TriNet Group Inc (TNET) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to the TriNet Fourth Quarter and Full Year 2020 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Alex Bauer of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to TriNet's 2020 Fourth Quarter Conference Call. Joining me today are Burton Goldfield, our President and CEO; and Kelly Tuminelli, our Chief Financial Officer. Our prepared remarks were prerecorded. Burton will begin with an overview of our fourth quarter operating performance. Kelly will then review our financial results. We'll then open up the call for the Q&A session.

Before we begin, please note that today's discussion will include our 2021 first quarter and full year guidance and other, statements that are not historical in nature, are predictive in nature, or depend upon or refer to future events or conditions such as our expectations, estimates, predictions, strategies, beliefs or other statements that might be considered forward-looking. These forward-looking statements are based on management's current expectations and assumptions that are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict that may cause actual results to differ materially from statements being made today or in the future.

Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock.

In addition, our discussion today will include non-GAAP financial measures, including our forward-looking guidance for net insurance margin, adjusted EBITDA margin and adjusted net income per diluted share. A reconciliations of our non-GAAP financial measures to GAAP financial results, please see our earnings release or our 10-K filing for our fourth quarter and full year of 2020, respectively, both of which are available on our website or through the SEC website. A reconciliation of our non-GAAP forward-looking guidance to the most directly comparable GAAP measures is also available on our website or in our earnings release.

With that, I will turn the call over to Burton for his opening remarks. Burton?

Thank you, Alex. 2020 proved to be the most challenging year of my professional career. It also proved to be a year where TriNet's mission and strategy were especially valued by our customers. We started 2020 by delivering strong financial performance and volume growth in the first quarter. Momentum in our business was strong.

Everything changed with COVID-19 and the subsequent lockdowns. We rapidly adjusted to the new environment and leveraged our deep understanding of the verticals we serve. This knowledge allowed us to quickly address the issues faced by our customers during this very difficult time.

Additionally, a unique program that TriNet created during COVID-19 was the Recovery Credit Program. The Recovery Credit Program is our effort to share with our customers the excess cost savings we generated from underutilized health services, primarily in April. This program has been very well received and provided a significant benefit to our customer base.

Our vertical strategy and customer selection process is intended to build a dynamic, growing customer base. Throughout the pandemic, we have been amazed by the inherent resiliency of our customers who in aggregate actually grew their employee base during the second half of 2020. We highlighted this customer hiring during our Q3 earnings call, and this growth accelerated in the fourth quarter.

Customer hiring has always been a key contributor to our financial model. Our fourth quarter financial performance reflected the contribution from customer hiring and underscored the overall success of our vertical go-to-market strategy.

During the fourth quarter, we grew GAAP total revenues 4% year-over-year to $1.1 billion, while GAAP earnings per share declined 52% year-over-year to $0.32 per share. The decline in our fourth quarter GAAP EPS was in part due to our accrual for the Recovery Credit Program. For the full year, we grew GAAP total revenues 5% year-over-year to $4 billion, and we grew GAAP EPS 34% year-over-year to $3.99 per share.

Finally, we finished the year with approximately 332,000 WSEs, down 2% year-over-year. Sequentially, we grew WSEs 4% during the fourth quarter when compared to the third quarter of 2020. This remarkable fourth quarter growth is attributed to our efforts in service of our customers, the strength and durability of our customers' installed base and the economic support provided by the government. COVID introduced significant volatility in the economy and in the equity markets.

Bolstered by the strength of our business model and customers, we took advantage of the volatility and repurchased $178 million in stock during 2020 at an average price of $53.85 per share.

As we look back over the past year, we are pleased with our execution. We understand the importance of the continued evolution of our service model to increase the overall value to our customers in both good and challenging economic times.

The recent rollout of our Connect 360 service model demonstrates our commitment to always evolve and improve. Standing still with our products and services is not an option as we endeavor to enhance the delivered value of our solution to these amazing customers. Our approach in targeting specific industries through verticalization allows us to define new attributes to our product and service model that will benefit our customer base.

