Barrett Business Services Inc Q3 FY2025 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the third quarter ended September 30, 2025. Joining us today are BBSI's President and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris. Following their remarks, we will open your call for questions. Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding the forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical fact, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and the company's quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements. I would like to remind everyone that this call will be available for replay through December 5, starting at 8:00 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at www.bbsi.com. Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining the call. We continue to build on our momentum in the third quarter, delivering a record number of worksite employees. Solid revenue growth was fueled by new client sales, expanded adoption of new products and excellent client retention. Moving to our financial results and worksite employees. During the quarter, our gross billings increased 8.6% over the prior year's quarter. We continue to execute various strategies to increase the top of the sales funnel, and we achieved a record number of worksite employees from new client adds. Client satisfaction continues to drive favorable retention rates. Every year, we conduct a survey of our clients to evaluate customer needs and satisfaction, and I am pleased to report that our Net Promoter Score remains in the high 60s for a third straight year. This gives us great confidence in the value our clients place on the service and solutions we provide. Our clients love what we do, and they are ready and willing to spread the word about BBSI. The result of all these efforts, or what I refer to as controllable growth, is that we added a record 10,400 worksite employees year-over-year from net new clients. However, our client hiring was lower than we forecasted. We experienced a slowdown in California across most industries, fueled by macro uncertainty, including tariff policy and interest rates. So our record controllable growth was slightly offset by a decline in our clients' workforce and resulted in a total growth of worksite employees by 6.1%. Moving to our staffing operations. Our staffing business declined by 10.3% over the prior year quarter and was within our expectations. We continue to see reluctance from our clients to place staffing orders amid the macroeconomic uncertainty. We continue to execute our strategy to recruit for our PEO clients and placed 116 applicants in the quarter, which is 11 more than the prior year quarter. Moving to the field operational updates. We are very pleased with our entrance into new markets with our asset-light model. We have 22 total new market development managers in various stages of their development. These folks have been gaining traction and consistency and have added approximately 1,400 new worksite employees through Q3. In September, we had grand openings for our new Chicago and Dallas branches. In each of these locations, we have formed business teams with local folks to support our clients and have moved into traditional brick-and-mortar BBSI branches. We are also planning another grand opening for Nashville in January. We continue to see positive results from our investments in new markets and are actively recruiting additional new market development managers. Regarding product updates, we continue to execute on the sale and service of BBSI Benefits, our health insurance offering. Our strong momentum continued into the third quarter. We added approximately 1,300 participants to our various benefits products in Q3. I am pleased to report that through October, we have approximately 750 clients on our various plans with over 20,000 total participants. We are gaining traction and continue to improve the sales and service of BBSI Benefits. Our value proposition resonates well, and we're having success with small and large clients in white and blue collar industries in every state we operate and with a diverse distribution channel. Our teams are now in the midst of the heavy selling and benefits renewal season. As many of you are aware, health insurance rates are increasing, which is causing consumers to shop around. Our October submissions for January 1 transactions are 60% greater than October of the prior year. I attribute this to the market forces plus the trust we have earned from our referral partner network. We anticipated an increase in activity, and we have staffed up accordingly. It is still too early to comment on January 1, but we are optimistic that we can repeat or exceed our successful selling campaign from the prior year. Next, I'd like to shift to our 2025 IT product objectives. I've previously mentioned that we've been investing in our tech stack on the product side to better service and support our clients. Over the last couple of years, we've made additional investments in myBBSI to support our BBSI Benefits offering, adding a learning management system, an applicant tracking system as well as numerous integrations with third parties. We continue to execute our product road map to round out the employee life cycle experience. We think of this life cycle from a client's perspective from when an employee is hired to when the employee retires and everywhere in between. We will be replacing or bolstering attributes of the life cycle with additional product launches over the next 6 months. Our client-centric focus is on delivering more technology and more products, all supported by the best local talent. We believe these enhancements will make it easier to sell to new customers and retain existing businesses. Additionally, we believe this offering will strongly resonate with white-collar businesses and larger employers. Next, I'd like to shift to our view of the remainder of the year. We've had consecutive quarters of great momentum. We are consistently growing our WSE stack. We ended Q3 with a record number of worksite employees, and we continue to be optimistic about the road ahead. We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients. We have more products to sell, more people selling them, and more referral partners recommending BBSI. Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I'm pleased to report we finished the quarter with strong results. Gross billings increased 8.6% to $2.32 billion in Q3 '25 versus $2.14 billion in Q3 '24. PEO gross billings increased 8.8% in the quarter to $2.3 billion, while staffing revenues declined 10% to $19 million in the quarter. Our PEO worksite employees grew by 6.1% in the quarter which, as Gary noted, was driven by a record number of WSEs added from new clients. This was coupled with ongoing favorable client retention, which continued a strong trend of controllable growth. This was partially offset by modest net negative client hiring year-over-year compared with our original expectation of flat hiring in the quarter. Average billing per WSE per day increased 2.5% in the quarter, which was driven by continued increasing wages. Looking at year-over-year PEO gross billings growth by region for Q3. Southern California grew by 9%, Northern California grew by 3%, Mountain grew by 13%, East Coast grew by 14%. The Pacific Northwest declined by 3%, and our asset-light markets grew by 132%. Southern California represents our largest region and has maintained strong growth driven primarily by strong client adds and favorable client retention. Northern California was the region most negatively impacted by client hiring trends in the quarter with several larger clients having an outsized impact. The strong Mountain and East Coast results also continue to be driven by strong controllable growth performance, and the Pacific Northwest has continued to be primarily soft due to economic conditions in the region. Turning to margin and profitability. Our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claim development. In Q3, we recognized favorable prior year liability and premium adjustments of $3.9 million compared to favorable adjustments of $4.3 million in the third quarter of '24. We previously discussed that workers' compensation pricing has been trending downward for several years. While these pricing reductions have largely been offset by cost savings, they have nonetheless created some margin pressure. Looking at our overall margin for the year, results are broadly in line with expectations, though modestly lower than prior year due to a combination of this pricing pressure and lower staffing volume. As a reminder, our staffing business carries a higher margin rate than our PEO services. Looking ahead, we are optimistic about the pricing environment. The California Insurance Commissioner recently approved an average 8.7% increase in workers' compensation premium rates and several carriers in the state have filed for similar rate increases. We are also seeing increased pricing and competitor renewal quotes for both workers' compensation and health benefits, which is leading to more shopping in the market. As a reminder, our workers' compensation claims are primarily fully insured, and our client health benefits offering is 100% fully insured. Our strategy of derisking our insurance operations continues to bring stability to our operating results while continuing to allow us to offer best-in-class, high-value products to our small business customers. Moving to our operating costs and overall profitability. Our results have continued to benefit from operating leverage with SG&A costs continuing to grow more slowly than our billings and gross margin. For Q3, SG&A expense increased by approximately 2% due primarily to employee-related costs. Looking at investment income. Our investment portfolios earned $1.9 million in the third quarter, down approximately $300,000 from the prior year due to lower average interest rates. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA. The combined results of these activities was a 7% growth in net income per diluted share in the third quarter to $0.79 compared to $0.74 per diluted share in the year-ago quarter. Our balance sheet remains strong with $110 million of unrestricted cash and investments at September 30 and no debt. We continue our consistent approach to capital allocation, making investments back into the company through product enhancements and geographic expansion and distributing excess capital to our shareholders through our dividend and stock repurchase plan. Continuing under the Board's August 2025 buyback program announced last quarter, BBSI repurchased $8 million of shares in the third quarter at an average price of $47 per share. The company also paid $2.1 million in dividends in the quarter and reaffirmed its dividend for the following quarter. This brings our return of capital to shareholders to $10 million in the quarter and $31 million year-to-date. Now turning to our outlook for the full year. We now expect gross billings growth between 8.5% and 9.5% for the year after adjusting for the slower client hiring in the quarter. We continue to expect our year-end controllable growth to be strong and WSEs to increase between 6% and 8% for the year. Given my earlier comments on pricing and margin, we are tightening our range for gross margin as a percent of gross billings and expect it to be between 2.9% and 3.0%. Finally, we continue to expect our effective annual tax rate to be between 26% and 27%. I will now turn the call back to the operator for questions.

