Insperity Fourth Quarter 2025 Earnings Call - Margin recovery underway, HRScale to seed 2027 growth

John, Conference Operator: 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 0 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.

Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer, Insperity: 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 HRScale 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 -$0.60 and adjusted EBITDA of -$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 EPS was -$0.54, and adjusted EBITDA was -$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 HRScale, 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 15th, 2028, increased our borrowing capacity from $650 million to $750 million, and raised our maximum leverage ratio from 3 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.

Paul Sarvadi, Chairman of the Board and Chief Executive Officer, Insperity: 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 HRScale. 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 -1.5% to +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 HR360 sales and retention initiatives and the rollout of HRScale. 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 HR360 offering without participation in our healthcare 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 HRScale and how we believe this solution helps us regain our growth momentum going forward. As a reminder, HRScale, our joint solution with Workday, is one of the most significant transformations that has occurred at Insperity, designed to effectively enhance our PEO solution set for mid-market companies ranging from 150-5,000 employees.

We believe the addition of HRScale 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 HRScale 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 HRScale and new prospects to go straight to this solution continues to grow. Our sales motion, including demo capability and tools to communicate the value of this offering, are resonating and confirming the demand we have expected for HRScale.

Based upon the early HRScale’s activity levels with new prospects and existing clients, we expect approximately 6,000-8,000 paid worksite employees on HRScale by year-end with a solid queue scheduled for future deployment. Current HR360 clients upgrading to HRScale 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 HR360. New prospects signing on as HRScale 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 HRScale 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 into paid worksite employee growth. We are proactively marketing HRScale 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 HRScale accounts to new clients and retention of larger HR360 accounts may provide a step-up into 2027 to launch year two of our three-year plan, I will discuss more in a moment. HRScale also represents an opportunity to extend the Insperity brand and widen the sales funnel for prospects for our flagship comprehensive HR solution, HR360, and our traditional employment offering, HRCore.

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 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. Thanks, Paul. By all accounts, 2025 was a challenging year.

We began the year with early growth momentum and a backdrop of improved small business economic sentiment. That was quickly offset by significant headwinds due to a rapid escalation in benefits cost trends that were experienced throughout the health insurance industry as well as the macroeconomic impact of tariff and other government policies. These factors significantly impacted our results. For the year, the average number of worksite employees paid increased 1% to just over 310,000. Adjusted EBITDA declined 51% to $131 million, and Adjusted EPS declined 71% to $1.03. Throughout the year, we took significant steps designed to limit the financial impact of these challenges and set the stage for profitability recovery in 2026. We increased our pricing targets and adjusted our pricing and client selection tools and strategies.

We renegotiated our contract with UnitedHealthcare, reduced our pooling level to $500,000 per member per year from $1 million, and implemented plan design changes, all of which are effective as of January 2026. We also managed our cash operating expenses under budget by $20 million. At the same time, we continued to advance our Workday Strategic Partnership, investing $59 million to bring Insperity HRScale to market, of which $48 million was expensed and $11 million was capitalized. We built out the technology platform and the service delivery playbooks. We initiated the implementation of our beta clients with a plan to go live in March. We launched our joint go-to-market plan to attract and sell new clients into the solution. As we reflect on 2025, we faced the challenges head-on with resiliency and resolve. We made a lot of progress, and we remain steadfast in confronting the challenges ahead.

As Paul discussed, our fall campaign and year-end transition resulted in a lower starting point in paid worksite employees. Given our recent sales, client retention, and client net hiring results, we expect our average paid worksite employees for the first quarter to be in a range of 303,000-305,000, a decline of 0.3%-1% from Q1 of 2025. For the full year of 2026, we are forecasting our average paid worksite employees in a range from -1.5% to +1.5%. With regards to gross profit, we do not expect a full return to pre-2025 gross profit per worksite employee levels in 2026. Rather, our forecast includes a significant improvement in key profitability drivers to start the year and continuing improvement throughout the year. Based on our year-end transition results, we believe that our pricing and client selection strategies are working as planned.

We have seen a step-up in pricing in January 2026 in both new and renewing accounts. In addition, the profitability of the clients that terminated in our year-end transition was significantly lower than the clients that remain active, which we expect to provide a meaningful boost in our profitability. Also, we believe that the quality of the new clients that have started is improved from a demographic, risk, and pricing perspective. We expect that the combination of these favorable impacts, along with our plan design changes and our renegotiated contract with UHC, provide the drivers for gross profit recovery in 2026. While healthcare cost trends remain at elevated levels, we are pulling many levers that we believe will either positively impact this trend through cost reductions or increase our pricing.

