TriNet Group Inc (TNET) 2015 Q4 法說會逐字稿

Good afternoon, and welcome to the TriNet Group fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions)

Please also note, today's event is being recorded. I would now like to turn the conference over to Alex Bauer, Executive Director, Investor Relations. Please go ahead.

Think you, operator. Good afternoon, everyone, and welcome to TriNet's 2015 fourth-quarter and year-end conference call. Joining me today are Burton Goldfield, our President and CEO; and Bill Porter, our Chief Financial Officer. Burton will begin with an overview of our fourth-quarter operating and financial performance. Bill will then review our financial results in more detail. Bill, Burton and I will then open up the call for the Q&A session.

Before I hand the call over to Burton, please note that today's discussion will include forward-looking statements, such as predictions, expectations, estimates or other information that might be considered forward-looking, including our 2016 forecast and strategy. During today's call, we will present some important factors relating to our business which may potentially affect these forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that may cause actual results to differ materially from statements being made today. We do not undertake to update any of these statements in light of new information or future events. We encourage you to review our most recent public filings with the SEC for a more detailed discussion of these risks and uncertainties that may affect our future results or the market price of our stock.

In addition, our discussion today will include non-GAAP financial measures. For reconciliations of non-GAAP financial measures, please see the Company's earnings release, available on our website or through the SEC website. With that, I will turn the call over to Burton for his opening remarks.

Thank you, Alex. We're pleased to report strong fourth-quarter results, as indicated by healthy double-digit growth in our top line, and solid affability. The fundamentals of our business remains strong, and we are successfully executing our vertical market strategy. In addition, we're well on our way to making the necessary changes in our insurance business to strength our product and improve our forecasting ability. In turn, we have entered 2016 in a strong position to continue to pursue the market opportunities in front of us, while further improving sales force productivity and driving cash flows to the benefit of our shareholders.

There are three items I would like to cover on today's call. First, our fourth-quarter results and 2015 highlights. Second, the progress we have made on insurance services. And third, our 2016 outlook.

In the fourth quarter, we grew total revenue 17% to $149 million. Net insurance service revenue increased 14% year over year to $42 million. Net insurance service revenue was slightly lower than expected, primarily due to reduced workers compensation revenue as a result of our clients paying lower bonuses within the financial services vertical. In the fourth quarter, professional service revenue increased 19% year over year to $107 million.

During the fourth quarter, we organically grew worksite employees by over 9,000 to 324,399, up 13% year over year, or 3% from the prior quarter. And we expanded our client base to over 12,700 small- and mid-sized businesses. We ended the year with 481 quota-carrying, non-duplicative sales reps, exceeding our stated goal of 470, representing 25% year-over-year front-line sales rep growth. We achieved our pro forma adjusted net income earnings per share guidance of $0.31 per share. For 2015, professional service revenue grew 17% year over year to $401 million.

In our Q3 call, I stated I would be focused on improving the insurance services component of our business. I am pleased with the progress we're making in that area and I want to report on our efforts. We have brought in new talent. I am excited to report that after an extensive national search, we have hired Ed Griese, Senior Vice President of Insurance Services. Ed brings extensive health, reinsurance and consulting experience. He is now responsible for the strategy and operations of our insurance services products, including our medical plans and workers compensation offerings.

Ed reports directly to me and is tasked solely with the effective management and optimization of our insurance products. Ed's broad expertise will be instrumental in driving the strategic vision for our insurance products, while optimizing the day-to-day management of that business. In addition, we now have a Chief Medical Actuary and a Chief Workers Compensation Actuary reporting directly to Ed. Our actuaries supplement our existing risk teams and our external advisors by the bringing a new level of sophistication to the in-depth analysis we already perform on our medical and workers compensation books.

We have completed a deep evaluation of our insurance services, with the help of a globally recognized consulting firm. I have carefully reviewed their findings with my management team and the Board of Directors. We examined a number of business and financial constructs to address the volatility of our quarterly medical claims. We explored a number of options, from guaranteed cost contracts and pooling limits with our carriers, to various reinsurance arrangements.

