TriNet Group (TNET) Q4 2016 Results - Earnings Call Transcript

| About: TriNet Group, (TNET)
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TriNet Group, Inc. (NYSE:TNET) Q4 2016 Earnings Call February 28, 2017 5:00 PM ET

Executives

Alex Bauer - TriNet Group, Inc.

Burton M. Goldfield - TriNet Group, Inc.

William Porter - TriNet Group, Inc.

Analysts

Tien-Tsin Huang - JPMorgan Securities LLC

Stephen Hardy Sheldon - William Blair & Co. LLC

Kevin McVeigh - Deutsche Bank Securities, Inc.

George K. F. Tong - Piper Jaffray & Co.

David Grossman - Stifel, Nicolaus & Co., Inc.

Operator

Good afternoon, and welcome to the TriNet Group Incorporated Fourth Quarter and Full Year 2016 Conference Call. All participants will be in listen-only mode. Please note this event is being recorded.

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

Alex Bauer - TriNet Group, Inc.

Thank you, operator. Good afternoon, everyone, and welcome to TriNet's 2016 fourth quarter conference call. Joining me today are Burton M. Goldfield, our President and CEO; and Bill Porter, our Chief Financial Officer.

Burton will begin with an overview of our fourth quarter and annual 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 our 2017 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, strategy, or other statements that might be considered forward-looking. These forward-looking statements are inherently subject to risks, uncertainties and assumptions that may cause actual results to differ materially from statements being made today or in the future. Except as maybe 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 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, including our forward outlook for non-GAAP net service revenues, adjusted EBITDA and adjusted net income. For reconciliations of our non-GAAP financial measures to our GAAP financial results, please see the company's earnings release available on our website or through the SEC website. A reconciliation of our non-GAAP forward outlook to the most directly comparable GAAP measures is available on our website.

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

Burton M. Goldfield - TriNet Group, Inc.

Thank you, Alex. I'm pleased with our fourth quarter and fiscal 2016 financial results. We delivered strong growth reflecting healthy contributions from both our professional service revenues and significantly improved insurance service revenues. These results reflect our commitment to profitable growth and providing industry-specific products optimized for our client needs.

In my formal remarks, I will review our fourth quarter and full-year 2016 financial results, highlight some of our 2016 operational accomplishments and finally provide our 2017 outlook.

During the fourth quarter, we grew GAAP revenues 12% year-over-year to $811 million and we grew our net service revenues by 16% year-over-year to $173 million. Professional service revenues increased 7% year-over-year to $114 million and net insurance service revenues increased 40% year-over-year to $59 million. Our strong net insurance service revenues performance is the result of our repricing efforts, claims tracking to our forecast and administrative cost savings in the quarter.

I'm pleased with the progress of our insurance services team has made during the past year under its new leadership. This team is focused on growing our business in a disciplined manner by delivering tailored insurance products and services at competitive prices using a data-driven approach.

Our Q4 GAAP EPS grew 60% year-over-year to $0.32 per share and our Q4 adjusted net income per share exceeded the top end of our guidance by $0.01 at $0.38 per share. We closed the year with a worksite employee count of approximately 338,000, up 4% year-over-year while servicing nearly 14,000 clients.

For 2016, we grew GAAP revenues 15% year-over-year to $3.1 billion and we grew our net service revenues by 18% to $647 million. This revenue growth translated to strong profitability and earnings. We grew GAAP earnings by 93% year-over-year to $0.85 per share and we grew adjusted net income per share by 24% year-over-year to $1.20 per share.

We remain excited about our market opportunity. In the United States, 57 million people work for companies with 500 or fewer employees representing an available market of approximately $90 billion. After excluding those employers with limited operating complexity, we estimate the addressable market for our targeted vertical strategy to be approximately $45 billion. My focus is on continuing the work to drive sustainable, long-term growth for TriNet, to take advantage of this large market opportunity.

