Trinet Group, Inc. TNET

Please tell us how you considered Question 100.03 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations when adjusting for interest expense while not adjusting for interest income in your non-GAAP measure, adjusted EBITDA.

As a leading provider of HR solutions for SMBs in the U.S., one of the core services we offer is helping our clients manage their employee compensation by providing multi-state payroll processing.

This involves holding and moving client funds intended for client payroll and related taxes. In 2024, we processed approximately $73 billion of payroll and payroll taxes on behalf of our clients.

1 Capitalized terms not otherwise defined herein have the meanings given in the above-referenced report.

One Park Place, Suite 600, Dublin, CA 94568 | t: 510.352.5000 | TriNet.com

As a result of the

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high volume of client funds we process, we earn interest income on cash balances that pass through our bank accounts in the day-to-day processing of client payroll. The high volume of cash that we process in turn results in a high volume of earned interest, which our management views as a key source of revenue to offset our operating costs.

In our PEO business, we utilize our scale to provide our

WSEs access to employee benefit and insurance programs with features and at costs that we believe many of our clients would be unable to obtain on their own. These insurance programs include both health and workers’ compensation insurance. Under these insurance programs, we pay premiums to third-party insurance carriers and reimburse insurance carriers or third-party administrators for claims payments within our insurance deductible layer, where applicable. We hold assets to support our liabilities under these insurance policies and earn interest on those assets. Accordingly, this interest income is also related to our core operations.

We designate the majority of our cash as restricted to inform the users of our financial statements how much cash is designated to fund payroll amounts and support liabilities to insurance companies. However, we hold our own corporate cash in the same operating bank accounts, which helps to support the efficient flow of client funds in case of occasional timing issues with receiving client funds for WSE payroll. As a result, cash that is not core to our operations is typically not segregated in separate bank accounts from our core operations until it is deployed for corporate purposes.

In light of this operating model, we do not segregate our interest income between core and non-core interest income (consistent with our treatment of cash) and we believe that the vast majority of our interest income is a fundamental component of the core operation and revenue of our business.

Our Use of Non-GAAP Measures

In calculating our non-GAAP measure, adjusted EBITDA, we exclude those charges that do not directly result from our core operations or that are not indicative of our ongoing operations.

We have carefully evaluated both negative and positive amounts in determining the appropriateness of the adjustments included in adjusted EBITDA in accordance with Question 100.03.

In our case, earning interest on the cash and investments we hold to process payroll and support insurance-related liabilities is a core part of our operations. In contrast, interest expense primarily relates to our long-term debt and is not core to our operations. As a result, interest expense is not related to our core operations, we believe it should be excluded from the calculation of our adjusted EBITDA measure.

We will continue to evaluate all specific gains and losses in determining the appropriateness of the adjustments included in adjusted EBITDA in order to ensure that the measure is relevant and meaningful to users of our financial information.

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In presenting net service revenues and net insurance service revenues, you comingle revenues and expenses and state that these non-GAAP measures provide a comparable basis of revenues on a net basis. Please tell us why you believe these non-GAAP measures do not substitute individually-tailored recognition and measurement methods for those of GAAP.

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Refer to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.

As requested, we have considered Question

100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations and related Staff guidance. In considering Question

100.04, we respectfully point out that our use of net service revenues (NSR) and net insurance services revenue (NISR) does not accelerate the recognition of any revenue in any period or alter net income in any way.

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Instead, our inclusion of NSR and NISR are intended to provide investors additional transparency and to facilitate an additional means for investors of analyzing our results.

