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DATE

Monday, Nov. 3, 2025, at 5 p.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Paul J. Sarvadi
  • Executive Vice President of Finance, Chief Financial Officer and Treasurer — James D. Allison

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RISKS

  • Adjusted EPS of minus 20¢ and Adjusted EBITDA of $10 million for Q3 2025 were both below forecasted ranges, due to higher-than-expected benefits costs.
  • Benefits Cost Trend increased 9.1% in Q3 2025 over Q3 2024, driven, according to management, by "higher than expected outpatient and inpatient utilization and pharmacy costs, including a significant increase in large claims frequency both sequentially over Q2 and year over year."
  • The prevailing view in the industry is that the higher claims trend experienced in 2025 will persist in 2026. According to Jim Allison, this explicitly signals ongoing earnings headwinds.
  • Management cited "a significant earnings shortfall from our initial budget," according to Jim Allison for 2025, driven by "the unexpected increase in health care claims costs."

TAKEAWAYS

  • Paid Worksite Employee Growth -- Increased by 1.2% to 312,842 in Q3 2025, within the company’s forecasted range.
  • Client Retention -- Averaged 99% per month in Q3 2025, consistent with the prior year.
  • Adjusted EPS -- Minus 20¢ for Q3 2025, below management's guidance "primarily due to a further continuation of higher than expected benefits costs," according to Jim Allison.
  • Adjusted EBITDA -- $10 million in Q3 2025, also below the forecasted range for the same primary reason as adjusted EPS.
  • Gross Profit per Worksite Employee -- $208 per month in Q3 2025, down from $247 in Q3 2024, with management attributing the decline to $20 million in unexpected benefits costs.
  • Benefits Cost Trend -- 9.1% year-over-year increase for Q3 2025 over Q3 2024, with management identifying higher claim frequency and utilization as the drivers.
  • Operating Expenses -- Decreased 4% year-over-year in Q3 2025 and declined $10 million sequentially, reflecting expense management below budget, especially in salaries and G&A.
  • HR scale Investment -- $17 million invested in Q3 2025, with $11 million included in operating expenses, down from $19 million in Q3 2024 (all expensed then); milestone reached for capitalization due to software platform progress.
  • Capital Return -- $22 million in cash dividends paid in Q3 2025; $68 million in dividends year-to-date, and 225,000 shares repurchased for $19 million in 2025.
  • Quarter-End Liquidity -- $120 million in adjusted cash and $280 million available under the credit facility at the end of Q3 2025.
  • Worksite Employee Guidance -- Q4 2025 average paid worksite employees expected at 313,000–315,000, up 1.3%–1.9% over Q4 2024.
  • Full-Year Growth/Profit Guidance -- Full-year adjusted (non-GAAP) EPS forecasted at 84¢–$1.47 and adjusted EBITDA (non-GAAP) at $119 million–$153 million for fiscal year ended Dec. 31, 2025.
  • Operating Expenses Outlook -- Full-year 2025 operating expenses expected to decrease by about 3% from prior year, with Q4 sequential declines anticipated.
  • Health Benefits Costs -- Full-year benefits cost trend projected to remain at 9% for 2025, due to utilization and pharmacy cost increases.
  • Workday Strategic Partnership Investment -- For fiscal year ended Dec. 31, 2025, total estimated at $58 million (including $48 million in operating expenses), compared to $57 million, all expensed in fiscal year ended Dec. 31, 2024.
  • Q4 2025 Profit Guidance -- Q4 2025 adjusted EBITDA forecasted at negative $25 million to $9 million, and adjusted EPS projected at minus 79¢ to minus 16¢.
  • 2026 Management Priorities -- UnitedHealthcare contract renewal through 2028 incorporates new financial terms, plan design, and a pooled claim cap reduction from $1 million to $500,000 per member, targeting a favorable impact of about 2% on gross benefits costs in 2026.
  • HR scale Rollout -- Platform milestones met, with client go-live targeted for March/April 2026, and 2026 HR scale operating expenses projected to be about $15 million lower than the $48 million estimate for 2025.
  • 2026 Recovery Opportunity -- Leadership stated, "we believe that 2026 represents an opportunity to recover a majority of the earnings shortfall we have experienced this year" (referring to fiscal year ended Dec. 31, 2025).

SUMMARY

Insperity (NSP 17.88%) management reported a steep drop in profitability, with both adjusted EPS and adjusted EBITDA for Q3 2025 falling below prior guidance due to elevated health benefits costs driven by increased claim utilization and frequency. Liquidity and capital returns remained healthy, while effective cost containment reduced operating expenses year-over-year and sequentially in Q3 2025. The company executed and capitalized significant investments in the HR scale platform with a major strategic milestone achieved for product rollout in 2026. New pricing measures and a renegotiated UnitedHealthcare contract, including a lower claim pooling cap, are intended to contain benefits costs and support margin recovery in 2026. Management expects operating expenses to decline as HR scale transitions from development to deployment, enhancing future profitability potential. The company’s joint solution with Workday (WDAY 1.77%) is positioned as a growth driver for large client sales and retention.

