Insperity, Inc. Q2 FY2025 Earnings Call

Good morning. My name is Tom, and I will be your conference operator today. I would like to welcome everyone to the Insperity Second Quarter 2025 Earnings Conference Call. 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 second quarter 2025 financial results. Paul will then comment on our second quarter results, the ongoing implementation of our Workday strategic partnership and our outlook for accelerated growth and improved profitability in 2026. I will return to provide our financial guidance for the third 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 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 such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. This morning, we reported second quarter EPS of $0.26 and adjusted EBITDA of $32 million. These results fell slightly under the low end of our forecasted range by $0.03 per share and $1 million, respectively, primarily due to a continuation of higher-than-expected benefits costs. I will provide additional details in just a minute. Our unit growth was within our forecasted range with an average number of paid worksite employees increasing 0.7% over Q2 of 2024 to 309,115. Our sales force demonstrated resiliency and solid productivity in a market that continued to face many economic uncertainties. Worksite employees paid from new sales increased by 2% over Q2 of 2024, reflecting an increase in sales efficiency from a team that is smaller and more tenured than it was a year ago. Our client renewals and service teams collaborated well to produce strong client retention, averaging 99% per month and in line with our prior year results. Net hiring within the client base showed some improvement throughout the quarter, slightly exceeding both our expectations and Q2 2024 levels, but remaining well below historical norms. Gross profit per worksite employee in Q2 2025 was $240 per month, down from $282 in Q2 of 2024. You may recall that Q2 2024 results were positively impacted by favorable development of health care claims, which had totaled $25 million. In contrast, benefits costs in Q2 2025 continued to trend negatively, exceeding our forecast by $12 million. Of this amount, $8 million related to higher-than-expected pharmacy costs, driven by higher utilization of specialty drugs such as the GLP-1s and a related acceleration in the unit cost of pharmacy on a per script basis due to a change in the mix of prescriptions towards higher-cost drugs. The remaining $4 million was primarily attributable to a modest increase in incurred but not reported claims that we expect to pay in the future based on recent claims payment patterns. We have not seen further deterioration in claim development related to older periods like we did in Q1, and we have seen some indications that the previously discussed acceleration in inpatient and outpatient service utilization has moderated somewhat but remains elevated. We did see large claim frequency continue at an elevated level with cancer and heart-related conditions showing the largest year-over-year increases. However, we have not seen signs of adverse selection among new clients as that large claim activity remains in a normal historical range. As reported, benefits cost per covered employee increased 9.6% year-over-year in Q2 and by 9% on a year-to-date basis. These results are skewed somewhat higher by the timing of recording favorable claims experience in the 2024 period and unfavorable claims experience in the 2025 period. But the fact remains that benefits costs continue to trend at a higher year-over-year rate, even slightly higher than the top end of our prior forecasted range. While this higher benefits cost trend has significantly impacted our earnings in 2025, we are executing plans designed to drive significant profitability improvement in 2026 through a careful combination of pricing increases, plan design changes and the negotiation of the anticipated renewal of our contract with UHC. As to pricing, we have and continue to implement higher pricing targets for both new and renewing business in a strategic and methodical way as we discussed in our Q1 call. We have been putting those bids out for a few months now, and our renewal discussions with clients do not appear to have changed in any meaningful way. We expect that the impact of these pricing measures will start to accumulate during the second half of this year and continue into 2026. As expected, we continue to see clients and plan participants migrate to lower cost plan options, which is a normal response to help offset the impact of higher prices. Plan migration has historically helped to mitigate the impact of higher cost trends over time. In addition, we have determined and are in the process of implementing benefit plan design changes effective January 2026 that are designed to further mitigate future cost trends and maintain our planned competitiveness in the marketplace. Our contract extension discussions with UHC are ongoing and addressing the elevated pharmacy cost trends and the expanding use of specialty drugs is a high priority. As we execute this plan, a key takeaway is that the challenges we are facing are not unique to Insperity, and we believe that the approach we are taking to address them is commonplace to address current market conditions. Operating expense management continues to be a keen area of focus, and we have seen a company-wide alignment and execution that continued to successfully manage operating expenses below budget across all expense categories while continuing to invest in our strategic priorities. On a year-over-year basis, operating expenses decreased by 3% with the most significant reductions in travel, professional fees and other G&A costs. During the second quarter, we invested $14 million in our Workday strategic partnership, which was consistent with Q2 of 2024. Our effective tax rate was impacted by the amount of nondeductible expenses as a proportion of pretax income. During the second quarter, we continued to return capital to our shareholders through a regular dividend program, paying $22 million in cash dividends. On a year-to-date basis, we have paid cash dividends of $45 million and repurchased 224,000 shares of stock at a cost of $19 million. We ended the quarter with $114 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. Despite our reported Q2 results and the lower guidance for this year, we remain confident in our outlook for accelerated growth and improved profitability in 2026. This is due to several reasons