The progress we have made so far is significant, and we intend to continue executing these pricing and client selection strategies throughout 2026. We believe that our employee benefit solutions remain competitive in the marketplace, and we can supplement those solutions as appropriate with client-sponsored benefit offerings through our insurance agency. Our plan is to provide the most effective option to each client and prospect, increasing our value proposition while also attracting and retaining the right clients at the right price to produce sustainable profitability at normal historical levels. Regarding workers’ compensation costs, we have historically been successful in managing claims to completion at a level below actuarial estimates, which has provided additional gross profit. We are taking a conservative approach to forecasting in this area relative to our history, consistent with our normal practice.

With regards to operating expenses, we expect another year-over-year reduction in 2026 driven primarily by reduced headcount as well as lower HRScale investment costs. We are planning to utilize a portion of those expected savings to ramp up HRScale service capacity, increase marketing spend, and grow the number of Business Performance Advisors along with other inflationary cost increases. In conjunction with our year-end transition, we analyzed our organization and have eliminated positions representing about 4% of our non-sales headcount. This effort, which we believe will be substantially completed in Q1, is expected to reduce our operating expenses by $20 million in 2026, excluding the impact of a $9 million restructuring charge. With regards to HRScale, our investment costs are expected to be near the Q4 2025 levels in the first two quarters of 2026 as we work through the payroll go live and stabilization period.

Beyond that, the investment costs are expected to drop to a much lower level consistent with a normal product roadmap. Throughout 2026, we expect our HRScale-related service costs to ramp up as we reallocate and add more resources to onboard and service clients. All in all, we expect our 2026 HRScale-related operating expenses to be about $12 million less than 2025 levels. Interest income is expected to be about $7 million lower than 2025 levels due to reduced interest rates and cash balances. The effective income tax rate for purposes of Adjusted EPS is projected to be 34% for the full year 2026. The effective tax rate for GAAP EPS could fluctuate from that based on the level of non-deductible expenses as a proportion of pre-tax income. We plan to exclude the $9 million restructuring charge from our Adjusted EBITDA and Adjusted EPS calculations.

As a result, we are forecasting full-year Adjusted EBITDA in a range of $170 million-$230 million, an increase of 30%-76%. For Adjusted EPS, we are forecasting a range of $1.69-$2.72, an increase of 64%-164%. As for Q1, we are forecasting Adjusted EBITDA in a range of $81 million-$111 million and Adjusted EPS in a range of $1.03-$1.50. At this time, I’d like to open up the call for questions. Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Once again, please press star one if you have a question or a comment. Our first question comes from Andrew Nicholas with William Blair. Please proceed. Hi. Good afternoon. Appreciate you taking my questions. I guess first, I was hoping we could dig in a little bit further on the HRScale momentum. Sounds like you have line of sight into 6,000-8,000 employees on the platform by year-end. I was hoping you could maybe talk about how confident you are in that number, what the average size of clients coming online looks like. Is it at the lower end of the 150-5,000 range, or how should we think about the typical client there?

How much of that year-end number is new clients versus ones that are transitioning from the HR360 point? Those are good questions, and it is exciting to be at this point on launching the new product. Now, what we have to balance here is we, of course, have informed our current clients first, and we have to prioritize especially larger customers. We have done that, and we do have visibility there. We also have tremendous energy around the prospect base, and we do anticipate new accounts as part of this picture. However, this is more like filling slots for each quarter.

And so what really gives us excitement about the visibility here is that as we close business, both selling current accounts to upgrade HRScale and new businesses, we’re going to be able to lock them into whatever their effective date needs to be based on the implementation period that works best for them, etc. So I know that’s kind of a long answer, and we don’t have those allocations specifically yet as to which accounts. Earlier, we have prioritized larger current accounts because we want to secure them and avoid the attrition that can be caused there that is so significant. But there’s a balance there, and it’s account by account, going through the process, evaluating their needs, evaluating their timing, what works for them.

We’re excited about both the ones that will be on this year but also looking to really build that queue of those who are sold, both new and upgrading accounts, and have a significant queue as we get toward the end of the year. Understood. So I guess, is it fair to say that that 6,000-8,000 pipeline, not a major part of kind of gross profit in 2026, is more about setting up for that contribution in the out years? That’s correct. That’s correct. That’s kind of the way it will work because we’re just rolling those in. You’ve got the beta clients coming on in April, a group of clients coming on in July, a group of clients coming on in October. Perfect. Understood.