With regard to expanding our guaranteed cost contracts, we have decided not to pursue this path. Our current view is that our clients value TriNet's medical plans, and have a desire to have customization associated with these plans. We are not willing to give up our flexibility in both plan design and pricing, as well as access to medical claims-level data.

With regard to reinsurance, our goal was focused on capping quarterly claims expense at the appropriate economic cost. The pricing and attachment points we received from the market to-date were not conducive to achieving this objective at this time. With very strong leadership in place in 2016, we will continue to evaluate all options to strengthen our insurance product and our performance in this segment of our business. We believe that our 2016 forecast allows us the flexibility to cover the estimated cost of reinsurance if we find acceptable terms in the market.

Turning to our overall strategy for 2016, we remain focused on penetrating our large addressable small- and mid-sized business market. Each day, more than 55 million people go to work at small- and mid-sized businesses with 500 or fewer employees. We are excited about the opportunities in this market, because when we compete for prospects, 75% of the time, we are still competing against the unbundled solution, where our prospects are piecemealing together an HR solution.

These SMBs not only have to worry about running a successful business, they also face the daunting challenge of remaining legally compliant with an increasingly complex regulatory web. This includes the Affordable Care Act, wage and hour regulations, and a variety of additional federal, state and local legal requirements. In most states, starting in 2016, the Affordable Care Act requires compliance for companies with over 50 employees during this calendar year. This creates a potential ACA-driven tailwind in the back half of the year, as companies search for ACA-compliant plans.

In 2015, we saw the implementation of 254 new federal, state and local employment-related regulations. In January 2016 alone, we saw an additional 55 new employment-related regulations enacted -- each requiring action on the part of the employer. In fact, in a recent survey we conducted, 73% of small business owners think it would be easier to increase their business's revenue by 5% than to keep their businesses fully compliant with government regulations.

Now more than ever, managing HR regulatory compliant is no easy task. TriNet offers SMBs a best-in-class bundled solution to provide HR expertise necessary to manage this regulatory burden, access the Fortune 500-level benefits, and an online and mobile technology platform. We have adopted an industry vertical strategy, where our sales force, our product development teams, and our plan services teams are increasingly focused on specific business sectors.

We are starting to see real dividends, as this approach takes hold. For example, our life sciences vertical, which was launched in April 2013, has experienced 20% compounded annualized worksite employee growth through the fourth quarter of 2015, and now services more than 10% of the firms in the California SMB life sciences market. This vertical approach deepens our relationships with our target industries and allows us to become more responsive to client needs, which we believe will continue to create opportunities to expand in those industries.

After three-straight years of growing our sales force 25% each year, we have reached critical mass at 481 quota-carrying sales reps. While the market opportunity remains compelling, there appear to be macroeconomic signs indicating that 2016 may be a more challenging environment for small-business formation and growth. Given this backdrop, we think it is prudent to moderate our sales force growth in 2016, and shift our emphasis to improving sales force productivity, while continuing to capture market share in the coming year.

Based on the market's strong reception to the TriNet Life Sciences and TriNet Not-for-Profit vertical products, we anticipate launching at least two more vertical products in 2016. Through the strong partnership between our products, technology and sales teams, we are continually refining our vertical approach. We are building scale by accelerating the development of product-ties verticals and product enhancements.

A powerful example of a product enhancement was the launch of a new version of our mobile app in early December. By mid-February, we had crossed 31,000 downloads of our app, with nearly 500,000 screen views. Our WSEs are now benefiting from improved access to HR. With more functionality expected to be rolled out this year, we will continue to evolve and improve our worksite employees user experience.

We will be further upgrading and integrating our technology platforms. For example, today we completed the migration of all Ambrose clients onto the TriNet platform. As of today, all Ambrose clients now enjoy a significantly improved user experience, as well as additional functionality, including mobile apps and better reporting. This technology enhances the high-touch service model, with top-tier benefits and direct access to compliance, tax and other specialists that Ambrose clients have always valued. Now I'd like to pass the call to Bill to review our financial performance and provide our 2016 guidance.

Thanks, Burton. As we review the financials, I will focus on the non-GAAP numbers, and go into the GAAP numbers where appropriate. During the fourth quarter, net service revenue increased 17.4% to $149 million year over year. Total WSE count was $324,399, up 12.5% year over year, or 3% since the end of the third quarter. Professional services revenue for the fourth quarter increased 18.8% to $107 million year over year.