Our focus is on the following industry verticals: technology, financial services, life sciences, professional services, nonprofit and Main Street. These verticals are attractive partners because they are comprised of the most dynamic SMBs in the U.S. economy. Many of the SMBs within these industries combine strong growth prospects with operational complexity and a prioritization around an exceptional employee experience.

For our customers and prospects, TriNet often proves to be a strong partner for solving their unique issues, while offering an attractive benefits solution for their employees. By providing an exceptional bundled PEO solution we deliver HR expertise, risk mitigation, payroll and a differentiated benefits offering. This is all enabled through our industry-leading technology platform.

When the COVID-19 pandemic hit and the economy stalled, TriNet quickly moved into action. We leveraged our team and our scale in service of our customers. We demonstrated that we are vested in their success. We weren't a vendor. We weren't a point solution. We were and remain a company that is uniquely positioned to help SMBs succeed based on the breadth and depth of our relationship.

The 2 most important examples of how we leveraged our team and our scale for the benefit of our customers and SMBs alike were our COVID-19 microsite, a public, single location where we provide our educational updates and outreach and our Recovery Credit Program. With the onset of the pandemic, we quickly launched our COVID-19 TriNet Business & Preparedness Center (sic) [TriNet Business Resiliency & Preparedness Center], which can be found on our homepage and available to all. This site has functioned as an efficient outreach channel where we can provide critical information regarding the CARES Act and PPP loan and loan forgiveness information. And for our customers, we provide alternative health care solutions and guidance through the difficult employee-related choices that they face, such as layoffs versus furloughs. The site provides a broad range of information available to all.

Behind the scenes, our customer service team is assisting our customers through any and all specific issues our customers must address in a timely fashion. In an effort to provide financial support during this difficult period, we created the unique Recovery Credit Program.

As the pandemic took hold, overall health utilization dropped even as incremental COVID-19-related costs increased. Due to the structure of our risk-based health plans, we realized significant excess cost savings, and we had immediate access to those savings during the year. We responded quickly by creating the Recovery Credit Program to ensure a portion of these savings were used for the benefit of our customers.

We believe it was important to get these dollars to our customers when they needed it most. We have demonstrated to our customers that we are an invaluable business partner delivering a level of service typically available only to much larger entities. To me, this defines a partnership where ultimately we play a vital role in helping them to pursue their vision and help them to succeed in rapidly changing business climates.

Once our customer base stabilized after the second quarter, we saw these customers begin to hire at an incredible rate. These SMBs hired 68% more new employees in the second half of 2020 than they did in the second half of 2019. Further, even when layoffs in the second quarter, a negative change in existing is included in the calculation, the outcome was net positive with respect to WSEs. Said another way, our customers actually grew in 2020 versus 2019.

As you recently saw, we launched Connect 360, our effort to further evolve and improve our customer experience. We know that 60% of our customers want to speak directly to a knowledgeable individual versed in the specific issue they needed resolved. 75% of our customers want to reduce the time it takes to get to resolution. Connect 360 is designed to get our HR experts on the line with our customers faster. 2020 has demonstrated that we put our customers at the center of everything we do.

As we beta tested the design of Connect 360, we listened to our customers. We learned from them, and we continued to adjust our service model in accordance with their feedback. We are confident that this evolution of the customer experience will be a long-term positive innovation.

Early in the fourth quarter, we again demonstrated our commitment to putting our customers at the center of everything we do by hosting our first annual TriNet PeopleForce conference. Over a 3-day period, TriNet PeopleForce tackled the key challenges such as business resiliency, diversity, equity and inclusion in the workplace, health care including cost management and employee access, legislative updates and access to government programs and stimulus; and finally, an economic outlook for the small and medium businesses. In post-conference surveying, 98% of the attendees indicated that they would attend again next year. We are excited to build on the success of this first conference.

As we look forward to 2021, we believe that we are well positioned for success, especially as the pandemic subsides. While it remains early in the recovery, we are encouraged by the ongoing distribution of vaccines. And we are optimistic that we will see a gradual improvement in business activity as the year progresses.