One Park Place, Suite 600, Dublin, CA 94568

Phone 866.344.6688 • Fax 510.352.6480 • TriNet.com

We believe that our non-GAAP financial measures, NSR and NISR, constitute supplemental measures that are necessary for an understanding of our results of operations and are therefore both appropriate and helpful for our investors under Regulation S-K and related SEC guidelines and interpretations pertaining to MD&A disclosures. We believe that these measures do not substitute individually-tailored recognition and measurement methods for those of GAAP, but instead provide investors with important key financial performance indicators that are utilized by management to assess our operating results, evaluate the business and make operational decisions on a prospective basis. For example, we use NSR to help manage our consolidated operating expenses for our different business functions and we have used the measure in the determination of incentive compensation for management. NISR helps investors understand our pricing to risk performance. As a result, investors benefit from our disclosure of these non-GAAP measures. NSR is also important because the revenue recognition methods under GAAP for our professional services revenues and insurance service revenues differ in that the former is recognized net of client payroll costs while the latter is recognized on a gross basis. While these methods of revenue recognition are appropriate, our disclosure of NSR enables investors to quickly grasp the net amount of revenue we retain after consideration of the variable, worksite employee (WSE)-related insurance costs incurred to generate such revenue.

Although we have historically compared and reconciled these measures to our GAAP revenue, in reviewing the Staff guidance we believe that it may be appropriate to instead compare NSR and NISR to gross margin, which is defined in the FASB Master Glossary as “The excess of sales over cost of goods sold. Gross margin does not consider all operating expenses.” While we have not previously disclosed

GAAP gross margin, we believe this is the most directly comparable measure other than GAAP revenue because GAAP gross margin includes all the components that we use to calculate NSR and NISR. Therefore, to avoid any implication that NSR and NISR substitute individually-tailored recognition and measurement methods for those of GAAP revenue, while still providing investors with important key financial performance indicators, in future filings, beginning with our next earnings release and Quarterly Report on Form 10-Q after the Staff’s comments have been resolved, we propose to rename NSR and NISR and modify our disclosure to compare and reconcile such measures to GAAP gross margin as follows:

Non-GAAP Measure

Definition

How We Use The Measure

Net Service Revenues Margin

•

Sum of professional service revenues and Net Insurance Service Revenues, or

Gross margin excluding cost of providing services and depreciation and amortization.

Provides a comparable basis of revenues on a net basis. Professional service revenues are presented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes.

Provides a measure of the adjusted gross margin earned by us after deduction of the variable, WSE-related insurance costs incurred, excluding our controllable cost of providing services and non-cash depreciation and amortization, and is comparable to GAAP gross margin.

Acts as the basis to allocate resources to different functions and evaluates the effectiveness of our business strategies by each business function.

• Provides a measure, among others, used in the determination of incentive compensation for management.

Net Insurance Service Revenues Margin

• Net service margin excluding professional services revenue

• Is a component of Net Service Revenues Margin.

• Provides a comparable basis of revenues on a net basis. Professional service revenues are presented net of client payroll costs whereas insurance service revenues are presented gross of insurance costs for financial reporting purposes. Helps our investors understand our pricing to risk performance by providing a measure of the adjusted gross margin earned by us, that excludes professional services revenue, our controllable cost of providing services and non-cash depreciation and amortization. Under

GAAP, insurance service revenues and costs are recorded gross as we have latitude in establishing the price, service and supplier specification

Year Ended December 31,

(in millions)

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Please remove adjusted EBITDA margin from your filing or use total revenues, rather than net service revenues, in the denominator of its computation.

We respectfully advise the Staff that we believe that the Company’s current presentation of Adjusted EBITDA margin is appropriate, particularly given the modified Net

Service Margin disclosure we propose to use in our future filings. As noted above, we propose to disclose the relationship between Net

Service Margin and GAAP gross margin in our future filings. We believe that using a ratio of Adjusted EBITDA tied to a measure of adjusted gross margin is more appropriate for our investors than using a ratio of Adjusted EBITDA to total revenue.

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The Company’s existing calculation provides investors with an understanding of our overall performance by eliminating the impact that results when WSE health benefit elections drive changes in GAAP insurance service revenue and GAAP insurance costs, without a corresponding change to Net Service

Margin.

