Prepared remarks
Good day, and welcome to TriNet's Second Quarter 2026 Earnings Conference Call. 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 two important fronts. First, as we previewed last quarter, our health fee pricing work over the previous 18 months positioned us to renew customers at rates more closely aligned with market trends 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 persists. 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. AI in HR is most valuable when combined with judgment rooted in deep domain expertise and a strong service orientation, a 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. Leave of absence has been a significant compliance and employee experience pain point for our customers and the broader SMB market. With Cocoon we addressed it with a best-in-class solution. I'm pleased to report that our integration is on track. Our first cohort of customers has migrated to the solution. Our second and third cohorts are expected to be completed by year-end which leaves us prepared to onboard new 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 benefits 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 TriNet 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 with 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-employed 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 out-performance 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 pharma 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 two points of year-over-year improvement in insurance cost ratio from favorable prior year development, just as we did in the first quarter. The other two points of our year-over-year improvement was due to the recovery of previously expensed insurance administrative costs incurred in the previous decade. This one-time benefit was a small part of a larger recovery to which we were one of many recipients. In the second quarter, operating expenses, which exclude insurance 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 three broad buckets: our distribution efforts, our benefits offerings and our service model. These investments will incorporate AI throughout. Most of this incremental spend is slated for the current fiscal year. Turning to earnings. Second quarter GAAP earnings per diluted share were $1.15 and adjusted net income per diluted share was $1.55. Our business remains a strong cash-generative business, which supports our investment priorities and business execution. During the second quarter, we generated $128 million in adjusted EBITDA, representing an adjusted EBITDA margin of 10.9%. We generated $88 million in net cash provided by operating activities and grew free cash flow by 18% to $67 million. Free cash flow benefited from disciplined expense management and better-than-forecast insurance performance. Our capital priorities remain reinvesting in our business for growth, M&A and returning capital to shareholders via share repurchases and dividends. In the second quarter, we leveraged our cash generation to return $31 million to shareholders across share repurchases and dividends. We repurchased approximately 500,000 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 out-performance 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 one-time recovery benefit. In the second half, we expect normal ICR seasonality, which means second half ICR should be higher than the first half driven by utilization patterns, deductibles being met and pooling limit resets. While 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 86% 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 88.5% to 89.5%. 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.
Questions and answers
The first question comes from Jared Levine with TD 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 retention of the most experienced sales reps there. 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 some additional increases in productivity or headcount in that most experienced tenured cohort?
Thanks for the question. We saw decisioning get elongated at the tail end of the first quarter, and that persisted into the first part of the second quarter. We've seen sequential month-over-month improvement as we worked through Q2 and sitting here in July we're encouraged with the results here, too. It feels like we are seeing momentum emerge. To your point, it is good to see our total rep staffing number inflect here again, where we sit in July and be back into growing that total number going forward. Another piece I would highlight is the growth in the broker channel, which has been very encouraging for us and has driven emerging momentum. If you look at the pipeline, at the end of Q1, we talked about a 12% year-over-year increase in broker-driven RFPs; now that's up over 50% growth as we close out Q2 in terms of the number of RFPs. So there are a number of factors: investments we've been making in the ASCEND program, the staffing program, retaining senior reps, getting the broker channel going that give 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 will materialize 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 look at the second half, it doesn't seem to suggest any improvement year-on-year. I would have expected some improvement due to the repricing effort. Are there any one-time impacts in the second half that we should be aware of in terms of that comp? Or is this an element of conservatism? Can you help us understand why that second half doesn't seem to suggest any improvement year-on-year on that ICR?
Yes. If I think about our ICR trajectory through the year, we've seen significant out-performance in ICR year-to-date, both in Q1 and Q2, as we said in our prepared remarks. We talked about the drivers of the Q2 out-performance year-over-year, including prior period development favorability and a one-time item. Medical trends at this moment in time remain persistently high. We are seeing slight favorability in our book relative to what we had previously assumed when we set guidance, but trends remain in the high single digits as we have shared. In the second half, a few things inform our guidance. First, our historical experience suggests we could see some lumpiness and volatility in our claims experience in the second half, and we are factoring that in. The guidance range, if you anchor to the more favorable end, essentially accounts for a lot of the year-to-date capabilities we have seen. Second, we see second-half seasonality in ICR driven by utilization factors, deductibles being met and pooling limit resets; we expect to see that this year as well. We've put all of that into our guidance as we updated it.
The next question comes from David Grossman with Stifel.
This is an analyst for David Grossman. Mike, now that you've had some time to implement your go-to-market changes, and they're beginning to take shape, specifically in the broker channel, what's resonating most with the brokers and leading to this kind of increase in RFPs?
Thanks for the question. We are encouraged with the growth in the channel for two reasons: the results that are emerging and the potential. PEO is an under-penetrated market, and SMBs that get health care, over 90% of them get it through health insurance brokers. What's resonating is making sure we put the right talent at the local level matched with the right broker producers, hence the need to retain our senior people. We've redesigned processes to ensure we're giving trusted-adviser access to brokers as our standard operating procedure and including them in renewal discussions. We're putting dedicated client service personnel against the broker block overall. It's not one factor, but rather thinking about the lifecycle from prospecting and quoting all the way through renewing a book of business where you're showing 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 WSE growth to start to trend positively? I know you said stabilize and then turn positive. And when a client does decide to leave, where are they typically going? Are they bringing it in-house or moving to a different solution? Any insight would be great.