Because of the unique circumstances brought on by the pandemic, I want to provide a bit more clarity on our sales efforts and on our installed base. As we noted through 2020, new sales were negatively impacted by the effects of the pandemic. For our field sales force, the quick transition to remote selling was a significant change. This is a team that aspires to be the trusted advisers to our prospects, and the face-to-face interaction had been an important part of the process.

I look forward to the day when our team can spend quality time with the amazing SMBs that are TriNet prospects. For these prospects, the extraordinarily difficult operating environment led business owners to be far more concerned with the front of the house rather than the back of the house. If either one of these disruptions occurred in a single year, it would represent a significant headwind to new sales growth. Having both occur in 2020 created an unprecedented hurdle, which was difficult to mitigate.

On the positive side, the PEO value proposition resonated strongly in 2020 with our customers, prospects and the SMBs more broadly. We, as an industry, demonstrated to SMBs the scale available to them, not just as it relates to benefit pricing and payroll, but a critical consultation and HR support.

As we look to 2021, I am encouraged by several aspects of our business. First, in the face of the pandemic, TriNet was there for our customers, and our efforts have only helped us deepen our relationships. We provided meaningful guidance to our customers during a highly uncertain period, and we created the Recovery Credit Program to help our customers when they needed it most. As we market to new prospects, we highlight that we are more than just a vendor, but a partner they can count on today and over the long term in all economic environments.

Second, I believe we are seeing green shoots in the first quarter. Sales are still down when compared to 2020. However, January is indicating that the gap between new sales and our pre-pandemic experience is beginning to narrow.

One vertical where we are seeing particular strength is technology. In fact, we are expecting new sales in the vertical to grow year-over-year in the first quarter, even in the face of the continuing pandemic in 2021 versus a nonpandemic quarter in Q1 2020. The tech industry remains flush with capital, and we have started to see VCs redeploy that capital.

Looking at our January tech sales according to our collected statistics, over 50% of the new annual contract value in the tech vertical is being derived from companies who are either newly funded startups or early-stage companies who have received an additional round of funding. This investment activity suggests a strong 2021 for the tech industry, and our January performance highlights that we continue to build a dynamic durable installed base.

Our team is focused and energized, and we are working to deliver strong year-over-year new sales. I look forward to updating you on our first quarter progress in a couple of months. Through our disciplined approach to customer selection, best displayed by our vertical strategy, our installed base has weathered the pandemic far better than we could have expected. We are more committed than ever to serving this installed base while growing it further throughout 2021.

With that, let me pass the call over to Kelly to discuss our financial results. Kelly?

Thank you, Burton. First, I'll review our fourth quarter and full year financial results before providing 2021 guidance.

Overall, I'm very pleased with the results we accomplished during the fourth quarter, particularly given the backdrop of the COVID-19 pandemic. During the fourth quarter, GAAP total revenues increased 4% year-over-year, and professional service revenues grew 3% year-over-year. GAAP total revenues outperformed the top end of our guidance range by 2 points, as our WSE volume outperformed as our clients grew their employee base and the mix of our WSEs, which remained at nearly 80% white-collar workers, drove 3 points of higher benefit participation over fourth quarter 2019 along with the associated revenues. This outperformance was partly offset by a 3% decline in average WSEs to 327,000 in addition to a $24 million accrual for the Recovery Credit Program, which reduced our revenue by 2%.

Net service revenues in the quarter decreased 2% year-over-year, in line with fourth quarter's lower average WSE volume, outperforming the top end of our guidance range by 10 points. For the fourth quarter, we delivered a net insurance margin of 8.7% versus our Q4 guided range of 4% to 8%. In the quarter, our health utilization approached a more normalized level by the end of December, with direct COVID costs representing approximately 4% of total claims costs, offsetting what would have otherwise been favorability in utilization. This early quarter experience was slightly favorable to the expectation discussed on our third quarter call. In addition, our workers' compensation portfolio performed well, adding an incremental 1% to this quarter's net insurance margin due to a $9 million contribution from prior period development.