  • Paul Sarvadi described the UnitedHealthcare partnership extension through 2028 as providing "plan design modifications, and risk transfer alternatives that are projected to significantly reduce Insperity claim costs and mitigate expected trends and large claim risk for the upcoming year."
  • CEO Sarvadi stated, "The projected immediate benefit cost trend combined with the lower large claim pooling level in 2026 presents a timely and important opportunity to reduce costs and lower risk."
  • Momentum in HR 360 and HR scale sales was highlighted, with booked HR 360 sales 45% higher than the prior year in Q3 2025 and record large-account wins attributed to the joint Insperity-Workday solution.
  • Management reiterated that recently implemented pricing increases are "exceeding this continuing higher rate," and early signs show client retention averaged 99% per month in Q3 2025, with a higher sales pipeline entering 2026.

INDUSTRY GLOSSARY

  • Worksite Employee: An individual employed by Insperity’s client firms and included in the company’s professional employer organization (PEO) service counts.
  • Pooling Level: The maximum annual health claim exposure per plan member before excess claims are transferred to an insurer, used for risk control in large group health plans.
  • HR scale: Insperity’s new cloud HR platform leveraging the Workday partnership, targeting mid-market firms with integrated service and technology solutions.
  • HR 360: Insperity’s flagship professional employer organization solution, offering comprehensive HR outsourcing for clients.

Full Conference Call Transcript

Jim Allison: Thank you. We appreciate you joining us today. Let me begin by outlining our plan for today's call. First, I'm going to discuss the details behind our third quarter 2025 financial results and provide an update on our financial guidance for the remainder of the year. Paul will then comment on our ongoing efforts to accelerate growth and improve profitability in 2026, including the rollout of our new HR scale solution. I will return to outline some initial thoughts regarding expected drivers of financial performance in 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-Ks filed today, which are available on our website. Our unit growth for Q3 2025 was within our forecasted range, with the average number of paid worksite employees increasing by 1.2% over Q3 2024 to 312,842.

New client sales results were encouraging, while worksite employees paid from new clients in Q3 fell just short of the Q3 2024 level. Our Q3 booked sales efficiency and the resulting number of accounts that are in the queue for first payroll over the next few months have increased significantly from a year ago. Client retention remains strong, averaging 99% per month and in line with prior year results. Similar to last year, the departure of seasonal summer employees caused net hiring within the client base to be negative in the third quarter. The overall hiring environment continues to be challenging, and Q3 2025 activity was slightly weaker than Q3 2024.

Adjusted EPS for the quarter was minus 20¢, and adjusted EBITDA was $10 million. These results fell below our forecasted ranges primarily due to a further continuation of higher than expected benefits costs. Gross profit per worksite employee in Q3 2025 was $208 per month, down from $247 in 2024, driven primarily by higher than expected benefits costs of $20 million.

As you may recall from last quarter's call, we had expected our benefits cost trend to taper down over 2025 due to favorable demographic changes within our plan combined with the relative benefits cost patterns in the comparison period, which had been more favorable in 2024 and resulted in a higher year-over-year cost trend in 2025 that we did not view as reflective of the underlying trend for the year. Unfortunately, while we benefited from those favorable impacts, Q3 claims data revealed that they were outpaced by higher than expected outpatient and inpatient utilization and pharmacy costs, including a significant increase in large claims frequency both sequentially over Q2 and also year over year.

These factors resulted in a benefit cost trend of 9.1% for Q3 2025 over Q3 2024. The issues that we have experienced with increased health care claims costs are not unique to Insperity. At a macro level, the health insurance industry has reported an unexpected rise in health care costs and loss ratios. From our discussions with our carriers and outside advisers, there are a number of factors driving a higher level of health care utilization, including the increased use of prescription drugs and outpatient procedures, the prevalence of high-cost conditions, and the introduction of new higher-cost treatments and drugs.

Additionally, we have recently been made aware that the use of AI tools by health care providers has emerged as an additional contributor to the higher cost trends, impacting everything from condition diagnosis and treatment plans to clinical documentation and coding for insurance billings, to pre-authorization and appeals processing. Many insurance carriers have alluded to such issues in their comments on higher cost trends and loss ratios, and our understanding is that they are responding in a variety of ways to reduce issues around upcoding or unnecessary spending. What we are hearing is that the accumulation of all of these things happening at the same time has created the unexpected increase in trend.

At this point, the prevailing view in the industry is that the higher claims trend experienced in 2025 will persist in 2026. We responded quickly to the emergence of higher than expected benefits costs earlier in the year by increasing our pricing targets. Over the course of the year, these costs have continued to outpace our projections, and we have revised our pricing plan accordingly. We believe that the plan we are executing remains competitive in the broader market and will continue throughout 2026. This plan is focused on attracting and retaining the right clients at the right price to produce sustainable profitability at normal historical levels.

