TriNet Group Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2024

Key Takeaways

  • Negative Sentiment: TriNet reported that widespread increases in healthcare costs drove an elevated insurance cost ratio, pressuring Q3 margins and prompting revised pricing assumptions.
  • Positive Sentiment: The company created a standalone Insurance Services team, unified data analytics and implemented double‐digit price hikes on renewals, achieving strong retention and forecasting record client retention for 2024.
  • Negative Sentiment: Customer hiring (CIE) was flat in Q3 versus a historical 8–12% growth rate, leading to zero net WSE growth year‐over‐year and limiting revenue expansion.
  • Neutral Sentiment: Operating expenses declined 1% as the company prioritized efficiency through process and technology investments while maintaining targeted growth spending.
  • Positive Sentiment: TriNet reiterated Q4 revenue guidance of –1% to +2%, narrowed full‐year forecasts with an ICR outlook near 2024 levels, and plans to continue capital returns via dividends and share repurchases.
AI Generated. May Contain Errors.
Earnings Conference Call
TriNet Group Q3 2024
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good morning, and welcome to the TriNet Third Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. 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

Speaker 1

ahead. Thank you, operator. Good morning. My name is Alex Bauer, and I'm TriNet's Head of Investor Relations. Thank you for joining us, and welcome to TriNet's 2024 Q3 conference call.

Speaker 1

I'm joined today by our President and CEO, Mike Simons and our CFO, Kelly Timonelli. Before we begin, I would like to address our use of forward looking statements and non GAAP financial measures. Please note that today's discussion will include our 2024 Q4 and 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.

Speaker 1

We encourage you to review our most recent public filings with the SEC, including our 10 ks 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 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 ks filing, which are available on our website or

Speaker 2

through the SEC website. With that, I'll turn the call over to Mike. Good morning. Thank you, Alex, and my thanks to all of you for joining us on today's call. While there are a number of very positive things happening across our business, increases in healthcare costs adversely impacted our overall financial performance this quarter, and so I'd like to start my comments there.

Speaker 2

As context, throughout 2024, the market has experienced a significant and broad based increase in healthcare costs. In looking at our own experience, similar to what many in the market are reporting, the overall number of claims is largely consistent with our expectations. However, the average cost per claimant driven by severity and overall inflation is higher than what we assumed in our pricing. Over the last several months, we've taken a number of actions to both improve our results in the short term and importantly enhance our capabilities moving forward. 1st, earlier this year, we broke out the insurance services group into a singularly focused team reporting to me and brought in a strong and experienced leader in Tim Nimer to head

Speaker 3

it up.

Speaker 2

Tim's background includes Chief Actuary and Head of Pricing and Underwriting roles at 2 of the largest global firms in healthcare. Already, Tim has strengthened our insurance services team with the addition of new actuarial talent. 2nd, we consolidated our data and analytics from around TriNet into a single team to ensure our performance data is strong and consistent throughout the customer lifecycle and that our new business and renewal pricing processes are disciplined and supported by data that is high quality and visible. 3rd, with strong talent, improved data and a more disciplined process in place, we thoughtfully increased our healthcare pricing over the past several months assuming a continued elevated trend in 2025. Utilizing our new rate level, we released our October 1 renewals for the largest cohort of our customers, approximately 39% of our annualized health care fees.

Speaker 2

With strong execution across our insurance services, customer relationship and service delivery teams, I'm pleased to say that the renewal went very well. We achieved the targeted double digit increases with strong retention of our customers. In fact, we are now forecasting record customer retention for full year 2024. We are currently engaged on our January 1 renewals, which represent another 29% of our health care fees. Again, pricing here will reflect current elevated health care costs with no relief assumed in 2025 to trend.

Speaker 2

Given the fact we will have repriced more than 2 thirds of our health care fee based by the start of next year and assuming 2025 health care costs continue to grow at the current elevated rate, we expect our 2025 insurance cost ratio to stabilize at or near our current full year 2024 outlook. Looking out to the mid- and long term, I believe our accelerated investment in risk management, talent, tools and processes will reduce the volatility of our insurance cost ratio while maximizing profitable growth. We believe the earnings power of our business with a stable annual insurance cost ratio in our long term range of 87% to 90% is considerable. And this management team is committed to achieving it, even if it means trading off customer and WSE growth in the short term. Turning now to a discussion of results outside of our ICR.

