Insperity, Inc. Stock

Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Insperity Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead.

Thank you. We appreciate you joining us today. Let me begin by outlining our plan for this afternoon's call. First, I'm going to discuss the details behind our second quarter 2026 financial results. Paul will then comment on the progress of our margin recovery plan and our game plan to regain worksite employee growth momentum. I will return to provide financial guidance for the third quarter and full year 2026. We will then end the call with a question-and-answer session.

Before we begin, I would like to remind you that Paul or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures.

For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website.

Today, we reported adjusted EPS for the second quarter of $0.34 per share and adjusted EBITDA of $36 million. Both results exceeded the midpoint of our expected range, and they represent a year-over-year increase of 31% and 13%, respectively. We believe these results reflect the significant progress we have made in our ongoing margin recovery plan.

As a reminder, our margin recovery plan includes 3 key components. First is our ongoing pricing and client retention strategy, which we intend to continue through the end of the year. Second is our benefits plan design changes and UnitedHealthcare contract changes, both of which became effective at the beginning of the year. The third key component is a robust focus on operating expense management.

The financial impact of this plan is evident in our second quarter results. We believe the impact will continue to build over the course of the year, consistent with our goals of producing a significant profit recovery in 2026 and laying the foundation for further earnings growth in 2027.

The average number of paid worksite employees in Q2 was 305,764, which was above the high end of our expected range and represents a modest 1.1% decrease versus Q2 2025. The worksite employee outperformance was primarily driven by higher-than-expected net hiring within the client base, which helped mitigate the expected impact of our margin recovery plan on sales and client retention. For Q2, client retention and worksite employees from new clients were both in line with our forecast. Paul will provide more color around our worksite employee results in a few minutes.

Total gross profit in Q2 2026 decreased by 3% to $217 million. Gross profit per worksite employee decreased by 1% to $237 per month, which was in line with our expectations and was a slight improvement over the 2% decrease reported in Q1 2026. For Q2, our margin recovery plan produced improvements in the matching of price and cost in our benefits area. Those improvements were largely masked by the year-over-year change in workers' compensation costs, which were impacted by lower actuarial reserve adjustments related to prior policy years.

Benefits cost per covered employee increased by 5.2% over Q2 of 2025, consistent with our expectations and first quarter results. While underlying benefit cost trends remain high in the health care marketplace, our 2026 results have been impacted favorably by a client mix change influenced by our pricing and client retention strategy, along with the plan design changes and UnitedHealthcare contract changes that became effective at the beginning of the year.

As I mentioned last quarter, we expect the UnitedHealthcare contract change to help temper the seasonality of our quarterly earnings patterns starting this year with less expected earnings early in the year and more expected earnings later in the year. This is primarily the result of the pooling level change from $1 million per member per year down to $500,000. The new pooling limit includes a higher fixed premium that is charged evenly on a per employee per month basis, or PEPM basis, throughout the year, while the related favorable impact on claims cost is expected to be significantly weighted towards the later quarters of the year with the largest impact in Q4.

With regards to workers' compensation costs, we have seen relative stability in our current period costs compared to our expectations. However, favorable adjustments in actuarial reserves related to prior period -- prior policy years declined in Q2 2026 versus Q2 2025. This is reflective of a market-wide increase in claim severity with elevated health care cost trends being a significant contributor. The lower level of actuarial adjustments was generally in line with our expectations.

At the halfway point of the year, we are pleased with the execution of our margin recovery plan, our pricing and client mix results and the relative stability of our benefits costs so far. At the same time, we continue to be vigilant regarding the range of potential outcomes for benefits costs over the remainder of the year, which I will discuss later in the call.

In conjunction with our margin recovery plan, total operating expenses decreased by 8% to $211 million in Q2 2026 due primarily to lower headcount-related costs and stock compensation costs, partially offset by increased advertising expenses to drive leads into our sales pipeline. Q2 cash operating expenses decreased by 6% versus Q2 2025.

With beta clients being live on HRScale in Q2 2026, we saw a reduction in certain investment costs and the transition of client onboarding and service-related costs from product investment into operational costs. As a result, our total investment in the development of HRScale for Q2 declined to $8 million, of which $5 million was capitalized.

During the quarter, we continued to return capital to our shareholders through our regular dividend program, paying $23 million in dividends. We ended the quarter with $95 million of adjusted cash compared to $36 million at the end of Q1. During the quarter, we borrowed $50 million under our credit facility for working capital purposes, primarily to address normal fluctuations associated with the timing of funding of our direct cost programs.

At this time, I'd like to turn the call over to Paul.

Thank you, Jim, and thanks to everyone for joining our call. Today, I'll discuss our successful execution of our margin recovery strategy year-to-date, followed by our plans to lay the groundwork over the second half of the year to regain growth momentum moving into 2027. This includes an update on our refined sales motion, HRScale progress and AI initiatives, which we believe will advance sales and retention efforts.

Our top priority for 2026 is margin recovery, and we are pleased that our Q2 results reflect the meaningful progress achieved in the first half of the year. This outcome was driven by exceptional collaboration across the company to address the health care claims trend and related margin pressure we experienced in 2025.

Executing this effort required company-wide cooperation, clear communication and disciplined implementation of new pricing strategies, product offering enhancements and the adjustment of many sales, client retention and benefits processes. These pricing and process changes created some initial challenges and, as expected, sales and retention finished at the lower end of our typical ranges in the first half of this year.

Against that backdrop, where some companies experienced significant volume reductions, our modest 1% year-over-year decline in worksite employees paid clearly demonstrates the resilience of our organization and the value of our services, including the breadth, depth and level of care delivered throughout this process.

The first half of this year also reflects strategic improvements that we believe can have a long-term impact of improving sales and retention while also supporting our efforts to reduce risk. In particular, we now provide more benefit options for current and prospective clients through our expanded insurance agency operation when it provides a better solution for the client.

While some clients choose to keep their own plan through a third-party broker, our insurance agency operation is also seeing success offering plans in our sales process, which may continue the recent trend of clients selecting a client-sponsored plan. At the end of Q2, 7% of our client base obtained their benefits outside of the Insperity plan, including 14% of new clients added within the past 12 months.

Demand for our insurance agency solutions continues to grow, and we're ramping up our capacity to capitalize on this opportunity. That said, we continue to expect that the bulk of our clients will choose to participate in the Insperity plan, and there could be some movement in and out of the Insperity plan from year to year. So while we believe sales and retention efforts for the first half of this year were executed well, the results were tempered by the impact of the margin recovery, pricing priority and significant change management.

The third growth factor in our model, net change in employment in the client base stabilized in Q2 and exceeded our forecast after showing some volatility in Q1. Each quarter, we conduct a survey to compare actual hiring, pay rates, overtime and commissions to client sentiment for the upcoming quarter. The data and client sentiment coming out of Q2 reflect a positive outlook for their own companies for the remainder of the year.

Client confidence remains resilient in a cautious economic environment with 63% of surveyed clients expecting their businesses to perform better in 2026 than in 2025. Clients remain more optimistic about their own businesses and industries than the broader economy, supporting continued demand for our HR solutions that help them manage uncertainty while pursuing growth. Talent availability and workforce planning remain key client challenges.

The hiring environment remains stable with increased overtime utilization and strong commission growth in Q2. Looking forward, roughly 1/4 of clients surveyed expect to hire in Q3 and more than 1/3 anticipate workforce growth in 2026.

As we look ahead to the balance of the year, we plan to continue our margin recovery efforts. At the same time, we believe sales motion changes across all 3 of our premium HR solutions are becoming more fully adopted and confidence is growing across the sales organization. We believe this sales motion progress combined with our HRScale ramp-up and AI agent rollout positions us well to advance sales and retention efforts over the balance of the year.

A Q2 highlight was the formal launch of HRScale, successfully onboarding and processing payroll for our beta clients and ramping up marketing and sales activity. We entered Q3 with sold HRScale accounts totaling nearly 8,000 worksite employees, including over 5,000 already live on the platform and approximately 3,000 moving through implementation.

This is a good start, and we believe we are building momentum with HRScale. The early demand generation signs are encouraging, and we're starting to see the benefit of broader market activity. The pipeline continues to move forward with progress across both client migration opportunities and new prospects.

As a reminder, HRScale, our joint solution with Workday, is one of the most significant transformations at Insperity designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 to 5,000 employees. We believe this addition of HRScale positions Insperity distinctively within the marketplace and serves as a new driver for sales and retention of larger clients. This significantly expands our total addressable market, advances our growth model and provides greater visibility for future growth.

Our sales, marketing, service, product and partner teams are all working in sync, and our go-to-market activity is now rolling out across a wide array of marketing channels, including events, partnerships, webinars, social media and more.

The referral and broker channel is also gaining traction. We're seeing opportunities from these sources enter the pipeline and upcoming education sessions should help partners better understand and communicate the HRScale story.

On the operational side, the focus is clear: strong implementations, stable client experiences that enhance time to value and the ability to scale with quality. We also have an ongoing dialogue with Workday to continue developing the product road map for HRScale and strengthen our go-to-market plan. So we continue to be excited about the HRScale opportunity. We're building demand, strengthening partner engagement, advancing the pipeline and improving implementation readiness with the foundation in place to support this strategic growth initiative.

We also expect our AI strategy will add value to the strategic HR services, technology and expertise provided by Insperity. We continue to see growing receptivity to AI, both within Insperity and across the client base, reinforcing our belief that AI can amplify human expertise, strengthen service delivery and improve productivity.

AI adoption and targeted use cases are accelerating, creating significant opportunities across Insperity from sales and marketing to client services and technology development. In many areas, we believe AI will prove to be transformational for Insperity. Client AI adoption is also accelerating with 63% of surveyed clients reporting that they are either piloting AI or integrating it into their business strategy and only 8% reporting no plans to use AI.

Insperity's AI strategy is focused on practical business impact, enabling our employees to better serve our clients, improving client access to insights and solutions, accelerating product development and helping clients prepare their workforce for an AI-enabled future. Insperity's proprietary Compass AI engine is maturing into a scalable enterprise AI platform, providing a foundation that connects data and business knowledge across the organization.

Our HR360 Agent is already helping clients and worksite employees access answers, resources and service support more efficiently, and we are working to expand its functionality to deliver conversational reporting and faster business insights. We plan to introduce conversational reporting using demographic and transactional data, shifting from static reports to real-time insights for better decision-making without the need for users to have advanced analytics skills.

We expect this functionality combined with the expertise of our staff, will reinforce the way Insperity provides sophisticated HR support to help HR360 clients succeed in a new world fueled by AI and can serve as a value driver in our discussions with clients and prospects. We believe as our refined sales motion becomes fully adopted and confidence grows within the HR360 and HRCore sales organizations, combined with the catalyst effect of HRScale and our AI initiatives, we have the opportunity for strong sales and client retention over the balance of the year.

So we believe we are on track to achieve both of our 2026 highest priorities of margin recovery and laying the foundation for regaining growth momentum. We expect success in these 2 areas would lay the foundation for balancing growth and profitability in 2027 and delivering shareholder value in the years ahead.

At this point, I'd like to pass the call back to Jim.

Thanks, Paul. Our updated outlook for 2026 reflects our solid worksite employee and financial performance in Q2, the progress of our margin recovery plan and the expected continuation of certain operating expense savings that we experienced in Q2.

With regard to paid worksite employees, we continue to analyze and revise our strategies to achieve our margin recovery goals while also focusing on regaining worksite employee growth momentum. We believe that our plan to emphasize long-term value drivers in discussions with clients and prospects could positively influence sales and retention results as we approach the fall sales and retention season.

In addition, we expect net client hiring to reflect some improvement in small business economic sentiment and the hiring environment, partially offset by seasonal summer help reverting in Q3. As a result, we are now forecasting paid worksite employees in a range of 305,000 to 307,000 for the full year 2026, which represents a decrease of 1% to 1.6% from 2025.

Moving to margin recovery. We are pleased with the progress we have made to date, and we continue to forecast some additional improvement as we execute the plan throughout 2026. Our pricing results are progressing in line with our plan, and we continue to see that profitability of terminating clients has been significantly lower than the profitability of those we are retaining, producing a favorable change in client mix.

With regards to operating expenses, we continue to expect year-over-year reductions throughout 2026, driven primarily by lower headcount and partially offset by some increase in marketing spend and growth in the number of Business Performance Advisors. HRScale operating expenses are expected to be generally in line with our budget.

As I mentioned earlier, our benefit cost trends have been relatively stable so far this year, but we are maintaining a wider range of potential outcomes in the second half of the year relative to our historical norms due to the elevated health care cost trends that remain in the marketplace. As a result, we are forecasting adjusted EBITDA in a range of $185 million to $225 million for the full year of 2026, an increase of 41% to 72% over 2025. Adjusted EPS is forecasted in a range of $1.88 to $2.43, an increase of 83% to 136% over 2025.

We expect our full year effective tax rate for adjusted EPS purposes to be 36%. The effective tax rate for GAAP purposes could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income. We expect our weighted average shares outstanding to be approximately 38.6 million for the full year.

As for Q3 2026, we expect the average number of paid worksite employees to be in a range of 305,500 to 307,500, a decline of 1.7% to 2.3% from Q3 2025. We are forecasting adjusted EBITDA in a range of $14 million to $41 million, an increase of 40% to 310% over Q3 2025. Adjusted EPS is forecasted in a range of minus $0.09 to positive $0.41, an increase of 55% to 305% over Q3 2025.

As many of you know, our quarterly earnings pattern is typically highest in Q1 and then declines each quarter thereafter, primarily due to the seasonality related to state unemployment taxes and benefits costs. While these influences remain intact, we expect the seasonality of our 2026 quarterly earnings pattern to be less pronounced for 2 primary reasons.

First, our pooling level change with UnitedHealthcare from $1 million per covered member per year down to $500,000 resulted in a significantly higher premium charged evenly on a PEPM basis throughout the year. while the related favorable impact on claims cost is expected to be significantly weighted towards the later quarters in the year with the largest impact in Q4. In addition, as we execute our margin recovery plan throughout 2026, the cumulative impact is expected to be more pronounced in the second half of the year and provide a solid foundation heading into 2027.

At this time, I'd like to open up the call for questions.

[Operator Instructions] First question comes from Andrew Nicholas with William Blair.

I wanted to start on HRScale. A lot of really interesting and encouraging commentary on that front, Paul. Can you speak a bit more to the makeup of the employees that you have on the platform today? I think you said 5,000 and 3,000 moving through the implementation process. Where did those clients come from? What do they look like in terms of size? And maybe any other color you can provide on the pipeline for the client onboarding?