I'll cover today, starting with the growth momentum recently achieved and the drivers we expect to continue growth acceleration over the balance of the year and into 2026. I'll also cover our updated HR solution portfolio announced yesterday and our excellent progress on Insperity HRScale, our new joint offering being developed through our strategic partnership with Workday. I'll finish with the robust plan we are executing over the balance of the year and continuing into next year, leading to our positive outlook. The highlight of the first half of 2025 is the resilience, agility and focus on sales and retention amid a complex and shifting market landscape. We successfully addressed the evolving uncertainty experienced by small- and medium-sized businesses resulting from macroeconomic tariff and policy developments in the first half of the year and challenges stemming from specific insurance carrier publicity issues in Q2. Even though year-over-year growth in paid worksite employees was 0.7% in each of the first two quarters, an underlying increase of more than 3% occurred from the low point in February through the end of July. All three growth drivers, including sales, client retention and net hiring within the existing client base contributed to this growth acceleration and were stronger than last year. Booked sales also showed relative strength in the face of some significant headwinds, which we accomplished with 11% fewer trained Business Performance Advisors, selling a slightly greater number of worksite employees than in the same period last year. This sales efficiency improvement of 13% in Q2 validated the sales organization changes put in place early in the year and is encouraging as we approach the fall selling season. A key driver of these booked sales results in the quarter was our successful marketing programs that achieved our qualified lead goal and converted a solid number of leads into discovery calls and opportunities to bid for our Business Performance Advisors. Our marketing team also completed our new product architecture and updated our HR solutions portfolio to rebrand our flagship PEO service as Insperity HR 360, our traditional employment solution as Insperity HR Core and working with our strategic partner, Workday to name our joint solution appropriately Insperity HRScale. Each solution is tailored to address specific aspects of human resource management, offering unrivaled comprehensive support for businesses at every stage of growth and development. Together, these three premium HR solutions expand the total addressable market of SMBs and employees that can be served by Insperity. Our portfolio of add-on products is dedicated to solving complex challenges for these companies and improving the lives of business owners and their employees. Now I would like to focus on Insperity HRScale and the excellent progress we have made on the way to bringing this unique solution to the marketplace. The four defined pillars of our work in the strategic partnership have included our Insperity corporate tenant, our exclusive PEO client tenant, our deployment and enablement services and our joint go-to-market plan. Our corporate tenant was successfully launched earlier this year and important milestones were achieved in all three of our remaining major initiatives in the second quarter. Our exclusive PEO client tenant is the major project deliverable, embedding Workday Human Capital Management as the client-facing technology into the Insperity 360 comprehensive HR service and technology platform to create Insperity HRScale. We are pleased to announce today that a detailed work and testing plan developed and agreed upon by both Workday and Insperity teams have established a target go-live date for Insperity HRScale beta clients early next year. This is an important step and our enablement and deployment team is ready to work with the selected beta clients for the ramp-up to the anticipated go-live date. Although this plan is detailed, precise and very well thought out, there are remaining risks that could cause the date to move out a bit further. But in any event, we have a direct line of sight to launch Insperity HRScale. We have agreed on a plan for the beta clients. We are actively working to define a timeline for a number of new clients and an additional group of current Insperity clients to become Insperity HRScale clients later in 2026. I mentioned last quarter the completion of the go-to-market plan for HRScale with Workday. Senior leadership and other key personnel from both companies agreed upon a plan and methodology to take our joint solution to the market together. We are aligned on the target market, the product name, messaging and competitive positioning, the sales motion and most importantly, we formed a new pod or a product-oriented delivery team focused on achieving the objectives set by the leadership of both companies. We achieved our goal of establishing this team in Q2 and began co-selling discovery calls with target prospects in July. This team is focused on identifying suitable early adopter candidates, refining the appropriate sales motion and selling the first new Insperity HRScale clients. Obviously, this effort has just begun. However, in our view, it's off to a very exciting start. The receptivity by prospects of the investment and commitment of Insperity and Workday to a strategic partnership focused on this underserved target market has been strong and encouraging. Our market research has shown conceptual buy-in by mid-market companies to Insperity HRScale, which is designed to focus on affordability, ease and speed of deployment, reducing complexity and agility as companies scale. One of the most exciting milestones achieved recently is the completion of the Insperity HRScale pricing strategy provided by a leading consultancy firm based upon extensive market research. These results affirmed the target market's intense need for both HR services and technology and validating the premium product fit of Insperity HRScale. This research specifically identified how components of Insperity HRScale are valued by the target market and determined their willingness to pay at various levels. The research supports HRScale premium pricing potential compared to historical HR360 pricing for mid-market accounts. This has provided what we need to establish our initial pricing framework, including upfront deployment and enablement fees, ongoing monthly HR service and technology support fees at a level exceeding our expectation, yet within the value