HR challenges for small, midsized businesses have never been more complex. The new administration is signaling significant changes to business regulations including a very public discussion around the future of the Affordable Care Act. Additionally, state regulatory frameworks continue to diverge from each other and from the Federal Government. TriNet is well positioned to address these challenges. In 2016 alone, we identified over 3,000 new local, state and federal regulations impacting employment.

Our clients face an increasingly difficult regulatory environment and the burden of compliance for small and midsized businesses is high. For example, SMBs can expect at least one employment practices claim every three years. While 75% to 80% of these claims are merit less, the remediation process is neither painless nor cost free. TriNet's market opportunity is in part driven by the challenge of regulatory compliance in a changing world. TriNet handles this complexity and risk on behalf of each of our nearly 14,000 U.S.-based clients so they can focus on growing their business.

Now more than ever, TriNet's comprehensive bundled solutions offer our clients relief from these challenges across four primary pillars of value.

Number one is a robust technology platform that serves as our HR system of record allowing clients and employees to view HR data and perform HR transactions online and through mobile apps. Number two, HR expertise to help support them on everything from recruiting, on-boarding, termination, compensation design and much more.

Number three, a variety of benefits offerings tailored to fit the client's needs from health and workers' compensation insurance, to retirement products and COBRA administration. And number four, compliance expertise built into our products and services to help clients stay on the right side of employment regulations in all 50 states.

In 2016, we continue to execute against our strategic plan including migrating clients off Ambrose and Accord, two of our legacy platforms on to our common TriNet platform; launching three additional vertical products, TriNet Technology, TriNet Financial Services and TriNet Nonprofit; beta testing a substantial platform upgrade with active client participation; expanding the usage of our mobile app now with 77,000 active users; completing the verticalization of our sales force with national sales leaders by vertical; and finally, investing nearly $53 million into our technology platform and supporting infrastructure.

This is in addition to our focus on enhancing profitability in insurance services and the introduction of client relationship executives to our largest clients. Each of our initiatives drive a combination of new sales, retention and operational excellence. I expect 2017 to be another significant year for our products and platform.

Through our focus and investment, we are committed to both improving our client experience and creating more operational scale by leveraging a common technology platform. The outcome of our efforts are expected to include: first, the launch of our Main Street product targeting verticals such as retail, manufacturing and real estate. This product will offer upgraded capabilities in important areas such as flexible time and attendance functionality, improved management of multiple job classifications and increased payroll flexibility.

Second, the migration of our legacy SOI clients onto the common platform. Third, the delivery of a more intuitive user experience for all clients enabling improved productivity for both online and mobile users. And finally, the release of an API first architecture allowing our platform to integrate more effectively with third-party products, a critical component of our commitment to working with our client as they succeed, grow larger and grow more complex.

By way of priority, we have focused our 2017 roadmap as a logical progression. First, we will improve the usability and interoperability of our products. With the implementation of these changes, we expect a successful SOI migration to the common platform and improve products.

With these enhanced products and the common platform, we'll then turn to the launch of our new Main Street product and the introduction of additional new verticals including our hospitality vertical whose launch date is being adjusted accordingly. While our investment in these initiatives is substantial, the benefits to TriNet from product enhancements and a successful SOI migration are significant.

Upon completion of the migration, we expect to have all of our clients on a single platform with products that enhance the user experience with an opportunity to continue to build operational scale and efficiency.

Verticalization remains a key focus in 2017. In prior quarters, we discussed the early pricing successes of our Life Sciences product. We were happy to see that these successes continued in Q4. We are expecting similar traction in the other verticals. As our new products are being adopted into the verticals, our clients are recognizing additional value yielding better pricing.

We continue to be patient in order to realize growth in volume at the right price. As part of our commitment to our vertical product strategy, starting February 1, all new technology prospects have been quoted solely on the new technology product. On April 1, all new financial services prospects will be quoted solely on the new financial services product. Each of these products have been tailored to the needs of clients in these industries. We look forward to updating you on the success of these products as the year progresses.