Sure. That's great. You bet. Happy to do that. And good news is we have in this pipeline that I mentioned on the 8,000. Of course, we prioritize current clients moving first, but we also will have employees or new accounts as we go through the year. So we're very pleased about that. And we have different size clients, including some over that 1,000 employee level, which is excellent. So we're really on a good track getting those initial clients on board, a variety of different types of clients.

What we're really working on is having that initial set of clients that can be that reference point for others and really build on that momentum. So we're just really excited. We're on a good track. It's obviously a new product, a new solution and it's unique in the marketplace. So there's education going on, but there's great enthusiasm and great receptivity. So we're on a good track.

Got it. And then I think you made some comments about different, kind of new clients or even existing clients finding health care plans outside of your plan. Can you speak a bit more, one, to kind of what's driving that? And also what that does to your economics? I guess just more color on the agency operation would be great.

Yes. This is something that we've considered over the years. And we've always had some clients that wanted to retain their own plan for a variety of reasons. And so we've always had that capability. But as we went through this higher pricing environment for health care overall, including the margin recovery effort for us, we really ramped up our own agency because we felt it was important to be able to provide options as many options as possible in a higher cost escalation environment for our clients.

Now of course, in our case, we're very pleased for them to come on our plan and it's an incredibly well-managed plan and brings a lot of advantages to the client. But if they're in a situation where their costs are going up a lot, if we can find coverage for them through our agency, integrated into our offering for them in the PEO offering, hey, that's great. If it's better for them, we're happy to do that.

And in that case, we're actually not taking the risk. They're not adding into the risk pool of the large plan. So we can be -- we don't -- it doesn't matter which one they end up deciding to do. And we are pleased that we can offer them options and keep clients that way and get new clients that way.

I guess from an economic perspective, is it fair to say that, that would mean lower costs, all else equal on a per worksite employee basis? Or is the benefit cost trend that you guys describe as insight reflective of just those that are attached to the plan?

Yes. So what I would say to that is, obviously, the cost associated with those plans wouldn't be in our benefits costs. We usually report those on a per covered employee basis. So to the extent that a client has their own plan, they would not be in a participant in our big plan and they wouldn't really be part of the math on the benefits cost as we report them.

The next question comes from Tobey Sommer with Truist.

I think you mentioned in your prepared remarks that you made more conservative assumptions than historically in health care in the back half of the year. As measured in EBITDA, what kind of would the EBITDA guidance have been had you stuck with historical patterns?

Well, I think that if you look back at what we have done in the past, typically, it's just the range. At this time of the year, the $40 million range on EBITDA is a little bigger than what we would normally have. I'd say in the past, we probably would be closer to $25 million or $30 million. So we just wanted to reflect the fact that there are these escalated trends out there in the marketplace. And it seemed prudent to make sure, especially since we're seeing some favorability through a lot of the actions that we're taking, just to make sure that we recognize that plus or minus, there could be a little movement off of what we've had so far.

And if I could get you to comment on how are you thinking about the importance of this year's selling season as we aim towards the fall and fourth quarter, particularly given that you've got your new platform, you've got other offerings, including letting customers have their own health care. What are you thinking about that now?

Yes. Well, I'm very excited about this effort. Of course, we always -- the business model needs a good fall selling season. That's the way the business works. It's both selling and retention to achieve our best starting point for the new year since it's a residual income business model, that starting point always makes a difference. This year, the point I was really happy to be able to make is that we went through quite a bit of what I call sales motion changes. over this last 6 to 8 months or so related to our margin recovery plan.

And the reason I call the sales motion change is because it's far beyond the sales organization. It was across the company when you have to make changes to pricing and to processes and offering things in different ways and legal aspects that change, a tremendous amount that had to happen. And so that's a lot of change to go on. We've made it through that. We have had enough reps over this first repetitions over this first 6 months to see the confidence level, see the adoption level.

So things are on the right track for us to be ramping up sales and retention right as we go into our fall selling season. And we're having great success on the marketing front to target folks. We also obviously -- we've talked a little bit about this here, but we've got HRScale that we've never had going into the fall selling season. So this is exciting how that affects -- it affects both HRScale sales, but in my view, it affects HR360 larger client sales because they have 2 options of what's the best for them to come on.

So is it critical? Yes, it always is. This year, it's exciting because we have new things we're doing that can make it better, but we have to do the blocking and tackling. We have to do it well. And I'm so proud of the way our organization focused on what we had to do to do margin recovery, and that's the type of effort that I've seen in getting through the change process. And I believe this organization is going to do a great job on this fall selling effort and finish off that second key priority for this year.

The next question comes from Mark Marcon with Baird.

A couple. Just with regards to the health care side, what sort of inflation rate are you expecting? And would that be one of the primary drivers in terms of the widespread in terms of the EBITDA guide for this year? Or are there any other factors? That's one question. And then the second question has to do with HRScale. I'm wondering if it's too early to tell like how investors should think about like the profitability when worksite employees are shifted to the HRScale model. I'm not sure, like, how you've described the expense share with Workday or how investors should think about that?

Well, let me talk about that first question first. I know Jim kind of went through more detail there. I just want to make sure everybody understands that we have been through an exceptional process for margin recovery, having to do with the repricing of the base and mentioned the other things, the contracts, et cetera. But we have 2 quarters in a row now where we have done really well. We've done the right things. That's 2 points, but it's not a trend until there's 3 points. So in my view, it's appropriate to be conservative. And we're on a really good track on that front, and we're going to do -- keep doing the right things and watch that come to fruition.

Now on the HRScale side, as we've mentioned previously, these first clients we're bringing on in favorable terms, but there're still terms that are typically at or better than being on our HR360 even as a very large client. So we expect that to grow more into the future but it's off to a good start on that pricing front as well. I know there was another aspect to that question.

Jim, if you know what that was or have a comment on that, that's fine.

Was this on the health care inflation?

Yes. On the health care inflation front, what I would say is there's multiple moving parts in the middle of that. And so obviously, it's the pricing that you're giving out -- it's the plans that ultimately get selected by clients and then worksite employees when they're in their open enrollment process. And then there's the client mix change associated with clients that terminate versus clients that stay. And so all 3 of those are -- have an influence on the overall, what I'd call the net trend expectation. We're still expecting that our trends over the remainder of the year will be favorable compared to the underlying trends that are out in the marketplace because of the plan that we're putting in place.

On the HRScale front, Paul had mentioned the pricing that we're doing. I would say, adding to that, these clients do have multiyear contracts. And there are price increases embedded in that as we kind of move past the beta client phase. So they're getting a discount to kind of the normal pricing in this beta phase, but there are price increases built in.

And I would say when you think about the profitability, our expectation over the next several years is that the profitability on HRScale looks as good or better than what it is on HR360. I think there are 2 factors that go into that. One is increasing pricing as we get from beta to early adopter and more mature phases. And then also the level of efficiency gains that we get as we bring more clients onto the platform and service more clients.

[Operator Instructions] The next question comes from Jeff Martin with ROTH Capital.

I wanted to jump into the advertising strategy, sales and marketing strategy a bit more. Just curious if you're adopting new lead generation initiatives with respect to HRScale versus what maybe you were thinking a year ago? And could you also speak to the commitments that Workday is making with respect to continued go-to-market strategy?

Yes, absolutely. We have a very powerful marketing effort coming along this fall on a lot of different fronts. And it's across the board, but there's also byproduct-related marketing and including a joint marketing plan that includes things that both Insperity and Workday are doing and doing together, continuing through our Pod relationship. So we have a wide variety of things, including some real improvements that AI has brought to the forefront for us to really target the right customer at the right moment with the right offering.

So we're in a position, I believe, that we're really going to be able to provide additional great support for the sales teams in each of our product offerings and have solid lead production.

And as a 2-part question, follow-up to the go-to-market strategy or the sales strategy. I believe it was the first time ever that I've heard you talk about referral partners and the broker network. Is that a new channel for you? Or are you spending more effort on a referral partner network? And then my second question relates to your onboarding experience with HRScale, how you learn from the beta clients and what you're applying that going forward? And then are you planning on increasing onboarding capacity over the next 12, 18 months?

Sure. So let's see the first part of that question. I got to the last part. I lost the first part. Jim, do you remember the first part?

Referral partners.

Yes. Okay. So, first of all, throughout quite a bit of our history, we have what we call centers of influence that are referral partners of all types. And we've had a broker network for a fairly long time, and we have some good results from that. But those types of networks, a lot of times, when it comes to this larger client community, this is a bigger deal for them as it is for us. And this is a unique offering into that space.

So we are seeing a lot of interest from that group. And we're really working together doing some educational things as well because we think that's going to be a great referral channel. So a lot of the same folks, but -- and we've had a good program over the years, but I think this new offering is another way to ignite that group for more lead flow.

[Operator Instructions] The next question comes from Brendan Biles with JPMorgan.

Nice work with the results here.

Thank you.

Yes, of course. Yes, I'd love to ask on sales and marketing spending. I saw some OpEx shift under the hood to some marketing and advertising away from stock-based compensation, which is awesome, like, it kind of beat on GAAP by more than adjusted. So when you think about the exciting stuff that you talked about already on the call rolling out in the fall selling season and all across the business, where would you advise us to think things should settle out in that mix shift? Or where you're going with kind of go-to-market spending? And then how should we benchmark returns on that kind of spending?

Yes. So we have allocated more dollars into the sales and marketing effort as we go through. Not only do we have some more advertising in the second quarter of the year, but we have more allocated in the second half of the year as well as some ramp-up in the number of BPAs in the forecast as well. And so we feel like we're in a spot where capturing the opportunity that's out there is a wise move. And we've always measured thinking about sales and marketing spend relative to the customer lifetime value of a client that you're going to keep over, call it, an average of 6 years or so, 5 to 7 years. And so it makes a lot of sense to make that investment relative to the profitability you expect to get over the lifetime of that customer.

That's great, Jim. That makes sense. And good to hear that those investments make sense at the moment. If I could follow up with Paul, just because you've been sounding so excited about the sales on the call. I'm loving that. Could you just like advise us as to how you're telling your guys on the front line to keep the message straight in this year where you've done so much progress on the margin recovery while you still have these kind of new offerings? What's the North Star for those guys?

Well, it's always that we are here to do what's best for these clients. And our mission, of course, is helping businesses succeed so communities prosper. And that's what's in the heart of our sales team, our BPAs and beyond that, our whole company. That's kind of how we recruit people that understand what the heroes are out there in the small and midsized business community and what it takes for these businesses to be successful and how what they do benefits their world around them. So we're there to support them. And we have made changes this year to not only create as many great options as we can for clients, but also to help them manage through some of the complexities that are out there in the marketplace today.

So their North Star is always, we're here to do what's best for the client, and we can do it better than anybody else. We can help those businesses succeed, and that makes a huge difference. And so we continue to kind of beat that drum and going through the difficult period of making a lot of changes. And now it's the enthusiasm phase. Now it's, hey, we see why we're doing all these things, and we see what it can do for our customers. Our differentiation has been the breadth, the depth and level of care of our services, and we've enhanced that throughout this process. So I believe that enthusiasm level is going to keep on moving up, and it's a perfect time for a great last half of the year.

Okay. We have no further questions in the queue. I'd like to turn the call back over to Mr. Sarvadi for closing remarks.

Well, once again, we'd like to thank everybody for participating on the call today, and we are definitely pleased about the margin recovery plan year-to-date, our top priority for the year. And we're very excited about laying the groundwork to regain our growth momentum through the sales and marketing effort over the balance of the year and setting us up for a great 2027. So thanks again, and we look forward to next quarter.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good day. My name is Ali, and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2026 Earnings Conference Call. [Operator Instructions] And please note, this conference call is being recorded.

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead.

Thank you. We appreciate you joining us today. Let me begin by outlining our plan for this afternoon's call. First, I'm going to discuss the details behind our first quarter 2026 financial results. Paul will then comment on 3 strategic initiatives in 2026, our margin recovery plan, our efforts to rebuild growth momentum, including the HRScale rollout and our AI initiatives. I will return to provide financial guidance for the second quarter and full year 2026. We will then end the call with a question-and-answer session.

Before we begin, I would like to remind you that Paul or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website.

Today, we reported adjusted EPS for the first quarter of $1.31 and adjusted EBITDA of $103 million. Each of these results exceeded the midpoint of our expected range. Our quarterly results included outperformance in gross profit and operating expense management, partially offset by slightly lower-than-expected unit growth. The average number of paid worksite employees came in at the low end of our forecasted range at 303,049, a 1.0% decrease versus Q1 2025.

As you may recall from last quarter's call, our fall campaign sales and year-end client retention were both impacted by our margin recovery efforts, which we included in our paid worksite employee guidance. Worksite employees paid from new client sales declined by 7% compared to Q1 2025. Client attrition totaled 11% in Q1 2026, within our historical range of 9% to 12%. Net hiring within the client base was in line with our forecast and slightly higher than Q1 2025, but the hiring occurred later in the quarter than we had expected, which impacted the average worksite employees paid for the quarter. Paul will discuss our worksite employee results in more detail in a few minutes.

Total gross profit in Q1 2026 decreased by 3% to $302 million. This represents a significant improvement compared to the 21% decline that we experienced in Q4 2025 and demonstrates the progress of our margin recovery plan. Gross profit per worksite employee in Q1 2026 was $332 per month, which is slightly above our forecast and within our range of expectations. The favorability was primarily driven by lower-than-expected benefit costs, partially offset by the lower worksite employee volume.

Benefit cost per covered employee increased 5% over Q1 2025, which is a solid improvement compared to the 9% level we encountered throughout last year. Much of this improvement was expected, driven by the positive impacts of a favorable client mix change during our year-end client transition that was influenced by our pricing and client retention strategy, our plan design changes and our new contract terms with UnitedHealthcare. It is important to note that the new UnitedHealthcare contract is anticipated to have a positive impact of helping to flatten our quarterly earnings pattern starting this year with less expected earnings early in the year and more expected earnings later in the year. This is primarily the result of the pooling level change from $1 million per member per year down to $500,000. The new pooling limit includes a higher fixed premium that is charged evenly on a [ PEPM ] basis throughout the year, while the claims reimbursements are likely to be significantly weighted towards the latter quarters of the year.

While it is still early in the year, we are pleased with the progress of our margin recovery plan and the lower-than-expected Q1 benefits cost. We have seen several positive signs contributing to these results, including slightly favorable runoff of prior period claims, reduced large claim activity and lower-than-expected pharmacy claims. At the same time, we remain cautious about the range of potential outcomes for the remainder of the year, which I will discuss later in the call.

Total operating expenses decreased by 1% to $240 million in Q1 2026, which includes a $9 million restructuring charge primarily related to severance costs associated with the recent workforce realignment. Excluding the impact of the restructuring charge, our operating expenses decreased by 5%.