In the fourth quarter, we delivered an adjusted EBITDA margin of 25%, 4 points above the top end of our guidance, largely driven by the volume growth in insurance capability. Partly offsetting our very favorable net service revenues, we had between $20 million and $25 million of expenses that we wouldn't anticipate recurring in 2021. These incremental expenses came from a number of places, including settling and accruing for the audits of open payroll tax years with taxing authorities, expenses associated with data and technology automation, some COVID-related and business reorganization restructuring expenses, as well as incremental consulting spend related to our growth strategy.

We spent $43 million to repurchase approximately 619,000 shares of stock during the fourth quarter. Our fourth quarter effective tax rate was 16%. In the quarter, the rate was lower due to the tax treatment of employee equity compensation, which we now recognize the tax benefit when vested.

GAAP net income per share decreased 52% to $0.32 compared to $0.68 per share in the same quarter last year, but exceeded the top end of our guidance by $0.04. Just a reminder that the continued accrual for the Recovery Credit Program reduced fourth quarter EPS by $0.27 a share. And our results were also dampened by the fourth quarter expenses that we would not anticipate recurring, which I mentioned a moment ago. Adjusted net income per share decreased 48% to $0.44 compared to $0.84 per share in the same quarter last year, which exceeded the top end of guidance by $0.12.

Turning to our 2020 full year financial results. Our performance was significantly impacted by COVID-19 and our response to the pandemic. On the downside, as Burton discussed, the pandemic negatively affected new sales and WSE retention, which impacted our volume and revenue growth. But positive to our results, the pandemic also changed how WSEs utilized health services, which resulted in significant insurance cost savings.

In response to the significant insurance cost savings, TriNet created and accrued the Recovery Credit Program. Beginning in the second and continuing through the third and fourth quarters, we accrued $128 million in total for the Recovery Credit Program, representing a 3% impact or headwind to 2020 GAAP total revenue growth. Despite these headwinds to revenue growth, in 2020, we grew GAAP total revenues 5% to $4 billion, and we grew net service revenues by 14% year-over-year to $1.1 billion.

Even after accruing for the Recovery Credit Program, the 2020 net insurance margin was 14.6%. For 2020, the broad underutilization of health care services by WSEs since the onset of the pandemic resulted in insurance cost savings remaining lower than forecast and driving net insurance margin higher than expected.

Total adjusted EBITDA increased 9% to $468 million with an adjusted EBITDA margin of 44%. Our 2020 GAAP effective tax rate was 24%, benefiting from timing differences and recognizing tax expense on equity compensation. GAAP net income and adjusted net income both increased 28% to $272 million or $3.99 per share, and $303 million or $4.44 per share, respectively.

Finally, we spent $178 million in 2020 to repurchase approximately 3.3 million shares of stock. As of December 31, 2020, we still had $358 million available under our current authorization.

Turning to our 2021 first quarter and full year outlook. I will provide both GAAP and non-GAAP guidance.

Before I provide guidance, I would like to share a few thoughts on the current state of the capital markets and the implications for TriNet. We believe the current capital markets remain historically accommodative and require that we opportunistically examine the use of more permanent longer-duration debt capital within our capital structure. While shifting to longer-term capital may slightly reduce our earnings per share, it could create an efficient avenue to raise financing for growth initiatives such as M&A as well as other corporate purposes, as well as become a hedge against potential future interest rate increases.

During the fourth quarter, we had repaid our outstanding borrowings under the credit facility, so our current capital structure includes a secured term loan A, of which $370 million remains outstanding. The term loan and our undrawn $250 million secured credit facility both mature in June of 2023.

As I mentioned last quarter, our priorities for capital deployment are: first, organic growth, which we're seeing traction given the signs the pandemic will ease in 2021 and beyond. Second, acquisitions, we will continue to pursue acquisitions that are complementary to our current focus, such as PEOs that are in attractive geographies or markets, or technology that could enhance our business model. And third, share repurchase, first to offset dilution, then opportunistically as we evaluate the best avenues for capital against growth versus efficiency. We will continue to keep these priorities in mind as we evaluate our market opportunities.