Retention of our larger clients will also be a continuing focus in 2017. Our client relationship executives, which we introduced last year, are tasked with owning the business relationship with TriNet's largest clients. Through the expansion of this team, TriNet will become more proactive in anticipating their needs and deepening our partnership with our largest clients.

2017 will also see TriNet continue to enhance the insurance benefits that we make available to our clients and our employees. We expect to further tailor these benefits to our target verticals and the unique needs of each market.

Turning to our sales strategy, during 2016, we enhanced our vertical go-to-market approach by structuring our sales force under national vertical VPs. These VPs have the flexibility to invest in their teams subject to the needs of their specific market. We finished 2016 with 452 quota carrying sales reps. In the beginning of 2017, we rolled out a new sales compensation plan based on annual contract value and revenue attainment. This compares to the prior plan that was focused on worksite employees. We expect our targeted vertical sales organization to create a virtuous cycle.

As our sales teams focus within their verticals, they will gain a richer understanding of the common challenges faced by clients within those verticals. This ongoing feedback will allow us to further tailor our offerings to meet their needs, which will make our product even more relevant and, therefore, attractive to our clients.

As I reflect on 2016, we executed on a number of challenging projects aimed at better positioning our company for long-term growth. In 2017, we'll build all these accomplishments, strengthening our position to sell the right products, to the right clients, at the right price. I'm confident as we execute on these initiatives, TriNet will be positioned to deliver on our revenue and profit targets for 2017.

And with that, I will turn the call over to Bill for his review of our financial performance. Bill?

William Porter - TriNet Group, Inc.

Thank you, Burton. As we review the financials, I will focus on the GAAP and non-GAAP numbers where appropriate.

During the fourth quarter, GAAP revenues increased 11.8% year-over-year to $811.1 million. Net service revenues increased 16.2% year-over-year to $173.1 million. Total WSE count was 337,885, up 4.2% year-over-year and up 1.2% since the end of the third quarter. Professional service revenues for the fourth quarter increased 6.8% year-over-year to $114.3 million. Net insurance service revenues for the fourth quarter increased 40.1% year-over-year to $58.8 million. The increase in net insurance service revenues was the result of our repricing efforts, claims activity trending to our trend forecast and administrative cost savings.

Total adjusted EBITDA for the fourth quarter increased 23.4% year-over-year to $56.4 million compared to $45.7 million during the prior-year period. GAAP net income increased 62.9% year-over-year to $23 million or $0.32 per share compared to $14.1 million or $0.20 per share in the same quarter last year. Adjusted net income increased 21.4% year-over-year to $26.9 million or $0.38 per share compared to $22.2 million or $0.31 per share in the same quarter last year. Our GAAP effective tax rate was 40.3% for the fourth quarter. And our pro forma tax rate was 42.5%.

During the fourth quarter, we generated $66.4 million in operating cash flow and spent $11.7 million on CapEx, representing 6.8% of net service revenues. We spent $27.9 million to repurchase 1.2 million shares of stock during the fourth quarter.

Turning to the full year results for 2016, we grew GAAP revenues 15.1% to $3.1 billion and we grew net service revenues 18.2% or $646.6 million. Total adjusted EBITDA for 2016 increased 23.3% to $186.6 million with an adjusted EBITDA margin of 28.9%, an improvement of 1.2 percentage points versus 2015.

2016 GAAP net income increased 93.7% to $61.4 million or $0.85 per share and adjusted net income increased 22.6% to $86.7 million or $1.20 per share. For the full-year 2016, we generated $144.5 million in operating cash flow and spent $39.7 million in CapEx, or approximately 6% of net service revenues. The increase in CapEx in 2016 was largely the result of our investment in technology.

We closed the year with total debt of $458.9 million, representing a debt to EBITDA ratio of 2.5 times trailing 12 months EBITDA. We finished the year with total cash of $184 million and working capital of $156.8 million.

Turning to our 2017 full-year outlook, I will provide both GAAP and non-GAAP guidance. We forecast GAAP revenues in the range of $3.3 billion to $3.4 billion, which represents year-over-year growth of 7.8% to 11.1%. We expect net service revenues in the range of $705 million to $720 million, which represents year-over-year growth of 9% to 11.4%.