Speaker 2

We should start with the broader environment for SMBs in the verticals we target. Slower economic growth, higher interest rates and a generally cautious outlook resulted in a Q3 of no net hiring amongst our customer base. While the headline jobs reports have been generally positive from the BLS over the last year, our experience has differed materially. Growth in several sectors including government, construction and healthcare are fueling aggregate headlines while our core verticals of technology, life sciences, financial services and other professional services have been muted. It's worth noting that the long term average CIE in our targeted verticals is 8% to 12% versus flat here in 3Q.

Speaker 2

Given that CIE growth comes with very low acquisition and incremental service cost, the impact of historically low CIE is meaningful to both top and bottom line. Again, like with a stable ICR in our targeted range, even a partial reversion over time to our historical CIE represents significant earnings upside in future periods and is another reason we believe our business is such a good one. However, given we find ourselves in this low growth environment, we are exercising particular discipline with respect to our expenditures. Expenses declined 1% in the quarter as we focused on process and technology improvements. I'm quite encouraged by the momentum we're building on these fronts, making investments that drive efficiency while improving the customer experience.

Speaker 2

And frankly, we have much more potential to improve creating value for customers, colleagues and shareholders. Recognizing this potential will require making clear and disciplined choices and our team continues to work through these methodically. And while there is more we will share with 4th quarter results, a few things are clear. First, our core PEO business operates in a very attractive market, uniquely blending services and strong technology to deliver exceptional value to SMBs. You can expect us to sharpen our focus on our core business, playing only where we believe we can win a leading share of our customers.

Speaker 2

2nd, the current healthcare environment is a short term headwind, but we firmly believe that the growing cost and complexity of employee benefits only strengthens demand for what we do. Look for us to bet on benefits, investing to extend our risk management offering and customer experience. I firmly believe we can deliver greater predictability in ICR while creating separation from PEO competitors who see insurance as simply a pass through. Benefits is our targeted SMB customers' number one concern and we will address it in a differentiated way. Finally, we have the opportunity to accelerate our investment in technology and talent to improve our platform and service delivery while growing overall expenses at a considerably slower rate than revenue.

Speaker 2

Like I said, there's considerable work still to do, but I'm excited by the engagement of our broader leadership team and look forward to updating you on the outcome of our work on our 4Q earnings call. In summary, we are taking the challenge of healthcare cost trend head on, both through our pricing and risk management actions. We're managing our expenses aggressively in the current low growth environment within our customer base. And importantly, we have our eyes on the future and the steps we will take to create a more focused, more differentiated, more efficient company capable of sustainable, profitable growth. With that, I'll pass the call to Kelly for her financial review.

Speaker 2

Kelly?

Speaker 4

Thank you, Mike. Our 3rd quarter results reflect a continuation of many of the trends we've experienced in 2024. We've accelerated actions across our business in response to this challenging environment. In doing so, we're leveraging the strength of our business model. We adjusted pricing over the last several months and delivered sales roughly in line with our prior year, which were up 40% over the levels achieved in Q3 2022.

Speaker 4

We passed through this revised pricing to the largest cohort of our customer base on October 1, and even so, we're now forecasting record retention. Unfortunately, we saw no meaningful contribution from customer hiring, and yet we delivered revenue in line with the lower end of our guidance range. We are operating in one of the most challenging health cost environments in years as provider costs, claims, severity and pharmaceutical costs all accelerated versus recent trends and our historical experience, which outpaced our 2023 early 2024 pricing. As a result of these trends, our insurance cost ratio for the Q3 was towards the higher end of our ICR range and our full year forecast was also adjusted to reflect continuing higher costs. Given our pricing actions, our initial view on 2025 reflects a stabilizing insurance cost ratio similar to our current full year expectation for 2024.

Speaker 4

We will refine this estimate as we get through our peak selling and renewal season. We exercised prudent expense management and saw our expenses decline year over year. We are actively managing our resources across the business, balancing cost savings with reinvestment in key areas. We retain the flexibility to reinvest our business and return capital to shareholders. To sum up the quarter, we took Expedia action to address elevated health cost trends and are successfully passing through appropriate rate increases and are still on track for record retention for the year.

