NSP - NYSE

Good morning. My name is Paul, and I will be your conference operator today. I would like to welcome everyone to the Insperity First 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. [Operator Instructions] Please note that this conference is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Jim Allison, Executive Vice President of Finance, Chief Financial Officer and Treasurer. At this time, I'd like to turn the call over to Jim Allison. Mr. Allison, please go ahead.

Thank you. We appreciate you joining us today. Let me begin by outlining our plan for this morning's call. First, I'm going to discuss the details behind our first quarter 2025 financial results. Paul will then comment on our first quarter results, the macroeconomic environment and the ongoing implementation of our Workday strategic partnership. I will return to provide our financial guidance for the second quarter and full year 2025. 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 discussions may include non-GAAP financial measures. For more detailed discussions of risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. This morning, we reported first quarter adjusted EPS of $1.57 and adjusted EBITDA of $102 million. These results fell below our guidance range, primarily due to higher-than-expected benefits costs, which I will discuss further in just a minute. The average number of paid worksite employees increased by 0.7% over Q1 of 2024 to 306,023. The paid worksite employee growth was slightly below our guidance range as some new client starts were delayed or canceled in the second half of the quarter due to mounting uncertainty around the impact of the new administration's economic policies. However, worksite employees paid from new client sales still increased 3% over Q1 of 2024. In addition, client retention remained a bright spot in the quarter with a total client retention of just 9% in Q1 of 2025 versus 12% in Q1 2024. Client net hiring was just slightly positive for the quarter, but continued to be very weak compared to historical norms and lower than last year. Gross profit per worksite employee in Q1 2025 was $338 per month, down from $378 in Q1 of 2024 as benefits cost per covered employee increased 8.4% year-over-year. Other components of gross profit per worksite employee, including pricing, payroll taxes and workers' compensation were generally in line with our expectations. We are obviously disappointed by the emergence of higher benefits costs. On a per covered employee basis, benefits costs exceeded our budget by $28 million, of which $12 million was related to higher-than-expected runoff of medical claims related to prior periods and $16 million was related to higher-than-expected medical claims incurred in Q1. Typically, the claims runoff from prior periods includes a mix of positive adjustments and negative adjustments. And in periods of higher-than-expected runoff, it's typically concentrated in the most recent prior period. Our $12 million adjustment this quarter was much more widespread in that we saw an elevated level of claims adjudication and payment above normal historical levels for virtually all older periods, which is an unprecedented occurrence. To mitigate future exposure to claims from these historical periods, our adjustment includes both the higher level of adjudicated claims plus an increase in our reserve for remaining unreported claims. We have analyzed our medical claims history to investigate the underlying causes of the higher-than-expected claims activity for Q1 and prior periods. Our analysis indicates a significant acceleration of claims payment activity for inpatient hospitalization and outpatient services in Q4 and Q1. Pharmacy costs also trended at higher-than-expected levels, although to a somewhat lesser degree. Looking at large claims, we can see that the frequency of claimants costing more than $100,000 in a quarter has increased by about 10% in Q4 and Q1 compared to recent history. To summarize, our data indicates that our benefits costs have been impacted by an acceleration of several interrelated factors. Claims processing affecting current and prior periods, inpatient, outpatient and pharmacy costs, and the frequency of large claims. As we look to what this means for our expectations for the full year, we have considered a range of possibilities, including whether these factors represent a longer-term new normal, a shorter-term increase in utilization that happens from time to time in our plan or possibly even a change in the timing of payments or processing speed. In addition, we have taken into consideration the impact of demographic changes and planned migration to lower-cost plan options, which should provide a favorable impact to claims trends as we proceed through the year. Based on these factors, we are forecasting a range of benefits cost per covered employee of 6.5% to 7.5% for the full-year, up from our initial projection of 5% to 6.5%. Based on the higher projected cost trend, we have raised our pricing targets moving forward. We have already started to implement these measures with an emphasis on strategically selected accounts. Assuming our benefits cost trends towards the midpoint of the projected range, we expect to be able to realign our pricing by January of next year. In addition, we are also evaluating benefit plan design and packaging changes that could mitigate healthcare cost trends in 2026. We continue to closely monitor claims activity and we'll adjust our pricing and plan offerings accordingly. Moving to Q1 operating expenses, they were managed slightly below budget and increased only $5 million or 2% over Q1 of 2024. The small increase was driven by the investment in our Workday strategic partnership, which totaled $13 million in Q1 of 2025 versus the initial ramp-up of $5 million in Q1 of 2024. Other operating expenses were down slightly year-over-year. As for income taxes, our effective tax rate was 29% and was generally in line with Q1 of 2024. During the first quarter, we continued to return capital to our shareholders through our regular dividend program and the repurchase of our shares. We paid $23 million in cash dividends and repurchased 224,000 shares of stock at a cost of $19 million in Q1. We ended the quarter with $124 million of adjusted cash and we had $280 million available under our credit facility. Now at this time, I'd like to turn the call over to Paul.