Your first question comes from the line of Jeff Martin from ROTH Capital Partners.

I guess let's start on the BBSI Benefits. Curious how policies are performing. I know there's a lot of noise out there in the marketplace right now and claims costs are rising at an unexpected rate. Just curious to get your perspective on that and how it might be impacting your policies. I know you don't take the risk, but still curious.

Yes. I mean that's an important part, Jeff, because we don't take the risk on health insurance, and we've derisked on the workers' comp. But at the end of the day, we've got to be good stewards of capital and good underwriters, and we're in a good spot. You've got a lot of carriers on the program. You're in many different states. But the one thing that's common is rates are going up, and they're going up for every carrier in every state for everybody. You're seeing that with all of the public insurance companies and the rate filings and everything going on. So I can just tell you that I don't think our rates are going up any more than anybody else's. But what I think we're seeing is just when folks are getting rate increases depending upon the size of the company and the size of the program they're in, if it's priced to risk, they're seeing some larger increases. And when that happens, you're seeing a lot more accounts go out to market. So our volume for what's coming into us for January 1 business through October was about 60% higher than what we saw, or 60% more opportunities than we saw in the prior year. And I think that's twofold: A, it's the market; but B, we're better at our craft and referral partners trust us and referral partners are comfortable recommending us. So ultimately, we're viewing this as an opportunity. Our renewal book is not as big as a lot of our competitors in the space, so we can spend more time on offense than defense.

Great. And then just was curious with record WSE adds in the quarter, congratulations on that, by the way. But just curious, how much do you think might be BBSI Benefits is driving that because you're clearly outperforming the industry.

We've been receiving this question consistently over the last few quarters, and it's not just one issue, but rather a combination of many factors. Our technology, product, team, and sales efforts are all contributing. In the new markets, we're seeing positive results. It's a combination of around nine or ten different initiatives we've implemented, and we're benefiting from the momentum created by these efforts. It took many years of hard work to achieve our current position.

Okay. Last one for me is on the workers' comp side. With rates finally going up, I know you've called your shot many times and it hasn't happened yet, but just curious if you think we might see some growth acceleration on a WSE basis in 2026 as a result of that and how you think about 2026 WSE growth in general?

I will focus on the comp market, and Anthony will address the WSEs. We have seen the regulator approve rate increases, primarily in California. These regulatory actions have led to carrier filings increasing to around 8% to 10%. As we approached the October 1 renewal cycle, it became evident that incumbent renewals were also experiencing price increases. Given this information, we anticipate rates will continue to rise, and we are prepared to request higher rates as they are justified in the industry. We have the necessary pricing discipline and processes in place to pursue these rate increases, and we are actively working on it for Q4 and Q1. However, the true impact will be clearer soon. We have not yet entered the January 1 workers' comp cycle, which should begin in about two weeks. This process is slower than for benefits since it does not involve employee enrollment. Currently, we are focused on the benefit side, and once that is completed, we will transition to the workers' comp cycle on January 1. We are approximately 30 days away from understanding how much business will enter the market for workers' comp.

Yes. On the WSE add trend going into 2026, as Gary said, there's not really one thing driving that. It's a combination of factors, and they're all working well. And that momentum is building from 2024, and we continue to set those records as we continue to increase that volume. So going into '26, there's nothing that indicates that, that controllable growth momentum should slow down for us.

Your next question comes from the line of Chris Moore from CJS Securities.

Recognizing you're not providing fiscal '26 guidance. When you look at the gross billings estimate for this year, 8.5% to 9.5%, what are the key variables that could make it meaningfully lower or higher in '26?

Yes, there is no change in the formula. That's why we present it this way. We have a strong understanding of controllable growth. We excel at acquiring new business and retaining existing clients, which contributes significantly to our growth this year. We expect this to continue to be a major part of our growth next year as well. Wage inflation will occur regardless, though it may be less than what we experienced post-pandemic. The uncertain factor is whether our clients will expand or reduce their workforce, which is difficult to predict for 2026. Currently, we're modeling it based on how we approached our initial guidance this year and the adjustments we made, maintaining a conservative outlook for our guidance as we move into February of next year.