Speaker 4

Now let's turn to our Q3 financial performance in more detail. In the quarter, total revenues grew 1%. We finished the 3rd quarter with approximately 356,000 worksite employees, up 6% year over year and approximately 334,000 co employee WSCs, down 1% year over year. In the quarter, client retention was strong and outperformed our forecast as our investments in customer service continue to pay off. Retention is now on pace to exceed our best historical annual retention rate.

Speaker 4

I'm particularly pleased with this given higher benefit renewals being passed through to help offset the higher claims experience. Consistent with last quarter, sales were again flat compared to the prior year. This was a positive outcome and reflected a significant increase over 2022 levels. Finally, CIE or customer hiring was just barely positive in the quarter. The modest positive CIE experienced in July August was almost completely offset by workforce reductions in September with each of our verticals declining during the month of September.

Speaker 4

Now let's drill down a little. Our professional service revenue was flat to our prior year. Last year, we benefited from a one time item related to a payment acceleration and cessation of a broker relationship on our HRIS platform. Without that item, our growth would have been 2%. Insurance revenue grew 2% year over year, consistent with our first half trends.

Speaker 4

Healthcare participation rates within our Comply WSE base were slightly lower and were partially offset by annual inflationary rate increases. Insurance costs grew 9% year over year. Insurance cost growth again reflected higher health care and pharmacy costs. Taken altogether, this brought our insurance cost ratio to 90% in line with the bottom half of third quarter guidance range. Now let's turn to operating expenses, an area we've been very focused on and quite a bright spot for our company.

Speaker 4

We continued managing the business in a prudent and disciplined fashion, resulting in a 1% year over year decline in operating expenses. We are proactively reducing our back office costs while making targeted investments in growth and automation. We believe robust expense management and prioritization will be critical to free up resources to reinvest in our business while delivering strong margins and attractive cash flows. Interest income on operating cash and investments offset our 3rd quarter interest expense. In the quarter, our average cash balances were lower year over year in part due to our cumulative stock repurchase as well as dividend payments.

Speaker 4

Taking this all together, we reported $0.89 in GAAP earnings per diluted share and $1.17 of adjusted net income per diluted share both within but below the midpoint of our guidance ranges. Regarding cash and capital, we had another solid quarter of cash generation to support our business and capital allocation. In the quarter, we delivered $109,000,000 of adjusted EBITDA. We also generated $213,000,000 of corporate operating cash flows year to date through the end of the quarter. By the end of next week, we will have returned $191,000,000 to investors so far this year.

Speaker 4

In the Q3, we repurchased 200,000 shares for a year to date total of approximately 1,500,000 shares. And by the end of October, we expect to have paid $37,000,000 in dividends. Our capital return priorities remain unchanged. As we generate cash throughout the year, we will continue to deliver value to our shareholders by investing in our business for growth and using our cash flows to fund dividends and share repurchases in line with our financial policy. Now let's turn to our Q4 and full year outlook.

Speaker 4

For the Q4, we expect total revenues to be down 1% to up 2% and professional service revenues to be down 8% to down 5%. Our underlying assumptions in support of our revenue guidance include our expectation for modest decline in new sales, continued strong customer retention and a limited contribution from CIE. Turning to our insurance cost ratio or ICR. For the Q4, we are forecasting an ICR of 96.5 percent to 93.5%. Our 4th quarter ICR performance is our seasonally highest quarter each year.

Speaker 4

Historically, we see a sequential Q3 to Q4 step up in ICR of anywhere from 2 to 5 points. One key driver behind the step up is the annual reset of our pooling limit deductibles, which occurred on October 1. Effective 10.1, our pooling coverage resets for claims that had previously hit the $500,000 per member cap for our enrolled population. In the 4th quarter, we are back on risk for any of those claims that are continuing. This results in a forecasted GAAP net income per diluted share in the range of negative $0.19 to positive $0.31 and an adjusted net income per diluted share in the range of $0.06 to $0.57 Turning to our full year guidance.