During Q1 2026, we invested a total of $13 million in HRScale, including $8 million in operating expenses and $5 million in capitalized costs. This compares with $13 million in Q1 of 2025, all of which was expensed. For Q1 2026, the effective income tax rate for purposes of adjusted EPS was 41% versus 29% in Q1 2025. This significant change was the result of our lower stock price, which reduces our tax reduction related to the vesting of stock compensation. Since the vast majority of our stock compensation vests in Q1 of each year, our effective tax rate is expected to normalize for the remainder of the year. The higher effective tax rate for Q1 2026 had a negative impact on adjusted EPS. Our adjusted EPS of $1.31 was 17% lower than the $1.57 we reported in Q1 2025, while our adjusted EBITDA of $103 million was 1% higher than the $102 million we reported in Q1 2025.

During the first quarter, we continued to return capital to our shareholders through our regular dividend program, paying $23 million in dividends, along with the repurchase of 171,000 shares of stock at a cost of $4 million. We ended the quarter with $36 million of adjusted cash. The decrease in adjusted cash was primarily the result of various seasonal working capital fluctuations including the timing of certain corporate payroll, health care and software maintenance contract funding. As of March 31, 2026, we had $380 million in unused capacity under our credit facility, of which approximately $330 million is available to borrow.

At this time, I'd like to turn the call over to Paul.

Thank you, Jim. Thank you all for joining our call. Today, I plan to cover 3 main areas. First, I'll share insights on our strong earnings results in Q1 and how we're executing our strategy for margin recovery this year. Next, I'll talk about our actions to regain growth momentum throughout the remainder of the year, especially as we navigate macroeconomic challenges in the SMB sector. Lastly, I'll provide our perspective on the evolving AI landscape and highlight the opportunities ahead for Insperity's strategic HR services, technology and expertise.

We are pleased with our Q1 earnings results, which reflect the effectiveness of our efforts to overcome the health care claims margin pressure experienced in 2025. As we discussed last quarter, our 3-year plan prioritizes margin recovery in year 1. The main drivers behind our successful margin recovery are our new agreement with UnitedHealthcare, our benefit plan design changes, our strategic pricing and client selection and our improvements in operating efficiency. We believe these strategies and tactics provided the desired step-up in margin to begin the year, and we continued these actions throughout Q1. We plan to continue this emphasis throughout the balance of the year with the objective of achieving a substantially full recovery as we move into 2027.

Our second priority for this year after margin recovery is regaining our growth momentum as we work to build the foundation for balanced growth and profitability in year 2 of our 3-year plan. Worksite employee growth is driven by our client sales and retention and the net change in employment within the client base. So let's look at each one of these to understand our outlook for the timing of regaining growth momentum coming out of Q1.

I mentioned last quarter as we focused on margin recovery, we expanded our tools, processes and client-sponsored benefit options to support client selection and pricing for new and renewing accounts. While we can clearly see these steps supported our gross profit recovery, they also contributed to lower-than-expected book sales and client retention. The effect on sales continued in Q1 as booked sales came in below our internal targets, except for our [ 3 ] HR360 mid-market sales. We have evaluated the processes and the outcomes and have recently implemented key learnings we believe will improve our booked sales results over the balance of the year. Our ongoing efforts to improve HR360 and HR core sales, combined with our new growth catalyst, HRScale, are expected to contribute to our growth momentum.

I'm very pleased to report today our initial HRScale beta clients were effectively onboarded in March and payrolls and invoices were processed in April as scheduled. We are off and running and the pipeline for HRScale clients is building. We believe HRScale is an unparalleled comprehensive solution that combines Insperity's flagship HR services and compliance expertise with Workday client-facing technology. We believe it's a growth catalyst for 2 reasons.

First, it addresses our historical success penalty where clients we have helped grow and mature decide to leave Insperity for technology built for larger firms. Second, we believe we will sell many more new larger accounts since this combination of technology and services are a hand-in-glove fit for the mid-market space of businesses with 150 to 5,000 employees. Our early sales effort indicates that we are right on track. We currently have signed commitments for nearly 6,000 worksite employees to be on board within the next 6 months. We also have sales activity ramping up significantly, including meetings, demos, bids and closing negotiations for both current clients planning to upgrade and new clients attracted to our unique comprehensive HRScale service and technology solution.

Our sales and marketing efforts for HRScale have also been refined based on the specific advantages that have resonated with business leaders. In particular, they view HRScale as a lower-risk decision due to the lower upfront investment, reduced time to value and lower ongoing costs compared to typical HCM and HR service vendor combinations in the mid-market space. We are actively engaged in the HRScale sales process with new and renewing accounts, targeting start dates of January 1 and each quarter of next year. We believe our HRScale ramp-up could play a significant role in regaining growth momentum as we move into 2027.

On the client retention side, while our strategy resulted in persistent attrition at the higher end of historical levels, we are seeing the desired impact as a greater percentage of departed clients were less profitable accounts, resulting in overall improvement in client profitability. We expect the slightly higher attrition to continue but moderate over the course of the year due to the smaller number of accounts renewing monthly and improvements we have put in place. The third contributor to our worksite employee growth metric is the net change in the existing clients' employee base. This continued to show volatility in Q1 turning negative in February and positive in March. We are cautious about the potential impact of the ongoing international conflicts and macroeconomic factors, including inflation fears and lingering uncertainty about tariffs, which could affect small business expansion or hiring.

Consistent with recent NFIB surveys, results from our business outlook survey shows a notable shift in sentiment with small- and medium-sized businesses becoming more cautious since January, particularly regarding the wider economy. More clients now anticipate economic challenges in the coming year. Worries about the economy have grown significantly as 54% of respondents expect a negative impact on their businesses, an increase from 42% in January, while only 25% foresee positive effects down from 37%. Optimism among clients has decreased compared to previous quarters. Nevertheless, most 64% still believe they'll perform better in 2026 than 2025, although this figure has modestly dropped from 70% in January.

Our survey reveals that clients are showing less confidence regarding increases in compensation, hiring, net earnings and sales volume. There's also a marked rise in expectations for higher capital asset costs compared to January, indicating greater sensitivity to cost and inflation awareness. The actual small- and medium-sized business data that we monitor as employment indicators align with this decline in business leader sentiment. Overtime as a percentage of base payroll and commissions paid to the sales staff of our clients were both below historical thresholds that typically have preceded increases in hiring and pay raises.

So in this environment, our paid worksite employee growth came in at the low end of our range. Based on the starting point for Q2, combined with our continued emphasis on margin recovery and the sentiment in the small- to medium-sized business community, we expect the low point of our previous worksite employee range to be closer to the midpoint of our new guidance. However, we expect continued progress on margin recovery to offset the shortfall from lower worksite employee volume. And as a result, we are reiterating our original adjusted EBITDA guidance for the year.

Now I'd like to discuss how artificial intelligence is changing the landscape and could become a driving force for Insperity in the years ahead. First, we'll look at broad employment challenges and how AI might affect the workforce. While labor -- the labor market faces risk of displacement, there are also exciting growth opportunities as AI sparks the rise of new businesses. AI is actively transforming the workplace by automating various tasks, which is expected to impact many roles, although white collar and entry-level positions are widely expected to experience the most upheaval. AI is also boosting productivity and generating new roles. So far, this shift has only slightly affected overall employment.

This shift has the potential to contribute to a decline in traditional employment, while significant disruption in other roles such as coding may drive changes that require employees to acquire new skill sets to leverage AI effectively. We believe disruption and a high rate of change in employment can possibly affect the overall level of employment growth and volatility in the SMB sector. However, it also potentially magnifies the need for sophisticated HR services, technology and insights, which could substantially increase demand for Insperity's comprehensive HR solutions. AI is driving new business formation in the U.S. with applications reaching nearly 500,000 a month in Q1, especially in AI-focused sectors. Growth remained strong at about 12% year-over-year for Q1. AI appears to be expanding opportunities and making starting a business easier, leading to record entrepreneurship among small and midsized companies.

While past technology shifts like PCs and the Internet replace jobs, they also boosted employment by fostering new businesses. Now as we drill down into our target of the SMB community, we see exciting possibilities for our HR solution offerings. As we roll out new AI agents alongside our AI-assisted HR experts, our strategy is to provide the flexibility to service our clients and worksite employees according to their preferences while also streamlining our operations and accelerating our product development.

SMB owners wear many hats and solution providers are increasingly becoming the principal avenue as channel partners for AI adoption among SMBs, utilizing established relationships to deliver secure and practical AI solutions that these businesses may find challenging to implement independently. Insperity is exceptionally well positioned as a premium HR channel partner to assist top-performing small- and medium-sized businesses in managing disruptions and personnel challenges resulting from AI-driven transformations. Our recent survey of our small and medium-sized business clients indicates that AI adoption is progressing. However, it does not appear to be driving widespread workforce changes yet. 62% of our clients are piloting or integrating AI primarily to support staff, facilitate routine operations and improve customer service.

We're leveraging our service using AI with our proprietary agent strategy. We started by implementing this solution internally in HR and payroll, resulting in higher productivity and service quality. We will soon expand this HR360 agent to help HR360 clients navigate the platform, find answers they need and boost engagement. This tool acts as a copilot removing barriers and increasing value for PEO customers. The next HR360 agent release will further improve client and employee experiences during major events, offering personalized support, faster onboarding and immediate access to expertise while reducing our service workload and maintaining security.

Our third HR360 agent version will include an introduced conversational reporting using demographic and transaction data, shifting from static reports to real-time insights for better decision-making without the need for users to have advanced analytics skills. We're also applying AI across the software development cycle in an effort to accelerate product launches, improve developer productivity and enhance code quality through AI-enabled methodologies.

As we look further ahead, we believe the nature of our business offers an exciting future for Insperity as the AI transformation continues to unfold. Despite technological advances, we believe human-to-human interaction remains essential and valuable in the human resource business. AI can deliver powerful data and insights, but when it's time to make the decision that affects the company and its people, there's no substitute for experienced human judgment and having Insperity standing shoulder to shoulder makes a profound difference. Our highest value for our SMB clients is the advice and support we provide through a lens of trust, judgment, care and protection of their company and their people, both employees and their families. We believe AI will likely add value to the strategic HR services, technology and expertise provided by Insperity.

At this point, I'd like to pass the call back to Jim.

Thanks, Paul. Our updated outlook for the full year 2026 is comprised of 3 primary drivers. First, we are revising our unit growth down to reflect both the weakening in small business economic sentiment and a slightly larger impact of our margin recovery plan on new client sales and client retention. Second, we believe that our margin recovery plan is slightly ahead of schedule, and we expect some continued improvement from favorable client mix changes related to our pricing and client renewal strategy. Third, we expect some continuation of the operating expense savings that we experienced in Q1. As a result, we continue to forecast adjusted EBITDA in a range of $170 million to $230 million for the full year 2026.

With regards to worksite employee growth, we are forecasting a range of 303,000 to 307,000 for the full year 2026, which represents a decrease of 1% to 2.3% from 2025. We have adjusted each of the drivers of our unit growth in our forecast. After being at the low end of our forecasted range in Q1, our starting point for the second quarter is a little lower than previously expected. In addition, as Paul discussed, our new client sales and client retention have been revised due to weakness in small business economic sentiment and the impact of our pricing and client renewal strategy. We continue to analyze and revise our strategies to achieve our margin recovery goals while also focusing on regaining our growth momentum, and we have implemented some changes that we believe can have a positive impact on our sales and retention results as we progress through the year. We continue to expect net hiring within the client base to be in the low single-digit range, similar to last year, with some positive benefit of summer help in Q2 that should revert in Q3.

Moving to margin recovery. We are pleased with the progress we have made to date, and we are forecasting some continuing improvement as we continue executing the plan throughout 2026. Some of the sales and client retention results that are a headwind to worksite employee growth also create a potential tailwind for margin recovery. We continue to see that the profitability of terminating clients, including the client terminations we know about for Q2 and Q3, has been significantly lower than the profitability of those we are retaining, producing a favorable change in client mix. We are also cautiously optimistic regarding the pricing and risk profile of our new client sales. It's important to note that many of the factors that drive our pricing results have the potential to positively impact cost trends over time.

As I mentioned earlier, our Q1 benefits cost results were slightly better than expected, including lower runoff of prior period claims, reduced large claim activity and lower-than-expected pharmacy claims. While those results are generally consistent with the plan design changes and client mix changes that we've made, we are forecasting somewhat less favorability than we experienced in Q1.

With regards to operating expenses, we continue to expect year-over-year reductions in 2026, driven primarily by lower headcount and lower HRScale expenses, partially offset by some increase in marketing spend and growth in the number of Business Performance Advisors, along with other inflationary cost increases. At this point, we expect continuing favorability in the remaining quarters of the year, but at a slightly lower level than in Q1 due to a few timing-related items. HRScale operating expenses are expected to be generally in line with our budget.

We expect our full year effective tax rate for adjusted EPS purposes to be 36%. The effective tax rate for GAAP purposes could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income. We expect our weighted average outstanding shares to be approximately 38.5 million for the remainder of the year, primarily reflecting the recent stock compensation vesting. As a result of the revised effective tax rate and number of outstanding shares, our full year 2026 adjusted EPS guidance range is now $1.60 to $2.60.

As for Q2 2026, we expect the average number of paid worksite employees to be in a range of 302,500 to 304,500, a decline of 1.5% to 2.1% from Q2 2025. We are forecasting adjusted EBITDA in a range of $18 million to $46 million and adjusted EPS in a range of $0.02 to $0.50. As I mentioned earlier, our quarterly earnings pattern is expected to be somewhat flatter than our typical historical pattern for 2 primary reasons.

First, our pooling level change with UnitedHealthcare from $1 million per covered member per year down to $500,000 resulted in significantly higher premium charged evenly on a [ PEPM ] basis throughout the year, whereas the expected claims reimbursements in that program will likely be significantly weighted towards the later quarters in the year. In addition, as we execute our margin recovery plan throughout 2026, the positive impacts are expected to be more pronounced as we move through the year.

At this time, I'd like to open up the call for questions.

[Operator Instructions] Our first question is coming from Andrew Nicholas with William Blair.

This is Daniel on for Andrew today. Just to start off, there's obviously a lot of moving pieces in guidance. But taking it all together, do you have any change to your expectation for gross profit per WSE? I know last quarter, you said you don't expect a recovery to pre-2025 levels, but would you still anticipate a year-over-year improvement on that line or more so in line with 2025?

Yes. So our original guidance included an increase in gross profit per employee compared to 2025 levels. We had mentioned last time that we didn't expect it to get back fully to 2024 levels. As we look at kind of where we are now compared to where we were coming into the year, we do think we're a little bit ahead of schedule on the profit recovery efforts. So we do think the gross profit per employee is likely to be a little bit higher than what we had in our original guidance. And between that and some additional favorability on the operating expense side, we expect that to be an offset to the lower worksite employee levels that we've guided to this quarter.