Net insurance service revenue for the fourth quarter increased 14.1% to $42 million year over year. Net insurance service revenue for the fourth quarter was lower than expected, primarily due to reduced workers comp revenue as a result of our clients paying lower bonuses within the financial services vertical.

Total adjusted EBITDA for the fourth quarter increased 14% year over year to $45.7 million, compared to $40.1 million for the prior-year period. Our Q4 adjusted EBITDA margin was 30.7%. Adjusted net income for the fourth quarter increased 15% year over year to $22.2 million or $0.31 per share, compared to $19.2 million or $0.26 per share in the same quarter of last year. Our GAAP effective tax rate was 43.8% for the fourth quarter, and our Q4 pro forma tax rate was 41.5%.

During the fourth quarter, we generated $27.3 million in operating cash flow, and spent $5.1 million on CapEx. For 2015, we grew net service revenue 7.8% to $546.9 million. Total adjusted EBITDA for 2015 decreased 8% to $151.3 million, with an adjusted EBITDA margin of 27.7%. 2015 adjusted net income decreased 5% to $70.7 million or $0.99 per share, compared to $74.4 million or $1.03 per share in 2014.

Our ability to generate cash flow is supported by our strong profile. For 2015, we generated $131 million in operating cash flow. Historically, we have spent approximately 3% to 4% of our net service revenue on an annual basis on capital expenditures. For 2015, our CapEx spending totaled $19.8 million, representing 3.6% of our 2015 annual net service revenue, in line with our CapEx spending-level target. We closed the year with a total debt of $500 million, representing a debt EBITDA ratio of 3.3 times 12 months EBITDA. Total cash was $166.2 million at the end of the fourth quarter, and working capital was $112.4 million.

Before discussing our FY16 guidance, I would like to first address items identified in our year-end reporting process. For the first time, this process included an assessment of internal controls over financial reporting pursuant to the Sarbanes-Oxley Act. In the course of completing our internal controls assessment and preparing the FY15 financial statements, we became aware of material weaknesses in our internal controls over financial reporting, related to ineffective information technology general controls and ineffective controls in key business processes. As a result of the material weaknesses in our internal control over financial reporting, we have concluded that our disclosure controls and procedures were not effective.

While these material weaknesses create a reasonable possibility that an error in financial reporting may go undetected, after extensive review and analysis, no material adjustments, restatement or other revisions to previously financial statements are expected to be required. Furthermore, we're putting in place plans, and are committed to remediating these deficiencies by implementing changes to our internal control over financial reporting in the future.

With this being our first assessment of internal controls over financial reporting pursuant to the Sarbanes-Oxley Act, and given the multiple platforms that require evaluation and testing, we have been unable to complete our assessment of our internal control over financial reporting. And as a result, we have filed a Form 12b-25 with the SEC today, providing for a 15-calendar-day extension for our annual report on Form 10-K for the fiscal year ended December 31, 2015. We currently expect to file our Form 10-K prior to the expiration of the extension, and further, that the financial information contained in the Form 10-K will be consistent with financial results in today's earnings release.

Turning to our 2016 full-year financial guidance, as mentioned earlier, we believe there are number of signs indicating that 2016 may be a more challenging environment for small business formation and growth. We have developed our 2016 guidance with this in mind, and will prioritize our bottom line, while we continue to position the Company for growth.

We expect net service revenue in the range of $610 million to $625 million, which represents growth of 11.5 % to 14%. Adjusted EBITDA in the range of $170 million to $180 million -- in line with our targeted adjusted EBITDA range of 28% to 29%. And adjusted net income in the range of $82 million to $87 million, or $1.12 to $1.19 per share. Our 2016 guidance assumes a pro forma tax rate of approximately 42.5%, a 1% year-over-year increase from 2015, due to an increase in our state tax expense and the loss of some employee tax credits due to the implementation of the Small Business Employment Act. Our 2016 adjusted EBITDA margin range of 28% to 29% allows us flexibility to cover the estimated cost of reinsurance, if we find acceptable terms in the market.