Speaker 4

Given our Q3 actual performance and our forecasted 4th quarter performance, we are lowering and tightening our full year guidance. For revenues, given our current projected volumes, our range reflects growth of 1% to 2% for the total revenues and flat to up 1% for professional service revenues. Given our Q4 forecast for insurance cost performance, we are tightening and raising our insurance cost ratio forecast to 90.3% to 89.6%. With respect to our earnings guidance, we are bracketing our full year guidance around the previous bottom end of our range, reflecting the impact from our revised insurance cost ratio forecast, offset by the expense efficiencies we have been focusing on. We now expect GAAP net income per diluted share in the range of $3.70 to $4.20 and adjusted net income per diluted share in the range of $4.95 to $5.45 So in summary, we are operating in a difficult health cost environment and are reacting quickly.

Speaker 4

By leveraging our team and improved processes, we are pricing new business and our renewals to appropriately reflect the current and expected health cost environment. As a result of the actions we're taking and have already taken, our initial view on our 2025 ICR is similar to 2024. Importantly, even as we pass through pricing reflective of the current environment, our customers are choosing to stay with us in record numbers. We remain prudent managers of our shareholder capital, keeping expense growth low while investing in our business and returning capital to shareholders. With that, let's open up the call for questions.

Speaker 4

Operator?

Operator

We will now begin the question and answer The first question comes from Andrew Volkowitz with JPMorgan. Please go ahead.

Speaker 5

Hey, good morning, everyone. I wanted to ask a question. Mike, you made a comment in the call about commitment to achieving that 87% to 90% long term ICR range and you're committed to that even if you have to trade off some WSE growth. I just wanted to start by asking, can you speak to like how materially you see that being or like how much of the book potentially would have to be cleaned up to achieve that?

Speaker 3

Yes. Thanks, Andrew. I really appreciate the question. And certainly, our first and best data point that we have is the October 1 renewals. And we if you take a step back, we've made a pretty significant set of changes and investments in our risk management capability, carving out the Insurance Services group, bringing in Tim Nimer, who's got a great background, particularly around health care.

Speaker 3

He's already made some ads on the actuarial side. So I'd say we've got a material sort of improvement in our risk management and our sort of ability to understand what we're seeing in the data and then to look forward. And our view I'd say is that the elevated trend we're seeing today isn't going to abate in 2025. And so we built those double digit increases in the October 1 renewals. And as Kelly went through, we're really encouraged with the retention of that cohort.

Speaker 3

And our CRM team and our service delivery teams are doing a very, very good job. We've got our eye on January 1, similar to probably slightly higher renewals coming then. So I think it is one of these really good parts of the business model is that while benefits is really important and health care is important inside of benefits, what we do for customers is much broader. And that service proposition, I think, lends itself to a much stickier situation. So I think that sort of positions us well.

Speaker 3

Our early read here is that it's actually quite good, particularly for our existing customer base. They've experienced TriNet and that puts us in good stead. On the new business front, we've made the same adjustments on our prospective pricing. We like the pipeline, the demand for the product. I think we are seeing a bit of pressure on conversion rates and I think that's a little bit the environment.

Speaker 3

Our SMB prospects are a little cautious on hiring. I'd say they're a little cautious to make major changes to their HR and benefit setups as well. So that's probably the more sensitive area is the sales growth. I feel really good and confident about the existing base.

Speaker 5

Okay. That's super helpful. Appreciate those comments. I just had one quick follow-up. I know that you guys are growing over pretty significant sales growth from last year.

Speaker 5

So the 40% on top of BREQ222 seems really strong. Just I'm curious as you look into next year, I know you talked about making investments in distribution last quarter. I was curious if you could give any more color just on those investments in multichannel distribution.

Speaker 3

Sure. Yes, thanks. And like I mentioned, the pipeline if you look at the pipeline for January 1, same day year over year, we've got nice growth, double digits, 20% plus in terms of volume. That's really encouraging to us. We've grown the count of both total intended reps by about 14% year over year, which is encouraging.