range that we believe the target market is willing and expecting to pay. This also provided valuable information to determine a pricing roadmap to align with the Insperity HRScale product roadmap into the future. Now let me provide some context for our growth and profitability outlook for 2026 based upon executing our plans for the balance of the year. This plan has three key elements, including continuing growth acceleration, recovering our gross profit margin and leveraging our operating expense management trend. Every year, the success of our fall sales and retention campaign is pivotal to achieving the desired starting point for the coming year in paid worksite employees, setting the stage for continued growth acceleration. This year, we are starting earlier, offering strong incentives and investing more to increase the likelihood and degree of success in sales and retention. We are officially launching the campaign in just a few weeks, which is approximately one month earlier than previous years. We have strong incentives for employees and prospective clients for sales and retention activity and results. We have also allocated a portion of the year-to-date operating expense savings to invest in marketing opportunities we expect to drive an increase in sales leads and opportunities. We expect to be making announcements and increasing advertising soon that will reveal significant potential return on this added investment. Another input to growth expectations is the state of the small- to medium-sized business community, which we believe is at an important inflection point compared to the last few years of one macroeconomic speed bump after another from inflation and interest rates to government policy and tariffs. The recent federal legislation signed into law is validating support for the small business community, especially on tax and investment outlook. We believe this may play out to be a catalyst for expansion in the SMB community, which could move the hiring trend back to historical levels next year. The second key element in our game plan for the balance of the year is execution of our gross profit margin recovery plans in the health care pricing and cost framework. Jim has described three critical initiatives, including pricing allocations, plan design changes and our contract negotiation with our insurance carrier. All three have moved forward rapidly in the last quarter and despite the benefits cost trend being slightly worse than expected, our recovery plan is progressing along, and we believe we are in a position to see improvement as we execute the recovery plan this year and heading into 2026. Another aspect of our positive outlook for next year is continuing the recent operating expense management focus to ensure operating leverage can be a part of our three-year plan beginning in 2026. One key element of this plan is to continue down our AI path, which we believe can be significant in our business model. Development of our AI capabilities, as I've discussed in the past, is well underway and in use by our client-facing HR professionals. Our AI focus is to improve the efficiency, value, productivity and quality of our services to the benefit of our customers and our internal operations. Our strategy is to leverage the combination of our own proprietary tool to optimize Insperity's HR and service delivery expertise with other specific AI capabilities native to platforms that we use across the company. So in summary, we have responded well to the challenges we have faced this year-to-date and our plan for the balance of the year is on course toward accelerating growth and improved profitability in 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 started to see some modest worksite employee growth acceleration in recent months. In addition, there are indications that clarity around tax policy has buoyed small business economic sentiment. At the same time, we remain cautious about the level of net hiring in the existing client base. For the full year, we are now forecasting worksite employee growth of 1% to 2% over 2024. Given the higher benefits cost trends experienced in the first half of the year and more broadly seen in the marketplace at large, we are raising our forecasted range of benefits cost per covered employee by 75 to 100 basis points for the full year. We anticipate that the benefits cost trend will taper down from the 9% we have experienced in the first half of the year for two primary reasons. First, year-over-year comparisons in the first half of 2025 were impacted by last year's favorable claims development, and that impact should subside in the second half of the year. In addition, we continue to see favorable changes in our planned demographics and planned migration that historically have helped to favorably impact benefits cost trends. We continue to expect that operating expenses will 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 $58 million in 2025 versus $57 million in 2024 and additional marketing spend for our fall sales campaign. For purposes of adjusted EPS, we are forecasting an effective tax rate of 29% for the full year 2025. The effective tax rate on GAAP EPS is expected to be somewhat higher and could fluctuate based on the level of nondeductible expenses as a proportion of pretax income. Based on all of these factors, we are forecasting full year adjusted EBITDA in a range of $170 million to $205 million. We are forecasting full year adjusted EPS in a range of $1.81 to $2.51. As for Q3, we are forecasting the average paid worksite employees to be in a range of 312,200 to 315,300, which represents an increase of 1% to 2% over Q3 of 2024. We are forecasting adjusted EBITDA in a range of $24 million to $44 million and adjusted EPS in a range of $0.06 to $0.49. As economic concerns show signs of stabilizing, business owners continue to see employee retention, engagement, benefits and cost of compliance as significant concerns. We believe that these are positive trends as we approach our fall sales and client renewal season. We are executing a pricing plan and implementing plan design changes in 2026 that we believe will address the elevated benefits cost trend environment. We remain focused on operating expense management and have initiated a three-year planning process to further sharpen the alignment of our sales, operating and development plans with our updated HR solutions portfolio strategy as we look to drive improved profitability in 2026 and beyond. At this time, I'd like to open up the call for questions.

