Insperity, Inc.

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. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul Cervati, 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 HR scale 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 60 cents 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 EBIT EPS was negative 54 cents, and adjusted EBITDA was minus $11 million, near the middle of our forecasted ranges. The average number of paid worksite employees was 312,377, an increase of 1.1% over Q4 of 2024. This was slightly below our forecasted range due to continued weakness and volatility in client net hiring. Client net hiring was in line with our forecast in October and December, but was offset by an unexpected net reduction in November. Regarding worksite employees paid from new clients and client retention, both were generally in line with our forecast. Worksite employees paid from new clients increased by 6% over Q4 2024, while client retention was in line with prior year results, averaging 99% per month during Q4. Paul will discuss our year-end transition in a few minutes. Gross profit per worksite employee in Q4 2025 was $183 per month, generally in line with our forecast. Benefits costs were within our expected range as healthcare claims development related to prior periods ran out higher than expected, but were largely offset by favorable results in other benefits components. We also experienced some favorability in the workers' compensation and payroll tax areas. Operating expenses in Q4 2025 decreased by 6% compared to Q4 2024. As I mentioned earlier, our Q4 operating expenses included $2.8 million related to an acceleration of sales office consolidation. In Q4, we invested a total of $15 million in HR Scale, the joint solution of our Workday strategic partnership, including $10 million in operating expenses and 5 million in capitalized costs. This compared with 19 million in Q4 of 2024, all of which was expensed. During the fourth quarter, we continued to return capital to our shareholders through our regular dividend program, paying $22 million in dividends. For the year, we paid cash dividends of $90 million and repurchased 232,000 shares of stock at a cost of $19 million. We ended the quarter with $57 million of adjusted cash. During Q4, we also amended our credit facility, which extended the maturity date to December 15, 2028, increased our borrowing capacity from $650 million to $750 million, and raised our maximum leverage ratio from three to 3.75 times EBITDA as defined in the agreement. As a result, at December 31st, 2025, we had $380 million of available capacity under our credit facility. At this time, I'd like to turn the call over to Paul.

Thank you, Jim, and thank you all for joining our call. Today, I'll focus my comments on our plans to position Insperity for stability and long-term value creation coming out of the significant challenges we encountered last year. I'll begin with the outcomes of the decisive actions we carried out in the fourth quarter in response to these challenges. Then I'll present an overview of our 2026 strategy to further enhance margin recovery and regain growth momentum in our flagship offering, HR360. and to advance the rollout of HR scale. 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 healthcare 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 number one priority to finish our fall sales and retention campaign with measurable margin recovery. We accomplished this key objective. As we enter 2026, we have seen a step up in several key drivers of gross profit margin that we believe position us for a significant recovery in profitability this year. On the growth side, we ended 2025 with solid new booked HR360 sales for the full year, although our Q4 results reflected our efforts to prioritize margin recovery. New booked sales for the year came in within 2% of the prior year with 14% fewer business performance advisors and a 13% improvement in sales efficiency. However, there were several factors that impacted our starting point for worksite employees in 2026. In Q4, the labor market continued to reflect uncertainty in the small and medium-sized business community at large and within our client base at Insperity. The net change in employment in the client base from hiring and layoffs was the primary reason we ended 2025 with several thousand paid worksite employees fewer than expected. As we focused on margin recovery, we introduced new tools and processes during the fall campaign to support client selection and pricing. While we believe these steps supported our gross profit efforts, they also contributed to lower-than-expected new booked sales in November and December. Our client retention results were also strong for the full year, but less favorable for renewals processed late in the year that would be effective in early 2026. Attrition was slightly higher than expected due to our margin recovery pricing and a higher number of company-initiated non-renewals, both of which contribute to profit recovery. All these factors led to fewer paid worksite employees at the beginning of the year, which lowers our view of projected growth for 2026 by around 3%. At this point, we expect growth for the year between minus 1.5% to plus 1.5% compared to 2025. As we transitioned into the new year, we also made a difficult but necessary decision to right-size our organization to the current and future needs of the company. This came after careful review of how to strengthen the business and position the company for future growth. This realignment has been initiated and will impact approximately 4% of our non-sales staff. So as we enter 2026, our plan includes continuing the emphasis on margin and profit recovery and regaining our growth momentum, which we expect will be achieved through HR 360 sales and retention initiatives and the rollout of HR scale. We believe we have more opportunities to improve key drivers to gross profit as we continue our margin recovery strategy, including client pricing and selection on new and renewing accounts. Approximately 60% of our current client base are yet to receive applicable pricing upon their renewal dates over the course of the year. We will also continue to approach renewals consistent with our margin recovery strategy. Throughout the year, particularly in the fourth quarter, The challenges encountered prompted innovative thinking and the implementation of strategies that we expect will enhance sales, retention, and overall prospect and client experience. We