TriNet Group Inc

NYSE:TNET

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon, and welcome to the TriNet Fourth Quarter and Full Year 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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.

[Alex Bauer, Executive Director of IR]

Thank you, operator. Good afternoon, everyone, and welcome to TriNet’s 2020 fourth quarter conference call. Joining me today are Burton M. 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 or predictive in nature or depend upon or refer to future events or conditions such as our expectations, estimates, predictions, strategies, beliefs, or other statements that might be considered forward-looking. These forward-looking statements are based on management’s current expectations and assumptions, and are inherently subject to risks, uncertainties and changes in circumstances that are difficult to predict, and that may cause actual results to differ materially from statements being made today or in the future. Except as may be required by law, we do not undertake to update any of these statements in light of new information, future events or otherwise. We encourage you to review our most recent public filings with the SEC, including our 10-K and 10-Q filings for a more detailed discussion of the risks, uncertainties and changes in circumstances that may affect our future results or the market price of our stock.

And 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 our GAAP financial results, please see our earnings release or our Form 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?

[Burton Goldfield, President & CEO]

Thank you, Alex. 2020 proved to be the most challenging year of my professional career. It also proved to be a year we're trying its 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 were 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 the 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 four percent 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 finish the year with approximately 332,000 WSCs, down 2% year over year.

Sequentially, we grew WSCs 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 roll out 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 mainstream. These verticals are attractive partners because they are comprised of the most dynamic SMBs in the US economy. Many of the SMBs within these industries combined strong growth prospects with operational complexity and a prioritization around an exceptional employee experience.

For our customers and prospects TriNet it 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 BPO 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 SMB succeed based on the breadth and depth of our relationship. The two most important examples of how we leveraged our team and our scale for the benefit of our customers and SMBs alike where our COVID-19 microsite of 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 Business and Preparedness Center which can be found on our home page 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 healthcare 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 and negative change in existing is included in the calculation the outcome was net positive with respect to WSCs. 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 this 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 tested the design of Connect 360 we listened to our customers. We learn from them and we continue 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 People Force Conference over a three day period TriNet people force tackled the key challenges such as business resiliency diversity equity inclusion in the workplace healthcare including cost management and employee access and legislative updates and access to government programs and stimulus and finally an economic outlook for the small and medium businesses.

In post conference serving 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 SMB that are TriNet prospects. For these prospects extraordinarily difficult operating environment business owners to be far more concerned with the front of the house rather than the back in 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 occurred 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 at 2021 I am encouraged by several aspects of our business. First, in the phase 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 the 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 phase of the continuing pandemic in 2021 versus a non-pandemic quarter in Q1 2020. The tech industry remains flush with capital and we have started to see these seas 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 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?

[Kelly Tuminelli, CFO]

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 two points as our WSC volume outperformed as our clients grew their employee base and the mix of our WSCs, which remained at nearly 80% with COVID [ph] workers served three points of higher benefit participation over first quarter 2019 along with the associated revenues.

This outperformance was partly offset by a 3% decline in average WSCs 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 quarters’ lower average WSC volume outperforming the top end of our guidance range by 10 points. For the first 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 and utilization. This early quarter experience with slightly favorable to the expectation discussed on our third quarter call. In addition our worker's compensation portfolio performed well adding an incremental 1% to this quarter's net insurance margin to $239 million contribution from prior period developments.

In the first quarter we delivered an adjusted EBITDA margin of 25%, 4 points above the top end of our guidance largely driven by the volume growth and insurance severability. 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 over 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 at employee equity compensation which we now recognize the tax benefit invested.

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 recovered 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 WSC retention which impacted our volume and revenue growth. The positive to our results, the pandemic also changed how WSC’s utilized health services which resulted in significant insurance cost savings.

