Barrett Business Services, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the first quarter year March 31, 2025. Joining us today are BBSI's President and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris. Following their remarks, we'll open the call for your questions. Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical facts, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and to the company's quarterly and annual reports, followed with the Securities and Exchange Commission, for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements. I would like to remind everyone that this call will be available for replay through May 30th, starting at 8 o'clock p.m. ET tonight, and a webcast replay will also be available via the link provided in today's press release, as well as available on the company's website at www.bbsi.com. Now, I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Thank you, and good afternoon, everyone, and thank you for joining the call. I am pleased to report that we had a record start to the year. Our new client sales coupled with our upselling of new products plus great client retention resulted in our revenue exceeding our expectations. We continued to execute our growth objectives, and we added a record number of worksite employees. Moving to our financial results on our worksite employees, during the quarter, our gross billings increased 9.5% over the prior year's quarter and was greater than our expectations. We continued to execute on our various strategies to increase the top of the sales funnel, and we are seeing positive results. We had a very strong Q1 selling season, adding 55% more WSEs from new client ads than prior year quarter. Our client retention continues to trend better than our historical levels. I'd like to attribute that to the work we do with our clients and the value our teams provide. The result of all these efforts, or what I refer to as controllable growth, is that we added approximately 7,900 worksite employees year over year from net new clients. We mentioned previously that we began to see our clients resume hiring, but below historical levels. January and February followed this fact pattern, but hiring slowed down in March and was less than we expected. Our clients' workforce still grew in Q1, but at a slightly slower pace than we planned for. The net result of strong customer ads and positive customer hiring was that we grew worksite employees by 7.6%. Moving to our staffing operations, our staffing business declined by 10% over the prior year quarter and was below our expectations. January and February were in line with our expectations, but we experienced the slowdown in March. We continued to execute on our strategy to recruit for our PEO clients. and we placed 105 applicants in the quarter. We also experienced macroeconomic headwinds, including supply and demand imbalances, which varied by geography. Moving to the field operational updates, we're very pleased with our entrance into new markets with our asset light model. We have 21 total new market development managers in various stages of their development. These folks have been gaining traction and consistency and had a great first quarter by adding over 600 new WSEs. In three of the markets, we've hired additional folks locally to support our clients and are in the process of moving into traditional brick-and-mortar BBSI branches. We expect to move into new physical locations in Chicago, Dallas, and Nashville by early third quarter. We continue to see positive results from our investments in new markets and are actively recruiting additional new market development managers. Regarding product updates, we continue to execute on the sale and service of BBSI benefits, our new health insurance offering. We're off to a great start for the year. For the 1-1 selling season, we added approximately 3,000 participants to our various benefits products. I am pleased to report that through April, we have approximately 640 clients on our various plans with more than 17,500 total participants. We're gaining traction and continue to improve the sale and servicing of BVSI benefits. Our value proposition resonates well and we're having success with small and large clients in white and blue collar industries in every state that we operate and with a diverse distribution channel. We are pleased with the results of BVSI benefits and this product will be accretive to earnings in 2025. We are bullish on this product and will now reap the benefit of leverage through scale. Next, I'd like to shift to our 2025 IT product objectives. I've previously mentioned that we've been investing in our tech stack on the product side to service and support our clients better. Over the last couple of years, we've made additional investments in myBBSI to support BBSI benefits, added a learning management system, and numerous integrations with third parties. As we evolve and look forward to the remainder of 2025, we will be making additional investments to round out the employee lifecycle experience. We think of the employee lifecycle from the client's perspective, from when an employee is hired to when the employee retires, and everywhere in between. We will be replacing or bolstering attributes of the lifecycle with additional product launches throughout the year. In March, we launched a BBSI applicant tracking system. a cutting-edge tool that allows our clients to create job postings from our centralized system, which integrates with various third-party job boards. Clients can manage the interview process in our system, and then when an employee is hired, they integrate seamlessly with our payroll and timekeeping system. This will help our clients with organization and create multiple efficiencies. It is still early days, but we're hearing only positive feedback. Clients appreciate the investment and appreciate the time they are saving. We are excited about this launch and the future launches as we execute on our product roadmap for 2025. Next, I'd like to shift to our view of the remainder of the year. We had a fabulous start to the year, and we have great momentum on buildings growth. We have consistently achieved strong, controllable growth by focusing on the needs of our clients and by adding new clients. We have more products to sell, more folks selling them, and more referral partners recommending DBSI. But we would be remiss if we didn't acknowledge that the remainder