We expect to see WSE volume growth lag overall revenue growth in 2017 as we continue to align products and price as well as complete our platform migration. As we saw in Q4, we expect a higher contribution from insurance revenue throughout 2017, aligning to our historical experience in 2014.

For the year, we expect adjusted EBITDA in the range of $198 million to $208 million, representing an adjusted EBITDA margin of 28% to 29%. We expect GAAP net income in the range of $69 million to $75 million or $0.97 to $1.06 per share, and we expect adjusted net income of $94 million to $100 million or $1.32 to $1.41 per share.

Our 2017 guidance assume a GAAP tax rate of approximately 44% and a pro forma tax rate of approximately 42.5%. Based on our 2017 full-year guidance, we expect our first quarter GAAP revenues in the range of $780 million to $800 million, which represents year-over-year growth of 6.4% to 9.2% and net service revenues in the range of $175 million to $180 million, which represents year-over-year growth of 7.2% to 10.2%.

We expect first quarter adjusted EBITDA in the range of $45 million to $50 million, representing an adjusted EBITDA margin of 26% to 28%. Our first quarter GAAP net income is expected to be in the range of $15 million to $18 million or $0.21 to $0.25 per share and we expect first quarter adjusted net income in the range of $21 million to $24 million or $0.30 to $0.34 per share.

As you recall from last year, we had a number of material weaknesses in our internal controls that we described in our 2015 10-K. While we made significant progress in improving our internal controls environment throughout 2016, we have concluded that we continue to have material weaknesses relating to our internal control or financial reporting.

However, after extensive review and the performance of additional analysis and other procedures, no material adjustments restatements or other revisions for our previously issued financial statements were required.

We are taking specific steps to remediate the material weaknesses that we identified by implementing and enhancing our control procedures. This is a high priority for the company. We would refer you to Item 9A in our 2016 Annual Report on Form 10-K to be filed with the SEC today for more details.

Now I will turn the call back over to Burton.

Burton M. Goldfield - TriNet Group, Inc.

Thank you, Bill. I'm proud of the team and the progress we have made in 2016. I believe that our strong financial performance was the result of our commitment to profitable growth and providing industry-specific solutions.

I'm pleased to welcome Atairos as a long-term investor and strategic partner. Michael Angelakis, Chairman and Chief Executive Officer of Atairos is an asset to our board. I look forward to benefiting from his insights and experience as a successful operator and entrepreneur. It is gratifying to have a TriNet client feel so strongly about the TriNet value proposition that they have decided to make a significant financial commitment.

We have several important initiatives in 2017. As we execute these initiatives, TriNet will be better positioned to serve all of our clients. Our business model is strong with volume, price and insurance all representing levers that allow us to continue driving profitable growth as we take steps to further align our business with the market opportunity. This gives me confidence for 2017 and beyond.

In closing, I want to thank our over 2,500 TriNet colleagues all around the country who work very hard every day in service of our amazing clients.

And with that, I'll turn the call back to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. And our first question comes from Tien-tsin Huang with JPMorgan. Please go ahead.

Tien-Tsin Huang - JPMorgan Securities LLC

Hi. Good afternoon. Thanks for the update. I'll ask about – obviously, a lot of changes going on with the move to the common tech platform and the verticalization including the sales. I'm curious how should we sort of measure certain items. I'm assuming there should be some impact on attrition and retention, higher revenue per WSE. Looks like no margin expansion per se this year, but perhaps as you convert the platform, get some lift there. But maybe could you address some of those topics, just some of the KPIs and how they might get impact your short-term, long-term from the changes? Thank you.

Burton M. Goldfield - TriNet Group, Inc.

Thanks, Tien-tsin. So, I'll start. There is a couple of questions in there, and then I'll turn it over to Bill. I think you've outlined some of the highlights for 2017. Getting to the one common platform is key from my standpoint and getting the additional functionality for the Main Street clients, obviously at that point all additional functionality attributes to all of our customers on that single platform.