Speaker 3

I'd say, one of our big focus areas, I should add, we brought a new Chief Revenue Officer in, Shay Treadway. He's been in a couple of months, deep, deep experience in building strong sales culture, as well as multi channel distribution and employee benefits brokers. So he and the team are working hard on the steps we can take to drive productivity through this bigger sales force. A big part of that will be driving retention and ultimately higher sales levels on those more experienced, more capable reps. The second piece of that is the brokerage channel, which has actually been a good add to our sales here in 2024.

Speaker 3

But as we sort of look out into the SMB market, of SMBs that offer health care, which is a little bit north of 70% under 100 employees, about 90% of them get benefits through employee benefits brokers. And so building a sustainable approach to that channel is something we're pretty excited about. All right.

Speaker 5

Thank you very much. Appreciate the color.

Speaker 4

Thanks, Andrew.

Operator

The next question comes from Kyle Peterson with Needham. Please go ahead.

Speaker 6

Great. Good morning guys and thanks for taking the questions. I wanted to start off on the 4Q guide for professional services revenue. I guess it's calling for a pretty decent sized step down both year on year end sequentially. So if you guys could provide any more color on how much of that is maybe due to some of these workforce reductions and stuff that your clients had in September versus any like whether it's just macro or other drags or just any more color on some of those headwinds in the services segment would be very helpful.

Speaker 4

Yes. Kyle, it's Kelly. Good morning. I'll be happy to take that one. The first and foremost point that you need to remember is last year, we had a little bit more of a one timer.

Speaker 4

We had about $8,000,000 or so of some revenue recognition that we got in the Q4 that just is not recurring this year. Secondly, we are assuming slower hiring. So as we're looking at our WSE pipeline, we're just assuming that we're not really going to get an uptick in hiring, and 2024 is going to look a lot like 2023 from that perspective. So it's really just those two things. From a sequential perspective, it's just down a couple of points and about flat with last year.

Speaker 6

Okay. That is helpful. And then just on timing with your insurance repricing, you guys said that you guys have more than 2 thirds of the book repriced now. Could you just, I guess, remind us what timeframe we should think about the kind of the roughly last third? Is that over the next 1 to 2 quarters?

Speaker 6

Like how should we think about when the rest of the book is expected to get repriced based on renewal cycles?

Speaker 4

Yes. So just to clarify part of your intro there, by January 1, we'll have a little over 2 thirds of the book priced. So the other renewals of the smaller cohorts are at Q1, so the Q4 for 1 renewal and then July, July. July is the smallest, April is a little bit larger.

Speaker 6

Okay. Okay. Sounds good. So I guess, you guys didn't reprice so July would still need to reprice it, that even though it's small, it hasn't it didn't reprice this past year.

Speaker 4

Is that correct? Right. So from a cycle perspective, we have to release our pricing to our customers about 90 days in advance. And so if you think back to earlier this year, we did make some modest changes to our July pricing as we were looking at implementing it. But given the change health care reach in the month of March, the data was still a little bit murky then.

Speaker 4

And so we did tweak some pricing on the margin as we were evaluating data that was coming in, in January February because those really weren't obfuscated by that. But we will have to price it to an appropriate level just given the trends that we're seeing from a severity perspective.

Speaker 6

Okay. Thank you very much for taking my questions.

Speaker 3

Thanks, Kyle.

Operator

The next question comes from Kevin McVeigh with UBS. Please go ahead.

Speaker 7

Thank you so much and good morning. Any sense, I mean, it seems like particularly the kind of CIE seems somewhat abrupt, just given the fact that kind of where we are in the just given, I guess, the percentages. Is that right? Or is there anything I mean, I know certain verticals have been kind of weak, but they've been weak for, I think, a while. Just any thoughts, Mike, as to what kind of was it the cost that really drove it?

Speaker 7

Just any thoughts because it obviously you have a pretty decent deceleration.

Speaker 3

Yes. I appreciate the question and good morning, Kevin. I guess I would take one step back and say, in general, we really do like the verticals that we target. And if you take a very broad 10%, 12%, 15 year perspective, these verticals have proven an average growth rate of sort of 8% to 12%. And so I think your question is a very good one about like what's happening in year and then we take one kind of step back from that and it's like compared to a historical average, it's a pretty sizable impact on the business.