For the first quarter of 2016, we expect net service revenue in the range of $148 million to $153 million, which represents growth of 4% to 7% year over year. Adjusted EBITDA in the range of $36 million to $41 million. And adjusted net income in the range of $17 million to $20 million, or $0.23 to $0.27 per share. Finally, our Board of Directors has approved a $50 million increase to our ongoing stock repurchase program. In 2015, TriNet repurchased $48 million of it's outstanding common stock. The remaining amount authorized for repurchases, after giving effect to the increase, is $82 million. Now I'll turn the call back to Burton.

Thanks, Bill. To summarize, we closed a challenging year on a strong note, with healthy growth in our top line and solid profitability. Looking ahead, the fundamentals of our business remain strong, and we are successfully executing our vertical market strategy. In addition, we are well on our way to making the necessary changes in our insurance business to strength our product and improve our forecasting ability. We remain well-positioned to pursue the market opportunities in front of us. This concludes our formal remarks, and now I'd like to turn the call back to the operator for the Q&A session.

(Operator Instructions)

Tien-tsin Huang, JPMorgan.

Hi, good afternoon. A couple questions, just first on the fourth quarter, just trying to look at the details here. What caused you to fall short of the revenue guidance a little bit? Is it primarily just the lower workers comp from smaller bonuses? Any other factors? How did claims come in versus plan, or the WSE unit count, and how did that come in versus target? Thanks.

Yes, Tien-tsin, this is Bill. That was the primary reason -- that is, we didn't see the same level of bonus revenue to our clients. And that reduced our workers comp revenue. That came through on the insurance services line. Our WSE count came in, in line with our estimates. So that really was the difference.

Okay. And on the outlook, the 28% to 29% margin, it sounds like it gives you freedom to execute on the reinsurance, but if you don't, there could be some upside to that. Anything else to consider on the margin front?

No, I think you have summarized it well. So for the outlook, we have considered the 2015 higher level of medical trend in 2016, so we think we've got our 2016 claims covered. And then we got enough to cover potential for the estimated cost of reinsurance, which we have been exploring in the market.

And then just a bigger-picture question, and then I'll let others ask. Just on the decision to not do the fully guaranteed. I get the pricing comment, but was the fear of client attrition and the inability to design your own plans -- it sounds like that maybe played a bigger role in taking that off the table. Did I read that correctly?

Tien-tsin, this is Burton. I think you read it very well. In the end, the verticals react very differently to different types of plans. As you are aware, 38% of our plans are fully insured. And in some markets, that's appropriate. In other markets, after talking to clients and analyzing the opportunity, we just were not willing to give up the visibility and control. As you realize, if we went with the fully insured plans, it reduces the quarter-to-quarter volatility, but it doesn't help the year-over-year, because the increase would then be passed directly on to our clients.

So from my vantage point, we looked at it every way possible, and it was not the right decision for us at the time. Having said that, with Ed Griese onboard, his expertise in medical, we continue very deep conversations with insurance companies and reinsurers, I'm keeping that possibility open. And I have kept the allowances in the budget so that those conversations could bear fruit under the right economic circumstances.

Got it. Thanks for taking my questions.

All right, thank you.

Daniel Hussein, Morgan Stanley.

Hi, Burton and Bill. I just wanted to follow-up on the decision not to sign with one of the reinsurers. I guess, just maybe you could walk us through the process? Did you not reach out to maybe a broad enough group of reinsurers? Or is it just that right now, the pricing you are being quoted is too high because of what you have seen recently? And then maybe looking forward, is there some potential change in how you can approach getting reinsurance, either by working with potentially more reinsurers or constructing it in a different way? Thanks.

I think you have answered the question. Yes, we have had a free and open dialogue. And I think part of it was, we didn't get face-to-face early enough with the reinsurers. I think there is an opportunity as they get to know us and our constructs, to be able to create something that is, frankly, somewhat unique. It has to do with the volatility on a quarterly basis, as opposed to an annual basis, which they are much more comfortable doing. It has to do with understanding our business environment. And we have the opportunity now to give them the data for the first couple months of 2016, and reevaluate it under the right price point.