In response to the significant insurance cost savings trying to create an accrued recovery credit program beginning in the second and continuing through the third and fourth quarter as 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 to 2020 net insurance margin was 14.6% for 2020 the broad underutilization of healthcare services by WSC 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 in 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 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 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 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 our 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 cost offset by a recovery and 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 hospitalization as both providers of USC become more comfortable utilizing health services during the pandemic. Neither our high or low scenarios assume shutdown at the magnitude experienced in 2020 but both suppressed health utilization and derived 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 revenues to be in the range of down 4% to down 3% year-over-year accounting for the lower WSC 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 between 12.5% to 14.5%. Historically the first quarter is a seasonally strong quarter. We do expect continued direct COVID costs 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 a 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 2020 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 healthcare. 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?

[Burton Goldfield, President & CEO]

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 blah, blah, blah.

Our customers are continuing to hire and we're seeing promising signs in the current quarter with regard to new sales especially in the tech vertical which remain 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]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tien-Tsin Huang with JPMorgan. Please go ahead.

[Tien-Tsin Huang, JPMorgan]

Thank you so much. I really appreciate the all the details giving on the prepared remarks. I wanted to ask on the recovery credit program of course just you're 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?

[Burton Goldfield, President & CEO]

Yeah Tien-Tsin, this is Burton and thanks for the question. I'm really proud of this program we are very much invested in our customer’s 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 which you are 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 making 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're in this with them alongside of them as a true partner as opposed to a vendor.

[Tien-Tsin Huang, JPMorgan]

Yes, it's very, very smart it was going to fun tracking it, as my follow-up then for you Burton, just on the sales I appreciate again the information you gave there. The tech sale has been good so just thinking how the recovery in general of new sales might shape up, you feel like there's some pent-up demand and then just a matter of getting to the COVID vaccine and getting to a new rhythm around sales. I'm just curious how you're thinking about what that recovery might look like -- second half of the year.

[Burton Goldfield, President & CEO]

No. That's a great question. So I'm going to take it two 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 we're 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 due to 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 startups or companies receiving an additional round of funding. So they've 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.

[Tien-Tsin Huang, JPMorgan]

Yeah. Hope that is the case. Thanks for the update.

[Operator]

The next question is from Kevin McVeigh with Credit Suisse. Please go ahead.

[Kevin McVeigh, Credit Suisse]

Great. Thanks so much. And thanks for all the details. Hey, I'm wondering, could you give us a sense of because to credit we can assume to help with a lot of different ways. What type of retention were you thinking about as we work our way through the year 2021 and how did that kind of correlate to 2020 and maybe more historical trends?

[Burton Goldfield, President & CEO]

I definitely appreciate the question. As we’re looking at retention into 2021, 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 and in a very good place as well. Just given the fact that we have the recovery credit and we're aligning with our customers and we approved a $128 million so far. And it just puts us in a really good spot for retention for the year.

[Kevin McVeigh, Credit Suisse]

It’s helpful. I mean Kelly or Burton, the one-time items kind of the data technology, the restructuring, should we expect some cost savings from that going forward? And is there any way to think about what that would be?

[Burton Goldfield, President & CEO]

The way we think about it, I mean 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 process one time in nature, I really as we look forward with best OpEx growth just in general in the lines that we saw and investing in things like our Connect 360 program and which is grow up as in the same way that you grow.

[Kevin McVeigh, Credit Suisse]

Thank you very much.

[Operator]

Your next question is from Andrew Nicholas with William Blair. Please go ahead.

[Andrew Nicholas, William Blair]

Hi. Good afternoon. 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 rollout late last year in certain markets and then relatedly kind of longer term what that shift in service model could mean for China in terms of driving scale and potentially stronger profitability?

[Burton Goldfield, President & CEO]

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've 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 ensuring success. This is one example of that. We took the year with the pandemic to work on projects like this and we’re excited about where it ultimately takes us using that scale that you just mentioned in service of these customers.

[Andrew Nicholas, William Blair]

Got it. It makes sense. And then into my follow up you seem the New Year some pretty major players move into the pool employer market for 401(k) plan. I think some have been noting some really strong initial growth. So I'm just curious what impacts test have had if any on your business today and then how do you expect kind of that change in regulation to impact the industry broadly going forward and just kind of wondering if it removes one aspect of the value frac or it’s not a big enough driver of new business to really move the needle.

