TriNet Earnings: Revenue Misses the Mark Amid Hiring Slowdown, but Margins Surprise to the Upside

Narrow-moat TriNet TNET reported mixed third-quarter results, with top-line growth falling short of our expectation and guidance but profitability exceeding our forecast due to a better-than-expected insurance cost ratio. Following the incorporation of these results, we have trimmed our full-year revenue growth forecast to flat year on year, down from our previous expectation of 2%. Nonetheless, our longer-term forecast and $145 fair value estimate are intact, and the shares continue to screen as attractive, trading at a 25% discount to our valuation.

TriNet is suffering from cyclical labor market weakness exacerbated by its heavy skew to the small and medium business technology sector, which has curbed hiring and shrunk workforces amid tough economic conditions and tighter access to credit. Nonetheless, we believe attractive industry tailwinds, including rising regulatory complexity and increasingly dispersed workforces, will support a recovery to mid-single-digit average annual worksite employee growth as economic conditions improve. We assume TriNet can achieve a compound annual growth rate of 6% over the five years to 2027, paired with gradually deteriorating operating margins as the firm ramps up investment in product innovation, platform consolidation, and sales and marketing efforts.

Third-quarter revenue declined 2% year over year due to decelerating employment growth and lower health insurance plan participation, partly offset by like-for-like pricing and uplift from human resources cloud services revenue. This result came in below management’s guidance of negative 1% growth at the low end and our forecast of 1% growth. The headwinds were particularly strong in the firm’s core technology vertical, with some relief from positive hiring activity in the life sciences, financial services, and Main Street sectors.