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's second quarter 2026 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 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 second quarter 2026 financial results. Paul will then comment on the progress of our margin recovery plan and our game plan to regain worksite employee growth momentum. I will return to provide financial guidance for the third 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 second quarter of $0.34 per share and adjusted EBITDA of $36 million. Both results exceeded the midpoint of our expected range, and they represent a year-over-year increase of 31% and 13%, respectively. We believe these results reflect the significant progress we have made in our ongoing Margin Recovery Plan. As a reminder, Our margin recovery plan includes three key components. First is our ongoing pricing and client retention strategy, which we intend to continue through the end of the year. Second is our benefits plan design changes and UnitedHealthcare contract changes, both of which became effective at the beginning of the year. The third key component is a robust focus on operating expense management. The financial impact of this plan is evident in our second quarter results. We believe the impact will continue to build over the course of the year, consistent with our goals of producing a significant profit recovery in 2026 and laying the foundation for further earnings growth in 2027. The average number of paid worksite employees in Q2 was 305,764. which was above the high end of our expected range and represents a modest 1.1% decrease versus Q2 2025. The worksite employee outperformance was primarily driven by higher than expected net hiring within the client base, which helped mitigate the expected impact of our margin recovery plan on sales and client retention. For Q2, client retention and worksite employees from new clients were both in line with our forecast. Paul will provide more color around our worksite employee results in a few minutes. Total gross profit in Q2, 2026 decreased by 3% to 217 million. Gross profit per worksite employee decreased by 1% to $237 per month, which was in line with our expectations and with a slight improvement over the 2% decrease reported in Q1 2026. For Q2, our margin recovery plan produced improvements in the matching of price and cost in our benefits area. Those improvements were largely masked by the year-over-year change in workers' compensation costs, which were impacted by lower actuarial reserve adjustments related to prior policy years. Benefits cost per covered employee increased by 5.2% over Q2 of 2025, consistent with our expectations and first quarter results. While underlying benefits cost trends remain high in the healthcare marketplace, our 2026 results have been impacted favorably by a client mix change influenced by our pricing and client retention strategy, along with the plan design changes and United Healthcare contract changes that became effective at the beginning of the year. As I mentioned last quarter, we expect the United Healthcare contract change to help temper the seasonality of our quarterly earnings patterns 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 per-employee per month basis or PEPM basis throughout the year, while the related favorable impact on claims costs is expected to be significantly weighted toward the later quarters of the year with the largest impact in Q4. With regards to workers' compensation costs, we have seen relative stability in our current period costs compared to our expectations. However, favorable adjustments in actuarial reserves related to prior policy years declined in Q2 2026 versus Q2 2025. This is reflective of a market-wide increase in claims severity, with elevated health care cost trends being a significant contributor. The lower level of actuarial adjustments was generally in line with our expectations. At the halfway point of the year, we are pleased with the execution of our margin recovery plan, our pricing and client mix results, and the relative stability of our benefits costs so far. At the same time, we continue to be vigilant regarding the range of potential outcomes for benefits costs over the remainder of the year, which I will discuss later in the call. In conjunction with our margin recovery plan, total operating expenses decreased by 8% to $211 million in Q2 2026 due primarily to lower headcount-related costs and stock compensation costs, partially offset by increased advertising expenses to drive leads into our sales pipeline. Q2 cash operating expenses decreased by 6% versus Q2 2025. With beta clients being live on HR scale in Q2 2026, we saw a reduction in certain investment costs and the transition of client onboarding and service-related costs from product investment into operational costs. As a result, our total investment in the development of HR scale for Q2 declined to $8 million, of which $5 million was capitalized. During the quarter, we continued to return capital to our shareholders through our regular dividend program, paying $23 million in dividends. We ended the quarter with $95 million of adjusted cash compared to $36 million at the end of Q1. During the quarter, we borrowed $50 million under our credit facility for working capital purposes. primarily to address normal fluctuations associated with the timing of funding of our direct cost programs. At this time, I'd like to turn the call over to Paul.