Now turning to guidance. Both the high end and low end of our guidance is informed by how we think the COVID-19 pandemic vaccination efforts and economic recovery will play out over the course of the year. The high end of guidance broadly assumes a return to economic normalization earlier in the year, including a recovery in new sales to pre-pandemic levels, continued growth in the installed base, and reduced direct COVID costs, offset by a recovery in health utilization with some delayed or deferred services being made up later in the year.

The low end of guidance broadly assumes the return to economic normalization occurs later in the third quarter with direct COVID costs remaining elevated, while we see a broad rebound in health utilization as both providers and the [users] become more comfortable utilizing health services during the pandemic. Neither our high or low scenarios assume a shutdown of the magnitude experienced in 2020 that both suppressed health utilization and drove unemployment, nor do they assume a significant bounce back in health care utilization to make up for the procedures avoided during 2020.

For our pro forma tax rate, we continue to assume 25.5% given our current expectation of our state rates. Finally, given the acceleration of our share repurchases in 2020, our full year 2021 forecast assumes approximately 67 million diluted shares.

For the first quarter of 2021, we expect GAAP revenue year-over-year growth of 2% to 4% and professional service revenue to be in the range of down 4% to down 3% year-over-year, accounting for the lower WSE starting base at the beginning of the year versus the beginning of first quarter 2020. In the quarter, we expect to accrue approximately 1% of revenue for our Recovery Credit Program.

Regarding net insurance margin, we're forecasting a Q1 margin of between 12.5% to 14.5%. Historically, the first quarter is a seasonally strong quarter. We do expect continued direct COVID cost plus a return to a more normalized health care utilization, but do anticipate the utilization numbers to start low and increase throughout 2021 as the COVID pandemic abates.

We're forecasting our Q1 2021 adjusted EBITDA margin to be in the range of 44% to 48%. We expect Q1 GAAP earnings per share to be in the range of $1.10 to $1.34 per share or down 16% to up 2% year-over-year. And we expect adjusted earnings per share to be in the range of $1.16 to $1.39 per share or down 18% to down 1%.

For our full year 2021 guidance, we're forecasting year-over-year GAAP revenue growth to be 8% to 11% and professional service revenue growth to be between 6% and 8% year-over-year as we grow throughout the year. Given the dynamics we articulated earlier, we expect our 2021 net insurance margin to be in the range of 10% to 11%.

Our full year '20 adjusted EBITDA margin is expected to be in a very strong range of 37% to 40%. GAAP earnings per share are expected to be in the range of $2.79 to $3.31 or down 30% to 17% year-over-year, with adjusted net income per share expected to be in the range of $3.35 to $3.90 or down 25% to down 12% year-over-year, both down due to the extremely favorable 2020 that benefited from the overall underutilization of health care. Please note that our adjusted EBITDA margin and earnings per share guidance ranges do not reflect any potential changes to our current capital structure.

With that, I will turn the call to Burton for his closing remarks. Burton?

Thank you, Kelly. I am proud of the entire TriNet team and their efforts to rapidly adjust to the challenging environment created by the pandemic.

Throughout the past year, we demonstrated the strength of our vertical strategy and the value proposition we deliver to SMBs. Our customer selection and our efforts to deepen our relationship with these SMBs allowed us to deliver sequential volume growth in the fourth quarter as we benefited from their robust hiring activity. Our customers are continuing to hire, and we are seeing promising signs in the quarter. Our customers are continuing to hire, and we are seeing promising signs in the current quarter with regard to new sales, especially in the tech vertical, which remains strong.

We are encouraged by the rollout of the vaccinations and remain optimistic that we will see a gradual improvement in the business environment as the year unfolds. In the meantime, we will continue to do what we do best: leveling the playing field for SMBs with regard to superior HR services, allowing them to attract and retain the right talent and grow their businesses. Operator?

(Operator Instructions) Our first question comes from Tien-Tsin Huang with JPMorgan.

