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 third quarter ended September 30, 2025. Joining us today for BBSI's President and CEO, Mr. Gary Kramer, and the company CFO, Mr. Anthony Harris. Following their remarks, we will open your call for 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 questions regarding the 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 fact, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by the forward-looking statements. Please refer to the company's recent earnings release and the company's quarterly and annual reports filed 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 December 5, starting at 8 p.m. Eastern Time tonight. 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. Good afternoon, everyone, and thank you for joining the call. We continued to build on our momentum in the third quarter, delivering a record number of worksite employees. Solid revenue growth was fueled by new client sales, expanded adoption of new products, and excellent client retention. Moving to our financial results and worksite employees, during the quarter, our gross billings increased 8.6% over the prior year's quarter. We continued to execute various strategies to increase the top of the sales funnel, and we achieved a record number of worksite employees from new client ads. Client satisfaction continues to drive favorable retention rates. Every year we conduct a survey of our clients to evaluate customer needs and satisfaction, and I am pleased to report that our net promoter score remains in the high 60s for a third straight year. This gives us great confidence in the value our clients place on the service and solutions we provide. Our clients love what we do, and they are ready and willing to spread the word about BBSI. The result of all these efforts, or what I refer to as controllable growth, is that we added a record 10,400 worksite employees year over year from net new clients. However, our client hiring was lower than we forecasted. We experienced a slowdown in California across most industries, fueled by macro uncertainty, including tariff policy and interest rates. So our record controllable growth was slightly offset by a decline in our client's workforce and resulted in a total growth of worksite employees by 6.1%. Moving to our staffing operations, our staffing business declined by 10.3% over the prior year quarter, and was within our expectations. We continued to see reluctance from our clients to place staffing orders amid the macroeconomic uncertainty. We continued to execute our strategy to recruit for our PEO clients and placed 116 applicants in the quarter, which is 11 more than the prior year quarter. Moving to the field operational updates, we were very pleased with our entrance into new markets with our asset light model. We have 22 total new market development managers in various stages of their development. These folks have been gaining traction and consistency and have added approximately 1,400 new worksite employees through Q3. In September, we had grand openings for our new Chicago and Dallas branches. In each of these locations, we have formed business teams with local folks to support our clients and have moved into traditional brick-and-mortar BBSI branches. We are also planning another grand opening for Nashville in January. 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 health insurance offering. Our strong momentum continued into the third quarter. We added approximately 1,300 participants to our various benefits products in Q3. I am pleased to report that through October we have approximately 750 clients on our various plans with over 20,000 total participants. We are gaining traction and continue to improve the sales and service 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 we operate and with a diverse distribution channel. Our teams are now in the mix of the heavy selling and benefits renewal season. As many of you are aware, health insurance rates are increasing, which is causing consumers to shop around. Our October submissions for 1-1 transactions are 60% greater than October of the prior year. I attribute this to the market forces, plus the trust we have earned from our referral partner network. We anticipated an increase in activity, and we have staffed up accordingly. It is still too early to comment on 1.1, but we are optimistic that we can repeat or exceed our successful selling campaign from the prior year. 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 better service and support our clients. Over the last couple of years, we've made additional investments in MyBBSI, to support our BVSI benefits offering, adding a learning management system, added an applicant tracking system, as well as numerous integrations with third parties. We continue to execute our product roadmap to round out the employee life cycle experience. We think of this life cycle 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 over the next six months. Our client-centric focus is on delivering more technology and more products, all supported by the best local talent. We believe these enhancements will make it easier to sell to new customers and retain existing businesses. Additionally, we believe this offering will strongly resonate with white-collar businesses and larger employers. Next, I'd like to shift to our view of the remainder of the year. We've had consecutive quarters of great momentum. We are consistently growing our WSE stack. We ended Q3 with a record number of worksite employees, and we continue to be optimistic about the road ahead. 