To date, we believe those plans are on track, and I will provide an update later in the call. Moving on to operating expenses, we continue to actively manage these costs below budgeted levels while continuing to invest in our strategic priorities. On a year-over-year basis, operating expenses in Q3 2025 decreased by 4%. Operating expenses declined sequentially from 2025 by $10 million, with the most significant reductions in salaries and G&A costs. During the third quarter, we achieved significant software development success on the HR scale platform, which met the threshold to capitalize a portion of our Workday strategic partnership costs for the first time.

For Q3, we invested a total of $17 million, of which $11 million is included in operating expenses. This compares with $19 million in 2024, all of which was expensed. During the third quarter, we continued to return capital to our shareholders through our regular dividend program, paying $22 million in cash dividends. On a year-to-date basis, we have paid cash dividends of $68 million and repurchased 225,000 shares of stock at a cost of $19 million. We ended the quarter with $120 million of adjusted cash, and we had $280 million available under our credit facility. Now let me provide an update to our Q4 and full-year 2025 outlook.

Given our recent sales, client retention, and client net hiring results, we expect average paid worksite employees to be in a range of 313,000 to 315,000 for the fourth quarter, an increase of 1.3% to 1.9% over Q4 2024. As a result, average paid worksite employee growth for the full year is expected to be 1%. We are forecasting full-year adjusted EPS in a range of 84¢ to $1.47 and adjusted EBITDA in a range of $119 million to $153 million.

As I mentioned earlier, our benefit cost trend over the first part of the year has hovered around 9%, as favorable changes in our plan demographics and plan migration have been outpaced by increased care utilization, pharmacy costs, and large claim activity. We expect our full-year benefits cost trend to remain at this elevated level. Q4 operating expenses are expected to decline sequentially once again. As a result, full-year 2025 operating expenses are expected to be below 2024 levels by approximately 3%. For the full year, we expect the investment in our Workday strategic partnership to total approximately $58 million, of which $48 million would be included in operating expenses.

This compares to $57 million in 2024, all of which was expensed. As for Q4, we are forecasting adjusted EBITDA in a range of negative $25 million to $9 million and adjusted EPS in a range of minus 79¢ to minus 16¢. For purposes of adjusted EPS, we are forecasting an effective tax rate of 28% for 2025. The effective tax rate on GAAP EPS could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income. Looking at the big picture of 2025 at this point, we have a significant earnings shortfall from our initial budget.

Nearly all of this shortfall is related to the benefits area, driven by the unexpected increase in health care claims costs. Other impacts, a lower level of growth than initially forecasted, mix changes in the business, and the impact of lower interest rates, have been largely offset by the management of operating expenses below budgeted levels. Now at this time, I'd like to turn the call over to Paul.

Paul Sarvadi: Thank you, Jim, and thank you all for joining our call. Today, my comments will focus on four important topics to frame the financial performance rebound and growth acceleration we expect in 2026 and beyond. First, I'll discuss the decisive and assertive actions we are taking to navigate the significant and unexpected step-up in health care claims we have experienced this year. Second, I'll present an update and perspective regarding the official rollout of HR scale this quarter. Our joint solution with Workday is designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 to 5,000 employees.

We believe the addition of this offering will position Insperity uniquely within the marketplace and serve as a new driver for large client sales and retention, advancing our growth model. Third, I'll provide an overview of our recent strong book sales performance and the momentum driving our flagship PEO solution HR 360, which is a key contributor to our growth and integral to our upcoming year-end transition. I'll conclude my remarks with some thoughts about the next three years and the plan we are working through that we believe will allow us to return to historical key metrics in our business model. The most urgent issue that we continue to address is the health insurance claim cost escalation.

This issue has occurred across the marketplace and industry and has impacted Insperity in a severe manner over the last three quarters. We have seen two significant negative developments in the health insurance marketplace. First, the claim trend for the industry at large for 2025 is now expected to be 200 to 400 basis points higher than the industry estimates at the beginning of the year. This unexpected increase that emerged during the year is significantly higher than a typical year. Analysis of our Q3 claims data revealed our benefits cost trend has increased from our initial estimate at the beginning of the year in line with the higher trends now reported in the health insurance industry.

Secondly, the increasing adoption of AI tools by health care providers appears to be a recent additional factor driving higher costs across a wide range of claim categories. As Jim mentioned, we have seen many providers cite utilization and revenue increases, while insurance carriers are reporting higher loss ratios and passing this higher level of claim trend on to employers. Jim has specifically addressed this claim cost escalation we've experienced in his remarks, including the expected effect on adjusted EBITDA in 2025. This factor accounts for nearly all the underperformance from our target for this key financial measure at the beginning of the year, so this is certainly the most significant challenge we are confronting.

Now even though the full effect of this higher than expected trend has made a larger impact on our estimates for the full year than we thought last quarter, we believe the actions we have taken in response have been progressing on track to achieve a rebound in 2026. When we saw signs of a step-up in claim costs in Q1, we quickly initiated action plans to address this trend. We also adjusted these plans during the year as the trend continued to increase. Today, we've had measurable success in increasing pricing appropriately with client retention remaining solid in Q3.