Thank you, Jim, and thank you all for joining our call. Today, I'll provide comments on four areas. First, I'll discuss the impact of the change in the macroeconomic environment that occurred in the first quarter and the effect on our full-year growth outlook. I'll follow with progress on initiatives to build on the growth momentum we established early in the year. Next, I'll provide some context around the benefit cost issues that developed in the quarter and the three initiatives we expect to mitigate effects into 2026. I'll finish with what I believe is the most significant recent development, the outstanding steps forward on our Workday strategic partnership, including our agreement on a go-to-market plan. Our first quarter began with an excellent year-end transition due to a very successful fall sales and retention campaign. We achieved an important inflection point, reestablishing positive growth in paid worksite employees. Midway through the quarter, tariff and other government policy initiatives led to turbulence in the market and uncertainty in the marketplace. We saw quite a sudden reversal of optimism in our small and mid-sized business target market and client base directly affecting decision-making. An outcome of the shock factor-in the small-business marketplace was a number of sold accounts in the queue to become paid worksite employees decided not to move ahead or delayed the start of their contract beyond the first-quarter. And although we've already seen some moderation of client and prospect in decision, the dramatic change in sentiment about the economic climate and the impact on their business for 2025 was evident in our recent client survey results. We completed our survey in the middle of April and 66% of respondents expect the economic climate to have a negative effect on their business this year. This is up from only 29% in January. Client survey respondents expecting their business to perform better than last year was down to 58% in April from 71% in January. And those expecting to add employees in the coming quarter were down to 34% from 43%. On a positive note, HR priorities continue to support demand for our comprehensive HR services as the top three needs identified by respondents were retaining talent, building a strong culture and keeping employee engagement high. Our new sales booked in the quarter were on-track through February; however, March came in below budget. We still had a relatively solid full-quarter at 85% of budget, especially considering the uncertainty in the marketplace, but the effect on sales was apparent. The Q1 book sales number is not below budget by enough to change our annual sales target; however, the timing of these sales combined with paid worksite employee results in Q1 slightly below our expected range has a significant cumulative effect on the year in our residual income business model. The math from this takes the shortfall in worksite employees times in the nine months of the balance of the year. In this case, in our model, the year-over-year growth rate comes down by over 1% and this lower number of employee months reduces gross profit. This is quite a contrast compared to the momentum we have seen in our growth drivers, including client retention and our sales and marketing efforts. Our exceptional start to the year and client retention of 91% has put us on track for a strong year in this key metric at the high-end of our historical range. Our recent realignment in our sales and service organizations I discussed last quarter already showing signs of success. Our sales activity figures creating the opportunity for new sales was excellent with a double-digit year-over-year increase in total business profiles or opportunities to bid our services. One of the key drivers of this sales activity was a double-digit increase in marketing leads over the same period last year. Many aspects of our marketing efforts are gaining traction and we believe we are in a strong position to continue to feed qualified leads to our more experienced team of business performance advisors driving sales this year even in this economic climate. Now let me provide some context for the benefit cost increase related to our health plan coverage we have with UnitedHealthcare. In our business model, our quarterly accounting requirements for our annual health plan policy is a source of potential volatility in our results. Volatility in the healthcare market at large has been more pronounced since COVID and predictability has been affected to a degree. But our analysis indicates that this quarter's higher-than-expected claim activity was due to a variety of factors rather than a primary root cause. UnitedHealthcare is going through a difficult period of their own and they've told us they've not altered their approach to handling our claims. Based on the data we received, there are indications of accelerated payments, utilization patterns, large claims or a combination of the three all appearing to be part of the mix. We've had times in our history where this type of quarter in hindsight simply reflected the concentration of large claims or other activity that evened out in subsequent periods. We've also had times where a quarter like this was the first sign of a higher trend rate than expected and at those times, pricing and cost management tactics were important to balance price and costs going forward. We're treating this development like the latter case. As a result, we're reserving additional amounts we believe are appropriate and factoring in a higher trend in our outlook, which produces a wider range of forecasted earnings for the current year. If there's such a thing as a silver lining here, the timing of this occurrence allows us to begin three initiatives that we believe will help address this situation with the goal of mitigating effects in 2026. As Jim mentioned, we've already begun a pricing initiative, which we believe can balance price and cost by year-end at the midpoint of our new expected benefit cost trend. The second initiative is our evaluation and implementation of planned design changes for the next plan year. Plan changes must be decided by midyear and then implemented over the second half of the year because we have this information about benefits costs now, we are factoring in this information as we evaluate upcoming planned changes. No significant planned design changes were initiated this year, so January 2026 would be a practical time for these changes to occur. The third initiative is also timely. Our multiyear contract with UnitedHealthcare is scheduled to be renewed on January 1st, 2027. UnitedHealthcare