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 people selling them, and more referral partners recommending BBSI. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary. Hello, everyone. I'm pleased to report we finished the quarter with strong results. Gross billings increased 8.6% to $2.32 billion in Q3 2025 versus $2.14 billion in Q3 2024. PEO gross billings increased 8.8% in the quarter to $2.3 billion, while staffing revenues declined 10% to $19 million in the quarter. Our PEO worksite employees grew by 6.1% in the quarter, which, as Gary noted, was driven by a record number of WSEs added from new clients. This was coupled with ongoing favorable client retention, which continued a strong trend of controllable growth. This was partially offset by modest net negative client hiring year over year, compared with our original expectation of flat hiring in the quarter. Average billing per WSE per day increased 2.5% in the quarter, which was driven by continued increasing wages. Looking at year over year PEO gross billings growth by region for Q3, Southern California grew by 9%, Northern California grew by 3%, Mountain grew by 13%, East Coast grew by 14%, the Pacific Northwest declined by 3%, and our asset light markets grew by 132%. Southern California represents our largest region and has maintained strong growth driven primarily by strong client ads and favorable client retention. Northern California was the region most negatively impacted by client hiring trends in the quarter. with several larger clients having an outsized impact. The strong mountain and east coast results also continue to be driven by strong controllable growth performance, and the Pacific Northwest has continued to be primarily soft due to economic conditions in the region. Turning to margin and profitability, our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claim developments. In Q3, we recognized favorable prior year liability and premium adjustments of $3.9 million compared to favorable adjustments of $4.3 million in the third quarter of 24. We previously discussed that workers' compensation pricing has been trending downward for several years. While these pricing reductions have largely been offset by cost savings, they have nonetheless created some margin pressure. Looking at our overall margin for the year, results are broadly in line with expectations, though modestly lower than prior year, due to a combination of this pricing pressure and lower staffing volume. As a reminder, our staffing business carries a higher margin rate than our PEO services. Looking ahead, we are optimistic about the pricing environment. The California Insurance Commissioner recently approved an average 8.7% increase in workers' compensation premium rates, and several carriers in the state have filed for similar rate increases. We're also seeing increased pricing and competitor renewal quotes for both workers' compensation and health benefits, which is leading to more shopping in the market. As a reminder, our workers' compensation claims are primarily fully insured, and our client health benefits offering is 100% fully insured. Our strategy of de-risking our insurance operations continues to bring stability to our operating results, while continuing to allow us to offer best-in-class, high-value products to our small business customers. Moving to our operating costs and overall profitability, our results have continued to benefit from operating leverage, with SG&A costs continuing to grow more slowly than our billings and gross margin. For Q3, SG&A expense increased by approximately 2%, due primarily to employee-related costs. Looking at investment income, our investment portfolios earned $1.9 million in the third quarter, down approximately $300,000 from the prior year due to lower average interest rates. Our investment portfolio continues to be managed conservatively, with an average quality of investment at AA. The combined results of these activities was 7% growth in net income per diluted share in the third quarter to $0.79 compared to $0.74 per diluted share in the year-ago quarter. Our balance sheet remains strong with $110 million of unrestricted cash investments at September 30th and no debt. We continue our consistent approach to capital allocation, making investments back into the company through product enhancements and geographic expansion and distributing excess capital to our shareholders through our dividend and stock repurchase plan. Continuing under the board's August 2025 buyback program announced last quarter, BBSI repurchased $8 million of shares in the third quarter at an average price of $47 per share. The company also paid $2.1 million in dividends in the quarter and reaffirmed its dividend for the following quarter. This brings our return of capital to shareholders to 10 million in the quarter and $31 million year to date. Now turning to our outlook for the full year. We now expect gross buildings growth between 8.5% and 9.5% for the year after adjusting for the slower client hiring in the quarter. We continue to expect our year-end controllable growth to be strong and WSEs to increase between six and 8% for the year. Given my earlier comments on pricing and margin, we are tightening our range for gross margin as a percent of gross billings and expect it to be between 2.9% and 3.0%. Finally, we continue to expect our effective annual tax rate to be between 26% and 27%. I will now turn the call back to the operator for questions.