And then maybe if I could ask my follow-up question just on healthcare claims dynamics, any numbers you can kind of put around the expected benefit cost trend in 2026, Jim? Yeah. So I think one thing to think about is, as we’ve said, we expect the claims trend to remain at an elevated level on a gross basis. We’ve obviously taken a lot of steps to try to positively influence that down through the negotiation of our fees with UnitedHealthcare through our plan design changes. We had talked last quarter about that being worth about 2%. We also see this change over in the client base with the terminating clients being significantly lower profitability than the ones that are remaining. So that actually can have some impact on both the pricing and on the cost side.

So as of right now, we’re not lasered in on exactly what we’re talking about what we think the kind of net trend for us to be this year is. But I think the thing that I would say is we’re starting with a high gross number, and all the things that we’re doing are aimed at positively influencing that number. Our next question comes from Jeff Martin with Roth Capital Partners. Please proceed. Thanks. Good afternoon, guys. Wanted to dive in a bit more on the client-sponsored healthcare plan. Do you foresee this being a significant trend, and is that a strategic initiative, or is that just kind of how the market is currently unfolding? It’s kind of both. It’s a strategic initiative from a couple of perspectives, Jeff.

One is we want to be able to offer the very best offer for every client, and this gives us the opportunity to do that. We’ve had our agency in place for a considerable length of time, and we’ve used it modestly, but it really ramped it up for the good reasons as the last half of last year. But it also allows us to have another way to grow the company with taking less risk on the benefit side. Obviously, we’ve got some wounds from a tough year last year on that front. But when you look at taking less risk through our contract with United with a lower pooling level or pooling level, and then we have HRScale now where large customers are more likely to want some other options, and so we’ve been preparing for that as well.

So extending this into the rest of our HR360 base was a good idea and gives us another option. Great. And then if I could just drill down a little bit more on the churn, it sounds like a good portion of that churn is lower profitability clients. Are you able to give us a sense of maybe what percentage? And then I have a second part to the question and wanted to also ask what your net hiring assumption is embedded in your 2026 guidance from the existing client base. Don’t want to necessarily give an exact number, but I will say it is a larger spread than I’ve seen. And I moved over into the pricing area about 15 years ago.

So as we go from one year into the next, it’s the biggest difference in the profitability of the clients staying versus the profitability of the clients who have terminated that we’ve seen in a very long time. Now, on the net gain from the client base or loss from employment, obviously, we had another year last year, and even in the fourth quarter, that reflected the ongoing labor market issues. And so we had a very low number last year, and so we’ve just built a range around that very low number, both directions. That’s included here. We think that was the appropriate approach to take. Thank you. The next question comes from Tobey Sommer with Truist. Please proceed. Thank you.

I was wondering if you could describe your cash flow expectations associated with the 2026 guidance and maybe remind me to what degree there’s an influence of investment shifting from OpEx to being capitalized in the EBITDA number. Thanks. Thanks, Tobe. Yeah. Until we started capitalizing related to Workday in the third quarter of this year, we had seen a pretty good drop-off from our historical levels as far as CapEx had gone. So as we wind this down, change over to a lower level of investment in HR Scale, we do expect that some people will be going back and become available to work on other projects that will also be capitalizable. Overall, I would say that we generally expect our CapEx to go about back to where it was before we started the Workday project, kind of $40 million-$45 million a year, something like that.

And so that’s the thought process there. And then relatively similar, should maybe be a little bit less interest expense. We did have a couple of rate cuts last year. Certainly, we recognize that our adjusted cash balance at the end of the year is a little bit lower. So we’re watching that. We’re about to go into our higher earnings quarter. So we’ll be watching the cash flow and deciding as we go through this year whether or not we need to borrow a little bit more money on our line of credit or not. So that’s a possibility that we could do. But generally speaking, it’s EBITDA, it’s CapEx, interest expense, and then the dividend policy. Paul, do you want to reference the dividends? Yeah. I mean, we’re pleased with the rebound that we’re experiencing this year.