Okay. Very helpful. And then maybe switching to the -- more specifically on the WSEE front and the lowered guidance. It seems to imply that we're likely looking at year-over-year contractions in all of the remaining quarters of the year. Is that fair to say? Or do you have any other insight on what the sequential cadence of WSE declines might look like over the course of the remaining quarters?

I think the best is to look at the big picture. We were forecasting minus 1.5% to plus 1.5% when we started the year. But based on the sales and retention levels in Q1 and in addition, the sentiment change that was quite dramatic that we saw based on macroeconomic and international conflicts, et cetera, causing a pause in the small, midsized business community mindset. We -- that's what's driving us down to the range that we have now, which is -- it makes that low end of minus 1.5% to be more like the midpoint.

But we have a fairly narrow range on that for the year in number of worksite employees is what's in the press release, the range. And that's because once you get to this point of the year, the sales and retention levels, the attrition is not like the year-end when you have so many that are attriting. And we're able to track that fairly well for what we are expecting. So there's not a lot of further reduction. It looks like the total year is the midpoint of our range is around minus 1.5% growth.

Okay. Understood. And if I could squeeze one more open-ended one in. I was wondering if you could just kind of frame any dynamics that you're seeing in the competitive environment, if there's anything worth calling out on the pricing front or any indication that competitors are being more aggressive on price or otherwise?

Well, I think the competitive environment has been -- has had quite a bit of pressure over the last 1.5 years or so. And it's normal when you have the higher pricing that's going on, on benefit costs and other things to cause more shopping. And when that happens, that just causes more competitive pricing. But we are in a position where we continue to compare well and are able to give customers options for how to look at their future. And we have a significant competitive differentiation that is just launched in HR Scale, which puts us in a completely different category. And that, we think, is going to be really significant as we go forward.

Our next question is coming from Jeff Martin with ROTH Capital Partners.

Paul, I wanted to dive into your sentiment survey results. Specifically, how are you seeing that affect -- if you are seeing it affect the sales cycle for HRScale at all?

On the HRScale front, it's kind of a little early for us to have a comparative to compare against some of the sentiment type issues. But no, we have -- we definitely have a significant pipeline building. There's quite a bit of enthusiasm around the uniqueness of this offering. And as I mentioned in my remarks, the part of our sales effort that actually hit budget was the mid-market area, where there's a lot of conversation, even though that area involves both HR360 for mid-market and HRScale. There's definitely tremendous energy around that, and we feel really good about that. The decision for HRScale and for mid-market, HR360 customers is more of a longer-term decision. So generally not as affected by the immediate circumstances as the smaller companies.

Great. And then for my follow-up, I wanted to dive into the sales productivity. If you could break that down between HR360 and HR core? And then tied to that, how has the adoption of client-sponsored benefit programs been trending? Are you seeing that continue to be more commonplace than historically?

Yes. Well, certainly, as we talked about on our last call in the fourth quarter, we really made a change in the sales process and some of the tools that we're using to identify customers and to look at how we wanted to offer components of what we do. We want to be more values-based talking about the full picture on the benefit side. We would determine whether being in our comprehensive plan is the right approach for that particular client. And these are new sales motions, new processes. So it took more in the first quarter to get these things working in a way that and understood by the sales team and internally by those that are supporting the organization.

So when you have a new sales motion, that takes some time to think things through and figure out exactly how to go about it. Now we did some real assessment of what worked, what didn't work, and we recently put in some new practices and tweaked, adjusted things, and we actually believe that's going to have some dramatic effect. But that's what you have to do when you are focused on margin recovery as the priority. Now having this very successful quarter where you can see what happened and see how that worked that is a breadth of fresh air for everybody and immediately moves attitudes and activity back to positive direction.

Our next question is coming from Mark Marcon with Baird.

Paul, just with regards to HRScale, how many clients do you now have on it? And what are your expectations with regards to having it fully ramped and when the associated costs with that ramping will start falling off? How should we think about that? And then I've got a couple of follow-ups.

Sure. Well, let me describe, first of all, the stage that we're at. Obviously, we just brought on. The first clients are on that new platform, that new entity on HRScale. And we are in that ramp-up phase of selling new accounts and selling current accounts to upgrade from HR360. So we have a significant pipeline already. And as I mentioned on my remarks, we have nearly 6,000 scheduled to be on board in the next 6 months on that program.

We also, of course, are now beginning to sell accounts to be scheduled in because it's a 6-month period for us to do the deployment and enablement to bring them on board. So the way to look at it for now, of course, is that we are converting current accounts onto the platform. That doesn't add worksite employee count, but it adds retention for those customers for multiyear accounts and many were focused on the larger accounts. So it's a very positive foundational effect on retention going forward and pricing.

Now in addition to that, we are now selling new accounts. that are coming straight on to HRScale. And over the balance of this year, those accounts will largely be set to start January 1 or April 1 next year, July 1. There will be -- we will start literally filling the pipeline and for those quarterly starts. And we'll, of course, start the deployment enablement as we sign those contracts. Now that will be -- will feed in directly into the growth momentum that we see for 2027 and beyond. So that should give you a picture of how to think about it.

So in terms of how that offsets cost, obviously, we have the cost in here now for being able to do the deployment enablement. And as we ramp up this employee count, there's your revenue to offset those costs in addition to the actual deployment enablement fees, which is a new element that we have not had to offset those costs before. So it's -- again, it's a start-up of that business, but it's on a great track, and we really see it being a hand-in-glove fit for these target clients.

The other point I wanted to make that I made in my remarks is that we have already seen a very clear picture in the business leadership evaluating this, they can readily see and feel that there's less risk to this decision than they've had to consider doing these things in a different way. Going through the traditional effort to have an HCM system and multi-vendors to provide the support services. There's a lot of risk around that because of the size of the investment, the length of time it takes to actually get to some realized value and ongoing ultimate cost. HRScale is very easy for them to understand how it has changed that equation.

That's really encouraging. I was referring to the -- just the implementation costs that you had outlined when you first announced the partnership and you talked about the incremental expense just on your end to implement it and to get the system up and running. I was just wondering if we could see some costs falling away either later this year or next year, just purely from your own systems development perspective now that you've got some clients on it and that you're getting ready to bring on more.

Yes. So we definitely expect that investment costs related to HRScale are going to decline in the second half of the year. We're kind of in a little bit of a stabilization period right now that we talked about in our last couple of quarters. But as we get through the second quarter, a lot of people and their time are going to be going to other things. I think that we'll still have a typical pipeline that you would have for any product from an investment standpoint going forward.

One of the things that's happening is that people that have been involved in the investment side of this deal now transition to becoming the service providers, the onboarding resources, the service provider resources that actually go along with the revenue that is being generated. Other costs that are third-party costs, we expect to taper away. And then the third piece being some internal technology resources that get reprioritized on to other key initiatives that we're working on -- kind of working on next, if you will. So there's a variety of different places that those resources go.

Got it. And then just on the health care costs and the benefit costs, if I heard you correctly, I think they were up like 5% year-over-year, which is a really good outcome given the level of inflation. Is that basically due to plan design changes that you were able to set through? And is it your expectation that over the balance of the year, that 5% will kind of hold in terms of benefit cost inflation on a per user basis?

Yes. I would say that the biggest impact is the client mix. So obviously, we've increased our pricing. And then you have the client mix change that comes from lower profitability, clients terminating higher profitability, clients staying, and that's kind of an embedded feature of the way we're playing out our strategy. I think that's a little bit bigger than of an impact on Q1 benefits cost and the plan design changes themselves. But the plan design changes also have an additive cost savings there.

And then the third component being the new contract with UnitedHealthcare. And I think the one thing that we wanted to try to make sure we pointed out today is the impact of that is more back-end loaded than I think probably we have maybe clearly communicated in the past and are in some earnings estimates that are out there on the analyst side. We are paying a higher premium for the $500,000 coverage, the claim reimbursements and the exposure that we're not going to have on claims going forward is more back-end loaded in the year. So we are expecting there to be a little flatter impact to our quarterly earnings pattern. So that's a smaller impact on Q1, the new contract. and it will be significantly larger as we go through the year.

Our next question is coming from Tobey Sommer with Truist.

I wanted to ask about your sales counselors and advisers, how you're thinking about growing those to drive growth beyond this year into '27 and '28. I'm sure you've been busy training, but trying to figure out how you can brute force some growth by getting more feet on the street.

Thank you. We will be over the balance of this year, modestly increasing the number of BPAs, BPCs, but we do not have to increase that as many to regain growth momentum substantially because of the average size of the HRScale accounts and how even have an HRScale available is increasing interest in HR360 mid-market accounts. So we believe there's a built-in factor that helps drive the growth based on the average size of clients where it doesn't take as many BPAs and BPCs. But we are expecting once we get into 2027 to have a more steady continuous uptrend in the number of BPAs for the target small business market.

And I would add, we saw some solid growth in the BPA count even in Q1. So that process has already started underway, and we expect to add more as we go through the year.

And from a balance sheet and capital allocation standpoint, what are the priorities and expectations as you work your way through the balance of '26?

So pretty much the same as it has been in terms of our prioritization, obviously, for investment, we've invested heavily the last couple of years in our new offering. And now we're at that breakpoint where the investment is tapering down, and we're about to see revenue start coming in. So that's the exciting part about that picture. But we also continue to have the same priorities with the Board on capital allocation and not seeing that change at this time.

Our final question today is coming from Brendan Biles with JPMorgan.

Appreciate you guys going through all the detail with us. Two questions for you guys. One, probably more interesting and one boring one. So first of all, I'm curious, when you get a result back like you guys heard in the survey from your customers that everyone is a little bit more worried about the environment. People are concerned that their business might not do as well this year than it did last year. What levers are available to you to adjust your go-to-market to ensure that you're still kind of providing the most value possible to your clients and helping them through this time, so you can maybe maintain a little bit more share of wallet? And to what extent are you guys able to put that into place this year?

And then on my boring question, I'm sorry if I missed it. Just I know you called out the 2 things that led to the guidance revision? It was like macro and then also a little bit more churn from the pricing initiatives. To what extent are you able to attribute the revision between those? I know it might be tough and maybe just comes from some of both? Or is it coming from more one or the other? That would be great.

Sure. No, we looked at -- on the 3 drivers for growth, remember, it's sales, retention and the net change in the client base. And all 3 of those are slightly lower than we were expecting when the year started. And so when you factor all those in, that's just going to affect you as the year goes on. We do change the messaging. We do emphasize different aspects of what we're doing to help client by client. We also, though, have on the sales and retention side, having this good quarter under our belt changes the dynamic for the environment for the selling and retention effort as the year progresses.

And as I mentioned in the call, we have fewer to contend with on the renewal side because the heavy renewal period is behind us now. And so we see some optimism on moving forward. But it is affected. The lower starting point already makes the year. You have to take down that projection for growth for the year. Like I said, so that means that, that low end of our previous range is now about the midpoint of our range for the year. So that kind of gives you a feel for that aspect.

And I think the one thing that I would add to that is if you look at the guidance range, obviously, we took a little bit more off the top side of that more than the bottom side of that. So the sentiment change has some impact on, I think, the top end, kind of where we are and what we've experienced so far changes the lower end a little bit more than the sentiment changes more at the top end.

I think one more aspect on that, that's probably worth putting in there is that some of these things that affect that slightly lower growth on all 3 of those areas actually enhanced the profit recovery mode that we're in. And actually, that's why there's a great offset between those 2 factors that were changing and still have very strong feelings about our recovery for the full year.

Yes, absolutely right. No, great to hear that the retained clients are the ones you want to hold on to anyway.

Absolutely.

Ladies and gentlemen, we have reached the end of our question-and-answer session. So I would like to turn the call back over to Mr. Sarvadi for any closing remarks.

We just want to thank everybody for participating today, and we're excited that we have reached that first milestone of our profit recovery, and we will be working to regain growth momentum as the year progresses. Thank you for your participation today, and we look forward to being in touch with you either out in the marketplace or on our next call. Thank you.

Thank you, ladies and gentlemen. This does conclude today's call, and you may disconnect your lines at this time. And we thank you for your participation.

Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Insperity Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead.

Thank you. We appreciate you joining us today. Let me begin by outlining our plan for this afternoon's call. First, I'm going to discuss the details behind our fourth quarter 2025 financial results. Paul will then comment on our year-end transition, profitability recovery efforts and other key drivers in 2026, including the rollout of our new HRScale solution. I will return to provide financial guidance for the first quarter and full year 2026. We will then end the call with a question-and-answer session.

Before we begin, I would like to remind you that Paul or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website.

Today, we reported adjusted EPS for the fourth quarter of minus $0.60 and adjusted EBITDA of minus $13 million. During the quarter, we accelerated the pace of sales office consolidation, resulting in an additional operating expense of $2.8 million. Excluding this expense, adjusted EPS was negative $0.54 and adjusted EBITDA was minus $11 million, near the middle of our forecasted ranges. The average number of paid worksite employees was 312,377, an increase of 1.1% over Q4 of 2024. This was slightly below our forecasted range due to continued weakness and volatility in client net hiring. Client net hiring was in line with our forecast in October and December, but was offset by an unexpected net reduction in November.

Regarding worksite employees paid from new clients and client retention, both were generally in line with our forecast. Worksite employees paid from new clients increased by 6% over Q4 2024, while client retention was in line with prior year results, averaging 99% per month during Q4. Paul will discuss our year-end transition in a few minutes.

Gross profit per worksite employee in Q4 2025 was $183 per month, generally in line with our forecast. Benefits costs were within our expected range as health care claims development related to prior periods ran out higher than expected, but were largely offset by favorable results in other benefits components. We also experienced some favorability in the workers' compensation and payroll tax areas. Operating expenses in Q4 2025 decreased by 6% compared to Q4 2024. As I mentioned earlier, our Q4 operating expenses included $2.8 million related to an acceleration of sales office consolidation.

In Q4, we invested a total of $15 million in HRScale, the joint solution of our Workday strategic partnership, including $10 million in operating expenses and $5 million in capitalized costs. This compared with $19 million in Q4 of 2024, all of which was expensed. During the fourth quarter, we continued to return capital to our shareholders through our regular dividend program, paying $22 million in dividends. For the year, we paid cash dividends of $90 million and repurchased 232,000 shares of stock at a cost of $19 million. We ended the quarter with $57 million of adjusted cash. During Q4, we also amended our credit facility, which extended the maturity date to December 15, 2028, increased our borrowing capacity from $650 million to $750 million and raised our maximum leverage ratio from 3x to 3.75x EBITDA as defined in the agreement. As a result, at December 31, 2025, we had $380 million of available capacity under our credit facility.