accelerated one of these strategies last year, which has resulted in the ability to quickly provide prospects with the best product option for their needs, including new client-sponsored benefit plan alternatives, working with the licensed brokers in our insurance agency. These efforts led to an increase of sales of our HR 360 offering without participation in our health care plan, and in many cases, the clients elected a client-sponsored benefit plan coordinated through our licensed brokers. As we offer these alternatives to renewing clients as well as prospects, we believe this approach will be favorable for sales and retention going forward. Our sales convention in late January was timely, especially to reinforce value-based selling for the entire sales team and share best practices of the highest performers. We believe our HR360 sales team is reset with new tools for a solid year ahead. We anticipate growth momentum for HR360 from the February low in paid worksite employees through year end. This is based on historical seasonality trends where Paid worksite employees added from booked sales typically exceed attrition during this period. Now, let me update you on the rollout of HR scale and how we believe this solution helps us regain our growth momentum going forward. As a reminder, HR scale, our joint solution with Workday, is one of the most significant transformations that has occurred at Insperity, designed to effectively enhance our PO solution strategy for mid-market companies ranging from 150 to 5,000 employees. We believe the addition of HR scale positions Insperity distinctively within the marketplace and serves as a new driver for large client sales and retention. This dramatically increases our total addressable market and advances our growth model. This solution also provides a possible new growth measure and greater visibility for future growth. The HR scale rollout continues to be on an excellent track. We have scheduled beta clients to go live next month, and we expect they will be on the system to run payroll as of April 1st. The pipeline of current clients wanting to upgrade to HR scale and new prospects to go straight to this solution continues to grow. Our sales motion, including demo capability and and tools to communicate the value of this offering are resonating and confirming the demand we have expected for HR scale. Based upon the early HR scales activity levels with new prospects and existing clients, we expect approximately 6,000 to 8,000 paid worksite employees on HR scale by year end with a solid queue scheduled for future deployments. Current HR 360 clients upgrading to HR scale are expected to add new revenue over time and improve retention with longer contracts, but not add to paid worksite employee growth since they are already in the numbers on HR 360. New prospects signing on as HR scale clients will add revenue both as part of the upfront deployment enablement fees and as they add to our growth in paid worksite employees once they run their first payroll. While the deployment and enablement period is currently six months, we expect to reduce this period over time as our teams gain experience. All HR scale clients are added for first payroll at the beginning of a quarter. This allows us to sell accounts and schedule their start in a queue and provide visibility in the paid worksite employee growth. We are proactively marketing HR scale to all our clients with at least 150 employees throughout this year and believe the value of this offering can have a positive effect on year-end retention in 2026. We believe that the combination of sold HR scale accounts to new clients and retention of larger HR 360 accounts may provide a step up into 2027 to launch year two of our three-year plan. I will discuss more in a moment. HR scale also represents an opportunity to extend the Insperity brand and widen the sales funnel for prospects for our flagship comprehensive HR solution, HR 360, and our traditional employment offering, HR Core. In summary, Insperity is entering 2026 with stronger alignment, clearer priorities, and the most competitive product portfolio of our history. which we believe positions us well to regain our growth momentum. Last quarter, I mentioned our work on a three-year plan with the objective of returning to the targeted growth and profitability key metrics of our business model. This plan includes specific initiatives designed to return our key drivers to these metrics and generate corresponding exceptional shareholder returns. Our historical key metrics in good times include double-digit unit revenue and gross profit growth combined with operating leverage to achieve adjusted EBITDA annual growth rates north of 20%. After 2025, this seems like a considerable challenge. However, we have developed a three-year plan that we believe provides a clear strategy for margin recovery in year one, balanced growth and profitability in year two, and in year three, high performance key metrics. It's also important to note that we're focused on building substantial improvement in adjusted EBITDA in subsequent years, like we expect in 2026. In just under a month, Insperity will mark 40 years of fulfilling our mission to help businesses succeed so communities prosper. Reaching this milestone, having pioneered and led A new industry over four decades is truly a significant achievement. The number 40 is often associated with a time of testing, refinement, transformation, and a new beginning moving up from one level to the next. This certainly applies to our 40th year at Insperity. 2025 presented significant unexpected challenges to overcome to pass the test of time. We have always been a values-based, culture-driven, people-centric company, aspiring to an exceptional standard of excellence. We believe Insperity has been in a category of one in the HR marketplace, differentiated by the breadth and depth of our services provided and the level of care of our small and medium-sized business clients, worksite employees, and their families. We view this as a rock-solid foundation upon which we will build our future with along with many other pillars of our success from the past. Our 40th year was exceptionally challenging, but we believe our resilience and determination have us on a solid path for margin recovery in 2026 and a return to higher growth and profitability and high-performance key metrics as we move ahead into the next 40 years. At this point, I'd like to pass the call back to Jim to provide some further perspective on 2026 expectations.