has been our primary carrier since 2002 and we typically negotiate our new contract before the last year of the current term begins. We've already had a call with UnitedHealthcare leadership and agreed to accelerate contract renewal discussions, including possible structural changes. We also believe there are opportunities to further leverage our Workday strategic partnership and our related go-to-market plan in these discussions. So, our most significant short-term issue in the first quarter was certainly the benefit cost challenges and we have a plan in place that we believe will address it in a manner likely to mitigate any effect next year. The most significant development in the first quarter for the long term was the exciting progress we made on our Workday strategic partnership, including our go-to-market plan, which I will cover in a few minutes. First, we achieved the critical milestone of launching our corporate Workday platform in mid-March. I'm very pleased to report that in spite of the complexity in the relatively short period of time to reach this milestone, this launch was nearly flawless. Both firms had prepared diligently for any possible issues and we're very pleased this transition occurred at such a high level of effectiveness outside the norm of typical deployments. The launch of Insperity Corporate Instance was a significant milestone for the entire strategic partnership for several reasons. Notably, many of the integrations and development efforts for the corporate instance are also foundational for the client instance. In addition, Insperity now has experienced the efficiency and effectiveness that the Workday solution offers companies like ours for with over 4,000, [4,400] employees. This achievement allows us and our people to become a strong advocate for the joint solution we are developing for clients. The reaction across Insperity from managers and employees alike has been tremendous. People leaders have been commenting that they have much more visibility into their organizations as we move from multiple systems into one with processes that are more efficient and happening in real-time as part of a business process workflow. Frontline employee comments have also been enthusiastic about the amount of information available all in one location, the ability to review and complete task inside the mobile platform, a fantastic issue resolution process and the ease of navigation. Now from the reaction and comments, it's apparent we're off to a great start in developing the advocacy, we intend to recommend the joint Insperity Workday solution to clients and prospects in the near future. There's still a hill decline to launch the new product, but the momentum from the team of both companies working together to achieve such a successful launch of the corporate instance is a leverageable confidence boost. I believe another critical highlight of our efforts so far this year was the completion of our Workday strategic partnership go-to-market plan for our new joint solution. With senior leadership and other key personnel from both companies together, our teams agreed upon the plan to take our joint solutions to market. We are aligned on the target market for the joint solution, the product name, messaging and competitive positioning, the sales motion and most importantly, to form a new POD, a product oriented delivery team focused on achieving the objectives set by leadership of both companies. This go-to-market plan contemplates this team of cross-functional sales, sales support, marketing and other professionals will execute a plan to co-sell our new joint offering. We plan for this to be a client-centered approach to determine the best path forward for a prospect matching their needs with the offerings of Workday, Insperity and of course, our new joint solution. This team is rapidly forming and taking the steps necessary to begin calling on targeted early adopter candidates over the last half of this year. The goals of this team over this period include developing the sales motion and selling accounts to queue up for 2026 when the joint solution is expected to be available. This team will wake up every day with the responsibility, authority, flexibility and incentive to achieve the goals of the go-to-market plan. We believe this new joint offering is a hand-in-glove fit for this large underserved target market. The target markets comprise of over 40,000 businesses with more than 25 million employees in total. We believe our new joint solution to be a uniquely comprehensive combination of technology and services for this mid-market and has the potential to be disruptive providing greater speed-to-value and lower cost and complexity. Up to this point, we have not provided any quantification of this new growth driver we expect to begin at some point in 2026. Now that we have an agreed upon go-to-market plan, we believe it's reasonable to give some frame of reference for consideration. It's important to note this is not specific guidance in any form, but just some information to help you understand the potential significant impact this new product could have to drive growth and return on investment. We expect the average size of prospects in this target market for this new solution to be higher than our historical sales of mid-market accounts, which we believe could double our annual mid-market sales production. As an example, we sold just 20 accounts at an average of 750 employees, this would produce 15,000 worksite employees, adding approximately 5% to our annual growth at our current size. When you also consider the opportunity for current mid-market accounts moving to the new solution and the corresponding increase in our client retention rate, we believe there's potential to double the size of our mid-market business over a reasonable period of time and drive a substantial return on investment. I had the opportunity to introduce this strategic partnership and the new solution to nearly 80 mid-market business leaders, owners or CEOs, both prospects and current clients at a recent event. The reaction included a high level of enthusiasm, but also a clear understanding that Insperity and Workday have made a significant investment of resources to bring a potentially game-changing solution to their doorstep. Co-branding, co-marketing, co-selling, all part of our go-to-market plan are key elements of the Workday strategic partnership. We believe this new joint solution will be well-received by the target market and will be a key driver to the growth trajectory of Insperity for 2026 and beyond. At this point, I'd like to pass the call back to Jim.