At this time, I'd like to turn the call over to Paul.

Thank you, Jim, and thank you all for joining our call. Today, I'll focus my comments on our plans to position Insperity for stability and long-term value creation coming out of the significant challenges we encountered last year. I'll begin with the outcomes of the decisive actions we carried out in the fourth quarter in response to these challenges. Then I'll present an overview of our 2026 strategy to further enhance margin recovery and regain growth momentum in our flagship offering, HR360, and to advance the rollout of HRScale. I will conclude with some comments about the three-year plan we have initiated and our 40th anniversary we are celebrating this quarter.

Throughout 2025, Insperity encountered two macroeconomic external factors that had a considerable impact on growth and profitability. One of the factors was the ongoing uncertainty in our primary target market of small- and medium-sized businesses and the corresponding employment stagnation. The second factor was the industry-wide step-up in health care claim costs, which are expected to continue at an elevated level in 2026. This trend drove our benefit plan direct costs causing a significant gross profit margin squeeze.

The highlight of the fourth quarter was the achievement of our #1 priority to finish our fall sales and retention campaign with measurable margin recovery. We accomplished this key objective. As we enter 2026, we have seen a step-up in several key drivers of gross profit margin that we believe position us for a significant recovery in profitability this year.

On the growth side, we ended 2025 with solid new booked HR360 sales for the full year, although our Q4 results reflected our efforts to prioritize margin recovery. New booked sales for the year came in within 2% of the prior year with 14% fewer Business Performance Advisors and a 13% improvement in sales efficiency. However, there were several factors that impacted our starting point for worksite employees in 2026. In Q4, the labor market continued to reflect uncertainty in the small- and medium-sized business community at large and within our client base at Insperity.

The net change in employment in the client base from hiring and layoffs was the primary reason we ended 2025 with several thousand paid worksite employees fewer than expected. As we focused on margin recovery, we introduced new tools and processes during the fall campaign to support client selection and pricing. While we believe these steps supported our gross profit efforts, they also contributed to lower-than-expected new booked sales in November and December. Our client retention results were also strong for the full year, but less favorable for renewals processed late in the year that would be effective in early 2026. Attrition was slightly higher than expected due to our margin recovery pricing and a higher number of companies initiated -- of company-initiated nonrenewals, both of which contribute to profit recovery. All these factors led to fewer paid worksite employees at the beginning of the year, which lowers our view of projected growth for 2026 by around 3%. At this point, we expect growth for the year between minus 1.5% to plus 1.5% compared to 2025.

As we transitioned into the new year, we also made a difficult but necessary decision to rightsize our organization to the current and future needs of the company. This came after a careful review of how to strengthen the business and position the company for future growth. This realignment has been initiated and will impact approximately 4% of our non-sales staff. So, as we enter 2026, our plan includes continuing the emphasis on margin and profit recovery and regaining our growth momentum, which we expect will be achieved through HR360 sales and retention initiatives and the rollout of HRScale.

We believe we have more opportunities to improve key drivers to gross profit as we continue our margin recovery strategy, including client pricing and selection on new and renewing accounts. Approximately 60% of our current client base are yet to receive applicable pricing upon their renewal dates over the course of the year. We will also continue to approach renewals consistent with our margin recovery strategy. Throughout the year, particularly in the fourth quarter, the challenges encountered prompted innovative thinking and the implementation of strategies that we expect will enhance sales retention and overall prospect and client experience.

We accelerated one of these strategies last year, which has resulted in the ability to quickly provide prospects with the best product option for their needs, including new client-sponsored benefit plan alternatives, working with the licensed brokers and our insurance agency. These efforts led to an increase of sales of our HR360 offering without participation in our health care plan and in many cases, the clients elected a client-sponsored benefit plan coordinated through our licensed brokers.

As we offer these alternatives to renewing clients as well as prospects, we believe this approach will be favorable for sales and retention going forward. Our sales convention in late January was timely, especially to reinforce value-based selling for the entire sales team and share best practices of the highest performers. We believe our HR360 sales team is reset with new tools for a solid year ahead. We anticipate growth momentum for HR360 from the February low in paid worksite employees through year-end. This is based on historical seasonality trends where paid worksite employees added from booked sales typically exceed attrition during this period.

Now let me update you on the rollout of HRScale and how we believe this solution helps us regain our growth momentum going forward. As a reminder, HRScale, our joint solution with Workday is one of the most significant transformations that has occurred at Insperity designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 to 5,000 employees. We believe the addition of HRScale positions Insperity distinctively within the marketplace and serves as a new driver for large client sales and retention. This dramatically increases our total addressable market and advances our growth model. This solution also provides a possible new growth measure and greater visibility for future growth.

The HRScale rollout continues to be on an excellent track. We have scheduled beta clients to go live next month, and we expect they will be on the system to run payroll as of April 1. The pipeline of current clients wanting to upgrade to HRScale and new prospects to go straight to this solution continues to grow. Our sales motion, including demo capability and tools to communicate the value of this offering are resonating and confirming the demand we have expected for HRScale. Based upon the early HRScale's activity levels with new prospects and existing clients, we expect approximately 6,000 to 8,000 paid worksite employees on HRScale by year-end with a solid queue scheduled for future deployment. Current HR360 clients upgrading to HRScale are expected to add new revenue over time and improve retention with longer contracts, but not add to paid worksite employee growth since they are already in the numbers on HR360. New prospects signing on as HRScale clients will add revenue both as part of the upfront deployment enablement fees and as they add to our growth in paid worksite employees once they run their first payroll.

While the deployment and enablement period is currently 6 months, we expect to reduce this period over time as our teams gain experience. All HRScale clients are added for first payroll at the beginning of a quarter. This allows us to sell accounts and schedule their start in a queue and provide visibility into paid worksite employee growth. We are proactively marketing HRScale to all our clients with at least 150 employees throughout this year and believe the value of this offering can have a positive effect on year-end retention in 2026. We believe that the combination of sold HRScale accounts to new clients and retention of larger HR360 accounts may provide a step-up into 2027 to launch year two of our three-year plan I will discuss more in a moment.

HRScale also represents an opportunity to extend the Insperity brand and widen the sales funnel for prospects for our flagship comprehensive HR solution, HR360 and our traditional employment offering, HRCore. In summary, Insperity is entering 2026 with stronger alignment, clearer priorities and the most competitive product portfolio of our history which we believe positions us well to regain our growth momentum.

Last quarter, I mentioned our work on a three-year plan with the objective of returning to the targeted growth and profitability key metrics of our business model. This plan includes specific initiatives designed to return our key drivers to these metrics and generate corresponding exceptional shareholder returns. Our historical key metrics in good times include double-digit unit revenue and gross profit growth, combined with operating leverage to achieve adjusted EBITDA annual growth rates north of 20%.

After 2025, this seems like a considerable challenge. However, we have developed a three-year plan that we believe provides a clear strategy for margin recovery in year one, balanced growth and profitability in year two and in year three, high-performance key metrics. It's also important to note that we're focused on building substantial improvement in adjusted EBITDA in subsequent years like we expect in 2026.

In just under a month, Insperity will mark 40 years of fulfilling our mission to help businesses succeed so communities prosper. Reaching this milestone having pioneered and led a new industry over four decades is truly a significant achievement. The number 40 is often associated with the time of testing, refinement, transformation and a new beginning moving up from one level to the next. This certainly applies to our 40th year at Insperity. 2025 presented significant unexpected challenges to overcome to pass the test of time.

We have always been a values-based culture-driven people-centric company, aspiring to an exceptional standard of excellence. We believe Insperity has been in a category of one in the HR marketplace, differentiated by the breadth and depth of our services provided and the level of care of our small- and medium-sized business clients, worksite employees and their families. We view this as a rock-solid foundation upon which we will build our future along with many other pillars of our success from the past.

Our 40th year was exceptionally challenging, but we believe our resilience and determination have us on a solid path for margin recovery in 2026 and a return to higher growth and profitability and high performance key metrics as we move ahead into the next 40 years.

At this point, I'd like to pass the call back to Jim to provide some further perspective on 2026 expectations.

Thanks, Paul. By all accounts, 2025 was a challenging year. We began the year with early growth momentum and a backdrop of improved small business economic sentiment. That was quickly offset by significant headwinds due to a rapid escalation in benefits cost trends that were experienced throughout the health insurance industry as well as the macroeconomic impact of tariff and other government policies. These factors significantly impacted our results. For the year, the average number of worksite employees paid increased 1% to just over 310,000. Adjusted EBITDA declined 51% to $131 million and adjusted EPS declined 71% to $1.03.

Throughout the year, we took significant steps designed to limit the financial impact of these challenges and set the stage for profitability recovery in 2026. We increased our pricing targets and adjusted our pricing and client selection tools and strategies. We renegotiated our contract with UnitedHealthcare, reduced our pooling level to $500,000 per member per year from $1 million and implemented plan design changes, all of which are effective as of January 2026. We also managed our cash operating expenses under budget by $20 million. At the same time, we continue to advance our Workday strategic partnership, investing $59 million to bring Insperity HRScale to market, of which $48 million was expensed and $11 million was capitalized. We built out the technology platform and the service delivery playbooks. We initiated the implementation of our beta clients with a plan to go live in March. We launched our joint go-to-market plan to attract and sell new clients into the solution.

As we reflect on 2025, we faced the challenges head on with resiliency and results. We made a lot of progress, and we remain steadfast in confronting the challenges ahead. As Paul discussed, our fall campaign and year-end transition resulted in a lower starting point in paid worksite employees. Given our recent sales, client retention and client net hiring results, we expect our average paid worksite employees for the first quarter to be in a range of $303,000 to $305,000, a decline of 0.3% to 1% from Q1 of 2025. For the full year of 2026, we are forecasting our average paid worksite employees in a range from minus 1.5% to plus 1.5%.

With regards to gross profit, we do not expect a full return to pre-2025 gross profit per worksite employee levels in 2026. Rather, our forecast includes a significant improvement in key profitability drivers to start the year and continuing improvement throughout the year.

Based on our year-end transition results, we believe that our pricing and client selection strategies are working as planned. We have seen a step-up in pricing in January 2026 in both new and renewing accounts. In addition, the profitability of the clients that terminated in our year-end transition was significantly lower than the clients that remain active, which we expect to provide a meaningful boost in our profitability.

Also, we believe that the quality of the new clients that have started is improved from a demographic risk and pricing perspective. We expect that the combination of these favorable impacts, along with our planned design changes and our renegotiated contract with UHC, provide the drivers for gross profit recovery in 2026. While health care cost trends remain at elevated levels, we are pulling many levers that we believe will either positively impact this trend through cost reductions or increase our pricing.

The progress we have made so far is significant, and we intend to continue executing these pricing and client selection strategies throughout 2026. We believe that our employee benefit solutions remain competitive in the marketplace, and we can supplement those solutions as appropriate with client-sponsored benefit offerings through our insurance agency. Our plan is to provide the most effective option to each client and prospect, increasing our value proposition while also attracting and retaining the right clients at the right price to produce sustainable profitability at normal historical levels.

Regarding workers' compensation costs, we have historically been successful in managing claims to completion at a level below actuarial estimates, which has provided additional gross profit. We are taking a conservative approach to forecasting in this area relative to our history, consistent with our normal practice.

With regards to operating expenses, we expect another year-over-year reduction in 2026, driven primarily by reduced headcount as well as lower HRScale investment costs. We are planning to utilize a portion of those expected savings to ramp up HRScale service capacity, increase marketing spend and grow the number of Business Performance Advisors, along with other inflationary cost increases.

In conjunction with our year-end transition, we analyzed our organization and have eliminated positions representing about 4% of our non-sales headcount. This effort, which we believe will be substantially completed in Q1, is expected to reduce our operating expenses by $20 million in 2026, excluding the impact of a $9 million restructuring charge.

With regards to HRScale, our investment costs are expected to be near the Q4 2025 levels in the first two quarters of 2026 as we work through the payroll go-live and stabilization period. Beyond that, the investment costs are expected to drop to a much lower level, consistent with a normal product road map. Throughout 2026, we expect our HRScale-related service costs to ramp up as we reallocate and add more resources to onboard and service clients. All in all, we expect our 2026 HRScale-related operating expenses to be about $12 million less than 2025 levels.

Interest income is expected to be about $7 million lower than 2025 levels due to reduced interest rates and cash balances. The effective income tax rate for purposes of adjusted EPS is projected to be 34% for the full year 2026. The effective tax rate for GAAP EPS could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income. We plan to exclude the $9 million restructuring charge from our adjusted EBITDA and adjusted EPS calculations. As a result, we are forecasting full year adjusted EBITDA in a range of $170 million to $230 million, an increase of 30% to 76%. For adjusted EPS, we are forecasting a range of $1.69 to $2.72, an increase of 64% to 164%. As for Q1, we are forecasting adjusted EBITDA in a range of $81 million to $111 million and adjusted EPS in a range of $1.03 to $1.50.

At this time, I'd like to open up the call for questions.

At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Andrew Nicholas with William Blair.

I guess, first, I was hoping we could dig in a little bit further on the HRScale momentum. It sounds like you have line of sight into 6,000 to 8,000 employees on the platform by year-end. I was hoping you could maybe talk about how confident you are in that number? What the average size of clients coming online looks like? Is it at the lower end of the 150 to 5,000 range? Or how should we think about the typical client there? And how much of that year-end number is new clients versus ones that are transitioning from the HR360 platform?

Those are good questions, and it is exciting to be at this point on launching the new product. Now what we have to balance here is we, of course, have informed our current clients first, and we have to prioritize especially larger customers. So we have done that, and we do have visibility there. But we also have tremendous energy around the prospect base, and we do anticipate new accounts as part of this picture. However, this is more like filling slots for each quarter. And so what really gives us excitement about the visibility here is that as we close business, both selling current accounts to upgrade HRScale and new businesses, we're going to be able to lock them into whatever their effective date needs to be based on the implementation period that works best for them, et cetera.

So I know that's kind of a long answer. We don't have those allocations specifically yet as to which accounts. Earlier, we have prioritized larger current accounts because we want to secure them and avoid the attrition that can be caused that is so significant.

So -- but there's a balance there. And it's account by account going through the process, evaluating their needs, evaluating their timing, what works for them. And we're excited about both the ones that will be on this year, but also looking to really build that queue of those who are sold both new and upgrading accounts and have a significant queue as we go -- as we get toward the end of the year.

Understood. So I guess is it fair to say that 6,000 to 8,000 pipeline, not a major part of kind of gross profit in '26. It's more about setting up for that contribution in the out years.