of the year may look different than the beginning of the year. Trade negotiations and other government initiatives are creating a time of uncertainty. EBSI has minimal to no direct exposure to tariffs. However, we have indirect exposure if this causes our clients to reduce or increase their workforce. When you have a time of uncertainty, you typically see hiring slow down, company investment slow down, and the demand environment can become more restrained and price sensitive. Guarding our outlook for the remainder of the year, in a traditional economy and based upon our strength in Q1, we would have raised our billings outlook for the year, but with this uncertainty, we think it prudent to err on the side of caution and maintain our outlook for billings growth and WSE growth. Similarly, we would have tightened the gross margin range. but we believe the current environment has clouded our ability to appropriately update our 2025 outlook. Nevertheless, we believe BBSI is well-suited to navigate these macroeconomic dynamics. In challenging times, small businesses are better off in a PEO relationship and can benefit from our scale and expertise. Our consistent execution, differentiated service model, and strong client relationships position us to continue driving sustainable growth in 2025 and long-term value beyond. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I'm pleased to report we finished the quarter with strong results and exceeded our plan. Gross billings increased 9.5% to $2.09 billion in Q125 versus $1.91 billion in Q124. PEO gross billings increased 10% in the quarter to $2.07 billion while staffing revenues declined 10% to $18 million in the quarter. Our PEO worksite employees grew by 7.6% in the quarter, which, as Gary noted, was driven by a record number of WSEs added from new clients. This was coupled with ongoing strong client retention, which continued a strong trend of controllable growth. In addition, we saw continued but still subdued client hiring in the quarter. Total hours and overtime hours increased modestly year-over-year, continuing to show stability. Wage rates continued to increase as well, and average billing per WSC increased 2.6% in the quarter. Average billing per WSC would have been higher, but Q1 included one less business day than the prior year. Looking at the year-over-year PEO growth billings growth by region for Q1, the East Coast grew by 14%, Southern California grew by 11%, Mountain grew by 9%, Northern California grew by 6%, and the Pacific Northwest declined by 1%. Southern California represents our largest region and has improved to double-digit growth through a combination of consistent client ads and customer hiring and better-than-expected client retention. The strong East Coast performance represents the 16th consecutive quarter of double-digit growth in that region, also driven by strong controllable growth. The Pacific Northwest region is our smallest region, comprising about 5% of our growth billings, and they had a modest reduction in net client hiring. Turning to margin and profitability. Our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claim development. This strong performance has once again resulted in favorable adjustments for prior year claims. In Q125, we recognized favorable prior year liability and premium adjustments of $3.8 million compared to favorable adjustments of $3 million in the first quarter of 2024. As a reminder, our client workers' compensation exposure is now primarily covered by our fully insured program with no retained risk by BPSI. As with past quarters, the cost savings we recognize on workers' compensation expense has continued to offset pricing pressure in the workers' compensation insurance market, which continued to move overall rates lower. Looking at our payroll tax costs, payroll taxes are typically highest in Q1 as wage caps reset. This results in lower margins than the first quarter of the year. This year has seen modestly higher effective unemployment tax rates than in recent years. These rates are reflected in our billing rates over the course of the year. Our gross margin rate remains in line with our expectation for the quarter. Our overall profitability has continued to benefit from operating cost leverage. For Q1, SG&A expense increased by approximately 6% due primarily to employee-related costs, including higher profit share incentives due to the strong quarter. SG&A costs continue to grow slower than our billings growth rate. Moving to investment income, our investment portfolios earned $2.6 million in the first quarter, down approximately $600,000 from the prior year due to lower average interest rates. As a reminder, our investment portfolio continues to be managed conservatively with an average quality of investment at AA. The combined results of these activities was a net loss per diluted share of 4 cents compared to a net loss of 1 cent per diluted share in the year-ago quarter. As a reminder, due to the seasonality and payroll tax expense, we typically incur a loss in the first quarter of the year. Our balance sheet remains strong with $99 million of unrestricted cash and investments at March 31st and no debt. We continued our consistent approach to capital allocation. making investments back into the company through product enhancement and geographic expansion, and distributing excess capital to our shareholders through our dividend and stock buyback plan. Under our $75 million repurchase program, BBSI repurchased $9 million of shares in the first quarter at an average price of $39.85 per share, with $21 million remaining available under the program at quarter end. The company also paid $2.1 million in dividends in the quarter and reaffirmed its dividend for the following quarter. Now turning to our outlook for the full year. Our Q1 results exceeded expectations, reflecting strong execution across the company. However, as Gary mentioned, we're approaching the rest of the year with measured caution given the potential effects of economic uncertainty on our clients. And we're therefore maintaining our outlook from the beginning of the year. To recap, that outlook includes a gross billings increase between 7 and 9% for the year, WSE growth between 4 and 6% for the year, gross margin as a percent of gross billings between 2.85 and 3.1%, and an effective annual tax rate between 26 and 27%. I will now turn the call back to the operator for questions.