We believe our pricing remains competitive with the industry and with the broader health benefits marketplace for our clients, and we provide plan design options and other ways for clients to mitigate these increases. These pricing measures take time to fully take effect as we price new and renewing accounts each month in line with market trends. The initial effect of these measures began in Q3, and we expect the positive impact will continue to grow over the coming months as we complete our fall sales and renewal season. These pricing initiatives are strategically designed to support our profitability recovery as we move into 2026.

Now in addition, we expect a significant new agreement with UnitedHealthcare announced today will add additional support and contribute substantially to our margin recovery. Since the first quarter, we have focused on negotiating a revised contract with UHC to go into effect at the start of this year. We've now signed the contract through 2028, which addresses our key short and long-term objectives. The contract incorporates financial terms, plan design modifications, and risk transfer alternatives that are projected to significantly reduce Insperity claim costs and mitigate expected trends and large claim risk for the upcoming year. Additionally, the agreement strengthens our partnership alignment to long-term favorable administrative and risk charges and credits as well as growth incentives.

This structure and alignment of this agreement are paramount as we expect them to enhance the financial impact in subsequent years as the business expands. The projected immediate benefit cost trend combined with the lower large claim pooling level in 2026 presents a timely and important opportunity to reduce costs and lower risk. When you combine the effects of these significant cost management and pricing initiatives, we believe we have the foundation for a substantial rebound of gross and margins in 2026 beginning in January. The second hot topic I'd like to discuss is the rollout of our HR scale solution underway with active co-marketing and co-selling target prospects, including demonstrations of the platform.

We're also working on deployment enablement of beta clients, and our software development success has proven the viability of the product, a milestone which impacts accounting treatment for our investment in the platform. This is a pivotal moment for Insperity due to the potential for HR scale to be a catalyst for growth into the future. It's important to recognize the tremendous accomplishment to reach this point in this length of time. We signed the strategic partnership agreement with Workday in January 2024, just 21 months ago.

This partnership was established to bring a unique comprehensive HR solution to a large underserved market of more than 40,000 companies employing more than 25 million employees by combining Insperity's HR service and Workday HR technology. We identified four pillars of work to create this joint solution with the potential to be a category of one and a competitive disruptor in the marketplace. The four defined pillars included our Insperity corporate tenant, our exclusive PEO client tenant, our deployment and enablement services, and our joint go-to-market plan. This effort represented a significant financial investment and a commitment of time, effort, and resources by both partners.

In our case, we estimated a $150 million investment, including $60 million in each of the first two years to build and take this joint solution to the marketplace. Following the signing of the agreement, we commenced the significant effort for this major development project, which involves integrating the client-facing Workday HR platform with our advanced Insperity HR compliance platform. Additionally, I set aggressive internal timeline goals to achieve key milestones across the other three pillars, with the emphasis on speed to market of the new product.

We did not share these at the time due to too many unknowns, but we believe it's important to note now we can look at the big picture and assess how we have performed up to this point. It's not uncommon for a significant project of this magnitude to take substantially more time and investment than initially projected to create a new product and prepare to take it to market. The internal goal for launching the first pillar, our corporate instance of Workday, was 01/01/2025. Implementation was completed by 04/01/2025. We set the goal for the client tenant for completion to initiate deployment enablement for beta clients on 07/01/2025.

The client tenant uses functionality in the Workday solution that did not exist when we entered the agreement, and both of our companies had to work diligently together to create a solution that had not been built before. This milestone was achieved by 10/01/2025. Our deployment and enablement capability is in place now to allow us to bring on beta clients for a go-live date in March 2026 for first payroll in April 2026. In August, our go-to-market plan was launched with our product page on the website going live, our demand generation campaign implemented, and prospect outreach underway.

Co-selling, co-marketing, and co-branding are in full swing, and a pod or product-oriented delivery team of sales professionals from both partners are working together every day on a team that's wholly dedicated to this solution. They are rapidly advancing the sales motion and identifying and meeting with prospects to fill the HR scale sales pipeline. Based on our forecasted investment for the rest of the year, we expect to achieve all these milestones while staying within our original $120 million estimated investment for the first two years. The achievement of these initiatives within this time period and within the budget reflects the professionalism, dedication, and proficiency of both the Insperity and Workday teams.

It also demonstrates the strong cultural alignment of the strategic partnership, which we expect will support the successful rollout of HR scale and positively affect our return on investment for years to come. We expect the launch of HR scale as a significant growth catalyst for Insperity is particularly timely, given the broader macro trends impacting our industry. For the past two years, the labor market has posed considerable challenges for small and medium-sized businesses, which has contributed to restrained growth across the business services sector. There's also uncertainty regarding the future impact of AI on employment, prompting companies in the HR service sector to seek a new catalyst for sustained growth.

Had we not established our strategic partnership with Workday, we believe we would also be searching for such an opportunity. Instead, we believe we have our new growth driver already in place. Now on to my third topic, our confidence in this new growth driver is growing due to recent booked sales success. In Q3, our booked HR 360 sales were substantially over budget and 45% greater than the same period last year. These strong results were driven primarily by outperformance in our mid and enterprise space, which is the target market for HR scale.