Our GAAP insurance service revenues and GAAP insurance costs vary with and are primarily related to each other. Our GAAP insurance services revenues include fees collected from clients that relate to health benefit services and that are withheld from payroll payments we make to our WSEs, while our GAAP insurance costs include premiums and reimbursement of claims paid to insurance carriers. Throughout the year, WSEs may make changes in their health benefit elections, due to benefits open enrollment or life status changes. These changes may include selecting higher deductible, lower fee plans; selecting lower deductible, higher fee plans; waiving coverage; electing coverage; or adding or removing dependents. These changes in health benefit elections by WSEs cause increases or decreases in our GAAP insurance services revenue, with corresponding increases or decreases in our GAAP insurance costs. Because of these WSE-controlled benefit election changes, if we instead use total revenues without consideration of insurance costs when calculating Adjusted EBITDA Margin, we create a one-sided view of the impact of WSE health benefit elections. As illustrated below, in a hypothetical scenario where WSE’s elect health benefits that decrease the Company’s total insurance service revenues by $500, the Staff’s requested calculation would show increased relative Adjusted EBITDA Margin even though our Net Service Margin remains consistent (and vice versa). This outcome has the potential to result in significant variation in our reported Adjusted EBITDA Margin when in fact the net amount of margin available to pay operating expenses has not changed.

Year Ended

Illustrative Example Using

December 31,

Changes in Insurance Services

Revenue and Costs

Change in insurance services revenue

$ (500 )

$ 500

Change in insurance costs

Professional services revenue

$ 544

Insurance services revenue

3,490

2,990

3,990

$ 3,534

$ 4,534

2,479

3,479

Adjusted EBITDA Margin / Net Service Margin

Numerator: Adjusted EBITDA

$ 468

Denominator: Net Service Margin

1,055

Adjusted EBITDA Margin

44 %

Adjusted EBITDA Margin / Total Revenue

468

Denominator: Total revenue

4,034

3,534

4,534

12 %

13 %

10 %

To avoid the result above, which we believe will confuse a user of our financial statements, we have concluded that in future filings, beginning with our next earnings release and Quarterly Report on Form 10-Q after the Staff’s comments have been resolved, we propose to modify our disclosures as follows:

Adjusted EBITDA

Net income, excluding the effects of:

- income tax provision,

- interest expense, bank fees and other,

- depreciation,

- amortization of intangible assets, and

- stock based compensation expense.

· Provides period-to-period comparisons on a consistent basis and an understanding as to how our management evaluates the effectiveness of our business strategies by excluding certain non-cash charges such as depreciation and amortization, and stock-based compensation recognized based on the estimated fair values. We believe these charges are either not directly resulting from our core operations or not indicative of our ongoing operations.

· Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects.

· Provides a measure, among others, used in the determination of incentive compensation for management.

· We also sometimes refer to Adjusted EBITDA margin, which is the ratio of Adjusted EBITDA to Net Service Revenue Margin.

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We read your response to comment 1 and your proposed presentation of Net Service Margin and Net Insurance Services Margin. Your definitions exclude the Cost of Providing Services line item, which you describe as costs that are controllable. Please tell us in more detail about the nature of these costs, how they differ from your variable costs of service and why presenting these margins is appropriate without them.

to the Staff’s request to explain why it is appropriate to present Net Service Margin and Net Insurance Service Margin excluding our Cost of Providing Services, we note that Net Service Margin and Net Insurance Service Margin are analogous to contribution margins that are available to us to pay our fixed costs, including our Cost of Providing Services.

A contribution margin is calculated as revenue less variable costs and represents the aggregate amount of revenue available after variable costs to cover fixed costs and generate a return.

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A variable cost is an expense that changes in proportion to sales volume. We measure and disclose volume based on the number of WSEs that we serve. As discussed above, increases or decreases in our WSE volume result in corresponding increases or decreases in our Professional Services Revenue, Insurance Services Revenue and Insurance Costs. Our Insurance Costs thus represent variable costs.