Sounds good. The asset-light model is clearly effective. I'm trying to estimate the potential growth from geographic expansion over the next five years. Can we expect 1 percentage point per year from this expansion? Is that considered modest or aggressive? I'm just trying to grasp how you view this.

I apologize, I'm doing some calculations here. Yes, based on what we'll add this year, we expect to finish with around 2,000 WSEs from our asset-light model. If you do the math, that's approximately 1.5 points for this year's WSE growth. Next year, I believe we can exceed that 2,000 figure. Therefore, I think the growth we can achieve from that will be over 2% on a WSE basis.

Your next question comes from the line of Vincent Colicchio from Barrington Research.

Yes, Gary, nice quarter on the WSE additions. And just curious what the new client pipeline looks like versus the year ago and sequential periods. I assume it's healthy.

Yes. We are putting a lot of effort into filling our pipeline. Once we have potential leads, we focus on scheduling discovery meetings with our clients, initiating conversations with prospects, and advancing to a consultative sale. We have an effective process and are dedicated to meeting our metrics and targets. Everyone understands their responsibilities and is actively working towards achieving them, which is reflected in our positive results. In fact, we have a significantly larger business pipeline now compared to this time last year, especially in the benefits sector.

That's great to hear. And then what are your expectations for existing client growth in Q4? And has your view of the overall economy changed given the weakness in California? Or do you think it's transitory?

I'm laughing because I think the term transitory has been misused by the Fed. Looking at what happened with our clients in Q3, we saw growth in Q1, a flat performance in Q2, and a decline in Q3, primarily in California, especially Northern California. When we examine the clients and their industries in Northern California, construction and trades were the most impacted in Q3. I believe the downturn in this sector is temporary. Discussions with our clients and the data show that new housing starts in the San Francisco Bay Area fell significantly in Q3, leading our clients to reduce their workforce in response to decreased business. The positive aspect is that the clients I spoke with have new orders for home construction, suggesting they may rehire in Q4. This indicates the transitory nature of the situation. Conversely, I am not optimistic about the transportation and logistics sector, which also saw shrinkage, affecting both Northern and Southern California. Although the business grew in Q1 as clients prepared for tariffs, it dropped off in Q2 and continued to decline in Q3. I am uncertain whether this sector will recover soon; it may remain flat for a while. Additionally, the third area I noticed decline was retail shops, particularly franchises. We observed a pullback from franchisees in the retail food segment in Q3, and based on insights from the market, it seems our clients are not alone in this challenge. Therefore, I do not expect this area to recover either. However, construction is a significant industry for us, and if it rebounds, it could offset the challenges in other sectors.

And you had mentioned that your platform is connected to third-party services. Are you seeing any meaningful revenue from that as of yet?

When we integrate with third-party systems, it's primarily to enhance services and provide better value, not to charge extra. Connecting to their general ledger, timekeeping, or various other systems makes it easier for clients and is another reason for their continued loyalty, as we take care of servicing for them. It's an additional factor contributing to our high retention rates.

Your next question comes from the line of Marc Riddick from Sidoti.

I wanted to mention a couple of things. First, could you share your early thoughts on the openings in Chicago and Dallas? Were there any aspects that stood out as being different from your expectations? Additionally, how does this relate to what you're anticipating for Nashville in the early part of next year?

Sure. We had the grand opening for both our Chicago and Dallas branches in September, and it was a fun event. The teams involved in building those branches experienced a significant sense of accomplishment as they showcased their new offices. They had referral partners and clients attend, creating a wonderful atmosphere after all their hard work. It truly felt rewarding to see everything come together, and both branches excelled in bringing together clients, referral partners, and members of their business communities to celebrate their success. Overall, both openings were fantastic, and I am proud of everything they achieved.

Excellent. I wanted to talk about the IT product objectives you mentioned, particularly regarding white-collar sectors and larger enterprises. Are there specific areas within that which you find particularly exciting, or how do they align with the broader AI strategy?