Thanks, Paul. Now let me provide an update to our full-year 2025 outlook. As Paul discussed, we have trimmed our expectations for worksite employees paid from new client sales and net client hiring due to the effects of the macroeconomic environment and the small-business sentiments. As a result, we have reduced our expected worksite employee growth rate by a little over 100 basis points from our initial guidance. For the full-year, we are now forecasting worksite employee growth of 0.5% to 3% over 2024, reflecting sequential quarterly growth of 1% to 2%. With regards to gross profit, we are forecasting a range of benefits cost per covered employee of 6.5% to 7.5% for the full year. The lower end of the range assumes that claims for the remainder of the year moderate toward budgeted levels, while the higher end assumes that elevated claims continue through the year. We anticipate that the benefits cost trend will taper down from the 8.4% experienced in Q1 as we progress through the year due to the expected favorable impact of planned demographic changes and planned migration that we have seen. In addition, year-over-year comparisons in the first-half of 2025 are impacted by last year's favorability and that impact should subside in the second-half of the year. We are keenly focused on operating expense management as a key priority in the current environment. We expect operating expenses to decline slightly sequentially in each of the remaining quarters. For the full-year, we expect that operating expenses will be an overall reduction compared to 2024. This includes planned spending on the implementation of the Workday strategic partnership, which we expect to total approximately $62 million in 2025 versus $57 million in 2024. Based on all of these factors, we are forecasting full-year adjusted EBITDA in a range of $190 million to $245 million. We are forecasting full-year adjusted EPS in a range of $2.23 to $3.28. As for Q2, we are forecasting the average paid worksite employees to be in a range of 308,000 to 311,000, which represents an increase of 0.3% to 1.3% over Q2 of 2024. We are forecasting adjusted EBITDA in a range of $33 million to $53 million, and adjusted EPS in a range of $0.29 to $0.67. As I noted earlier, earnings comparisons to Q2 of 2024 are expected to be significantly impacted by the favorable benefits costs in Q2 of last year compared to the challenging environment this year. We are pleased that our year-end transition has generated year-over-year worksite employee growth and barring a significant change in the macroeconomic environment, we expect some modest improvement over the course of the year. We have a pricing plan in-place that we believe will address the benefits cost trend environment, and we have many other options available that could contain or reduce costs and drive improved profitability in 2026. At this time, I'd like to open up the call for questions.

