TriNet Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. TriNet provides HR, payroll, benefits, and employment-risk services to small and midsize businesses through a co-employment model.
Financial and operating performance
| Metric | Q1 2019 | Prior period / change |
|---|---|---|
| Total revenue | $934 million | $861 million; up 9% |
| Net service revenue (non-GAAP) | $251 million | $220 million; up 14% |
| Net insurance service revenue (non-GAAP) | $115 million | $91 million; up 26% |
| Operating income | $82 million | $71 million; up 17% |
| Net income | $63 million | $54 million; up 17% |
| Diluted EPS | $0.89 | $0.75; up 19% |
| Adjusted EBITDA (non-GAAP) | $108 million | $91 million; up 18%; margin 43% of net service revenue, versus 41% |
| Adjusted net income (non-GAAP) | $69 million | $58 million; up 20% |
| Average worksite employees (WSEs) | 312,760 | 314,561; down 1% |
| Cash and cash equivalents | $251 million | $228 million at Dec. 31, 2018 |
| Long-term debt | $407 million | $413 million at Dec. 31, 2018 |
Insurance service revenue was $798 million, with related insurance costs of $683 million. Net insurance service revenue margin rose to 14% from 12%. These insurance amounts are reported gross; net service revenue is a non-GAAP measure.
Net cash used in operating activities was $142 million, compared with $536 million used in Q1 2018. The company reported $78 million in corporate operating cash flows, a non-GAAP measure, versus $45 million. The difference between corporate and total operating cash flow primarily reflects timing of payroll, tax, insurance, and other WSE-related cash flows. Investing activities used $11 million and financing activities used $47 million. Total unrestricted and restricted cash and cash equivalents decreased by $200 million during the quarter.
At March 31, corporate working capital was $226 million. The $1.149 billion of cash and cash equivalents shown in the cash-flow statement includes restricted funds; much of the restricted balance supports payroll, taxes, insurance claims, and collateral obligations. The company also reported approximately $1.3 billion in cash, cash equivalents, and investments and $234 million of unused capacity under its $250 million revolving credit facility.
Changes and management commentary
- Revenue growth reflected pricing, changes in WSE and client mix, and higher health-plan enrollment. Monthly revenue per average WSE increased 9% year over year.
- Average WSEs declined 1%, with elevated attrition in the Main Street vertical associated with the platform migration, partially offset by new sales and hiring among existing clients. Growth continued in several other verticals.
- Operating income increased by $11 million: higher revenue contributed $73 million, while higher insurance costs and operating expenses reduced the increase by $42 million and $20 million, respectively.
- Management cited higher medical cost trends, partly offset by lower administrative costs, and favorable prior-year development in workers’ compensation costs due primarily to lower-than-expected claim severity.
- The company continued spending on customer experience, systems, processes, and internal controls, and expects operating expenses to rise in the foreseeable future. It also expects continued software and hardware investment.
- Management stated that existing corporate cash and positive working capital should meet working-capital and capital-expenditure needs for at least 12 months. The company was in compliance with credit-facility financial covenants at quarter-end.
Outlook, risks, and unusual items
- The filing provides no specific numerical full-year earnings or revenue guidance. Management described continued work on customer experience, retention, operational efficiency, and its vertical-market strategy.
- Key risks include changes in insurance claims and costs, client attrition, co-employment and employment-law obligations, regulatory uncertainty, cybersecurity and system reliability, competition, and the ability to meet debt-facility requirements.
- On March 26, 2019, the Ninth Circuit affirmed dismissal of a securities class-action complaint. The plaintiff could seek further review; TriNet said it could not reasonably estimate any resulting loss, if any.
- TriNet obtained a $15 million judgment, plus interest, in litigation seeking recovery of employment tax credits previously disallowed by the IRS. The IRS appealed in March 2019.
- TriNet adopted the new lease accounting standard on January 1, 2019. At March 31 it reported a $59 million operating lease right-of-use asset and $70 million of operating lease liabilities; adoption did not materially affect the income or cash-flow statements.
Important facts for investors to verify
- Assess whether revenue and net insurance service revenue growth can continue despite lower average WSEs and elevated attrition.
- Review insurance-cost trends, health-plan enrollment, medical cost development, and workers’ compensation reserve estimates.
- Distinguish unrestricted corporate liquidity from restricted WSE payroll and insurance funds; reconcile the quarter’s negative total operating cash flow with the positive corporate cash-flow measure.
- Track debt, revolving-credit availability, covenant compliance, and the scale and funding of the expanded share-repurchase authorization. TriNet repurchased 782,909 shares for approximately $38 million under the program during the quarter.
- Monitor the IRS appeal concerning the $15 million tax-credit judgment and any further developments in the securities litigation.
- Note that the MD&A reports Q1 2018 interest income as $1 million in one passage, while the income statement reports $2 million; verify the intended comparative figure.