timing shifts and the outside benefit this quarter?

Yes. Kyle, it's a great question because it has been definitely a bright spot on our revenue for the year for sure. We have had some catch-up interest associated with IRS tax refunds, and that did occur again this quarter. It's a little uncertain due to the fact that the IRS is currently shut down. But other than that, we're just -- have small balances that we're still expecting to to receive some level of interest on. So I can't really give you the forecast for catch-up interest for delayed payments there.

But I think as we're all watching what's going on with rates, we would expect those to come down. But while we're building our cash buffer back half.

Okay. I guess then, I guess, just as kind of a house, is there like a rough amount of the catch-up interest that has benefited this quarter or anything you guys...

Sure. In terms of the catch-up interest, it was roughly $3 million this quarter. So that was the amount that I would kind of consider unusual. Our balances are a little bit higher right now as well before we distribute some of those to our clients as well.

The next question comes from Andrew Polkowitz from JPMorgan.

Before I ask my question, Kelly, I just wanted to congratulate you on a great tenure.

Thanks, Andrew.

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

Yes. Great question. And we are. So I think we made the decision to exit the SaaS-only business because we really do feel like, competitively, our advantage is the combination of really strong technology and outstanding colleague support. And so we sort of made a set of assumptions around the rate at which the ideal profile of customers that are currently sitting on the SaaS-only product with buy up. And we've done pretty considerably better than we would have thought, which was really encouraging.

And then the second piece, Andrew, is of late here in the last quarter or so, we've seen organic new sales coming in and our forecast coming up on that front as well. So this is sort of a long-term bet for us. And I think will be a meaningful contributor to our longer-term growth. And I think partly, it's because to your kind of what's inferred in your question, we've got clients that on the PEO side and their needs change over time. And so they may want to unbundle certain parts of that offering and ASO can make a lot of sense for them. I think the competitive set is probably is a little bit of a Venn diagram. It overlaps in certain respects with some of the traditional competitors we have on the PEO side.

I think we're also seeing a lot of success in a much more fragmented ASO and much more sort of locally delivered ASO market where kind of having the depth of expertise and then sort of the strength of technology platform on a national scale, I think, sets us up well against that sort of local fragmented customer or competitor base.

Got it. That's helpful. And maybe for my follow-up question, I'll just ask around the guidance. So very clear that revenue kind of pointing from the midpoint EPS, I a little bit to the stronger end of the range. I just wanted to ask the question, is there anything we should consider like what the unknowns are that would point to the higher or lower end of the range. Understanding there's only about 2 months left in the quarter, but still on January 1 selling season is sort of in flight right now. So I just wanted to ask kind of the range of outcomes embedded there.

Yes. Good question, Andrew. And we have tried to pivot to annual guidance just to make sure that we're really focusing on the core direction of the business, et cetera. We're not expecting anything unusual at this point in the fourth quarter. we pointed towards the top end of the EPS range overall. And that was also helped by capital management throughout the year 2 and partly through share repurchase.

But ICR obviously, will have some minor level of fluctuation that will impact EPS in a little bit more disproportional way. But that would be the largest winner, I think we've got a pretty good eye on both new sales and retention from a volume perspective. So I really wouldn't point anything out of the normal seasonal impact.

Great. Thanks, Andrew. SP1 The next question comes from David Grossman at Stifel.

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

Yes, let me take the CIE question, and then I'll pass it over to Mike to take overall growth questions about next year. Regarding CIE, I did make the comment earlier on Jared's question around less layoffs. CIE, we expect to be really low single-digit positive for the year on a net basis. Just when you pull up the covers, you do see that while hiring has been pretty stable at a low level, we are seeing just less layoffs.

So net-net, when those 2 net out it's a small single-digit positive, but about 0.5 point better than last year.

Yes. And then on the second question around getting to growth of 2026, I have to take 1 step back, Dave and say, we laid out a series of objectives, a medium-term strategy, 2 component parts of that what get revenue growth going. Certainly, volume growth would be a sort of component part on that side and then get the EBITDA margin improved. In aggregate, we're very much on track, maybe tracking a little bit favorable. I'd say within that, we're probably a tick or 2 stronger, quicker to the margin improvement and maybe a tick or 2 slower to sort of the outlook on revenue growth.

That forces the ability to do a little bit of rebalancing here in the short term as we kind of head into 2026. So I would stop short of predicting kind of volume growth or WSE growth, but I would say just because CIE is going to be a little bit of a wildcard, but I do feel like getting past January 1, our last catch-up renewal as we work through 2026, being on track for total revenue growth to reemerge. We certainly are feeling bullish on that prospect. That's helpful.

Right. And then -- I'm sorry if I missed this, if you mentioned this earlier. However, are you seeing if the pricing discrepancy between you and the market is compressing, if you look sequentially throughout calendar has the attrition been diminishing on a relative basis each quarter by virtue is that price differential diminishing?

Yes. I think the way I would sort of actually think about that is we brought on, as you talked about and sort of laid out at the beginning of the year, a cohort of business over about 6 quarters. That tended to be skewed pretty heavily to Jan 1. So that sort of throws out sort of throws off the retention patterns that doesn't have that kind of not sort of natural, what you might expect, improving. So I do think we'll look to this getting through this January 1 renewal. I do think we're going to remain above our historical average of 80% retention. I am looking forward to the sort of last catch-up being in the rearview mirror and getting out into 2026, back into that long-term insurance cost ratio range of 87% to 90%.

So I think the team has done a very good job of sort of balancing retention, taking a couple of cycles for a cohort or 2 to kind of get back to where we need to be. I think that was the the fair and balanced things to do for these small businesses. But yes, in general, I'd say, you can -- the end is in sight from what we can tell in terms of catching back up to where we need it to be.

And then just lastly, you gave a metric on the broker channel. I think about the percentage of RFPs that are coming in. Is there anything that you can -- I think it was double-digit growth in our fees in that channel. Is there anything you can tell us about the character of the business that's coming through the channel versus your existing growth?

Yes. It matches up very well from a vertical point of view. And I think as we're sort of building out, we're learning a lot about these relationships and I think really good partners in the channel. They want to understand what kind of client is going to be the best fit for TriNet and their job is to match make obviously. So I think that's coming through really well. I think our proposition comes through really well. I'd say, on average, maybe the 1 difference we could point to is -- the average size of prospect tends to be a little bit bigger, not dramatically so, but a little bit bigger.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Simonds for any closing remarks.

Thanks, Drew, and thank you all for the early start this morning. Hopefully, you're leaving with a better understanding of both our strengthening results and a really positive outlook. Here, TriNet and I do want to thank Kelly 1 more time as we are wrapping up our last TriNet earnings call. Kelly, I appreciate everything you've done to help make TriNet the strong company that it is and all the support you provided for me in coming in and that you will provide in making this a really seamless and successful transition.

I know you've already got a couple of board seats and you're looking to add to that portfolio over time. And I can't imagine a better person to help guide a company. So thank you, Kelly. Much appreciated. And with that, operator, that concludes our call.

Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.