We sold our largest account in history during this quarter, which is scheduled to come on HR 360 in January and is planned to upgrade to HR scale by the end of the second contract year. The opportunity to have a discovery call with this large potential client resulted from the client becoming aware of HR scale as an Insperity Workday joint solution. Over the last quarter, we've been encouraged by prospective clients' receptivity to the Insperity Workday strategic partnership in a number of ways, including the ability to set appointments and the nature and level of the conversation.

The system and service demos to beta and prospective clients have resonated well, and we are very pleased with the receptivity to the proposed value proposition. We believe that the early feedback is validating our strong competitive positioning in the marketplace. It's also compelling to see prospective clients considering two product options with the opportunity to start on HR 360 with a plan to upgrade to HR scale in the future. We also believe that the availability of HR scale and HR 360 at different price points will positively impact the level of sales for both solutions.

We believe our success and momentum in book sales through the third quarter puts us in a favorable position going into our year-end transition, with more client worksite employees in the pipeline scheduled to become paid in January. This is also important in a year where we have higher pricing for new and renewing business, which could have some impact on client retention when our priority is to see margin improvement into the new year. The last topic I'd like to address today is our three-year plan we expect to finalize this quarter with the objective of returning to the targeted growth and profitability metrics of our business model.

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%. Our work on this three-year plan includes specific initiatives designed to return our key drivers to these metrics and generate corresponding shareholder returns. We are confident that a return to double-digit growth is possible with the implementation of our new growth driver, HR scale, even if future small and medium-sized business employment gains remain modest. We anticipate improvements in gross profit margin as we align price allocations and direct costs moving forward and expect that the value proposition and pricing of HR scale will further support these outcomes.

We expect operating expense efficiencies and improved margins from both internal and client-facing AI initiatives. As we grow, our AI strategy is already generating efficiency gains and should help us achieve greater operating leverage. Earlier this year, we launched a proprietary Insperity AI tool called Compass, which is already being used by our service providers. We are continuing to develop AI capabilities across our operations, including targeted and proprietary tools for things like predictive analytics and prospect scoring. We are also working to combine the speed and information reach of AI with the validation of our HR expertise to more efficiently deliver complete and accurate information to our clients.

This improves response time and enables us to focus even more on the high-touch nature of our customer relationships, which continues to be a strong competitive differentiator and retention driver. So in summary, we believe the elevated health care trend and malaise in the small and medium-sized business labor market is masking significant progress we are making across the company in these areas to return to historical growth and profitability metrics. We take full responsibility for continuing to take appropriate action steps to address these issues, and we believe we will see significant progress ahead. At this point, I have to pass the call back to Jim to provide some further perspective on 2026 expectations.

Jim Allison: Thanks, Paul. As this year has progressed, we have worked diligently to create and execute plans aimed at generating a significant profitability rebound in 2026. In the benefits area, we expect the elevated benefits cost trend to persist in 2026 based on input from our carriers, outside advisers, and industry benchmarks. As a result, our response must remain swift and steadfast, and our focus is both on right pricing our book of business and reducing plan costs. On the pricing side, we continue to strategically implement higher pricing targets for both new and renewing business using AI tools and revised methodologies.

Our focus is to attract and retain the right clients at the right price that can produce sustainable forward-looking profitability at our normal historical levels. This process began earlier this year, is progressing according to plan, and will continue throughout 2026, consistent with what we're hearing in the broader market. Through a combination of higher pricing and the exit of lower profitability clients, we believe that we are on pace to exceed the projected benefits cost trends. Regarding our plan costs, I'm happy to report that we have successfully completed our contract negotiation with UHC and have extended our contract through 2028.

The combination of cost savings from this contract and other plan design changes, both of which will be effective in January, are expected to have a favorable impact of about 2% of our gross benefits costs. In addition, we plan to reduce our health care claims risk in 2026 by lowering our pooling level from $1 million per member per year down to $500,000. For clarification, the pooling level represents the maximum annual amount of claims exposure we have for any individual plan participant, which provides a measure of protection against the severity of large claims.

Taken altogether, these contractual changes reflect the strategic alignment of Insperity and UHC to provide exceptional value for our clients and plan participants, and they are foundational to both our 2026 financial performance and our long-term success. Regarding the rollout of HR scale, we expect to add clients into this solution during 2026, which is expected to incrementally impact worksite employee growth and revenue as we move through the year. As the rollout plan continues, we should be in a better position to comment on client traction and revenue potential in future calls.

Once we achieve go-live and a stabilization period, the level of our investment is expected to decline, and certain product development costs will be capitalizable, which we expect to positively impact operating expenses. A portion of those savings will be offset by new costs to build service capacity and for the implementation and ongoing service of HR scale clients, as well as Workday platform maintenance and support. Taken altogether, operating expenses associated with HR scale in 2026 are expected to be about $15 million lower than the $48 million estimate for 2025.