Speaker 3

And for reasons you understand, CIE comes in with very low acquisition cost and pretty low incremental servicing costs. So the impact of a flat CIE like we're experiencing today versus a historical norm of 8% to 12%, it's a pretty material impact from the top line to the bottom line as well. And like we talked about in the prepared remarks, what we're sort of seeing is like the U. S. Economy is actually pretty robust from an employment point of view, but when you go down one click, you're seeing things like manufacturing, government, health care.

Speaker 3

Certainly, costs are coming from somewhere and part of that is the provider system staffing back up. Our targeted verticals, we're just not seeing that growth. And all the way to the micro question of what we saw even in the quarter, a little bit of net hiring in the 1st couple of months in the quarter and then in the last month actually saw kind of gave that fall back some seasonal hiring interns that are in over the summer, temporary summer help, sort of a little bit of a bigger impact than we've seen prior. So again, we think it's prudent to have a conservative assumption going forward in the short term on CIE. But again, we like the verticals and sort of earnings power in the customer base even with a partial reversion back to historical norms is pretty marked.

Speaker 7

Got it. So it wasn't any client loss or anything like that, right? I mean that wouldn't be factored in. This was just kind of purely employee driven?

Speaker 3

No, you got it exactly. I mean at the client level, as far back as we were able to pull the data, this is going to be a record client retention year for us, which is credit to the team. But yes, just within the client base, we just and actually to be honest, but the layoff levels are pretty not too, too far off from what we would have seen a couple of years ago. It's just that the new hires are just not coming in at the pace that we would like to see. I think a lot of our high growth verticals there retilted the balance here a little bit towards margin expansion and away from growth.

Speaker 3

And so they're being cautious on the new hire front.

Speaker 6

That's helpful. Thank you.

Speaker 3

Thanks,

Operator

Ken. The next question comes from Andrew Nicholas with William Blair. Please go ahead.

Speaker 8

Hi, good morning. Thank you for taking my questions. I wanted to circle back to the commentary regarding kind of balancing WFE growth and ICR and pair that with the preliminary 2025 outlook on ICR. I guess I'm trying to understand, given renewals seem to have gone quite well in terms of getting your targeted price increases, retention is good. Why is it then that you wouldn't see an uptick in the ICR sooner?

Speaker 8

Is it a function of the fact that a third of the book will not have been repriced to start the year? Is it maybe you didn't you weren't as aggressive with price increases of late to keep retention high? I'm just trying to understand what the different dynamics are, because I would think if you're able to raise price and maintain clients on the book that maybe you'd see a bit better outlook next year compared to the 90% that you're looking at in 2024?

Speaker 3

Sure. Maybe I'll start and then Kelly, please jump in. Thanks for the question, Andrew. And you've hit on it and you've touched it a little bit, but just again, I think it's worth pausing for a second because it's an industry wide phenomenon that we're experiencing. Most players that have exposure to health risk have really one shot a year, particularly in the SMB market to make adjustments.

Speaker 3

And I think this cohort by cohort quarterly approach is a really attractive element of the way we get to market here at TriNet. And you're exactly right in terms of, okay, why wouldn't you have snapped all the way to your long term ICR target for full year 2025? And I think the reality is like pretty much what you're saying, we would have had to have on January 1, the entire customer base priced to the level that we're anticipating claim trend to be at. And so it will take a bit of time to work through that other third of the book in the year as sort of a key contributor. And then there's a little bit else in the ICR around our workers' comp line is in there as well favorable particularly favorable this year with some one time reserve adjustments that won't recur next year.

Speaker 3

So there's a couple of little moving pieces. But again, as we work through Q4, as we see experience here in the Q1, that's all great data that we can put in and actually put into pricing, like Kelly said, 90 days later. So Kelly, anything that you would add

Speaker 4

to that? I think you cut the bulk of it there. And good job on the remainder on workers' comp too because we're not planning on that recurring next year.

Speaker 8

That's very helpful. Thank you. And maybe as a follow-up to that discussion, understanding that the macro is incredibly difficult to predict and healthcare utilization over any short term timeframe can be lumpy. I mean, how do you feel about kind of the conservatism of your outlook for the Q4? What are you assuming or what do we need to have happen or change from kind of year to date levels on the claims front to be outside or above that range?