And every quarter, we obviously meet as a board and make those kind of decisions. But that’s a very high priority for us, and we’re on the right track. Thank you. If I could ask a follow-up about healthcare, this has been a journey for the entire anybody who touches healthcare. This isn’t just a PEO nor an Insperity phenomenon. If you could, when you step back and you think about reducing the firm’s exposure to healthcare, what do you think that that does to the long-term value proposition to customers? Yeah. That’s a good question. And fortunately, we are at a stage in our business where the HR services that are provided, that’s the core value of what we’re providing.

Benefits, of course, is one aspect. Usually, it’s all about attracting and retaining key people, but there’s a lot of other things you do to attract and retain key people. We provide all of the services that contribute toward that. So benefits still obviously critically important, but we believe that we can have a future that purposefully lowers our risk in this area. But the demand for our service is much broader than just benefits. And I think we really have a great sales organization that I mentioned in my remarks about our convention was really focused on the full value of what we provide. And we had some real high performers across the country that they didn’t miss a beat in anything that had to do with the benefit plan issues that happened last year.

We really wanted to extend that across those best practices across the organization. We did. So I really think this is kind of one of these examples where some of the learnings that you have going through a difficult period turn into a real powerful positive going forward. And if I can add to that real quick, in retirement services, we’ve always had an approach that you could come onto our big plan, and we could provide all the service around that. If you wanted certain aspects of a plan unique to a customer, you could adopt a client-sponsored plan. We can still record-keep it for you. Or if you wanted to use an outside record-keeper, we could interact with that from a payroll perspective to make sure the money was taken out of everybody’s check right and gotten over to the record-keeper.

That approach is similar to the approach that we have on benefits. It’s just that historically, our attachment rate of our big plan has been way over 90%. I think that we’ll still attach our big plan at a very high rate. It is very cost-effective. It has good options in it. It has some flexibility in it. But to the extent that there’s an opportunity to look at a client-sponsored program through our insurance agency, whether it’s a larger customer or a smaller customer, it does give us more flexibility to kind of meet them where they’re at and approach it the same way we do with retirement services. Yeah. Also be able to have fees that relate to doing the administration, which we believe is an important part of that as well. Thank you. Next question is from Mark Marcon with Baird. Please proceed.

Good afternoon, and thanks for taking my questions. Just with regards to the health benefits costs, if I heard you right, Jim, you basically said you’re doing some things to mitigate roughly 2% of the price increase. So does that get us to somewhere in the 6%-8% range in terms of when you’re going to renew a client? And did I hear you correctly that we still have about 60% of the client base to go through in terms of renewals for the balance of this year with the new plan? Yeah. Let me clarify on that front. So from a pricing perspective, we’re still looking at price increases in the teens on average. And I say on average. We obviously will have some variance across the client base, but average is in the teens.

And as Paul mentioned on the pricing side, we renew about 40% or so of our clients as we come through kind of the year-end timeframe. So as we look between now and the end of next year, relatively evenly spread out, we’ve got about 60% that will go through renewal at some point this year. From a cost perspective, the United contract and the plan design changes affect the cost side only. And so when you think about high claims trends like the industry has seen, like we saw last year, you start there. We’ve estimated that about 2% reduction in the cost side comes out of the United contract and the plan design changes. On top of that, we do have the impact of the change in the mix and the profitability of the remaining clients versus the terminating clients as another component in there. Yeah.

I think one other thing, Mark, that would help you see the picture. As Jim said, we start out with a higher price that is the proposal. But we have definite processes we go through to help the client figure out how they can adjust their plan, adjust other things to reduce that price. And that’s not just an Insperity thing. That’s kind of what happens in the marketplace. And so your net pricing that you end up having coming in is not in that range because you have ways to help the client reduce their cost. I appreciate that. And certainly, everybody is aware that higher healthcare costs are out there. I’m just wondering, for the full year, for full year 2025, what was the retention rate? And then what sort of reaction are you getting from clients as you’re renewing them?

I’m sure that they appreciate that you’re doing everything you can to help them. But I’m just wondering, what sort of reaction? Sure. We were in the 83% range of retention, which is just above kind of right around the midpoint, a little bit above. It was a good year of retention. The year prior was in the 81% range. Both the years are always impacted more by the year-end transition. So this year, our profit margin recovery mode, we had a higher percentage. It wasn’t as high as two years ago, but it sure wasn’t as low as last year. Our retention for the balance of the year, we expect it to be managed the way we have in the past. It’s a much smaller number every month that are going through the process, much more manageable than the surge of year-end transition.