And then finally, Ed comes from the reinsurance market, so he has already, in the short time he has been here, reached out and is exploring other companies that we didn't to in the first round, that may be closer to what we are looking for. So absolutely still an open discussion, and still an opportunity for us. But frankly, we feel comfortable either way.

Okay. And then can you maybe just talk about any pricing changes you rolled forward in your insurance line for the quarter, and what percent of the book was repriced this quarter? Thanks.

Sure, Daniel, this is Bill. So in Q1, we're seeing it sitting around 35% to 40% of the book that got the price increases. And that starts to slow down in Q2 and Q3. And then we'll hit another approximate 40% in Q4. So that's how the pricing rolls out. And we've got pretty good acceptance in the market. Everyone understands it's competitive.

Okay. And maybe just a quick question on the two sort of offsetting factors for the year. You called out a second-half tailwind, but then offsetting that is a macro headwind just from SMB formations. The net -- would you expect this to still turn out to be a headwind, assuming you were to keep your sales force growth consistent from year to year? Or is the net impact that you would expect that macro headwind be a little bit more powerful?

I'm pretty optimistic about the year. I think, as you say, there's different forces, some of them very positive, some of them not as positive. It's around things like business in the technology area. It's around areas of our installed base growing as quickly -- January wasn't as much growth within the installed base -- what we call change in existing. But ultimately, I believe these small businesses are pretty resilient. So I think that overall, it's net positive for the year. It may be back-half-loaded, but they're still a tremendous opportunity.

Great, thank you.

Jason Kupferberg, Jefferies.

Thanks, guys. I just want to start with a question on the guidance. If we look at Q1 relative to the full year, it looks like we need to see a pretty healthy ramp during the last three quarters of the year to get to the full-year numbers. Can you just talk about the factors that should drive that acceleration?

Jason, this is Bill. I think we generally would expect, as you saw in 2015 and again in 2016, a pretty steady increase in our professional service line every quarter. And so I don't think we're going to expect anything different in 2016 -- just good, steady progression. I think what you'll also see in 2016 is, we do have a little bit seasonality on the insurance services line. And traditionally, we have seen better performance in the first quarter and the fourth quarter, generally just because of the way the seasonality comes in with claims. But I wouldn't see really much different other than that in 2016, as we have laid it out.

Okay. And then can you just talk about some of the more specific underlying assumptions for sales force growth and WSE growth that underpins the guidance for the year?

So for sales force growth, we're going to look at that with a little more cautious outlook, as Burton mentioned. We've got critical mass, coming out of 2015. And with our look at the macro environment, we will grow the sales force, but we don't need to push it as fast, given that it's a little harder for new salespeople to get their feet on the ground, given this macro environment.

So we will take it a step at a time. We will take opportunities to grow sales infrastructure, and to look at sales force growth where we are seeing the right opportunities in selective verticals. But I think we're going to just be moderate going in, and then we'll see what happens throughout the year on the sales force side.

And on the WSE side?

We don't try to lay out what WSE growth would be, but it's generally going to be somewhat in line with our top-line growth. There's always going to be a volume element to it. We're continuing to focus on improving our pricing, along with watching our WSE growth. So I think they will both be contributors to the outlook that we have indicated in our guidance.

Okay. And just last one for me. On the balance sheet, can you just remind us in terms of the composition of your debt, what we've got in terms of upcoming maturities, average interest rate, how much is fixed versus floating rate?

Yes, it's basically all LIBOR plus 275. There's no LIBOR floor. We do have a component that comes due in July, the Term B, that comes due in July 2017. And that's pretty much what we've got going in. So it will float with LIBOR, but the terms are pretty favorable.

And just remind us, the Term B, what the size is, that payment?

Yes, I think that's sitting around $175 million. But I can confirm that with you. I don't have that right in front of me.

Okay, all right. Thank you for the color.

Thank you.

Timothy McHugh, William Blair.

Thanks. Just want to ask, I guess, as we think about the guidance, can you be any more specific about how much you've built in, in terms of the cost of reinsurance? And if you didn't do it, I guess, would you expect that cost not to be there, or will it show up in something else? And then I guess maybe related question is just, what you're assuming about the profitability or the MLR for healthcare in 2016?