[Burton Goldfield, President & CEO]

We have good participation in our 401(k) program and it's nice if there is alternatives out there. It's not going to move the needle from a revenue standpoint. But the integration of the 401(k) 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 been part of our plan. If other plans come up we're perfectly happy with them using those plans as well.

[Operator]

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

[David Grossman, Stifel]

Hey, Burton. Maybe we can 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 2020 versus 2019 did I hear that or am I getting that wrong.

[Burton Goldfield, President & CEO]

No. That is correct. So our clients that are still with us grew between 2019 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 was fantastic.

[David Grossman, Stifel]

And do you have any sense for you know 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 impact the year?

[Burton Goldfield, President & CEO]

I spent a lot of time on it. That's why I wanted to give you a color around the technology vertical which I have a deep, deep telemetry into and the new customer formation or new company formation. I also dug in to the follow on rounds of funding of existing tech companies, then subsequently became trying to 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 four years ago. But I'll let Kelly take a shot at it that 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.

[Kelly Tuminelli, CFO]

Yeah. 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.

[David Grossman, Stifel]

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

[Burton Goldfield, President & CEO]

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.

[David Grossman, Stifel]

Got it. Okay. Great. Thank you for the 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 WSC growth? Is it revenue per WSC? Is it geographic? Just trying to get a better sense of what you're hoping to accomplish with that move.

[Burton Goldfield, President & CEO]

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, so it's 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 nine 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.

[David Grossman, Stifel]

And do you want to point our eyes at any changes that will be forthcoming over the course of the year or is there something specific you want to highlight?

[Burton Goldfield, President & CEO]

You will hear about some of the changes but think about it -- your focus on the industries that we covet. Think about it is 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 our birth right 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.

[David Grossman, Stifel]

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

[Burton Goldfield, President & CEO]

No prob.

[David Grossman, Stifel]

Thank you. Just one last question if I could sneak it in. What is the likelihood -- I understand the dynamic, the credit but I'm just wondering what's the likelihood that the recovery credit program could be embedded in the model as we -- even after we've migrated to a more normalized economic and healthcare 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.

[Burton Goldfield, President & CEO]

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

[David Grossman, Stifel]

Got it. And then just in terms of the targeted insurance margin you know it's been bouncing along 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.

[Kelly Tuminelli, CFO]

Yeah. I'll take that one, you know 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 a 11% range and I believe that's an appropriate target for net interest margin to cover our cost given it’s a full employment relationship and our single employer plan.

[David Grossman, Stifel]

All right. So when you're thinking kind of way beyond 2021 which is a very noisy here is that 10% to 11% is a good number to think about it going forward and beyond.

[Kelly Tuminelli, CFO]

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

[Operator]

Excuse me. The next question is from Sam England with Berenberg. Please go ahead.

[Sam England, Berenberg]

Hi, guys. Thanks for taking the questions. And the first one you touched on capital allocation. Could you talk a bit more about some of its potential areas of opportunity that in turn are impact the opportunity that you see going forward, you know and you mentioned that advanced technology you know having more people on the business development side, what do you think the most internal investment will be needed?

[Burton Goldfield, President & CEO]

Yeah. I appreciate the question and you know I really did talk about a variety of things around capital allocation in the past and today as well. Just to remind you, you know we will continue to invest in our business for growth. And that'll include all the things that you mentioned both you know 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.

[Sam England, Berenberg]

Okay, great. And you talked about that the next question. I just wondered what the current M&A environment looks like you know are you seeing a decent pipeline of potential opportunity, or you’re talking more about doing – talk on M&A rather than anything larger, but what is the environment like at the moment.

[Burton Goldfield, President & CEO]

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 PDOs and verticals or geographies that were attractive to us And frankly other than 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.

[Operator]

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.