That's correct. That's correct. That's kind of the way it will work because we're just rolling those in. You've got the beta clients coming on in April, a group of clients coming on in July, a group of clients coming on in October.

Perfect. Understood. And then maybe if I could ask my follow-up question, just on health care claims dynamics. Any numbers you can kind of put around the expected benefit cost trend in '26, Jim?

Yes. So I think one thing to think about is, as we've said, we expect the claims trend to remain at an elevated level on a gross basis. We've obviously taken a lot of steps to try to positively influence that down lower through the negotiation of our fees with UnitedHealthcare through our plan design changes. We had talked last quarter about that being worth about 2%. We also see this change over in our -- in the client base with the terminating clients being significantly lower profitability than the ones that are remaining.

So that actually can have some impact on both the pricing and on the cost side. So, as of right now, we're not lasered in on exactly what the -- or talking about what we think the kind of net trend for us to be this year is. But I think the thing that I would say is we're starting with a high gross number and we -- and all the things that we're doing are aimed at positively influencing that number.

Our next question comes from Jeff Martin with ROTH Capital Partners.

I wanted to dive in a bit more on the client-sponsored health care plan. Do you foresee this being a significant trend? And is that a strategic initiative? Or is that just kind of how the market is currently unfolding?

It's kind of both. It's a strategic initiative from a couple of perspectives, Jeff. One is we want to be able to offer the very best offer for every client. And this gives us the opportunity to do that. We've had our agency in place for a considerable length of time, and we've used it modestly, but have really ramped it up for the good reasons as the last half of last year.

But it also allows us to have another way to grow the company with taking less risk on the benefit side. Obviously, we've got some wounds from a tough year last year on that front. But when you look at taking less risk through our contract with United with a lower level or pooling level. And then we have HRScale now where large customers are more likely to want some other options. And so we've been preparing for that as well. So extending this into the rest of our HR360 base was a good idea and gives us another option.

Great. And then if I could just drill down a little bit more on the churn. It sounds like the a good portion of that churn is lower profitability clients. Are you able to give us a sense of maybe what percentage? And then I have a second part to the question, and I wanted to also ask what your net hiring assumption is embedded in your 2026 guidance from the existing client base.

I don't want to necessarily give an exact number, but I will say it is a larger spread than I've seen. And I've moved over into the pricing area about 15 years ago. So as we go from one year into the next, it's the biggest difference in the profitability of the clients stay in versus the profitability of the clients have terminated that we've seen in a very long time.

On the net gain from the client base or loss from employment, obviously, we had another year last year, even in the fourth quarter that reflected the ongoing labor market issues. And so we had a very low number last year. And so we've just built a range around that very low number, both directions that's included here. It's -- we think that was the appropriate approach to take.

The next question comes from Tobey Sommer with Truist.

I was wondering if you could describe your cash flow expectations associated with the '26 guidance and maybe remind me to what degree there's an influence of investment shifting from OpEx to being capitalized in the EBITDA number?

Thanks, Tobey. Yes, until we started capitalizing related to Workday in the third quarter of this year, we had seen a pretty good drop-off from our historical levels as far as CapEx had gone. So as we wind this down, change over to a lower level of investment in HRScale, we do expect that some people will be going back and become available to work on other projects that will also be capitalizable. Overall, I would say that we generally expect our CapEx to go about back to where it was before we started the Workday. -- project kind of $40 million to $45 million a year, something like that. And so that's the thought process there.

And then relatively similar, should maybe be a little bit less interest expense. We did have a couple of rate cuts last year. Certainly, we recognize that our adjusted cash balance at the end of the year is a little bit lower. So we're watching that. We're about to go into our higher earnings quarter. So we'll be watching the cash flow and deciding as we go through this year, whether or not we need to borrow a little bit more money on our line of credit or not. So that's a possibility that we could do. But generally speaking, it's EBITDA, it's CapEx interest expense and then the dividend policy.

Paul, do you want to reference the dividend?

Yes. I mean we're pleased with the rebound that we're experiencing this year. And every quarter, we obviously meet as a Board and make those kind of decisions. But that's a very high priority for us, and we're on the right track.

If I could ask a follow-up about health care. This has been a journey for the entire -- anybody touches health care. This isn't just a PEO nor an Insperity phenomenon. If you could -- when you step back and you think about reducing the firm's exposure to health care, what do you think that, that does to the long-term value proposition to customers?

Yes, that's a good question. And fortunately, we are at a stage in our business where the HR services that are provided, that's the core value of what we're providing. And benefits, of course, is one aspect of -- usually, it's all about attracting and retaining key people, but there's a lot of other things you do to attract and retain key people. And we provide all of the services that contribute toward that. So benefits still obviously critically important, but we believe that we can have a future that purposefully lowers our risk in this area, but the demand for our service is much broader than just benefits.

And I think we really have a great sales organization that kind of this -- I mentioned in my remarks about our convention was really focused on the full value of what we provide. And we had some real high performers across the country that they didn't miss a beat in anything that had to do with the benefit plan issues that happened last year. And we really wanted to extend that across those best practices across the organization we did. So I really think this is kind of one of these examples where some of the learnings that you have going through a difficult period turn into a real powerful positive going forward.

If I can add to that real quick. In retirement services, we've always had an approach that you could come on to our big plan and we could provide all the service around that. If you wanted certain aspects of a plan unique to a customer, you could adopt a client-sponsored plan. We can still record keep it for you. Or if you wanted to use an outside recordkeeper, we could interact with that from a payroll perspective to make sure the money was taken out of everybody's check right and gotten over to the record keeper.

So that approach is similar to the approach that we're looking -- that we have on benefits. It's just that historically, our attachment rate of our big plan has been way over 90%. I still -- I think that we'll still attach our big plan at a very high rate. It is very cost effective. It has good options in it. It has some flexibility in it. But to the extent that there's an opportunity to look at a client-sponsored program through our insurance agency, whether it's a larger customer or a smaller customer, it does give us more flexibility to kind of meet them where they're at and approach it the same way we do with retirement services.

Yes, and also be able to have fees that relate to doing the administration, which we believe is an important part of that as well.

Next question is from Mark Marcon with Baird.

Just with regards to the health benefits costs, if I heard you right, Jim, you basically said you're doing some things to mitigate roughly 2% of the price increase. So does that get us to somewhere in the 6% to 8% range in terms of when you're going to renew a client? And did I hear you correctly that we still have about 60% of the client base to go through in terms of renewals for the balance of this year with the new plan?

Yes. Let me clarify on that front. So from a pricing perspective, we're still looking at price increases in the teens on average. And I say on average, we obviously will have some variance across the client base, but average is in the teens. And as Paul mentioned, on the pricing side, we renew about 40% or so of our clients as we come through kind of the year-end time frame. So as we look between now and the end of next year, relatively evenly spread out. We've got about 60% that will go through renewal at some point this year.

From a cost perspective, the United contract and the plan design changes affect the cost side only. And so when you think about high claims trends like we -- like the industry has seen like we saw last year, you start there. We've estimated that about 2% reduction in the cost side comes out of the United contract and the plan design changes. On top of that, we do have the impact of the change in the mix and the profitability of the remaining clients versus the terminating clients as another component in there.

Yes. I think one other thing, Mark, that would help you see the picture. As Jim said, we start out with the higher price that is the proposal. But we have definite processes we go through to help the client figure out how they can adjust their plan, adjust other things to reduce that price. And that's not just an Insperity thing. That's kind of what happens in the marketplace. And so your net pricing that you end up have coming in is not in that range because you have ways to help the client reduce their cost.

I appreciate that. And certainly, everybody is aware that higher health care costs are out there. I'm just wondering what -- for the full year, what was for full year 2025, what was the retention rate? And then how what sort of reaction are you getting from clients as you're renewing them? And I'm sure that they appreciate that you're doing everything you can to help them. But I'm just wondering...

Sure. We were in like the 83% range of retention, which is just above the kind of right around the midpoint, a little bit above. It was a good year of retention. And the year prior was in the 81% range. And both -- the years are always impacted more by the year-end transition. So this year, our profit margin recovery mode, we had a higher percentage. It still -- it wasn't as high as two years ago, but it sure wasn't as low as last year. And so our retention for the balance of the year, we expect it to be managed the way we have in the past. It's a much smaller number every month that are going through the process, much more manageable than the surge of year-end transition.

So we had a very effective transition, achieving our primary -- our #1 priority of this step-up in gross profit key drivers, and that puts us in the right place to start the year. But you do have the price you pay on the starting point in paid worksite employees that we outlined in our remarks.

Great. One last one, if I could. Just on Workday, obviously, there's a leadership change over there, but that should impact your relationship with them. But I'm wondering, how are you thinking about 2027 in terms of level of investment? Should we see that decrease meaningfully, which should then lead to an improvement in terms of profitability as we look out to '27?

Yes. I'm obviously really excited about '27 because it's the beginning of serious revenue coming from this. And this will be more in a phase of, as Jim said, a typical road map that's continuing to be developed by both Workday and our own people. So, yes, there's less spend. And obviously, it's the revenue side and the growth rate that we believe this can be really significant relative to our three-year plan, which that second year is all about balancing growth and profitability. So we want to see this momentum be reestablished over the course of this year, and we're working toward seeing '27 really show that picture.

The next question comes from Andrew Polkowitz with JPMorgan.

Congrats on the 40th anniversary coming up.

Thank you.

I wanted to ask a question that's a little bit of a follow-up on one of Mark's questions. So you mentioned that the retention was about 83% this year is an improvement versus last year. I wanted to ask if you can kind of break down the components within the worksite employee guidance for next year around change in retention. You already mentioned same-store growth in the same zone as this prior year. And then what the bookings estimate or contribution is within that guidance?

So I guess the best way to think about it is we gave a guidance about the minus 1.5% to plus 1.5% in total growth. And you have to kind of think of the midpoint of that being similar to a very low level of net hiring in the base like we had last year. We had a little higher -- we also had higher attrition. So we've kind of budgeted slightly higher attrition for this year to be at that midpoint. And then also, sales were below budget. They were strong for the full year, but we thought we sat our folks down and worked through the entire year and said, what should we budget and we budgeted that. And so if there's other challenges to any one of those, that's how you kind of get down to the minus 1.5%. And any benefit to those is why you get up to the high end of it. So we think we're properly have thought through how to look at growth for this year. And it does mask a little bit.

We -- I mentioned in my remarks that our net gain in clients and worksite employees from new HR360 sales overcoming the low level of attrition that happens from our renewal process throughout the year, there's typically a net gain and you actually see a net gain going on throughout the course of the year. And that's how you get from a negative number in the first quarter to you have positive numbers as you move out in the year and you're teed up for a good start into the following year.

Okay. Super clear. For my follow-up question, it's a little bit of a bigger picture question, maybe looking out to 2027. But you have the new UHC contract live effective now. You also start to have revenue from Workday really coming in, in 2027. So I wanted to ask if there's any way you could help us in thinking about how unit economics show up in the model. So, specifically, you kind of guided this year's gross profit for worksite employee to be recovered, but not quite to the same level as historical. But I'm curious in 2027, how we should start to think about that as these new model drivers sort of enter the picture.

Yes. I think the way I would think about it is we were successful in taking these steps on a decent percentage of our client base, but we have a serious percentage of client base to continue that process. And so as we implement and as we continue to do what we've been doing, we should see continuing improvement in these drivers to gross profit where we go into '27 at a different level. And that's the objective. That's the focus. Our margin recovery is the centerpiece of 2026. And thankfully, we have a nice step-up to start the year out. But that's our focus.

Now we are also -- and we believe we can do this at the same time, and that is regain that growth momentum because of both HR360 and how we have some new tools and new methodology that can help our team. But then also, I believe we're going to be able to update you quarter-by-quarter, so you can kind of hear how things are going relative to future margin improvement and also how, for example, HRScale visibility in paid worksite employees, and we should have some good information to be able to give a better picture of how things will look as we go forward.

Okay. We have reached the end of the question-and-answer session. I will now turn the call over to Mr. Sarvadi for closing remarks.

Well, once again, we just want to thank everybody for participating today, and we look forward to having you back in a quarter and hearing more about how we're progressing on our plan for margin recovery and then balanced growth and profitability. And ultimately, it's our intent, as I mentioned in our three-year plan to get back to the level of high-performance key metrics that are core to the business model that we have here at Insperity. Thank you again, and we'll see you soon.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead.

Thank you. We appreciate you joining us today. Let me begin by outlining our plan for today's call. First, I'm going to discuss the details behind our third quarter 2025 financial results and provide an update on our financial guidance for the remainder of the year. Paul will then comment on our ongoing efforts to accelerate growth and improve profitability in 2026, including the rollout of our new HR scale solution. I will return to outline some initial thoughts regarding expected drivers of financial performance for 2026. We will then end the call with a question-and-answer session.

Before we begin, I would like to remind you that Paul or I may make forward-looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website.

Our unit growth for Q3 2025 was within our forecasted range with the average number of paid worksite employees increasing by 1.2% over Q3 2024 to 312,842. New client sales results were encouraging. While worksite employees paid from new clients in Q3 fell just short of the Q3 2024 level, our Q3 booked sales efficiency and the resulting number of accounts that are in the queue for first payroll over the next few months have increased significantly from a year ago.

Client retention remained strong, averaging 99% per month and in line with prior year results. Similar to last year, the departure of seasonal summer employees caused net hiring within the client base to be negative in the third quarter. The overall hiring environment continues to be challenging, and Q3 2025 activity was slightly weaker than Q3 2024. Adjusted EPS for the quarter was minus $0.20, and adjusted EBITDA was $10 million. These results fell below our forecasted ranges, primarily due to a further continuation of higher-than-expected benefits costs. Gross profit per worksite employee in Q3 2025 was $208 per month, down from $247 in Q3 of 2024, driven primarily by higher-than-expected benefits costs of $20 million.

As you may recall from last quarter's call, we had expected our benefits cost trend to taper down over the second half of 2025 due to favorable demographic changes within our plan, combined with the relative benefits cost patterns in the comparison period, which had been more favorable in the first half of 2024 and resulted in higher year-over-year cost trend in the first half of 2025 that we did not view as reflective of the underlying trend for the year.

Unfortunately, while we benefited from those favorable impacts, Q3 claims data revealed that they were outpaced by higher-than-expected outpatient and inpatient utilization and pharmacy costs, including a significant increase in large claims frequency, both sequentially over Q2 and also year-over-year. These factors resulted in a benefit cost trend of 9.1% for Q3 2025 over Q3 2024. The issues that we have experienced with increased health care claims costs are not unique to Insperity.

