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…

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%…

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…

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.