Insperity, Inc. (NSP) Q1 2026 Earnings Report, Transcript and Summary

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 booked 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 HRCore 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 combination 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 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 replaced 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 introduce 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 benefit 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 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. That's what's driving us down to the range that we have now, which is -- 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's 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 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 HRScale, 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 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 HRCore? 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 value-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 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 breath 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 for those quarterly starts. And we'll, of course, start the deployment enablement as we sign those contracts. Now that 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 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 now 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 enhance 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.