[Operator Instructions] And the first question today is coming from Andrew Nicholas from William Blair. Andrew, your line is live.

Hi, good morning. Thanks for taking my questions. The first one I wanted to ask was just on the, some of the cancels or I guess I should say like onboarding pauses that you cited in the back-half of the first quarter. Paul, could you speak a little bit more to that? I think you mentioned some moderation in, in that dynamic since late first quarter, but any, any more color there, or even quantification of how that surprised you would be helpful?

Yes, absolutely obviously, as the year began, the optimism level in the small-business community went skyrocketing. It was really strong, post-election, but even post first of the year and the reversal was quite dramatic once the government actions related to tariffs and other things that were happening and we were surprised by the level of shock factor, if you will. And so that lasted, that was basically the last five weeks or so of the quarter. And the level of uncertainty was high enough just to cause a pause. And we had such a strong fall campaign that was rolling in, there were just a more accounts that we would have expected that half that basically put it on pause indefinitely, basically canceled for now. And the half that just delayed beyond the first quarter, so, they're coming in now. But that was not something really predictable. We did a really thorough client survey that provided good information that I went through and I think is helpful for all of us. But we have seen some moderation, that basically, people with the mindset that, okay, we still don't know all that's happening yet. There's still a lot of uncertainty, but we're moving ahead. So, we've been battling through that. Our sales team, service team have done a great job of supporting clients, communicating with prospects about, how our service is a benefit to them when they're facing uncertainty, how it supports their employees in a way that helps them be more productive and helps the client be able to focus on their profit opportunities that are right in front of them. So, we can manage this. We've done this before and we're on a good track on that front.

Got it. Thank you. And then switching gears a little bit for my follow-up. I appreciate all the color on the Workday go-to-market plan and maybe some of the potential financial impact. I'm curious on, on the cost side, in particular, I think $62 million of cost in '25 is expected, only $13 million, I believe in the first quarter. Can you walk us a little bit more through the cadence of that spend this year? And maybe more importantly, how should we think about that cost item in, in '26 and beyond? Is it something that you'd expect to gradually move lower? Is it part of your ongoing expense base? I'm just trying to figure out now that you have the go-to-market plan agreed upon, what additional visibility do you have on that expense side?

That's great. I'll let Jim comment on, on some of the, the cost side. But let me, let me just say that the way we look at this, of course, we outlined the significant investment we were making when we started, about $150 million. We said it was heavily weighted toward the first two years and you're seeing that, it was $57 million last year. We've got a forecast for $62 million here. The investment there is largely the development effort that's going on to launch the joint solution and so we do anticipate that as, we've said at the beginning that investment in years three, four and five would be, considerably less. However, that all relates to the timing of the launch, et cetera and so we'll see that diminish and we'll see revenue start to flow in, '26 and beyond. How much? We're not sure yet, but I think, we do have a plan to be pinning that down as we get closer to it and providing more information that will help you all evaluate it. But I think what I want to make sure you understand is that this go-to-market plan is very straightforward. It is one that does - it's more targeted, it's rifle shot, things that we can do on that front are not going to add tremendously to expense but are going to be able to, we believe with, closing relatively few accounts really start to have a dramatic effect on the business and we really do, like I said in my remarks, I believe attract toward, rapidly increasing our sales effort, increasing our client retention that we've already kind of seen signs of and what that relates to doubling the size of our whole mid-market business in a reasonable period of time really drives that return on investment. So, Jim, do you have any other comments on the cost side?