Obviously, there's an impact of the medical pricing over the course of the year. They'd have some headwind associated with it. But I believe that the PEPM or the revenue per client is going up. And I believe that the uptake of the new products with the additional functionality creates opportunity for additional revenue.

Tien-Tsin Huang - JPMorgan Securities LLC

How about on the...

Burton M. Goldfield - TriNet Group, Inc.

Go ahead .

Tien-Tsin Huang - JPMorgan Securities LLC

Sorry. I was just going to say, any thoughts on the retention and attrition not only on the clients side, but also on the sales force, retention and attrition?

Burton M. Goldfield - TriNet Group, Inc.

Yeah.

William Porter - TriNet Group, Inc.

Yeah. Tien-tsin, this is Bill.

Tien-Tsin Huang - JPMorgan Securities LLC

Hey, Bill.

William Porter - TriNet Group, Inc.

So, on the retention side, as we generally look and look at our business, we're averaging around 20%. Last year 2016, we were little worse than that and I think as we look forward to 2017, we expect to do slightly better than our historical experience in the majority of the verticals. And as we called out, with SOI migration there's going to be some probably some additional attrition there. And that's where there is a little bit more of a risk. So, we'll manage that carefully throughout 2017, but I think it should benefit us when we get to 2018 with a better client experience and I think improved attrition across all of the verticals.

Tien-Tsin Huang - JPMorgan Securities LLC

Got it. Thank you.

Burton M. Goldfield - TriNet Group, Inc.

Thank you.

Operator

The next question comes from Tim McHugh with William Blair. Please go ahead.

Stephen Hardy Sheldon - William Blair & Co. LLC

Hi, it's Stephen Sheldon for Tim. Thanks for taking our questions. First, I wanted to ask what you're kind of embedding in your guidance for sales and marketing expense in 2017? It's come down quite a bit in the second half of the year. So, I'm wondering how you would expect that to trend as you kind of look through the year.

William Porter - TriNet Group, Inc.

Yeah, Stephen. This is Bill. I do expect that we would see some increase. We are going to continue to invest in our sales force. It's going to be more specific based on how the verticals are coming to market, in vertical products. So, it's not going to be across the board, but I do expect by the end of the year that we should see an increase probably somewhere in mid-to-low double digits in terms of sales force growth, but again, I think we'll be surgical in when those increases happen. And it could vary quarter-to-quarter depending on how the new VP leaders are kind of realigning their sales force.

Stephen Hardy Sheldon - William Blair & Co. LLC

Okay. That's helpful. And then secondarily, kind of, I wanted to know kind of what your specific assumptions are for – if you're looking between growth and net insurance revenue versus kind of professional services, what are you guys kind of embedding for that?

William Porter - TriNet Group, Inc.

Sure. It's a good question. So, historically, if we look back prior to having the additional claims experience, we were running our professional services revenue in the 67% to 65% of total net services revenue. So, as we look at 2017, I think we're going to back that historical average of around two-thirds of our net revenue coming from professional services. We're getting our net insurance contribution come back to the historical level that we saw prior to the claims experience we saw in 2015.

Stephen Hardy Sheldon - William Blair & Co. LLC

Okay. Great. Thank you.

Burton M. Goldfield - TriNet Group, Inc.

Thank you.

Operator

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

Kevin McVeigh - Deutsche Bank Securities, Inc.

Great. Thank you. And thanks for the color. Any thoughts on how WSE growth should trend as we work our way through 2017?

Burton M. Goldfield - TriNet Group, Inc.

Hey, Kevin. What I'd say on WSE growth is long-term, we expect to grow both volume. So, WSE grew both and revenue with this data-driven approach that's really being used by our actuarial team. So, I'd expect double-digit growth in both areas. I think in 2017, obviously, we're not going to have that same level of WSE growth based on our outlook. So, it'll be less than that. I'm not going to give a specific target, but it's not going to be quite double-digits in 2017.