Conversely, a fixed cost is a cost that does not change with increases or decreases in sales volume. As discussed above, increases or decreases in our WSE volume do not result in changes in our Cost of Providing Services, and thus represent a fixed cost.

Net Service Margin can be calculated as Total Revenue less our Insurance Costs (which are variable). This measure excludes our Cost of Providing Services (which are fixed), as well as other operating expenses. We believe Net Service Margin is an important metric for users of our financial statements because it allows investors to zero in on the growth (or decline) of TriNet’s contribution margin from professional services and insurance services, net of changes in variable Insurance Costs. It is worth noting that Net Service Margin is a common metric used by equity analysts that cover PEOs along with other tech-enabled service companies when writing research reports for their investors. This concept is very analogous to several industries, such as the payment processing industry that presents a contribution margin consisting of GAAP Revenue less variable interchange fees, or the oil and gas industry that presents crack spread, representing the difference between the selling price of finished products and the purchase price of crude oil.

Net Insurance Service Margin can be calculated as Insurance Services Revenue less our Insurance Costs (which are variable), and it represents the contribution margin from our insurance services. Net Insurance Service Margin is a performance measure of our insurance pricing adequacy, which we believe is important for our investors because it illustrates the impact of changes in the rate (resulting, for example, from WSE medical services utilization or workplace accident frequency and severity) for Insurance Costs independent of changes in our volume of WSEs that impact both Insurance

Service Revenue and Insurance Cost.

Increases or decreases in workplace accidents or medical services utilization by WSEs cause a change in our rate for Insurance Costs, measured as Insurance Cost per WSE.

While our Insurance Costs vary with and in proportion to changes in the volume of our WSEs and Insurance Service Revenue, the fees we charge per WSE for insurance services are established at the inception of the contract and do not change as a result of these rate changes.

By excluding our Professional Service Revenue and Cost of Providing Services (which are fixed costs), we provide users of our financial statements with an important performance measure of the adequacy of our pricing for insurance services. For instance, in periods where we have increased WSE volume, but underpriced our insurance risk (for example, by underestimating WSE medical services utilization or the frequency or severity of workplace accidents), this measure would illustrate the decrease in margin despite the growth in Insurance

Service Revenue.

If we instead include our fixed Cost to Provide Services in these contribution margins, we would effectively be disclosing aggregated gross margins. We believe that aggregated measures are less useful to users of our financial statement because such metrics are distorted by management resourcing decisions, which are appropriately classified in our Cost of Providing Services. We believe that an aggregated approach would be unhelpful to users of our financial statements, who we believe seek to understand the contribution margin earned from our Total Revenue and the adequacy of our pricing for insurance services, independent of our fixed Cost of Providing Services. By disclosing and discussing the material changes in these contribution margins period over period, while separately discussing changes in our Cost of Providing Services, we believe we provide additional important and relevant information at a disaggregated level to the users of the financial statements.

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We read your response to comment 2. By including Net Service Margin as the denominator in the calculation of Adjusted EBITDA margin, you are effectively presenting Net Service Margin as a substitute for GAAP revenue.

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However, your response to comment 1 indicates that you are presenting Net Service Margin and Net Insurance Services Margin as types of gross profit, more akin to contribution-type measures, rather than as substitutes for GAAP revenue. As such, please revise to exclude any ratio utilizing Net Service Margin as the denominator.

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We note your response to comment one. Your presentation of Net Service Margin does not contemplate any cost of generating professional services revenue. In addition, while Net Service Margin and Net Insurance Service Margin contemplate insurance costs, which you previously disclosed as substantially pass-through costs, they do not contemplate any of the costs incurred to generate the related revenue.

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In this regard, we believe that the presentation of these measures fails to comply with Question 100.04 of the Non-GAAP Compliance and Disclosure Interpretations. Please revise accordingly.

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