TriNet Earnings Benefited From Acqusitions

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TriNet reported strong first-quarter financial results last night. We have published a detailed initiation report that provides a much longer overview of the company’s operations and financials, as well as our views of the company’s main investment highlights and risks. Whereas our initiation report is focused on the long-term thesis for the stock, this note provides a short review of the company’s first-quarter financial results.

We and other sell-side analysts did not publish financial results before this earnings release, so we do not have an established sell-side consensus to compare the results with. In general, though, TriNet’s results showed strong revenue and earnings growth, reflecting both the strength of the PEO sector and market share gains by TriNet.

The company’s earnings benefited from acquisitions last year and an unusual gain from a prior-year’s payroll taxes, but the underlying pro forma revenue growth in the business (19%) was nonetheless very strong. Strong organic growth in the number of worksite employees (up 22% on a pro forma basis for acquisitions completed in the last year), continued development of the salesforce, and strong growth in professional services fees (up 28% pro forma) also bode well for the long-term growth of the business, in our view.

Management provided guidance for the second quarter and full year of 2014 that calls for 15%-17% organic revenue growth and an EBITDA margin for the full year of 2014 that is toward the high end of the company’s medium-term target of 33%-34% (probably helped a little, in our view, by the aforementioned gain related to the historical payroll taxes). Shares of TriNet trade at 20 times our next-12-months’ adjusted EPS estimate. Our investment thesis is described in more detail in our initiation report, but we believe that the prospect for strong earnings growth and potential upside to our estimates makes shares attractive. 

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