Kevin McVeigh - Deutsche Bank Securities, Inc.

Great. And then, any thoughts on – with all the kind of moving parts around ACA, are you getting any feedback from clients in terms of trying to position for that or is it still too early? Any thoughts on how we're thinking about the ACA act in 2017.

Burton M. Goldfield - TriNet Group, Inc.

Yeah, Kevin. This is Burton.

Kevin McVeigh - Deutsche Bank Securities, Inc.

Hey, Burton.

Burton M. Goldfield - TriNet Group, Inc.

Good to hear from you. So, a couple of points on that. Obviously, complexity and change are good for our business. We have taken this vertical-driven approach and we help our clients through all the changes that occur. We don't have products that are focused on specific laws like ACA. We didn't have a big uplift from ACA because of the large quantity frankly of white-collar workers who already had great benefits. But I see change is being good for our business as people want to focus on growing their business and allowing us to deal with that complexity.

So, nothing precipitous either positive or negative, but a great opportunity for us to be into this client base with the ones that are affected and help them through any changes that might occur.

Kevin McVeigh - Deutsche Bank Securities, Inc.

Thank you so much.

Burton M. Goldfield - TriNet Group, Inc.

Thank you.

Operator

The next question comes from George Tong with Piper Jaffray. Please go ahead.

George K. F. Tong - Piper Jaffray & Co.

Hi. Thanks for taking my questions.

Burton M. Goldfield - TriNet Group, Inc.

Hey, George.

George K. F. Tong - Piper Jaffray & Co.

Can you provide an update on what you're seeing with medical claims frequency and severity trends, some more details there and what those trends may imply for gross margins on a near and intermediate term basis?

William Porter - TriNet Group, Inc.

Sure, George. This is Bill. So, in general, we've seen very consistent MLRs in the 87% to 88% range. As you recall, that's very consistent between what we saw early in the year and it's been consistent in Q4 as well. Where we saw a lot of the improvement is in the fixed cost or the administrative portion of the program, and I expect that to continue into 2017. So, we think we're probably right where we need to be with trend.

Medical trends, as far as we can see, on a national basis is probably running around 7%. It is somewhat unique to each region, but in general and our trend is running very close to that in terms of total medical. And it does vary slightly by the components. Pharmacy is probably running high-single digits. We're seeing run rate medical running in the lower-single digits and the large claims have been subsiding. But in total all part of that medical trend that I just referred to. So, I think it's fairly steady. Our pricing is adjusted to that trend line. And we're continuing to watch it very carefully. I do expect over time that we'll continue to see very competitive pricing as our team is monitoring that claims activity and our pricing accordingly.

George K. F. Tong - Piper Jaffray & Co.

Got it. Very helpful. I wanted to touch a bit about on average professional services revenue per WSE. In the quarter, the average revenue per WSE on the professional side was in the 2% range. As you begin to embark on your verticalization initiative and focus on to these upgraded platforms and provide more value add. How do you envision the average revenue per WSE evolving on the professional side of the business?

William Porter - TriNet Group, Inc.

Sure, George. It's a good observation. So, as we've seen the new products come into the market and our best experience right now is with TriNet Life Sciences, we're continuing to see an approximate 9% improvement in average selling price when we look at clients of the same size who have the new TriNet product versus the legacy product who are in Life Sciences. So, we're expecting hopefully something similar to that in the new or in the rest of the products both financial services and technology, but it's really too early to tell. We don't have enough data at this stage.

As Burton indicated, we're just starting to see 100% of our quotes happening in technology at the end of Q1 and we won't be quoting all of our new business on financial services until the beginning of Q2. So, it'll take us some time to see that come through into the results. But we're getting good feedback on the products and I do expect to see a good uplift as those products get into the market over time and we'll keep you updated with our experience every quarter.

George K. F. Tong - Piper Jaffray & Co.

Very helpful. Thank you.

Burton M. Goldfield - TriNet Group, Inc.

Thank you very much

Operator

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

David Grossman - Stifel, Nicolaus & Co., Inc.