And when you think about the quarterly pattern, this year, it's going to be relatively stable from quarter to quarter, a little bit higher as we go through the year. Obviously, we're entering a very significant time of testing. There's some new functionality in the Workday system that's being deployed as part of this Workday solution that becomes part of things that we have to test and tweak and work through in the setup process. So, there's a lot of people that are engaged in that process and we expect that, that will be the case and as we go through the year and as, milestones are hit and functionality is deployed for us to include in our testing. So, that's the - that shouldn't be a really big, a really big difference. As far as the moving forward, and the concept of how much of this repeats or doesn't repeat, Paul obviously made the first important point, which is that the deployment date is the biggest driver for 2026. Some of the costs that we have right now could - well, some of them will go away certainly. Some people that are on this project are likely to move back towards other projects within the company. But some of those projects, particularly on the IT side, are we'll be in a position where we'd be able to capitalize some dollars around software development and we may also get to a point where some of the dollars related to this project are capitalizable. So, there's a lot of variables in the mix there and as we get closer to the deployment date, we'll have a better line-of-sight on how all that's going to shake out.

Thank you. The next question is coming from Tobey Sommer from Truist. Tobey, your line is live.

Thanks. I wanted to ask a question about your view of the customer base and sentiment, certainly, in the last 100 days or so, we've had uncertainty increased. Paul, what do you look for in terms of actions maybe out of Washington that could add stuff to the other side of the ledger to allow for confidence to grow in the customer base and therefore affect the trajectory of the company's sales and retention?

Thank you for that question, Tobey. I really had a lot of interaction this quarter, a full week of client interaction every evening at one of our corporate events where I was able to have direct discussions. And I have to say, I was pretty astonished that the comments about the government action and tariff and uncertainty of the time of the moment, was mentioned, but was not the primary topic of discussion. The long-term view of where their businesses were going, the energy around that was still strong. This was just more of a common sense pause in decision-making. It was an -- I think very little has to happen for this to turn the other way in terms of, for example, locking down the tax system for the going-forward, I think would have a significant effect to rebalance the, certainty about the future. I think the regulatory environment, industry by industry makes a big difference. And I think we'll be hearing more about that, that should also flow the other way. But in terms of us just evaluating what to do this year, I think we've done the right thing to kind of factor-in this sentiment level for the immediate decisions about, hiring people and there's some of the capital spending that they're not doing right now, based on waiting for some things to turn the other direction. But I don't think it's going to take much and I think it's going to be a strong move, the growth direction because there's so much emphasis on supporting growth in the business community.

And then I was wondering, I know it's a little bit out in the future, or five months from starting. Could you maybe anticipate for us how this year's fall selling campaign may be different from last year's because of perhaps progress in not only the Workday implementation at the firm, but also your, kind of tangible working relationship with Workday itself by that time?

Yes. I think, I tried to mention that a little bit of that in my script about the contrast between some of the recent, happenings, the macroeconomic, et cetera, and the momentum that we have going in our sales service and our Workday team implementation. So, it's - I think we're really building some strong momentum. It's too early for me to kind of project out fall campaign but I can tell you, we're very excited about it and I think it can be very favorable compared to last year's environment, which was in the midst of an election environment and we actually saw a slow start last year followed by a pretty strong finish, had a really good campaign. But I think there's a lot of things that are in place now and happening over the year that put us in a good position for the fall and for the start of 2026.

Thank you. The next question is coming from Mark Marcon from Baird. Mark, your line is live.

Good morning and thanks for taking my questions. So, two questions. I'll start with one and then have a follow-up. With regards to the healthcare cost, Paul, we've seen this before and you've handled it before. Just wondering how quickly can you start making adjustments with regards to the pricing, it sounded like, by January of next year, we should be relatively well set in, in terms of making the adjustments. But just wondering, intra-quarter over the course of the year, how quickly can we make some adjustments and when we would start seeing some improvement in terms of the gross margin per WSEE relative to last year. So that's the first question and then I'll have a follow-up.