Even though we expect each of these positive contributors to be significant, we also recognize that there are likely to be a variety of other puts and takes in our financial performance. In addition, there are risks and uncertainties that could impact 2026 results, including changes in prevailing health care cost trends or plan utilization, the successful completion of our fall sales and renewal season, and more broadly, changes in the macroeconomic environment and labor market.

We will not be providing our financial outlook for 2026 until our earnings call in early February, but given the significant positive contributors that we have outlined, we believe that 2026 represents an opportunity to recover a majority of the earnings shortfall we have experienced this year. At this time, I'd like to open up the call for questions. Thank you.

Operator: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 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 poll for questions. Once again, please press 1 if you have a question or a comment. Our first question comes from Andrew Nicholas with William Blair. Please proceed.

Andrew Nicholas: Hi. Good afternoon. Thank you for taking my question. I wanted to first ask for some clarification, Jim, on that last comment you made about an opportunity to recover the majority of the earnings shortfall. Is that related to 2024 as the base? Is that specific to the shortfall relative to your initial guidance? Just trying to think, I think you're trying to guide us a little bit in terms of what next year looks like. I know there are a lot of moving pieces. Just trying to make sure I understand what you're specifically referencing in terms of the shortfall.

Jim Allison: Yeah. Thanks for the question, Andrew. You know, our initial guidance for 2025 and our actual results for 2024 were relatively similar. So yeah, what I'm referencing is pretty well aligned with both of those.

Paul Sarvadi: I think the best way to look at it is relatively straightforward. In that we had an expectation at the beginning of the year, and you can see from our guidance today where this year is forecasted to end up. And nearly all of the shortfall that occurred this year is from this one issue. And we expect, as Jim commented, to see a rebound from these three major elements of at least a majority of that shortfall in 2026.

Andrew Nicholas: Understood. Thank you. And then for my second question, in terms of 2026 worksite employee growth, I understand that the macro hasn't been super supportive in terms of change in existing or net client hiring, but to what extent should we be concerned with these cost trends and the repricing on attrition? Do you expect it to have any impact? Or to what extent do you expect it to impact new sales heading into next year? Just want to understand if we should expect a decent sequential step down in the first quarter tied to some of this repricing activity? Thank you.

Paul Sarvadi: Yes. Thanks for that question. No, we actually again are, you know, we had a strong sales effort continuing, and we don't see the pricing changes that we're making to be far out of sorts with what's happening in the marketplace at large. So even, you know, I mentioned in my remarks that the most recent results in the third quarter not only were sales 45% ahead of last year, but also the renewing business that came on, you know, our renewal rates were still at the 99% level for the quarter. So we have not seen that dynamic causing a reduction.

We are also going into this stage of the year with a significantly higher number of worksite employees scheduled to be paid in January, and I think in my remarks, I was kind of putting that out there just to make sure we understood that even though we may know, because of the priority to have some margin recovery, we probably will have some more go away. I don't expect that to be, I expect that to be offset by the degree to which we're ahead in new sales.

Operator: Okay. Our next question comes from Jeff Martin with Roth Capital Partners. Please proceed.

Jeff Martin: Thanks. Good afternoon, Paul and Jim. I wanted to dive into some initial anecdotal responses from your new pod that's currently marketing the joint solution. What are you hearing from them? Are they finding this a relatively smooth process? Anything they've learned along the way, and how encouraged are you by the initial results?

Paul Sarvadi: Yeah. It's hard to hold it all back as it's been very exciting. You know, we even had a three-day retreat meeting with the full pod just a week or two ago. And what's really exciting is that they are now seeing the full picture of this unique solution that we have developed that is the full HR scale. It is the full scalable solution of both service and technology in one comprehensive solution. And they've worked through how to help customers understand even the cost comparison to other options they have. They start to understand better how we have gone through the research to understand how to price this for the client.

And the energy level is really impressive, and we are already beginning to fill the pipeline. And, you know, we're ahead of where I thought we'd be. Remember, we put this in place on July 1, gone through a lot of effort just to make all that work at this point. But now we're already out there calling on customers. We've got the messaging down, and we're getting great reactions from the prospects.

Jeff Martin: Great. And then my other question is on the benefits repricing. Have you had to make adjustments from the initial repricing that you did in the first quarter? If so, could you provide some details around that? And is that a dynamic thing on a quarterly basis, or how are you looking at that going forward as we are very close to starting 2026 here?

Paul Sarvadi: Yeah. That's always been a part of our whole operation where we are literally month to month on a rolling basis, we're looking at what pricing is necessary for the trend rate. In this case, of course, we've seen the trend escalate. And so, you know, where we were at the end of the first quarter, we started processing some pricing changes. But as the year progressed, we were continuing to raise the level of price increase up to and through and including everything we sent out for January 1. So we believe we're in good shape on that front.

As Jim mentioned in his remarks, we expect our pricing going into next year to actually be exceeding this continuing higher rate that we've seen. So we're on a good track to balance that out in the appropriate timetable.

Operator: Our next question comes from Mark Marcon with Baird. Please proceed.