Thank you, Jim, and thanks to everyone for joining our call. Today, I'll discuss our successful execution of our margin recovery strategy year to date, followed by our plans to lay the groundwork over the second half of the year to regain growth momentum moving into 2027. This includes an update on our refined sales motion, HR scale progress, and AI initiatives which we believe will advance sales and retention efforts. Our top priority for 2026 is margin recovery, and we are pleased that our Q2 results reflect the meaningful progress achieved in the first half of the year. This outcome was driven by exceptional collaboration across the company to address the healthcare claims trend and related margin pressure we experienced in 2025. Executing this effort required company-wide cooperation, clear communication, and disciplined implementation of new pricing strategies, product offering enhancements, and the adjustment of many sales, client retention, and benefits processes. These pricing and process changes created some initial challenges and as expected sales and retention finished at the lower end of our typical ranges in the first half of this year. Against that backdrop where some companies experience significant volume reductions, our modest 1% year-over-year decline in worksite employees paid clearly demonstrates the resilience of our organization and the value of our services including the breadth, depth and level of care delivered throughout this process. The first half of this year also reflects strategic improvements that we believe can have a long-term impact of improving sales and retention while also supporting our efforts to reduce risk. In particular, we now provide more benefit options for current and prospective clients through our expanded insurance agency operation when it provides a better solution for the client. While some clients choose to keep their own plan through a third-party broker, Our insurance agency operation is also seeing success offering plans in our sales process, which may continue the recent trend of clients selecting a client-sponsored plan. At the end of Q2, 7% of our client base obtained their benefits outside of the Insperity plan, including 14% of new clients added within the past 12 months. Demand for our insurance agency solutions continues to grow. and we're ramping up our capacity to capitalize on this opportunity. That said, we continue to expect that the bulk of our clients will choose to participate in the Insperity Plan and there could be some movement in and out of the Insperity Plan from year to year. So while we believe sales and retention efforts for the first half of this year were executed well, the results were tempered by the impact of the margin recovery pricing priority and significant change management. growth factor in our model, net change in employment in the client base stabilized in Q2 and exceeded our forecast after showing some volatility in Q1. Each quarter we conduct a survey to compare actual hiring, pay rates, overtime and commissions to client sentiment for the upcoming quarter. The data and client sentiment coming out of Q2 reflect a positive outlook for their own companies for the remainder of the year. Client confidence remains resilient in a cautious economic environment, with 63% of surveyed clients expecting their businesses to perform better in 2026 than in 2025. Clients remain more optimistic about their own businesses and industries than the broader economy, supporting continued demand for our HR solutions that help them manage uncertainty while pursuing growth. Talent availability and workforce planning remain key client challenges. The hiring environment remains stable with increased overtime utilization and strong commission growth in Q2. Looking forward, roughly one-quarter of clients surveyed expect to hire in Q3 and more than one-third anticipate workforce growth in 2026. As we look ahead to the balance of the year, we plan to continue our margin recovery efforts At the same time, we believe sales motion changes across all three of our premium HR solutions are becoming more fully adopted and confidence is growing across the sales organization. We believe this sales motion progress combined with our HR scale ramp up and AI agent rollout positions us well to advance sales and retention efforts over the balance of the year. A Q2 highlight was the formal launch of HR scale Successfully onboarding and processing payroll for our beta clients and ramping up marketing and sales activity. We entered Q3 with sold HR scale accounts totaling nearly 8,000 worksite employees, including over 5,000 already live on the platform and approximately 3,000 moving through implementation. This is a good start, and we believe we are building momentum with HR scale. The early demand generation signs are encouraging, and we're starting to see the benefit of broader market activity. The pipeline continues to move forward with progress across both client migration opportunities and new prospects. As a reminder, HR Scale, our joint solution with Workday, is one of the most significant transformations at Insperity, designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 We believe this addition of HR-scale positions in Sparity distinctively within the marketplace and serves as a new driver for sales and retention of larger clients. This significantly expands our total addressable market, advances our growth model, and provides greater visibility for future growth. Our sales, marketing, service, product, and partner teams are all working in sync. and our go-to-market activity is now rolling out across a wide array of marketing channels including events, partnerships, webinars, social media and more. The referral and broker channels also gaining traction. We're seeing opportunities from these sources enter the pipeline and upcoming education sessions should help partners better understand and communicate the HR scale story. On the operational side, the focus is clear, strong implementations Stable client experiences that enhance time to value and the ability to scale with quality. We also have an ongoing dialogue with Workday to continue developing the product roadmap for HR scale and strengthen our go-to-market plan. So we continue to be excited about the HR scale opportunity. We're building demand, strengthening partner engagement, advancing the pipeline, and improving implementation readiness with the foundation in place to support this strategic growth initiative. We also expect our AI strategy will add value to the strategic HR services, technology, and expertise provided by Insperity. We continue to see growing receptivity to AI both within Insperity and across the client base, reinforcing our belief that AI can amplify human expertise, strengthen service delivery, and improve productivity. AI adoption and targeted use cases are accelerating, creating significant opportunities across Insperity from sales and marketing to client services and technology development. In many areas, we believe AI will prove to be transformational for Insperity. Client AI adoption is also accelerating with 63% of surveyed clients reporting that they are either piloting AI or integrating it into their business strategy, and only 8% reporting no plans to use AI. Insperity's AI strategy is focused on practical business impact enabling our employees to better serve our clients, improving client access to insights and solutions, accelerating product development, and helping clients prepare their workforce for an AI-enabled future. Insperity's proprietary Compass AI engine is maturing into a scalable enterprise AI platform, providing a foundation that connects data and business knowledge across the organization. Our HR 360 agent is already helping clients and worksite employees access answers, resources, and service support more efficiently, and we are working to expand its functionality to deliver conversational reporting and faster business insights. We plan to introduce conversational reporting using demographic and transactional data, shifting from static reports to real-time insights for better decision-making without the need for users to have advanced We expect this functionality, combined with the expertise of our staff, will reinforce the way Insperity provides sophisticated HR support to help HR 360 clients succeed in a new world fueled by AI and can serve as a value driver in our discussions with clients and prospects. We believe as our refined sales motion becomes fully adopted and confidence grows within the HR 360 and HR core sales organizations, Combined with the catalyst effect of HR scale and our AI initiatives, we have the opportunity for strong sales and client retention over the balance of the year. So we believe we are on track to achieve both of our 2026 highest priorities of margin recovery and laying the foundation for regaining growth momentum. We expect success in these two areas would lay the foundation for balancing growth and profitability in 2027 and delivering shareholder value in the years ahead. At this point, I'd like to pass the call back to Jim.