Sure. Let me, it brings up the comment I made in the script about the silver lining. Obviously, we never like for this kind of thing to happen. It's disappointing. But we've been through it before. We know how to handle it and frankly, the timing of this happening early in the year like this actually optimizes the likelihood of going into '26 in a favorable environment on this issue because we have the large majority of our client base, in fact, we have the smallest part of the client base that actually goes through their renewal bidding process in Q1. The rest of the year, north of 80%, 85%, I don't have the exact number, but it's - the large majority of our client base will renew over that period. So from a pricing perspective, Jim, and his team already started the changes, which we do because we're looking at it month by month and when the quarter ends, that's when we make those kind of pricing game plan and they've already put that in place. We also, Jim mentioned in the book of business, we actually have had some demographic changes that are favorable. So the pricing as it happens and the demographic change should improve the margin as the year goes on. But the main thing for all of us, I believe, to be focused on is, the likelihood 2026, being that step up into a different level of profitability. We're going through this investment period. We're going to be much closer to the launch of the product. We're going to be selling the new offering in the marketplace over the last half of the year and, we'll have that picture come together where we can hopefully be able to time when things are happening into next year that will give us a better picture of how things will look.

Great. And then - and for my follow-up, just are you seeing any sort of regional differences or industry differences, both in terms of the healthcare costs as well as the hesitancy with regards to finalize some of the hires that, that were initially planned? And then are you seeing any sort of - any sort of lead-generation from the Workday partnership as yet or when would you start expecting to see that? Thank you.

Thank you. So, I'll start with the last part of that question. So, what's exciting about is that the go-to-market plan involves putting this POD together, this product oriented team - that delivery team that will actually be handling or handling - actually doing the marketing and the lead generation and the lead management of everything that we're targeting together as a partnership and so it's really a whole new approach to that whole effort that makes so much sense. It's such a perfect fit. So, we're expecting to see that start as we go - as we put this new program in place, we're looking at a July 1st kind of effective date of managing those things differently. So, we're positive about that front. Now the first part of your question, I've lost the track of it. What was that first part of the question?

In terms of either hiring or just in terms of healthcare cost inflation?

Yes. So, I mean, I think what we've done is built into our going-forward scenario, both of the stumbling blocks that appeared in the first quarter, what the sentiment of the client base, which I believe will get better as the year progresses, like I said, when some of these things move the other way, possibly on taxes or other regulation things. You also were asking I think about geographic, we actually had some better results in the Northeast than we had in part of last year. But other than that, it's been, kind of across the board. So, it's more of a nationwide issue than it is any regional type issue.

Thank you. And the next question will be from Jeff Martin from ROTH Capital Partners. Jeff, your line is live.

Thanks. Good morning. So, I wanted to just kind of get your initial view, your feel, that the pricing changes historically and we've known each other a long time here. So, I've seen this happen numerous occasions. But just what's your sense of receptivity of the client base to these pricing adjustments? I would assume that this is a broader healthcare industry trend and there's really attrition is not likely to tick up as a result because it's industry rate is going to go up. Just curious your thoughts there.

Yes, Jeff, thanks for the question. I would agree with you that the healthcare cost trends are elevated and being experienced by very broadly across and the whole industry. So, the receptivity from a perspective to higher-than-normal costs is certainly out there. I do think that whenever we do this our goal is not necessarily just to take up pricing, to every client across the whole book. So, when we're looking at that pricing changes, we're always taking into consideration, what the population of that particular company looks like, how it may have changed from one year to the next, what's the relative level of pricing to that particular client, what does their overall profitability picture look like and so there's a lot of different factors that are going into that and allows us to, strategically select customers, to implement pricing strategies on. So, there's a few different groups that, that falls into and kind of helps kind of balance it out a little bit. That also helps to make sure that you're having the least impact on your customers that are in the best profitability picture.

Great.

And then just to add to that - just to add to that --.

Sorry.

I was just going to say just to add that those things that Jim is talking through, I'll help to be certain that our pricing approach does mirror to a great degree what they're facing in the marketplace. So, to not have, more attrition is something that we've managed through many times and we're comfortable we're in the right position for that today.