Mark Marcon: Good afternoon, and thanks for taking my questions. Just on the health care pricing, Paul and Jim, is it your expectation that on an apples-to-apples basis, cost trend that would, you know, same plan design, we're basically looking at a benefit be somewhere in the 9% range for next year? Or would it be higher or lower?

Paul Sarvadi: So apples to apples, same client, same people, same plan to same plan design, we would expect the average increase to be in the low double digits range.

Mark Marcon: Okay. And what typically happens there, of course, is you know, you quote the increase. And then we have tools and ways we can help the client mitigate the increase, other plans to choose from, and other aspects of what we can do to help them manage that increase. And that's what's happening all over. You know, when we look at the quotes that are coming in and the competitive situations, you know, our increased level and our ability to help them manage that puts us in a very competitive position. And that's what I think we've demonstrated even up to this point in the process.

Mark Marcon: I appreciate that. And then the second question is, basically, along the lines of you mentioned, you know, potentially managing out some of the lower profitability clients. I was wondering if you could give us a sense for the magnitude of that level of the client base. And one other thing, Paul, if I can squeeze one in, you know, you and I, along with a lot of investors, we used to talk about the risk mitigation and, you know, whether it makes sense to be at a million dollars versus 500,000. We had lots of discussions even back in 2019. Now that you're going down to 500,000, how would you, obvious what the benefits are.

What are the costs or what are the things that we should take into account in terms of thinking about that?

Paul Sarvadi: Well, you know, just to put it in historical perspective, we have looked at that for a long time. And, of course, you know, there was a time when we didn't have the million-dollar limit in our world. But what's happened over the years is the number of ways that someone can have a claim of a significant size like that, the number of ways has increased. But also, I think it's important to note that this contract that we have just signed with UHC is, this is what we mean by better alignment and how we're looking at the entire game plan for our program.

And in this particular case, you know, the agreement to be able to look at the various levels every year and have them, you know, I'm gonna say, you know, priced in a way that makes it fit our program. And for the whole program to be designed to have growth incentives and things of that nature. So I'm just telling you, though, the elements, the terms of the agreement, really line up to where to have the best program we can have for our people. And have a higher level of consistency and predictability in the model.

So, you know, being able to have a significant immediate cost reduction right now where we get, you know, a majority of even the shortfall we had this year back as we go into next year. And be able to put a lower pooling level at the 500,000 level, you know, that's really good timing, obviously, against the backdrop of, you know, a sudden elevated claim level. And, Mark, on your question, I was gonna answer the question, you know, about pricing. And, you know, a little bit more focus, you know, on unprofitable clients. I think generally speaking, you know, as we're increasing our pricing, you know, the curve is a little bit higher than it was.

So you're not just raising the pricing equally across the board. You know, we're taking actions to make sure that we're doing everything we can to retain, you know, our profitable clients. And, you know, so we think that, you know, the ones that do terminate are likely to be lower profitability than the ones that stay.

Operator: Our next question comes from Tobey Sommer with Truist. Please proceed.

Tobey Sommer: Thanks. I was wondering if you could provide a little bit more detail on the pricing. On the prior earnings call, you said you'd done some work and were really encouraged by the opportunity to be more significant than you had mentioned. And I just want to understand that to also provide color and a better grip on how you can offset the incremental operating and service expenses associated with the new platform. Thanks.

Jim Allison: Yeah. Thanks for the question, Tobey. You know, clarifying for anybody who's listening, you know, you're referring to HR scale pricing. And yeah, so if you think about, you know, what we are offering, obviously, we've got a lot of services that are similar to what we offer today. There are some new services that get unlocked or made more advanced because of new functionality available in the Workday platform. And the opportunity for, you know, strategic services around those things, as well as keeping the platform up to date and current. So we've taken all those things into consideration in our pricing.

There's a significant uplift in what I would call the base price, if you will, or the list price of the product. And what we expect to be happening, you know, over this first, you know, six to twelve months, we're thinking about, you know, the pricing in terms of kind of three stages, if you will. So there's, from a new client perspective, there's a beta stage, and then there's an early adopter stage. And then we'll be into the pure growth stage. And so we do plan to give some fairly significant discounts to the first customers that are willing to sign a contract and come on to the platform.

And then we will reduce those discounts as we go through time and get to a growth stage. We still anticipate that even at those significant discounts, it's higher than what we historically have charged in HR 360 for similar-sized clients. But I think one thing that's important to point out, you know, that I think Paul was alluding to in his script, you know, having the two price points for these two products is really beneficial and actually supports the pricing of HR 360 from what we're seeing in, you know, over the course of our discussions and sales in 2025. So we see these as being complementary and supportive of each other at the different price points.

Tobey Sommer: Thanks. You mentioned being able to hit your target growth and profit metrics even if the SMB labor market is kind of sluggish. Do you think you can hit the historical double-digit worksite employee growth even if SME job growth is, you know, flat versus, I think, the long-term trend within your customer base is around 5% per annum?