Sure, Tim. I'll start with your second question first. MLR, we are looking at something that's going to be close to what we saw in 2015. So somewhere in the 85 range. But we've also been able to make progress with our carriers in continuing to reduce our admin cost. So we are continuing to be able to provide a little bit more opportunity for us as we continue to push down the admin fee, as we continue to grow our WSE count and provide good risk to the carriers.

We're not going to be specific on what amount of cost we've built in for reinsurance. But I'd say that, as I mentioned, we have built in enough trend into our 2016 estimate for claims. If you factor in our experience in 2015, as well as having tested the markets, I think we have a pretty good sense of what a reasonable cost range will be. And we've got that built into that EBITDA range that we've given. That's the level of detail I am comfortable going into.

Okay. And then a related question, or earlier question, the difference between Q1 kind of run rate and the full year. I guess particularly even at the margin line, I guess I didn't understand your response. Because I thought you highlighted Q1 as normally a better-than-average quarter for insurance profitability. So I guess, why the better profitability as we go later in the year?

Probably what I was referring to mostly for the year-over-year comparison is, it's a little bit of a tougher compare, Q1 of 2016 versus Q1 of 2015. Because in Q1 of 2015, we had a pretty good insurance quarter. So the year-over-year growth doesn't look as strong when you're going against a strong comparison. And that being said, we've got a pretty reasonable ramp throughout the year. And then Q4 is generally our strongest quarter, and that's because our insurance is strongest in Q4.

Okay, thanks.

David Grossman, Stifel.

Thank you. I'm wondering if we can just could go back, just to some of the questions that have been asked, both about the first-quarter guide and some of the expenses assumed in guidance. Because it would seem to imply -- your guidance implies a year-over-year increase in margin, and that's on a flat MLR. And that's also with factoring in, I'm assuming, some incremental potential costs from reinsurance.

So I guess I'm just trying to connect all the dots. Was the reduction in admin fees significant enough that you could not only absorb the incremental costs of reinsurance, yet still show some year-over-year improvement? Or are there some other pricing dynamics or something else going on, on the cost side that is allowing you to show that increment in margin percentage year over year?

It's a good question, David. Yes, we did pick up what I would say is not insignificant increase in admin coverage from the carriers, in reduction and costs. So that clearly helps us with our margin there. But we've also, as we have talked, laid out reasonable price increases that also gets spread out throughout 2016, which helps on the margin. It's a combination of those, as well as, as Burton indicated, we're going to continue to manage, given the somewhat cautious outlook for the headwinds, with making sure that we can manage flexibly our cost side of the business to get the margins that we're expecting throughout the year.

And can you help us understand just when the price -- did you start increasing price last year, that you're getting some follow-through this year, on a year-over-year basis? Or is that pricing pretty much going on each quarter?

It goes on each quarter, David. As we indicated, we did not have our pricing early enough to catch us for Q4 2015. So it really started in Q1 of 2016, and then it will take us through Q4 of 2016 to pretty much lap and get that price increase into place that we needed for what we saw experienced in the second quarter of 2015.

But the insurance compare is difficult enough that, that pricing benefit in the first quarter doesn't help quite enough?

Correct. Q1 of 2015 was a pretty good insurance quarter.

Okay. And I guess, going back to the whole decision to say: you know, the market is not giving us what we think is fair and reasonable to ensure some of this risk. And I understand the process, you are going to maybe find the right fit. But were there any points or any quarters last year where the MLR exceeded 15%? And just to give us some comfort that -- because you remain uninsured, basically, this year. What data points can you give us that give us some comfort that there isn't some potential volatility that could happen, that has happened in the past, that could somehow derail the guidance again this year?

So I think we have learned -- obviously, we all continue to learn a bit from our experience. But as we have laid out 2016, I think, one, we made sure we built in enough trends to cover us on the claims side. So we have done that. And secondly, as we have look at either the cost of reinsurance or the cost of, quote -- holding that on our own books for now -- either way, we should be able to get enough coverage so that we -- we can't completely mitigate volatility. I wouldn't think that, that's possible. But we think we have enough ability, given the EBITDA range we have laid out, to be able to mitigate a large component of it. And we think we're pretty well set for the year. On a quarterly basis, there can always be activity that could bunch claims.