Speaker 8

Just any thoughts on the conservatism of the outlook you provided. Thank you.

Speaker 4

Yes, Andrew. I'll be happy to start and then I'll throw it to Mike if he has any other thoughts. As we're looking at the Q4, that's really our best estimate on the range. Our 4th quarter has our polling resets, which since one of the reasons for the experience this year really dealt with severity, the number of high cost claims is materially up year over year. And so with that pooling reset, that does create a little bit more pressure in the Q4 than we would see from normal seasonality there.

Speaker 4

So, what would have to be right for it to not, what would we have to see different? It's a pretty wide range at 3 points is really what I would say. Anything you want to add?

Speaker 6

Thank you.

Speaker 3

Okay. Thanks, Andrew.

Operator

The next question comes from Jared Levine with TD Cowen. Please go ahead.

Speaker 4

Thanks. Thank

Speaker 9

you. I just wanted to double click in terms of the sales headcount growth. Previously, you were targeting about 20% growth for this fall selling season. So can you just discuss kind of what results in you not getting to that 20% growth target and update thoughts on sales headcount growth here over the near term?

Speaker 3

Yes. Thanks, Jared. We definitely talked about that 20%. I don't think there's a lot of magic to sort of being in the 14% range other than to say, they're really pleased with the quality of the folks that we've brought on. I think and actually we've talked about this.

Speaker 3

The productivity lever for us is becoming increasingly important. I feel like the pipeline is robust. We're covering the market reasonably well. Having more tenured, more experienced sales reps in place to take advantage of that prospect pipeline as it comes through and drive the better conversion rate is, I would say, increasingly our focus going forward.

Speaker 9

Got it. And then in terms of the PO bookings, you did call out some impact in terms of the pipeline conversion there. What would you primarily attribute to that? Is that macro uncertainty? Is it the elevated health cost pricing that we're seeing there?

Speaker 3

Just like you said, I mean, the demand for what we do is very high. Again, like very much 20% -plus same day year over year as we look through championship season here for us. And by the way, and we've talked about this as well, a lot of the short term pain of health care is a long term tailwind for our business model. And so we've got real work to do here to reprice the book. But at the end of the day, the kinds of cost and the kinds of complexity facing small businesses that they're trying to offer competitive benefits is only getting tougher, which only drives the demand for what we do.

Speaker 3

I'd say it is the cautionary decisioning that the lengthening of sales cycle is a key driver for us. And the other piece, we talked a little bit about this, but we have actually made some pretty material changes by breaking out the Insurance Services Group, adding some considerable talent, centralizing data and putting a more disciplined, I would say, process both at new and at renewal. And so I'd say we're getting better at our risk management. We are going to price the risk. And so you heard it a little bit in my prepared remarks.

Speaker 3

Does every player adjust as quickly and bring the same sort of level of risk management expertise? I can't really speak to that. And so for us, it's kind of prudent to assume there's going to be a little bit of conversion rate pressure for that reason.

Speaker 9

Got it. And then just lastly here real quickly in terms of the 1Q discussions around health enrollment in terms of those pricing discussions, is it you feel like it's setting up pretty similar here to how it's going in 4Q where you're maintaining still really healthy retention or any kind of differences that you're seeing in terms of these 1Q health enrollment discussions?

Speaker 3

Nothing that's emerging different at this point. We do inspect pretty closely the major health carriers as they're sort of talking about the results and what they're seeing very much in line with what we're seeing A number of folks that we would be competing within the market are working with carriers that are again seeing the very same dynamics that we're seeing. So I think it's because it's a market wide phenomenon that gives us a little bit of extra confidence that the prices that we're seeking are not outsized relative to market and we're not an outlier. Yes.

Speaker 4

And Jerry, the thing I would add to that too is we do price every individual customer to its risk you know, as best we see it based on a number of factors. So the dispersion of price increases does vary on a customer by customer basis, just depending on the risk. We usually do provide some pretty detailed claims information so they understand the basis for the renewal and, you know, really try to engage with our customers on anything that they can do as well preventatively, to make sure that they can control their claims costs. So that is part of the value that we bring to our customers to really help them manage what's outside of salary, one of the biggest costs of their business.

Speaker 9

Got it. Thank you.