Yes. Feel like you can't talk about anything without having AI in it. But just in general, like we're building the technology, and we're building it with the most up-to-date technology that's AI-enabled. If you think of the employee life cycle, it's everything from hire to retire and in between, and we're working to fill those holes, and we're going to have a product launch in January. We're going to have a product launch in March. After we have the product launches, we can continue to make investments. But really, what we're going to get to is a comprehensive, what the industry calls, human resource information system. So a comprehensive platform that has all of that. And really, that platform, when you get into the white collar, when you get into the larger, more sophisticated clients, they look for you to have that platform. So I think we're going to have good tech with good integrations with great people. And I think that when you put that up against any other tech platform, if you can go tech for tech and have great people that are there locally to support it, why would you not go with BBSI?

Great, and I appreciate the update on the Net Promoter Score. That's always really helpful and important. I wanted to ask about the 60% increase—did you notice anything in the mix? Is it similar to your existing mix, or did you see any differences in terms of client verticals or enterprise size?

Yes, that's a good question. I would say it’s similar to the construction of our existing client portfolio. When clients choose BBSI, it doesn’t matter whether it's for payroll, HR, workers' comp, or benefits. We can sell them any of those products. Once we do, we can offer them the full range of BBSI services. This combination is what drives our retention. For instance, if they come to us for benefits and we can also provide HR services, that’s great. If they come for workers' comp and we can enhance their experience with additional services, that’s also great. Overall, we focus on identifying their pain points, addressing those, and showcasing everything else we have to offer. We don’t limit ourselves to specific client categories; instead, we concentrate on solving the problems they face, including those they may not even realize they have.

Your next question comes from the line of Bill Dezellem from Tieton Capital.

Gary, you mentioned the change in WSE from Q1 to Q2 to Q3. Did the trends in hours worked reflect those overall WSE numbers?

Yes, Bill, this is Anthony. We have seen a slight reduction in average hours worked. So we noted that last quarter in my remarks. I'm not sure if I included that this time, but it wasn't actually quite as significant this time, but it was a small decrease year-over-year in hours worked as well. So that is part of the overall softening trend that we're seeing.

Okay. Regarding the increase in the healthcare quote pipeline this October compared to last year, if you achieve your usual level of wins from that quoting process, what would be the additional impact on 2026?

If the closing rate remains unchanged, the improvement would be 60%, but we won’t achieve 60% better than what we accomplished in 2025. We had a strong performance in 2025, especially during the January 1 selling season, but I’m cautious about stating any projections due to the current uncertainties in the market, particularly with rising rates for certain carriers. I’ll hold off on discussing this in detail until the Q4 call.

Okay. Thank you for giving me some words but without any answers. And let me shift, if I may, as you look at that quote pipeline, that 60% increase, what's the average size of the businesses that you're quoting versus either a year ago or just versus what you typically would end up having in your normal pipeline for new prospects? Essentially, I'm trying to understand if the health insurance is leading to a skewing of size of business one direction or another.

It's a good question. I can give it to you in the total. I don't have it for what's health insurance. But for clients we've brought on this year, they've averaged about 2 worksite employees greater than what we brought on last year.

And would you please remind us the base?

You got me, Bill. You got to tell the world, I don't have my glasses on me, and I can't read this.

It's the fine print that gets us all.

I can tell you it's too, and I want to say it's difficult for me to see. It's embarrassing for me to admit that, but...

Are you observing any specific factors, like health insurance, that are contributing to an increase in the average size? Or is it really a mix of all elements? Additionally, are there any notable statistics emerging from your new clients this year compared to previous years?

I would say it starts with having good people that understand how to position BBSI, and we put a lot of work into that. It's having good products for them to position, and we put a lot of work into that. It's having referral partners that understand your value proposition and are comfortable that you're going to execute, and we'll put them in front of their clients, and we've really executed on that. So that's kind of the three-prong approach. But in general, right, our tech is better, our products, we have benefits. There's a lot of things we've been working on that lean toward larger clients. So it's not just one thing. It's the combination of all those things. Yes. I would say the reason we're growing is not solely due to adding larger clients; on average, it doesn't significantly impact our growth. It’s really about the speed at which we're acquiring clients, and I don't anticipate that speed decreasing.

There are no further questions at this time. I will now turn the call over to Mr. Gary Kramer. Please continue, sir.

I just want to take the time to thank all the folks at BBSI for a great quarter and keep doing what you're doing, everybody appreciate your hard work. Thank you, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.