Really appreciate all the details you're giving here in the prepared remarks. I want to ask on the Recovery Credit Program, of course, just your thinking here in terms of ROI and the impact to the P&L and KPIs like churn. Update on visibility here, can you give us a little bit more on the ROI that you're expecting? Can you hear me?

Yes, Tien-Tsin. This is Burton, and thanks for the question.

I'm really proud of this program. We're very much investing in our customers' success, and their success is our success. And we hope by providing this stimulus when they need it most, they will continue to prosper and grow even in this environment.

So we have 4 different cohorts, as you're aware. We completed the first cohort, finalizing the second, and communicating with the third. So the bottom line is the first cohort was very positive, exceeded our expectations. And the others are coming up.

I think ultimately what we're trying to do is make it clear that we are unique in the way we're approaching this problem, and that we are part of their success. So that we want to differentiate ourselves. It's a phenomenal model. And we've already demonstrated our success through the vertical strategy. And this was one more example where we could use that recovery credit to show them that we are in this with them alongside of them, as a true partner as opposed to a vendor.

Yes. No, it's very smart. It's just going to be fun tracking it.

As my follow-up then for you, Burton, just on the sales. I appreciate all the -- again, the information you gave there, the tech sales being good.

So just thinking how the recovery in general of new sales might shape up, do you feel like there's some pent-up demand? And is it just a matter of getting through the vaccine and getting to a new rhythm around sales? I'm just curious how you're thinking about what that recovery might look like for the second half of the year.

No, that's a great question. So I'm going to take it 2 ways.

First, I'm encouraged by new sales performance. We said it in the prepared remarks. We're seeing strength across the verticals and particularly tech, which you just mentioned.

The performance relative to the second and third and fourth quarters is seeing improvement, but not as much as I'd like it to be. However, as you know, the year-over-year comparisons get a lot easier Q2 and on because they're all post-COVID-19. So I expect relatively to have significant improvement.

But to your question of how the economy is performing, what I would go back to is this technology vertical. We're seeing strong funding in the vertical.

And one statistic I'll give you, Tien-Tsin, is 50% of the net new ACV we generated in January in the tech vertical is either brand new start-ups or companies receiving an additional round of funding. So they got a round of funding, they're going to grow, and they came to TriNet as their partner. So there are segments of the economy that are doing really well, and I am expecting that if we can get post vaccine, the economy, in general, will do well, particularly in the verticals that we're serving.

Yes. I hope that is the case.

The next question is from Kevin McVeigh with Crédit Suisse.

Great. I wanted -- could you give us a sense of -- because the credit seem to help in a lot of different ways. What type of retention are you thinking about as we work our way through the year '21? And how does that kind of correlate to 2020 and maybe more historical trends?

I definitely appreciate the question. As we're looking at retention, and we said '21. I'll comment on 2020 for one. It's been the best retention year that TriNet really has ever had. So we're looking at retention in 2021 in a very good place as well, just given the fact that we have the recovery credit and we're aligning with our customers. As you know, we accrued $128 million so far, and it just puts us in a really good spot for retention for the year.

That's helpful. And then Kelly or Burton, the onetime items kind of the data technology, the restructuring, should we expect some cost savings from that going forward? And is there a way to think about what that would be?

The way we think about it, and we took the fourth quarter as an opportunity to invest in a few different things: technology enhancements, other process improvements as well as our go-to-market strategy. And while I view those costs as onetime in nature, and really as we look forward, we expect OpEx growth just in general in the line that we saw and investing in things like our Connect 360 program. And we'd just grow OpEx in the same way that you (inaudible).

The next question is from Andrew Nicholas with William Blair.

I wanted to start with a little bit more detail on the Connect 360 rollout. I'm wondering if you could speak to some of the initial feedback you've gotten from clients on the change. I think this is something you started to roll out late last year in certain markets. And then relatedly, kind of longer term, what that shift in service model could mean for TriNet in terms of driving scale and potentially stronger profitability?