So we had a very effective transition achieving our number one priority of this step-up in gross profit key drivers. And that puts us in the right place to start the year. But you do have the price you pay on the starting point in paid worksite employees that we outlined in our remarks. Great. One last one, if I could. Just on Workday, obviously, there’s a leadership change over there, but that shouldn’t impact your relationship with them. But I’m wondering, how are you thinking about 2027 in terms of level of investment? Should we see that decrease meaningfully, which should then lead to an improvement in terms of profitability as we look out to 2027? Yeah. I’m obviously really excited about 2027 because it’s the beginning of serious revenue coming from this.

This will be more in a phase of, as Jim said, a typical roadmap that’s continuing to be developed by both Workday and our own people. Yes, there’s less spend. Obviously, it’s the revenue side and the growth rate that we believe this can be really significant relative to our three-year plan, which that second year is all about balancing growth and profitability. We want to see this momentum be reestablished over the course of this year. We’re working toward seeing 2027 really show that picture. The next question comes from Andrew Steinerman with J.P. Morgan. Please proceed, Andrew. Good evening, guys, and congrats on the 40th anniversary coming up. I wanted to thank you. Thank you. Yep. Yep. I wanted to ask a question that’s a little bit of a follow-up on one of Mark’s questions.

So you mentioned that the retention was about 83% this year as an improvement versus last year. I wanted to ask if you could kind of break down the components within the worksite employee guidance for next year around change in retention. You already mentioned same-store growth in the same zone as this prior year. And then what the bookings estimate or contribution is within that guidance. Thank you. So I guess the best way to think about it is we gave guidance about the -1.5% to +1.5% in total growth. And you have to kind of think of the midpoint of that being similar to a very low level of net hiring in the base like we had last year. We had a little higher we also had higher attrition. So we’ve kind of budgeted slightly higher attrition for this year to be at that midpoint.

And then also, sales were below budget. They were strong for the full year. But we thought we sat our folks down and worked through the entire year and said, "What should we budget?" And we budgeted that. And so if there’s other challenges to any one of those, that’s how you kind of get down to the minus 1.5. And any benefit to those is how you get up to the high end of it. So we think we’re properly have thought through how to look at growth for this year. And it does mask a little bit. I mentioned in my remarks that our net gain in clients and worksite employees from new HR360 sales, overcoming the low level of attrition that happens from our renewal process throughout the year, there’s typically a net gain.

You actually see a net gain going on throughout the course of the year. That’s how you get from a negative number in the first quarter and to you have positive numbers as you move out in the year and you’re teed up for a good start into the following year. Okay. Super clear. For my follow-up question, it’s a little bit of a bigger picture question, maybe looking out to 2027. But you have the new UHC contract live effective now. You also will start to have revenue from Workday really coming in in 2027. So I wanted to ask if there’s any way you could help us in thinking about how unit economics show up in the model. So specifically, you kind of guided this year’s gross profit for worksite employee to be recovered but not quite to the same level as historical.

But I’m curious in 2027 how we should start to think about that as these new model drivers sort of enter the picture. Yeah. I think the way I would think about it is we were successful in taking these steps on a decent percentage of our client base. But we have a serious percentage of client base to continue that process. And so as we implement and as we continue to do what we’ve been doing, we should see continuing improvement in these drivers to gross profit where we go into 2027 at a different level. And that’s the objective. That’s the focus. Our margin recovery is the centerpiece of 2026. And thankfully, we have a nice step up to start the year out. But that’s our focus. Now, we are also and we believe we could do this at the same time.

And that is regain that growth momentum because of both HR360 and how we have some new tools and new methodology that can help our team. But then also, I believe we’re going to be able to update you quarter by quarter so you can kind of hear how things are going relative to future margin improvement and also how, for example, HRScale visibility in paid worksite employees. And we should have some good information to be able to give a better picture of how things will look as we go forward. Great. Thanks. And congrats again. Thank you. Okay. We have reached the end of the question and answers session. I will now turn the call over to Mr. Sarvadi for closing remarks. Well, once again, we just want to thank everybody for participating today.

We look forward to having you back in a quarter and hearing more about how we’re progressing on our plan for margin recovery and then balanced growth and profitability. Ultimately, it’s our intent, as I mentioned in our three-year plan, to get back to the level of high-performance key metrics that are a core to the business model that we have here at Insperity. Thank you again, and we’ll see you soon. This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.