Great. And then with respect to the results or the potential results from the Workday partnership, how should we think about profitability of that book of business relative to what Insperity has done historically? Are we talking significantly higher potential EBITDA contributions here? Just any perspective there would be helpful.

Yes, we haven't locked that down yet. We're going through a very detailed pricing analysis over the course of this quarter. And we anticipate that the value of this offering is a dramatic advantage. And we believe that we're going to have higher upfront pricing for the deployment and implementation and a higher ongoing component of price that relates to the - what they're receiving and the service support that we're providing, so we're not in a position to anticipate what that is yet. We are going, we're doing even more favorable things for the beta customers and for our early adopters to, get that launch off the way we want to. But we do expect it to be a margin builder in the future, and we'll try to lock more of that down as we get closer to launch.

Thank you. And the next question is coming from Andrew Polkowitz from JPMorgan. Andrew, your line is live.

Hi, good morning, guys.

Good morning.

My first question, I just wanted to ask about - within the 2025 outlook, what is assumed for the balance of the year as far as net hiring? And just as a second part to that question, obviously, Insperity has been battle tested through several cycles over the years. So, I was curious if the current period of uncertainty would compare to anything in the past or any past cycles that you have been through?

So, relative to client hiring, we definitely have diminished it down to a pretty nominal level. We do have, you have to factor in some summer help that comes on goes away. So there's a little factors in there. But our - at least we're in a growth front. I note, compared to the world, having us move to positive growth and having some growth in the forecast, I think reflects that what we're doing day-in and day-out is working well. But we're not anticipating much support from the client growth in the model for this year. That happens, well, we'll all be, more excited about that. Let's see. What was the other part of the question.

Sorry, the other part of the question was just obviously, Insperity has been through very different cycles over the years. I was curious if there's any comparisons you could draw as far as the current SMB sentiment to past cycles.

Yes. So, kind of the way I'm looking at it, like I said, we don't like when this happens when there's a benefit cost of happening or instance or issues that come up. But - and it's, we decided to look at this compared to the times when we felt the likelihood, you had to factor in, a change in trend level and there are times, of course, when that doesn't actually happen as things lay out. But this had such a variety of contributing factors that we felt it was less likely to be more of a spike that just goes away quickly. So, I think we have properly and appropriately moved toward the direction of saying, hey, let's factor in whatever we think right now and be conservative because, hey, we want to be sure that whatever we do over the course of this year puts us in a strong position for 2026. And so that was why we looked at it that way.

Got it. That makes sense. And just my one follow-up question. Paul, in your remarks, you mentioned that with the acceleration of discussions with UnitedHealthcare, you believe there's opportunities to leverage the Workday partnership as part of those discussions. So, I just wanted to know, could you unpack that a little bit for us?

Yes. Let me just say that this target market for our Workday joint solution is clients that have like we've said before, 300 to - or even 150 to 5,000 employees, and let me just say that this is a really underserved market and as we go upmarket from our small business community, there are many times where we see that there - this client size has other considerations to think through, some want to have a self-funded benefit plan, some of have - or employees in so many different places, they want a different environment for their benefit plan than what our standard programs are and so we've had an approach where we can bring them onto our current service where they keep their benefit plan. But us being able to come in the door together with Workday and then actually have some others with us for example, UnitedHealthcare, to help evaluate that element as well is certainly a part of the strategy. We think that this size customer really needs that person to come in there shoulder-to-shoulder and help evaluate their entire situation of what relates to their employees and we believe we can do that, bringing some others to the table with us.

Thank you. That does conclude today's Q&A session. I would now like to hand the call back to Mr. Sarvadi for closing remarks.

Once again, I want to thank everyone for joining us today. And even though we had some difficulties this quarter, we believe we've got things on the right track to get where we need to go through this year and looking forward to 2026 in so many different ways with our sales and marketing effort with our Workday relationship, we're on a very good track and looking forward to giving you an update on how we're progressing next quarter. Thank you again for participating today.