So Andrew, this is Burton. Good question. So Connect 360 is about evolving the service model to serve our customers in the way that they want to be serviced. You are correct. We launched the beta version back in November. We learned from the beta version by listening to the customers' feedback, and we made changes where we needed it to be.

Ultimately, it's all about servicing these customers. And given our performance throughout the pandemic, I believe we built a reservoir of goodwill and trust with these customers. Ultimately, we want to be able to add incremental services and evolve the model, so that we can serve a broad range of customers within the verticals that we're serving. But we are never going to sit still. We are always going to be evolving and enhancing our service model, our technology and our offerings around insurance, et cetera.

So this was one example of that. We took this year with the pandemic to work on projects like this. And we are excited about where it ultimately takes us, using that scale that you just mentioned, in service of these customers.

Got it. Makes sense. And then for my follow-up, we've seen with the new year some pretty major players move into the pooled employer market for 401(k) plan. I think some have been noting some really strong initial growth. So I'm just curious what impacts that could have, if any, on your business to date? And then how you'd expect kind of that change in regulation to impact the PEO industry broadly going forward? I'm just kind of wondering if it removes one aspect of the PEO value prop, or if it's not a big enough driver of new business to really move the needle?

We have good participation in our 401(k) program, and it's nice that there's alternatives out there. It's not going to move the needle from a revenue standpoint, but the integration of the 401(k) program into our offering has been well received. It's a very low cost program, and it gives the employees an option that they did not have being part of our plan. If other plans come up, we're perfectly happy with them using those plans as well.

The next question is from David Grossman with Stifel.

Burton, maybe we could just circle back to the comments you made about the acceleration of hiring in the base and some of the statistics that you gave us. And just to level set, I think you said that if you back out the clients that left during the year, in total, the base grew year-over-year in '20 versus '19. Did I hear that right? Or am I getting that wrong?

That is correct. So our clients that are still with us grew between '19 and '20. That is absolutely correct.

And overall if you look at the total book, there was dramatic growth in the second half of the year over the second half of 2019. And David, that's the story of the quarter from my standpoint. We did a lot of great things, but I think the customer selection, the vertical strategy and the performance of this group of clients is -- was fantastic.

And do you have any sense for -- I know it's really hard because it's such a bizarre year. But how much of it was the kind of the cessation of hiring, furloughing and all that stuff that happened at the front end of the pandemic. And then combined with the stimulus, I mean are you able at all to share it out what's fundamental strength versus just timing and the cyclical factors that impacted the year?

I spend a lot of time on it. That's why I wanted to give you color around the technology vertical, which I have the deep, deep telemetry into, and the new customer formation or new company formation. I also dug into the follow-on rounds of funding of existing tech companies that then subsequently became TriNet customers, but the hiring was broad-based across all of our verticals.

So I would say a lot of it has to do with the change in customer selection over the last couple of years. And the type -- even in Main Street, the type of Main Street customers we're taking on today is very different than what we took on 4 years ago.

But I'll let Kelly take a shot at it. That's sort of -- you're on the key question. These are great clients. And there -- it's just a pleasure to support them because they're fighting like hell.

Yes. The only color I'd add to that is the strongest verticals in the quarter were life sciences, technology, Main Street and professional services. To Burton's point, on a full year basis, any of the reductions or layoffs were more than offset in total by the hiring in the second half. The only vertical that was down on a full year basis is Main Street.

Okay. And that's -- when you say down, you mean down on this adjusted basis, right?

Down from a hiring perspective, so they laid off more in the second quarter than they rehired in the second half. But all other verticals, on a full year basis, were up.

Got it. Okay. Great. Thank you for that incremental color. And then, Burton, you decided to make a change in the sales organization late last year. Perhaps you could expand on what areas you think you can drive the most improvement with that change? Is it WSE growth? Is it revenue per WSE? Is it geographic? Just trying to get a better sense of what you're hoping to accomplish with that move.