Paul Sarvadi: Yeah. Tobey, that is exactly what I said in my script. And I'm just, you know, reflecting what I see going on when you have a new offering where you've got over 40,000 businesses that have over 25 million employees. And when you sell them, the average size is, you know, four to 700 employees instead of your average size client being, you know, 25 to 30 or 30 employees. This is a significant catalyst for growth. And I think the timing of it is particularly exciting because of what we've seen in the small to medium-sized business labor market.

And, you know, we've seen now this is the third year in a row with very low single-digit net gain within the client base. I would have never dreamt that, and we're on the front end of AI. So I see us being in a unique position in our space by having, you know, such a rifle shot target perfect fit solution for this highly underserved and highly desirable client being able to walk in the door with two of the leading companies in the HR space coming to the table, having made an incredible commitment and investment to make a hand and glove fit solution for these target accounts.

And when you look at the whole pricing picture, where you're bringing so many different elements together, and able for them to do this at a price that's never been able to do before, both upfront cost and ongoing cost, it is an engine for growth. And we're very excited about it. You know, it's not time yet to convert that into, you know, the sales per salesperson per month and how the size, all that kind of stuff. But we're on that way now.

We're on the way of, you know, keeping track of everything we're doing on every call and how it goes and what, you know, over this next year or so, I don't think we're gonna see some exciting things where we can give you some, you know, better picture of the future.

Operator: Our next question comes from Andrew Polkowitz with JPMorgan. Please proceed.

Andrew Polkowitz: Good evening, Paul, Jim. Thanks for taking my question. Congrats again on the launch of HR scale. I appreciate the color that you guys gave on the investment over year one and year two. You also mentioned that you expect something to be, call it, low $30 million in investment in 2026. So that gets us pretty close to the aggregate $150 million you called out at the start of the process. I was just curious now that we're kind of in the early days of go-live, is that $150 million aggregate investment still the right framework, or is there a different way we should be thinking about the cost of the go-live?

Jim Allison: Andrew, thanks for the question. I would like to clarify one thing. When we talk about, you know, the operating expense impact of HR scale for next year, we're including ongoing operating expenses that have revenue offsetting them, you know, a little bit of probably some inefficiencies in the first year. But, obviously, you know, I would consider those to be operating expenses and not necessarily investment. The level of investment is down significantly lower than that. And I think you have to think about, as Paul alluded to, you know, we still have some months to go before we get to the first go-live and the stabilization period.

So our investment kind of continues through that period, and then it's gonna fall off relatively significantly and just have kind of a normal, you know, product roadmap associated with it. Now, you know, is that number, yeah, we don't have a better number right now than $10 million a year going forward. Obviously, what we're looking at when we think about the product roadmap is the available resources across a lot of different, you know, projects and ideas, things that people want to do with HR 360, things that people want to do with AI, and other potential projects that are out there. And so this is a, you know, resource allocation decision that gets made there.

So as we're thinking about the three-year plan, as we're thinking about the budget for 2026, we'll be making some decisions in that regard. But, obviously, a little bit fluid when we're trying to, you know, capture the opportunity but also balance the level of investment with, you know, needs in other parts of the company.

Andrew Polkowitz: Got it. That clarification is super helpful. Just for my quick follow-up, Paul, you mentioned that, you know, you guys consider through your midterm framework uncertainty about AI and employment. And just understanding that at this stage, no one really knows the full impact. I'm curious how you just think about that over the midterm relative to, you know, your kind of prior three-year plans that you called out in the past? Thanks.

Paul Sarvadi: Sure. You know, it's interesting because we haven't seen any of it yet where the malaise, so to speak, in the hiring front is rooted in specific AI job replacement. We haven't seen that yet. So, you know, everything we've seen so far is really more about the big picture of, you know, where things have been, some of the uncertainty, and etcetera, that has caused a delay in decision-making, that type of thing. But I believe as we go forward, you know, we want to be at least prepared for that. And that's why I think it makes sense that everybody should be looking at other growth engines.

I just think the timing of ours being in place right now is really sweet.

Jim Allison: If I can add to that a little bit, I would say when you think about what's going on in the small business environment today, to the extent that they're using AI tools, it's more likely to make them more effective right now as compared to more efficient. Efficiency could come certainly at some point in the future, but the other point is, you know, as larger companies have potential efficiency gains and potentially reduce headcount historically, that has led to a lot of entrepreneurship. People that are really smart. And I think about, you know, whether it's the .com boom or other times in the past, that, you know, people leaving large companies decide to start small companies.

And so I do think there's a possibility as we go through time that new business creation could provide some level of buffer against the employment efficiency.

Andrew Polkowitz: Thank you.

Operator: We have reached the end of the question and answer session. And I will now turn the call over to Mr. Sarvadi for closing remarks.

Paul Sarvadi: Once again, I want to thank everyone for participating today, and we are really excited about both the UnitedHealthcare contract and the rebound that we're expecting in 2026. And also the exciting news about HR scale and how we're off to the races on that front. So thanks for participating today. We look forward to further discussion with each of you. Thank you.

Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.