Thank you. Good afternoon. I'm wondering if we go back to the WSE question. Just, if we look at the timing of when the insurance book started to reprice and when you largely completed that effort, it would seem that you would experience more favorable comparisons on the WSE side and the pricing side towards the second half of 2017. Am I understanding that right? Or should we expect that headwind to persist throughout the balance of the year?

Burton M. Goldfield - TriNet Group, Inc.

Yes, David. It's a good question. I think we still see a bit of a headwind. That was an impact to our volume over the course of 2015 and 2016. And I think we're still seeing some of that as we get into 2017. And we're going to continue to refine our pricing, as I mentioned, it is a very data-driven approach that's being used to really analyze what our experience is. And so, I do expect that we'll continue to refine our pricing. And over time, we should see volume pick up, but it is going to be a gradual thing. I don't think it's something that we're going to see immediately.

David Grossman - Stifel, Nicolaus & Co., Inc.

Okay. And did you say, Bill, that the MLR was between 86% and 88% or did I hear that incorrectly?

William Porter - TriNet Group, Inc.

87% to 88%.

David Grossman - Stifel, Nicolaus & Co., Inc.

87% to 88%. Got it. Okay. And then, I guess, Burton, going back to, I think, a question that was asked earlier about the dynamic around the verticalization of your business. In addition to higher revenue per client, are there any other observations you can share with us that you've seen thus far? I know it's early and you really only have one vertical up and running, but, or fully running I should say, is there anything else you can share with us that you've seen thus far as a result to the shift?

Burton M. Goldfield - TriNet Group, Inc.

Yeah, David. Great question. Thanks for asking it. So, there's three aspects to it that are very important to me, David. First is that we're delivering a higher value product that command a higher price. So that's the point that I expect to continue. The early returns are good, but I need a heck of a lot more time to be able to make that blanket statement.

The second is the feedback from the clients and the service team, which is now getting verticalized to make sure that product is dead-on for those clients. Right service model, right pricing, right technology, right programmatic interfaces with third-party software. So, early indications are, we're getting phenomenal feedback. There is a list of additional functionality that's being asked for in the version two of those products, because we're still at version one. And I'm really happy with the feedback and the communications that's coming from the field team that's servicing them through the client to our development and products organization. So that's the second thing.

And then finally from a sales force standpoint, I like the direction things are heading. I love the fact that I've VPs that have their handcuffs off to build their organizations where they want to, of the size they want to, in the markets that they believe they can penetrate. This is not about the geography. It's about getting a percentage of a total vertical. There're some great experiences with some of the reps. Some of them need more time, and are taking little longer with this new approach. And it's around building the network around that industry-specific vertical.

So those are the three things that are important to me, which is great product that we can command a reasonable price for, great feedback so that product gets better and our dev organization builds amazing feature functionality that can't be touched, and finally the overall sales force heading in the right direction with the singularity of leadership that manage those teams and mine the referral networks.

David Grossman - Stifel, Nicolaus & Co., Inc.

Do you have any metrics yet on sales force productivity or is it just too early to benchmark that?

William Porter - TriNet Group, Inc.

If I had them I'd give them to you. I just don't have enough yet.

David Grossman - Stifel, Nicolaus & Co., Inc.

Okay. And just one last one, Bill, can you give us a sense of what the pro forma adjustments look like for 2017, what we should assume for stock-based comp and the other pro forma adjustments?

William Porter - TriNet Group, Inc.

Sure. And actually David that is part of the reconciliation that is posted to our website. So, we can go through those in detail after but they are posted, so you'll be able to see them specifically for all the reconciliations both historical and for the guidance.

David Grossman - Stifel, Nicolaus & Co., Inc.

Okay. Great. Thank you.

William Porter - TriNet Group, Inc.

Thanks, David.

Operator

And this concludes our question-and-answer session for today. Thank you, everyone, for your questions. The conference has now concluded for today. Thank you all for attending today's presentation. And you may now disconnect your lines.

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