Speaker 3

Thanks, Jared.

Operator

The next question comes from David Grossman with Stifel. Please go ahead.

Speaker 10

Thank you. Good morning. I'm wondering if you could maybe help us understand what the competitive dynamic looks like in an environment like this, particularly given how an at risk PEO kind of can perform relative to the PEOs who don't take risk? Is it an environment that would typically put you at a disadvantage? Would it put you at an advantage?

Speaker 10

Or do you think it really doesn't have much impact, given that a couple of your larger competitors are largely passing through healthcare?

Speaker 3

Yes. Good morning, David. It's Mike. Thanks for the question. At this point, I don't know that there's a huge difference in where we are.

Speaker 3

I would say on balance, we do like the flexibility that being on risk allows us, Kelly just sort of highlighted a process that we go through at renewal, similar approach is taken in evaluating prospects. I am actually though excited about the potential here at TriNet over time. We've talked a little bit about the investments that we've made in insurance services and in risk management. Were materially better than we were at the start of the year. I see a similar level of improvement that we can put in place over the coming quarters.

Speaker 3

And I think the better we get at understanding the risk that we're taking on, being more consultative with our clients once we are on risk with them to help them manage that cost, providing a differentiated experience. I do think over time that's a capability that we can develop and exploit for the benefit of our customers and to kind of our ability to grow in a sustainable profitable way. I don't have the data set in front of me, David, today to sort of be able to quantify for you what that difference might be. But as I look out, I'm pretty encouraged about the potential there.

Speaker 10

Right. And Kelly, I thought you said, if I heard you right, that you released your pricing 90 days in advance. If I heard that correctly, is that implied that the pricing for the October 1 renewals would have gone out prior to the uptick in utilization? I just want to make sure that I understood that comment and the impact that may have.

Speaker 4

Yes. No, Pat, happy to answer that, David. We had when I answered, Kyle's question, I mentioned sort of the obfuscation from the change healthcare, and we were getting more and more data as we were about to release those prices kind of at the beginning of July. As we evaluated it, we did see trends starting to elevate and so did put through an appropriate double digit price increase. And we do think, 2020 hindsight, that's adequate just based on the risk of the individual clients within that renewal cohort.

Speaker 10

And so does that imply that you would have a similar increase on the January 1 cohort then as well?

Speaker 4

It is our expectation is it's similar, yes. And we are watching and having conversations with clients right now. Just the realized level may come in slightly different because we assume like for like plans and there may be buy ups or buy downs that change the percentage. But it is in the ballpark of the same area.

Speaker 10

Right. And, I'm sorry, I missed, some of your commentary about the 4th quarter professional services revenue. I thought you said limited CIE contribution. Is there anything else that's impacting the year over year growth?

Speaker 4

Yes. The other one, David, that I mentioned was, last year, we had somewhat of a one timer, dollars 8,000,000 of revenue recognition associated with some certain set of fees. And that's not recurring this year.

Speaker 10

Okay. I'm sorry. I thought that was in the Q3. Got it. And just lastly, I know workers' comp is the tailwind is diminishing throughout the industry.

Speaker 10

Can you give us a rough sense of how much of a margin headwind workers' comp will be in 2025?

Speaker 4

Well, we've tried to call out some of the unusual items as they've come through. We can go back and look at our disclosures just to make sure that, we can gather that up for you just based on what we've said publicly.

Speaker 10

Got it. Okay, guys. Good luck. Thanks very much.

Speaker 4

Great. Thank you, David.

Operator

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

Speaker 3

Thank you, Drew. And I just want to quickly say to our shareholders that the best days for TriNet are ahead of us. You've heard it throughout our prepared remarks and Q and A. Effective risk management is really important to me. We have and will continue to make the investments in this capability.

Speaker 3

And even as we're tackling the challenges of healthcare head on, we are taking necessary steps on the future to create a more focused, more differentiated, more efficient TriNet, one that I am really excited about and one that I think is very much capable of sustainable and profitable growth. So I appreciate the questions. I appreciate everyone that took the time to join us on the call today. I look forward to engaging with many of you, Kelly and I do, over the coming weeks months. And with that, Drew, we can conclude today's call.

Operator

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

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