Okay. And then if we could just -- could you give us -- or help us with modeling the non-GAAP adjustments to GAAP pro forma, both EBITDA and net income?

Yes, I think that's better done offline, but we can do that.

Okay. And then just finally, on the stock repurchases, I didn't do the math -- and perhaps you have given us enough information. But it would appear that the stock repurchases were fairly modest in the fourth quarter, despite what was a pretty weak stock price. So did the weakness in internal controls -- were you restricted on buying stock in the quarter? Or was there another reason? Or maybe my math is off, in which case, just mention that. But just curious why, at least on the surface, it appears that not a lot stock was bought in the fourth quarter?

Yes, we did not actually repurchase any stock in the fourth quarter, David. It has nothing to do with our internal controls. We had just decided that it was something that we would keep our powder dry on. And the Board now has given us the ability to raise, as we have indicated, $50 million of additional authority. And so we will take that into 2016.

Okay. Thank you.

George Tong, Piper Jaffray.

Hi, thanks, good afternoon. You've ruled out changing pooling limits and are holding off on purchasing reinsurance. Can you elaborate on the remaining strategy that you have to better manage claims costs and improve visibility?

Sure, George. We did a lot of modeling as we looked at the reinsurance constructs that were available in the market. And one of the things that was clear, based on the work that we did, was that individual pooling limits really did not have that significant of an effect on reducing volatility on a quarterly basis. And so while we evaluated that as an option, we went back, we priced it -- that was not as effective a tool as other different constructs were.

So we have modeled them all; we think there are some that potentially could work. But at this stage, we just haven't seen the rate pricing. And as Burton mentioned, Ed is continuing to look at the different opportunities out in the market with the constructs we think work better for reducing volatility. And we'll see if we can arrive at the right balance of risk mitigation and cost. And so it's that right balance that we're looking to explore throughout 2016.

All right then. Obviously pricing is one tool that you have to manage some of the higher claims patterns. How much is average insurance pricing increasing by this year? And how much would you need to see to fully offset the higher claims accrual costs that are required for this year?

Well, we have built into our outlook both what we expect our total claims trend to be, as well as the pricing that we will roll throughout the year. And we basically are trying to take a couple of points above trend, because that was what we needed to do to get back to the equilibrium that we had looked at before, which was slightly better than at 85 MLR. So we've built that pricing in.

Trend is sitting somewhere in the 7% to 8% -- it really depends on the region and the plan. So it's slightly higher in certain costs states where you see higher trend, and it's lower in others. And on top of the trends that we see in those individual markets, generally we've got one or two points on top of that, just to get us back in line where we were prior to 2015.

Okay, got it. And you've brought on new talent in the insurance business, with a lot of experience in health and actuarial analysis. What new findings have you discovered that you didn't previously know, that caused the elevated medical claims frequency from last year?

I don't think there's anything that we have seen that is going to help us go back and understand when you get large claims activity. But what we are looking at, both as part of the evaluation that we did with the consulting firm, as well as with Ed and the new actuarial talent, is, we're continuing to look at ways to get access into analyzed data faster. And come to insights probably a little sooner, which helps us both identify trends earlier, and that also helps us then to consider what the effects are, either positive or negative, on pricing, earlier. So I think those are some of the things that have already come up, and we're looking at ways we can institutionalize that, both internally with the way we handle the data, as well as how do we get data from different sources and look at it a little faster than we do today.

Got it. Thank you.

Paul Ginocchio, Deutsche Bank.

Thanks. Just back on that comment around maybe a tougher macro environment, is there anything beyond sort of this lower change in existing year-to-date and that bubble-bursting [protective of] evaluations here in Silicon Valley? Is there anything else you're seeing that gives you that pause? And then I've got a couple more questions.

Yes, so the indications that I am seeing are particularly on the technology arena and business formation, and across the board in the January change in existing. You know, when I look at January, the activity levels are great in the pipeline for new business. I don't see massive change in the competitive environment. And those are really the cause for pause.

And it sort of goes to the earlier question about net-net, how is the year? I think we're going to have tailwinds as well as headwinds, and it's playing out each and every month, with still a big month, which is March, as far as Q1 goes. So I think that it's just a cautionary environment when I see some reaction in the small businesses. And I want to make sure we're right on top of it.