We have good evidence in Q2 on the progress we've made: getting the ICR back into our targeted range, seeing retention increase nicely, and having our NPS at a stable and improved level. That foundation is important. Our next milestones are revenue growth. As retention improves, it slows the rate of decline in WSEs. We continue to price, as Mala said, for high single-digit market-wide health care cost trends; those pricing actions outpaced the WSE decline and the net is revenue growth. The sum of our growth investments across distribution, benefits offering and service proposition will turn the corner on WSE growth. We are not pinpointing exact timing today, but the next couple of milestones feel achievable. When clients leave for health care reasons, they are often going into an open market solution of some type. The health care reason for departure is coming down. Service-related departures are also coming down with the NPS improvements. Competitive landscape remains robust; if it's a service issue, we might lose to another competitor; if it's health care pricing, they often end up in open market, multi-vendor solutions.
The next question comes from Tobey Sommer with Truist.
This is Tyler Barishaw for Tobey. Sticking with the WSE growth, we saw 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?
What I would say is, as we indicated in our prepared remarks, we expect a couple of things in the second half. We expect retention to improve on a year-over-year basis as we move through the second half; we saw that in Q2 and expect it to continue. Second, we expect new sales to ramp as we go through the second half. These two drivers are what will inform 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. Can you give a quick update on how that is progressing relative to plan and any other feedback or thoughts on the traction you're seeing so far?
The ASO product is one we're quite excited about. We saw continued double-digit growth in the quarter. It's a relatively small business in the scheme of things, but it presents a great opportunity to think about innovation and different approaches to that market. We're excited about the growth and what we're learning in that market and how we can apply that learning over time. It remains something we are quite focused on.
One other note: when we gave guidance at the beginning of the year, we talked about a net headwind to our 2026 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. As a follow-up, on the insurance profitability, good to see the quarter and the outlook better. It sounds like some things were timing-driven with fewer inpatient procedures and pharma costs lower than forecast. How should we think about how much of an impact was timing this quarter versus anything better in the core that would be more sustainable moving forward?
I would not characterize the favorability we've seen as timing. What drove our improvement in cost ratio year-over-year and versus expectations is really two things. One is a one-time benefit we discussed, which accounted for about half of our year-over-year improvement. The other is prior year development favorability. We monitor prior period development in our medical reserves as an indicator of emerging cost trends. In recent quarters, claims have developed slightly more favorably than we had initially expected, suggesting underlying health care cost growth has been moderating relative to the assumptions we embedded when building our reserves. The favorable emergence in prior period development is consistent with stabilization in health care cost trends. It's still high—in the high single digits—but it is stable. That stabilization 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. First, how are you retaining the high-performing sales folks for longer? How sustainable is that? And second, looking ahead to the fall selling season, what metrics will you use to define success and how will you know it's a very successful season?
On retention of senior reps, it's straightforward: making it a focus, reviewing incentives, and investing in the front line and regional management teams to improve leadership and culture. Providing good tools and support matters. We've been removing sales friction across the lifecycle. As we bring new people into ASCEND, they are assigned to senior reps, which provides mentorship to juniors and support to seniors by taking administrative work and keeping prospects moving. This creates a symbiotic relationship. To define success in the second half, for us it's showing strong year-over-year growth, which we anticipate based on the pipeline and investments. We would like to see continued acceleration in the broker side. As sales rep staffing increases and newer reps roll into production, we target growth in our direct channel, which remains our primary go-to-market motion.
The next question comes from Kevin McVeigh with UBS.
Great. Congratulations as well. How are you thinking about the broker channel's influence on revenue trajectory? Where has it been historically and what do you expect its contribution to be? Also, remind us what's the profitability of a new client as opposed to an existing client given sales commission and onboarding costs?
In rough terms, about one-third of our new business year-to-date is coming through the brokerage channel and that's growing. I expect direct to remain more than half of new client acquisition over the medium term. The business model's profitability builds with tenure—both because of the cost of acquisition and because as a risk-taking PEO we better understand risk over time. After being through two annual renewal cycles on insurance products, we're in a much better place to align price with risk. This underscores why retention is so important, both for volume growth and for margins.
That makes sense. On AI, are you leveraging it to get better intelligence on existing clients? Will AI implementation change WSE growth dynamics, and how are you thinking about its impact on revenue and expense?
A concrete use case is our customer health score. Our data and analytics team built a score using AI to monitor every interaction with a client and aggregate sentiment and transaction types to produce a collective score, which correlates well to NPS and retention. AI helps us be smarter and more proactive in managing clients, which improves service, NPS and retention—key revenue drivers. Other AI uses include selecting the right health care bundle in the fall selling season and TriNet Assistant, which helps WSEs get answers any time. We're excited about AI's impact on client experience, growth and efficiency.
I believe AI in our sales motion is giving tools to salespeople so they are better informed about the clients they are targeting, which makes them more effective and should improve win rates. We'll invest more in tools like that and in AI for benefits bundling and customer service. TriNet Assistant is already allowing us to up-skill colleagues on the service delivery side because many calls are being handled through the assistant. Overall, AI has direct and indirect impacts on revenue, efficiency and NPS.
Is AI affording the opportunity to make better decisions in terms of client selection upfront?
We're experimenting with that use case. I wouldn't say the new business we're writing today is materially informed by AI-driven insights, but it's a possible and valuable use case for us down the road.
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. With that, Megan, we can conclude today's call.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.