At a macro level, the health insurance industry has reported an unexpected rise in health care costs and loss ratios. From our discussions with our carriers and outside advisers, there are a number of factors driving a higher level of health care utilization, including the increased use of prescription drugs and outpatient procedures, the prevalence of high-cost conditions and the introduction of new higher cost treatments and drugs. Additionally, we have recently been made aware that the use of AI tools by health care providers has emerged as an additional contributor to the higher cost trends, impacting everything from condition diagnosis and treatment plans to clinical documentation and coding for insurance billings to preauthorization and appeals processing.

Many insurance carriers have alluded to such issues in their comments on higher cost trends and loss ratios, and our understanding is that they are responding in a variety of ways to reduce issues around upcoding or unnecessary spending. From what we are hearing, it is the accumulation of all of these things happening at the same time that has created the unexpected increase in trend. At this point, the prevailing view in the industry is that the higher claims trend experienced in 2025 will persist in 2026.

We responded quickly to the emergence of higher-than-expected benefits costs earlier in the year by increasing our pricing targets. Over the course of the year, these costs have continued to outpace our projections, and we have revised our pricing plan accordingly. We believe that the plan we are executing remains competitive in the broader marketplace and will continue throughout 2026. This plan is focused on attracting and retaining the right clients at the right price to produce sustainable profitability at normal historical levels. To date, we believe those plans are on track, and I will provide an update later in the call.

Moving on to operating expenses. We continue to actively manage these costs below budgeted levels while continuing to invest in our strategic priorities. On a year-over-year basis, operating expenses in Q3 2025 decreased by 4%. Operating expenses declined sequentially from the second quarter of 2025 by $10 million with the most significant reductions in salaries and G&A costs. During the third quarter, we achieved significant software development success on the HR scale platform, which met the threshold to capitalize a portion of our Workday strategic partnership costs for the first time.

For Q3, we invested a total of $17 million, of which $11 million is included in operating expenses. This compares with $19 million in Q3 of 2024, all of which was expensed. During the third quarter, we continued to return capital to our shareholders through our regular dividend program, paying $22 million in cash dividends. On a year-to-date basis, we have paid cash dividends of $68 million and repurchased 225,000 shares of stock at a cost of $19 million. We ended the quarter with $120 million of adjusted cash, and we had $280 million available under our credit facility.

Now let me provide an update to our Q4 and full year 2025 outlook. Given our recent sales, client retention and client net hiring results, we expect average paid worksite employees to be in a range of $313,000 to $315,000 for the fourth quarter, an increase of 1.3% to 1.9% over Q4 2024. As a result, average paid worksite employee growth for the full year is expected to be 1%. We are forecasting full year adjusted EPS in a range of $0.84 to $1.47 and adjusted EBITDA in a range of $119 million to $153 million. As I mentioned earlier, our benefit cost trend over the first 3 quarters of the year has hovered around 9% as favorable changes in our planned demographics and planned migration have been outpaced by increased care utilization, pharmacy costs and large claim activity. We expect our full year benefits cost trend to remain at this elevated level. Q4 operating expenses are expected to decline sequentially once again.

As a result, full year 2025 operating expenses are expected to be below 2024 levels by approximately 3%. For the full year, we expect the investment in our Workday strategic partnership to total approximately $58 million, of which $48 million would be included in operating expenses. This compares to $57 million in 2024, all of which was expensed. As for Q4, we are forecasting adjusted EBITDA in a range of negative $25 million to $9 million and adjusted EPS in a range of minus $0.79 to minus $0.16. For purposes of adjusted EPS, we are forecasting an effective tax rate of 28% for Q4 of 2025. The effective tax rate on GAAP EPS could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income.

Looking at the big picture of 2025 at this point, we have a significant earnings shortfall from our initial budget. Nearly all of this shortfall is related to the benefits area, driven by the unexpected increase in health care cost claims costs. Other impacts, including a lower level of growth than initially forecasted, mix changes in the business and the impact of lower interest rates have been largely offset by the management of operating expenses below budgeted levels.

Now at this time, I'd like to turn the call over to Paul.

Thank you, Jim, and thank you all for joining our call. Today, my comments will focus on 4 important topics to frame the financial performance rebound and growth acceleration we expect in 2026 and beyond. First, I'll discuss the decisive and assertive actions we are taking to navigate the significant and unexpected step-up in health care claims we have experienced this year. Second, I'll present an update and perspective regarding the official rollout of HRScale this quarter, our joint solution with Workday that's designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 to 5,000 employees. We believe the addition of this offering will position Insperity uniquely within the marketplace and serve as a new driver for large client sales and retention, advancing our growth model.

Third, I'll provide an overview of our recent strong book sales performance and the momentum driving our flagship PEO solution, HR 360, which is a key contributor to our growth and integral to our upcoming year-end transition. I'll conclude my remarks with some thoughts about the next 3 years and the plan we are working through that we believe will allow us to return to historical key metrics in our business model.

The most urgent issue that we continue to address is the health insurance claim cost escalation. This issue has occurred across the marketplace and industry and has impacted Insperity in a severe manner over the last 3 quarters. We have seen 2 significant negative developments in the health insurance marketplace. First, the claim trend for the industry at large for 2025 is now expected to be 200 to 400 basis points higher than industry estimates at the beginning of the year. This unexpected increase that emerged during the year is significantly higher than a typical year. Analysis of our Q3 claims data revealed our benefits cost trend has increased from our initial estimate at the beginning of the year, in line with the higher trends now reported in the health insurance industry.

Secondly, the increasing adoption of AI tools by health care providers appears to be a recent additional factor driving higher costs across a wide range of claim categories. As Jim mentioned, we have seen many providers cite utilization and revenue increases, while insurance carriers are reporting higher loss ratios and passing this higher level of claim trend on to employers. Jim has specifically addressed this claim cost escalation we've experienced in his remarks, including the expected effect on adjusted EBITDA in 2025. This factor accounts for nearly all the underperformance from our target for this key financial measure at the beginning of the year. So this is certainly the most significant challenge we are confronting.

Now even though the full effect of this higher-than-expected trend has made a larger impact on our estimates for the full year than we thought last quarter, we believe the actions we have taken in response have been progressing on track to achieve a rebound in 2026. When we saw signs of a step-up in claim cost in Q1, we quickly initiated action plans to address this trend. We also adjusted these plans during the year as the trend continued to increase.

To date, we've had measurable success in increasing pricing appropriately with client retention remaining solid in Q3. We believe our pricing remains competitive with the industry and with the broader health benefits marketplace for our clients, and we provide plan design options and other ways for clients to mitigate these increases.

These pricing measures take time to fully take effect as we price new and renewing accounts each month in line with market trends. The initial effect of these measures began in Q3, and we expect the positive impact will continue to grow over the coming months as we complete our fall sales and renewal season. These pricing initiatives are strategically designed to support our profitability recovery as we move into 2026. Now in addition, we expect a significant new agreement with UnitedHealthcare announced today will add additional support and contribute substantially to our margin recovery.

Since the first quarter, we have focused on negotiating a revised contract with UHC to go into effect at the start of this year. We've now signed the contract extension through 2028, which addresses our key short- and long-term objectives. The contract incorporates financial terms, plan design modifications and risk transfer alternatives that are projected to significantly reduce Insperity claim cost and mitigate expected trends and large claim risk for the upcoming year. Additionally, the agreement strengthens our partnership alignment to long-term favorable administrative and risk charges and credits as well as growth incentives.

This structure and alignment of this agreement are paramount as we expect them to enhance the financial impact in subsequent years as the business expands. The project -- the projected immediate offset to the benefit cost trend, combined with the lower large claim pooling level in 2026 presents a timely and important opportunity to reduce cost and lower risk. When you combine the effects of these significant cost management and pricing initiatives, we believe we have the foundation for a substantial rebound of gross profit and margins in 2026 beginning in January.

The second hot topic I'd like to discuss is the rollout of our HRScale solution underway with active co-marketing and co-selling target prospects, including demonstrations of the platform. We are also working on deployment and enablement of beta clients and our software development success has proven the viability of the product, a milestone which impacts accounting treatment for our investment in the platform. This is a pivotal moment for Insperity due to the potential for HRScale to be a catalyst for growth into the future.

It's important to recognize the tremendous accomplishment to reach this point in this length of time. We signed a strategic partnership agreement with Workday at the end of January 2024, just 21 months ago. This partnership was established to bring a unique comprehensive HR solution to a large underserved market of more than 40,000 companies employing more than 25 million employees by combining Insperity's HR service and Workday HR technology.

We identified 4 pillars of work to create this joint solution with the potential to be a category of one and a competitive disruptor in the marketplace. The 4 defined pillars included our Insperity corporate tenant, our exclusive PEO client tenant, our deployment and enablement services and our joint go-to-market plan. This effort represented a significant financial investment and a commitment of time, effort and resources by both partners. In our case, we estimated $150 million investment, including $60 million in each of the first 2 years to build and take this joint solution to the marketplace.

Following the signing of the agreement, we commenced the significant effort for this major development project, which involves integrating the client-facing Workday HR platform with our advanced Insperity HR compliance platform. Additionally, I set aggressive internal time line goals to achieve key milestones across the other 3 pillars with the emphasis on speed to market of the new product. We did not share these at the time due to too many unknowns, but we believe it's important to note now so we can look at the big picture and assess how we have performed up to this point.

It's not uncommon for a significant project of this magnitude to take substantially more time and investment than initially projected to create a new product and prepare to take it to market. The internal goal for launching the first pillar, our corporate instance of Workday was January 1, 2025, and implementation was completed by April 1, 2025. We set the goal for the client tenant for completion to initiate deployment and enablement for beta clients on July 1, 2025. The client tenant uses functionality in the Workday solution that did not exist when we entered the agreement, and both of our companies had to work diligently together to create a solution that had not been built before. This milestone was achieved by October 1, 2025. Our deployment and enablement capability is in place now to allow us to bring on beta clients for a go-live date in March 2026 for first payroll in April 2026.

In August, our go-to-market plan was launched with our product page on the website going live, our demand generation campaign implemented and prospect outreach underway. Co-selling, co-marketing and co-branding is in full swing and a pod or product-oriented delivery team of sales professionals from both partners are working together every day on a team that's wholly dedicated to this solution. They are rapidly advancing the sales motion and identifying and meeting with prospects to fill the HRScale sales pipeline. Based on our forecasted investment for the rest of the year, we expect to achieve all these milestones while staying within our original $120 million estimated investment for the first 2 years.

The achievement of these initiatives within this time period and within the budget reflects the professionalism, dedication and proficiency of both the Insperity and Workday teams. It also demonstrates the strong cultural alignment of the strategic partnership, which we expect will support the successful rollout of HRScale and positively affect our return on investment for years to come. We expect the launch of HRScale as a significant growth catalyst for Insperity is particularly timely given the broader macro trends impacting our industry.

For the past 2 years, the labor market has posed considerable challenges for small and medium-sized businesses, which has contributed to restrained growth across the business services sector. There's also uncertainty regarding the future impact of AI on employment, prompting companies in the HR service sector to seek a new catalyst for sustained growth. Had we not established our strategic partnership with Workday, we believe we would also be searching for such an opportunity. Instead, we believe we have our new growth driver already in place.

Now on to my third topic, our confidence in this new growth driver is growing due to recent booked sales success. In Q3, our booked HR 360 sales were substantially over budget and 45% greater than the same period last year. These strong results were driven primarily by outperformance in our mid-market and enterprise space, which is the target market for HRScale. We sold our largest account in history during this quarter, which is scheduled to come on HR 360 in January and is planned to upgrade to HRScale by the end of the second contract year. The opportunity to have a discovery call with this large potential client resulted from the client becoming aware of the HRScale as an Insperity Workday joint solution.

Over the last quarter, we've been encouraged by prospective clients' receptivity to Insperity Workday strategic partnership in a number of ways, including the ability to set appointments and the nature and level of the conversation. The system and service demos to beta and prospective clients have resonated well, and we are very pleased with the receptivity of the proposed value proposition. We believe the early feedback is validating our strong competitive positioning in the marketplace. It's also compelling to see prospective clients considering 2 product options with the opportunity to start on HR360 with a plan to upgrade to HRScale in the future. We also believe that the availability of HRScale and HR360 at different price points will positively impact the level of sales for both solutions.

We believe our success and momentum in book sales through the third quarter puts us in a favorable position going into our year-end transition with more client worksite employees in the pipeline scheduled to become paid in January. This is also important in a year where we have higher pricing for new and renewing business, which could have some impact on client retention when our priority is to see margin improvement into the new year.

The last topic I'd like to address today is our 3-year plan we expect to finalize this quarter with the objective of returning to the targeted growth and profitability metrics of our business model. Our historical key metrics in good times include double-digit unit revenue and gross profit growth, combined with operating leverage to achieve adjusted EBITDA annual growth rates north of 20%. Our work on this 3-year plan includes specific initiatives designed to return our key drivers to these metrics and generate corresponding shareholder returns.

We are confident that a return to double-digit growth is possible with the implementation of our new growth driver, HRScale, even if future small- and medium-sized business employment gains remain modest. We anticipate improvements in gross profit margin as we align price allocations and direct costs moving forward and expect that the value proposition and pricing of HRScale will further support these outcomes. We expect operating expense efficiencies and improved margins from both internal and client-facing AI initiatives.

As we grow, our AI strategy is already generating efficiency gains and should help us achieve greater operating leverage. Earlier this year, we launched a proprietary Insperity HI tool called Compass, which is already being used by our service providers. We are continuing to develop AI capabilities across our operations, including targeted and proprietary tools for things like predictive analytics and prospect scoring. We are also working to combine the speed and information reach of AI with the validation of our HR expertise to more efficiently deliver complete and accurate information to our clients.

This improves response time and enables us to focus even more on the high-touch nature of our customer relationships which continues to be a strong competitive differentiator and retention driver. So in summary, we believe the elevated health care trend and malaise in the small- and medium-sized business labor market is masking significant progress we are making across the company in these areas to return to historical growth and profitability metrics. We take full responsibility for continuing to take appropriate action steps to address these issues, and we believe we will see significant progress ahead.

At this point, I'll pass the call back to Jim to provide some further perspective on 2026 expectations.

Thanks, Paul. As this year has progressed, we have worked diligently to create and execute plans aimed at generating a significant profitability rebound in 2026. In the benefits area, we expect the elevated benefits cost trend to persist in 2026 based on input from our carriers, outside advisers and industry benchmarks. As a result, our response must remain swift and steadfast, and our focus is both on right pricing our book of business and reducing planned costs. On the pricing side, we continue to strategically implement higher pricing targets for both new and renewing business using AI tools and revised methodologies.