Great, Burton. What's your exposure to technology overall? And then maybe Silicon Valley specifically? Then I've got two more.

Paul, this is Bill. We don't have any significant increase or significant exposure. But in California and probably in New York, that's where we are seeing some new business formation slow down. So we're just going to be watching carefully. But we don't have any significant component of our business that's overly concentrated in technology.

Okay. And if I kind of heard what you said earlier about choosing not to go fully insured, I'm just trying to understand what percentage of your WSEs or revenue are in those industries that are very price-sensitive, to maybe go to fully insured or raising prices to go to fully insured insurance. Can you give us a rough how many verticals that is, or how many industries, what percentage of WSEs?

Sure, Paul. So I think first point, I just want to make a clarification. All of our programs, all of our plans, are fully insured. So about 40% are what we call guaranteed costs, which is a complete pass-through for the carriers. The remaining 60%, we do have the deductible risk, which gives us both the flexibility on pricing and plan design. So that's -- and it's generally in the larger markets and the larger verticals where you see that 60%. So clearly, California, New York -- those would be the markets that have the deductible component, or the flexible component. It's usually the smaller markets, and depending on the vertical, where you have the guaranteed cost programs.

So the pricing is more geography-based than industry-based?

I think it's a combination of both. We are looking at it vertically based. But plans also have a strong regional component to them, because carriers are different. You get some national carriers, which we have throughout the country, but you also have regional players who can be very strong in particular markets like California or Florida or Texas. So you have to look at those in concert with the particular verticals that they're serving.

Great. And Burton, if I could ask you one more. Just, it looks like the guidance for WSEs is a little bit lower than we have just seen. Are you assuming in that guidance maybe some tighter gates for new clients, to ensure that you don't have insurance revenue volatility? Or is that not the right way to think about it?

Look, I have always pursued growth through profitable business. I think that the nice opportunity I have is to turn the dial towards the profitable verticals in the business, where we are not bumping head to head into anybody, and we can add significant value at the right price. As we have talked about, some of these new products are higher-value and higher priced. And the ability to turn the dial by vertical -- and I mentioned earlier, I'll add two vertically specific products, at least, this year -- gives me the ability to find the right vertical with the right value proposition in the product, at the right price.

So these are very industry-specific. The medical plans are tied directly to those verticals. And I think your point is a good one, which is that I want to growth the business on profitable new clients. And ultimately, what I am interested in is top-line revenue and bottom-line profitability, and delivering it to you guys each and every quarter.

Okay. So with the new Chief Risk Officer, it sounds like you have built in a little of -- well, a little tighter factor when you bring in new clients. Is that safe to assume? Or you are not there yet?

I think that what I would say is, I am getting a tremendous amount of additional visibility on the new clients coming in the door. So you can draw that conclusion. But having Ed at my table, having Ed on the huddles that we do four days a week, and having the direct line -- which frankly, I have had for the last couple of months -- into the risk constructs of our Company, has certainly given me an additional focus on who is coming in the door at the Company.

Yes, Paul, this is Bill. I wouldn't say that it's not something that's new. I'd just say there's just different insights that we're able to get with different experience and different sets of eyes looking at the same issue. So we have always looked at it, but I think we're getting different insights as we look at the risk profiles in the pricing of clients.

Thank you.

Thanks, Paul.

Timothy McHugh, William Blair.

Just one quick one. I wasn't clear, Burton, what you were saying about January, with the change in existing. Were you saying employment trends at existing clients? Or was there something about retention of clients, I guess, overall?

No, it was -- so Tim, the installed base in January -- CIE, which we call Change in Existing, their hiring practices for the month of January, the amount of new employees hired by our existing clients, was off year over year.

Okay. Retention -- there's no big change or something, that you have?

It was about CIE I was talking about.

Okay, thanks.

And by the way, Tim, it was still positive. So don't want to give the impression that there's a major change. It's just enough to scratch my head and say: I need to see February. Which I will get in a few days, and go from there.

Thank you, sir. This concludes today's question-and-answer session, and today's conference. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.