Sure. So I believe and you've heard me say it for years, David, this is a large underpenetrated market where we believe that we can add tremendous value to a select set of verticals and industries. And I want to capture a significant portion of those, so I continue to evolve the sales and go-to-market model to be more effective at capturing that market share.

So obviously, efficiency is an issue, but at the end of the day, I want to make sure that we're capturing a significant share of the targeted market in, sot its verticals and then its geographies. And I'm in the middle of making some changes. I'm seeing some great candidates, but ultimately I don't feel a lot of pressure to close out the leader because I have an interim leader doing a great job, who's been here for 9 years.

I have a great CX team and retention is good. I have a great customer base that's moving forward. And I'm making some of the changes that I believe are necessary to emerge with a larger capacity or a larger ability to capture these specific clients that I'm looking for.

And do you want to point our eyes at any changes that will be forthcoming over the course of the year? Or is there nothing specific you want to highlight?

Look, you'll hear about some of the changes, but think about it in terms of a tighter focus on the industries that we covet. Think about it as segmentation in terms of the size of the customers and the way we approach those customers from a size standpoint. And think about it from a very targeted set of geographies that we believe are birthright because the scale in those geographies, particularly as it relates to the medical insurance, is a very important part of using scale in service of those customers.

Got it. Okay. Thanks for that color. That's very helpful.

No problem.

And then I guess just one last question, if I could sneak it in, is what is the likelihood -- I understand the dynamic behind the genesis of the credit. But I'm just wondering what's the likelihood that a Recovery Credit Program could be embedded in the model as we -- even after we migrate to a more normalized economic and health care utilization environment. Is that possible? Do you want to do that? And I guess just a corollary to that question is how should we think of the new normal in terms of what the target insurance margin should be, once kind of all the dust settles?

It's a great question. And what I'd say is that anything I can do to show our partnership side by side with these small and medium businesses is something I'd consider. This was announced as a onetime credit program, but I'm seeing innovation out of my team and looking at what the next opportunity is for us to show, not talk about, but show what the partnership looks like in the subsequent years.

Got it. And then just in terms of the targeted insurance margin, it's been like a bouncing ball with all the volatility in the market. So just curious, do you have a thought on -- if we think of a normalized insurance margin, any thoughts about that?

Yes. I'll take that one. I stated in our guidance that while we expect our first quarter margin to be higher, we do expect a full year to be in the 10% to 11% range. And I believe that's an appropriate target for net insurance margin to cover our costs, given it's a co-employment relationship in our single-employer plan.

All right. So when you're thinking, Kelly, beyond 2021, which is a very noisy year, is that -- 10 to 11 is a good number to think about going forward beyond it?

It's a good range, and I think it will help us grow as well.

The next question is from Sam England with Berenberg.

The first one, you touched on capital allocation. Could you talk a bit more about some of the potential areas of internal investment opportunity that you see going forward? And you mentioned that, is that technology? Is that adding more people on the business development side? Where do you think the most internal investment would be needed?

Yes. Appreciate the question. And I really did talk about a variety of things around capital allocation in the past and today as well. Just to remind you, we will continue to invest in our business for growth. That will include all the things that you mentioned, both making sure we've got the right sales force there as well as the right processes from an M&A perspective. And that leads into our second priority, which is M&A. And then lastly, we will repurchase stock opportunistically. But as I mentioned in the guidance, we're assuming 67 million shares outstanding.

Okay. Great. And you sort of answered it, but the next question, I just wondered what the current M&A environment looks like? Are you seeing a decent pipeline of potential opportunities now? You've talked more about doing sort of tack-on M&A rather than anything larger, but what's the environment like at the moment?

Look, M&A remains part of this long-term growth strategy. You saw with Little Bird, while not a large deal, that we will acquire companies that fit our broader vertical strategy. And we're continuing to look at targets, whether they're PEOs and verticals or geographies that were attractive to us, and frankly other technology that we may acquire over time.

It goes a little bit back to what I was saying to David. I want to be innovative in terms of servicing this dynamic customer base when the economy, first of all, recovers, but it will inexorably change as we move forward.

This concludes our question-and-answer session, and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.