Our focus is to attract and retain the right clients at the right price that can produce sustainable forward-looking profitability at our normal historical levels. This process began earlier this year, is progressing according to plan and will continue throughout 2026, consistent with what we're hearing in the broader market. Through a combination of higher pricing and the exit of lower profitability clients, we believe that we are on pace to exceed the projected benefits cost trends.

Regarding our plan costs, I'm happy to report that we have successfully completed our contract negotiation with UHC and have extended our contract through 2028. The combination of cost savings from this contract and other plan design changes, both of which will be effective in January, are expected to have a favorable impact of about 2% of our gross benefits costs. In addition, we plan to reduce our health care claims risk in 2026 by lowering our pooling level from $1 million per member per year down to $500,000.

For clarification, the pooling level represents the maximum annual amount of claims exposure we have for any individual plan participant, which provides a measure of protection against the severity of large claims. Taken all together, these contractual changes reflect the strategic alignment of Insperity and UHC to provide exceptional value for our clients and plan participants, and they are foundational to both our 2026 financial performance and our long-term success.

Regarding the rollout of HRScale, we expect to add clients into this solution during 2026, which is expected to incrementally impact worksite employee growth and revenue as we move through the year. As the rollout plan continues, we should be in a better position to comment on client traction and revenue potential in future calls. Once we achieve go-live and a stabilization period, the level of our investment is expected to decline and certain product development costs will be capitalizable, which we expect to positively impact operating expenses. A portion of those savings will be offset by new costs to build service capacity and for the implementation and ongoing service of HRScale clients as well as Workday platform maintenance and support.

Taken all together, operating expenses associated with HRScale in 2026 are expected to be about $15 million lower than the $48 million estimate for 2025. Even though we expect each of these positive contributors to be significant, we also recognize that there are likely to be a variety of other puts and takes in our financial performance. In addition, there are risks and uncertainties that could impact 2026 results, including changes in prevailing health care cost trends or planned utilization, the successful completion of our fall sales and renewal season and more broadly, changes in the macroeconomic environment and labor market.

We will not be providing our financial outlook for 2026 until our earnings call in early February. But given the significant positive contributors that we have outlined, we believe that 2026 represents an opportunity to recover a majority of the earnings shortfall we have experienced this year.

At this time, I'd like to open up the call for questions.

Our first question comes from Andrew Nicholas with William Blair.

I wanted to first ask for some clarification, Jim, on that last comment you made about an opportunity to recover the majority of earnings shortfall. Is that related to 2024 as the base? Is that specific to the shortfall relative to your initial guidance? Just trying to think -- I think you're trying to guide us a little bit in terms of what next year looks like. I know there are a lot of moving pieces. Just trying to make sure I understand what you're specifically referencing in terms of the shortfall.

Yes. Thanks for the question, Andrew. Our initial guidance for 2025 and our actual results for 2024 were relatively similar. So what I'm referencing is pretty well aligned with both of those.

I think the best way to look at it...

Go ahead, Paul.

I'm sorry, yes. So I think what we're describing there is relatively straightforward in that we had an expectation at the beginning of the year, and you can see from our guidance today what -- where this year is forecasted to end up. And nearly all of the shortfall that occurred this year is from this one issue. And we expect, as Jim commented, to see a rebound from these 3 major elements of at least the majority of that shortfall in 2026.

Understood. And then for my second question, in terms of 2026 kind of worksite employee growth, I understand that the macro hasn't been super supportive in terms of change in existing or net client hiring. But do you have -- to what extent should we be concerned with kind of these cost trends and the repricing on attrition? Do you expect it to have any impact? Or to what extent do you expect it to impact new sales heading into next year? Just want to understand if we should expect a decent kind of sequential step down in the first quarter tied to some of this repricing activity.

Yes. Thanks for that question. No, we actually, again, are -- we have strong sales effort continuing. And we don't see the pricing changes that we're making to be far out of sorts with what's happening in the marketplace at large. So even I mentioned in my remarks that the most recent results in the third quarter, not only were sales 45% ahead of last year, but also the renewing business that came on, our renewal rates were still at the 99% level for the quarter. So we have not seen that dynamic causing a reduction.

We are also going into this stage of the year with a significantly higher number of worksite employees scheduled to be paid in January. And I think in my remarks, I was kind of putting that out there just to make sure we understood that even though we may -- because of the priority to have some margin recovery, we probably will have some more go away, but I don't expect that to be -- I expect that to be offset by the degree to which we're ahead in new sales.

Our next question comes from Jeff Martin with ROTH Capital Partners.

I wanted to dive into kind of some initial anecdotal responses from your -- from this new pod that's jointly marketing the joint solution. What are you hearing from them? Are they finding this as a relatively smooth process? Anything they've learned along the way? And how encouraged are you by the initial results?

Yes. It's hard to hold it all back because it's been very exciting. We even had a 3-day retreat meeting with the full pod just a week or 2 ago. And what's really exciting is that they are now seeing the full picture of this unique solution that we have developed that is the full HRScale. It is the full scalable solution of both service and technology in one comprehensive solution. And they've worked through how to help customers understand even a cost comparison to other options they have. They started to understand better how we have gone through the research to understand how to price this for the client.

And the energy level is really impressive, and we are already beginning to fill the pipeline. And we're ahead of where I thought we'd be. Remember, we put this in place on July 1, gone through a lot of effort just to make all that work at this point. But now we're already out there calling on customers. We've got the messaging down, and we're getting great reaction from the prospects.

Great. And then my other question is on the benefits repricing. Have you had to make adjustments from the initial repricing that you did in the first quarter? If so, could you provide some details around that? And -- is that a dynamic thing on a quarterly basis? Or how are you looking at that going forward as we are very close to starting 2026 here?

Yes, that's always been a part of our whole operation where we are literally month-to-month on a rolling basis, we're looking at what pricing is necessary for the trend rate. In this case, of course, we've seen the trend escalate. And so where we were at the end of the first quarter, we started processing some pricing changes. But as the year progressed, we were continuing to raise the level of price increase up to and through and including everything we sent out for January 1. So we believe we're in good shape on that front. As Jim mentioned in his remarks, we expect our pricing going into next year to actually be exceeding this continuing higher rate that we've seen. So we're on a good track to balance that out in the appropriate timetable.

Our next question comes from Mark Marcon with Baird.

Just on the health care pricing, Paul and Jim, is it your expectation that on an apples-for-apples basis, same plan design, we're basically looking at a benefit cost trend that would be somewhere in the 9% range for next year? Or would it be higher or lower?

So apples-to-apples, same client, same people, same plan design. We would expect the average increase to be in the low double digits range.

And what typically happens there, of course, is you quote the increase. And then we have tools and ways we can help the client mitigate the increase, other plans to choose from and other aspects of what we can do to help them manage that increase. And that's what's happening all over. When we look at the quotes that are coming in and the competitive situations, our increased level and our ability to help them manage that puts us in a very competitive position. And that's what I think we've demonstrated even up to this point in the process.

I appreciate that. And then the second question is basically along the lines of you mentioned potentially managing out some of the lower profitability clients. I was wondering if you could give us a sense for the magnitude of that level of the client base. And one other thing, Paul, if I can squeeze one in. You and I, along with a lot of investors, we used to talk about the risk mitigation and whether it makes sense to be at $1 million versus $500,000. We had lots of discussions even back in 2019. Now that you're going down to $500,000, how would you -- it's obvious what the benefits are. What are the costs or what are the things that we should take into account in terms of thinking about that?

Well, just to put it in historical perspective, we have looked at that for a long time. And of course, there was a time when we didn't have the $1 million limit. in our world. But what's happened over the years is the number of ways that someone can have a claim of a significant size like that, the number of ways has increased. But also, I think it's important to note that this contract that we have just signed with UHC is -- this is what we mean by better alignment in how we're looking at the entire game plan for our program.

And in this particular case, the agreement to be able to look at the various levels every year and have them, I'm going to say, priced in a way that makes it fit our program. and for the whole program to be designed to have growth incentives and things of that nature. So I'm just telling you the elements, the terms of the agreement really line up to have the best program we can have for our people and have a higher level of consistency and predictability in the model.

So being able to have a significant immediate cost reduction right now where we get a majority of even the shortfall we had this year back as we go into next year and be able to put a lower cooling level that's the $500,000 level, that's really good timing, obviously, against the backdrop of a sudden elevated claim level.

Mark and on your question, I was going to answer the question about pricing and a little bit more focus on unprofitable clients. I think generally speaking, as we're increasing our pricing, the curve is a little bit higher than it was. So you're not just raising the pricing equally across the board. We're taking actions to make sure that we're doing everything we can to retain our profitable clients. And so we think that the ones that do terminate are likely to be lower profitability than the ones that stay.

Our next question comes from Tobey Sommer with Truist.

I was hoping you could provide a little bit more detail on the pricing. On the prior earnings call, you said you've done some work and we're really encouraged by the opportunity being more significant than you had mentioned. And I just want to understand that to also provide color in a better grasp on how you can offset the incremental operating and service expenses associated with the new platform.

Thanks for the question, Tobey. Clarifying for anybody who's listening, you're referring to HRScale pricing. And Yes. So if you think about what we are offering, obviously, we've got a lot of services that are similar to what we offer today. There are some new services that get unlocked or made more advanced because of new functionality available in the Workday platform and the opportunity for strategic services around those things as well as keeping the platform up to date and current. So we've taken all those things into consideration in our pricing.

There's a significant uplift in what I would call the base price, if you will, or the list price of the product. And what we expect to be happening over this first 6 to 12 months, we're thinking about the pricing in terms of kind of 3 stages, if you will. So there's -- from a new client perspective, there's a beta stage and then there's an early adopter stage and then we'll be into the pure growth stage. And so we do plan to give some fairly significant discounts to the first customers that are willing to sign a contract and come on to the platform.

And then we will reduce those discounts as we go through time and get to a growth stage. We still anticipate that even at those significant discounts. It's higher than what we historically have charged in HR360 for similar-sized clients. But I think one thing that's important to point out that I think Paul was alluding to in his script, having the 2 price points for these 2 products is really beneficial and actually supports the pricing of HR360 from what we're seeing over the course of our discussions and sales in 2025. So we see these as being complementary and supportive of each other at the different price points.

You mentioned being able to hit your target growth and profit metrics even if the SMB labor market is kind of sluggish. Like do you think you can hit the historical double-digit worksite employee growth even if SME job growth is flat versus, I think the long trend within your -- long-term trend within your customer base is around 5% per annum.

Yes, Tobey, that is exactly what I said in my script. And I'm just reflecting what I see going on when you have a new offering where you've got over 40,000 businesses that have over 25 million employees. And when you sell them, the average size is 0 to 700 employees instead of your average size client being 25 to 30 or 30 employees. This is a significant catalyst for growth. And I think the timing of it is particularly exciting because of what we've seen in the small business -- small- to medium-sized business labor market. And we've seen now this is third year in a row with very low single-digit net gain within the client base. I would have never dreamt that.

And we're on the front end of AI. So I see us being in a unique position in our space by having such a rifle-shot target, perfect fit solution for this highly underserved and highly desirable client, being able to walk in the door with 2 of the leading companies in the HR space coming to the table, having made an incredible commitment and investment to make a hand-in-glove fit solution for these target accounts.

And when you look at the whole pricing picture, where you're bringing so many different elements together and able for them to do this at a price that's never been able to do before, both upfront cost and ongoing cost -- it is an engine for growth, and we're very excited about it. It's not time yet to convert that into the sales per salesperson per month and how the size, all that kind of stuff. But we're on that way now. We're on the way of keeping track of everything we're doing on every call and how it goes and what -- over this next year or so, I think we're going to see some exciting things where we can give you some better picture of the future.

Our next question comes from Andrew Polkowitz with JPMorgan.

Congrats again on the launch of HRScale. I appreciate the color that you guys gave on the investment over year 1 and year 2. You also mentioned that you expect something to be effective, call it, low $30 million in investment in 2026. So that gets us pretty close to the aggregate $150 million you called out at the start of the process. I was just curious now that we're kind of in the early days of go-live, is that $150 million aggregate investment still the right framework? Or is there a different way we should be thinking about the cost of the go-live?

Andrew, thanks for the question. I would like to clarify one thing. When we talk about the operating expense impact of HRScale for next year, we're including ongoing operating expenses that have revenue offsetting them a little bit of probably some inefficiencies in the first year. But obviously, I would consider those to be operating expenses and not necessarily investment. The level of investment is down significantly lower than that. And I think you have to think about, as Paul alluded to, we still have some months to go before we get to the first go-live and the stabilization period. So our investment kind of continues through that period, and then it's going to fall off relatively significantly and just have kind of a normal product road map associated with it.

Now is that number -- we don't have a better number right now than $10 million a year going forward. Obviously, what we're looking at when we think about the product road map is the available resources across a lot of different projects and ideas, things that people want to do with HR360, things that people want to do with AI and other potential projects that are out there. And so this is a resource allocation decision that gets made there. So as we're thinking about the 3-year plan, as we're thinking about the budget for 2026, we'll be making some decisions in that regard. But obviously, a little bit fluid when we're trying to capture the opportunity, but also balance the level of investment with needs in other parts of the company.

Got it. That clarification is super helpful. Just for my quick follow-up, Paul, you mentioned that you guys consider for your midterm framework uncertainty about AI and employment. And just understanding that at this stage, no one really knows the full impact. I'm curious how you just think about that over the midterm relative to your kind of prior 3-year plan that you called out in the past.

Sure. It's interesting because we haven't seen any of it yet where the where the malaise, so to speak, in the hiring front is rooted in specific AI job replacement. We haven't seen that yet. So everything we've seen so far is really more about the big picture of where things have been and some of the uncertainty and et cetera, that has caused a delay in decision-making, that type of thing. But I believe as we go forward, we want to be at least prepared for that. And that's why I think it makes sense that everybody should be looking at other growth engines. I just think the timing of ours being in place right now is really sweet.

If I can add to that a little bit, I would say -- when you think about what's going on in the small business environment today, to the extent that they're using AI tools, it's more likely to make them more effective right now as compared to more efficient. Efficiency could come certainly at some point in the future. But the other thing -- other point is as larger companies have potential efficiency gains and potentially reduce headcount, historically, that has led to a lot of entrepreneurship, people that are really smart. And I think about whether it's the dot-com boom or other times in the past that people leaving large companies decide to start small companies. And so I do think there's a possibility as we go through time that new business creation could provide some level of buffer against the employment efficiency.

We have reached the end of the question-and-answer session. And I will now turn the call over to Mr. Sarvadi for closing remarks.

Well, once again, I want to thank everyone for participating today, and we are really excited about both the UnitedHealthcare contract and the rebound that we're expecting in 2026 and also the exciting news about HRScale and how we're off to the races on that front. So thanks for participating today, and we look forward to further discussion with each of you. Thank you.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.