And your first question this morning is coming from Andrew Nicholas from William Blair.

I wanted to ask about Workday. I appreciate all the updates and the new branding of the solutions. With the beta timing now seemingly set, could you provide any insights on the financial impact for 2026 or anything related that could help us understand how it might influence profitability and growth next year?

Thank you for the question, Andrew. I appreciate it. We are very excited about our progress, but it's still a bit early to accurately predict the revenue and profitability impact. We are starting with a beta group, which I am pleased to announce has a target date early in the year. Our next step is to introduce two additional waves of client groups throughout next year. The first wave will include new clients, which we will refer to as new beta clients. The second wave will consist of current clients that we will identify and bring in later in the year. We have just received all the necessary information regarding the pricing aspects, which is very important. As I mentioned earlier, it surpassed our expectations regarding the valuation of different elements. In fact, the value of the service component was even greater than we anticipated. Clients will have the opportunity to consider the various components of our offerings, and we can price these accordingly, including upfront fees, ongoing service fees, ongoing technology support fees, and fees for adding technology elements over time. There are numerous components to this. We are currently working on establishing a recommended pricing strategy for clients of varying sizes over the next quarter. This will allow us to better understand how we will price our services for these crucial client groups involved in our launch. We will be offering advantages to early clients, and this process is confirming our long-term strategy to address the challenges of companies outgrowing our business model, while also paving the way for acquiring larger new clients.

Understood. Maybe switching gears a little bit to the WSEE dynamics. It sounds like there is some progress at least from the low point in February. I wanted to ask specifically about the net client hiring piece. Is that something that you've seen improve sequentially over the last couple of months? Is there anything that you could say about regional or vertical dynamics there? And is there an expectation that, that continues to improve over the course of the next couple of quarters?

Yes. The positive news is that we have observed underlying hiring at a higher level than in the past. Some of this is a typical summer seasonal effect and other factors. However, in our analysis, we see underlying movement in the right direction. It is still significantly below historical levels. I believe the confidence we're observing after the legislation indicates that we are about to see some positive developments. We haven't included much of that in our projections for the remainder of the year, but we feel things have already improved. In the first half of the year, there was only one month that showed a slight decline, which is encouraging. This trend is progressing positively, and we are committed to supporting our customers' growth.

Your next question is coming from Tobey Sommer from Truist.

At this point, do you believe that the original $150 million investment is still the appropriate figure, and do you now have clearer insight into how much of the Workday-related expense will completely disappear and contribute positively to the bottom line?

So Tobey, thanks for the question. I do think that the $150 million expense, when we put that out there, I think largely our focus was on the cost, not only to get to go live, but to think about kind of what was going to hit the income statement. I do think we're going to get to a point where we do see that there's going to be a product development roadmap beyond launch, but we also believe that we're going to be at a point where those expenses become capitalizable as we get closer to launch. So I would say over the five-year period, the overall investment in the product is likely to continue to be a little bit over the $150 million, but I also think that the impact on the income statement will reduce pretty significantly. At the same time, I think it's important to recognize that when we move into this launch phase, the beta phase, I would call it, you expect that you're going to have to muscle through some level of working issues with the beta clients. One of the reasons you're going through this process is to make sure that you're building out very smooth processes and stuff. But we're not expecting that those are going to be perfect in that first beta launch. So we do think that from an operating cost standpoint, there's a little muscle and through that will happen in those early phases and then that there will be growing operating efficiency on that front over the first several years of the launch.

Thank you for that. Regarding the business's margin profile, I would like to ask a question that allows you to share your insights on pricing opportunities without revealing specific numbers. Paul, do you believe that in two or three years, when everything is running smoothly, the margin profile per worksite employee and at the corporate level will be better than it has been historically, the same, or lower?

I believe this is my opinion based on what I understand in terms of the progress we're making and even this new information we have, but I would expect it to be better. And we are literally seeing validation of the premise of this investment. And what I mean by that is, obviously, retention is your lowest cost new business. I believe that the increase in retention we anticipate from effective execution over the next few years will be significant. Additionally, regarding margins, we are attracting much larger clients at even higher pricing than I initially expected. Although it will take some time to fully develop the solution, I am confident that this progress will occur as well. And so like I say, it's the trifecta for our business model. It's growing the company faster in bigger chunks at a time at higher prices. That means our historical operating leverage that we've had because the technology is better, I think that ultimately enhances our business model as well. It's just at an early stage for us to lock some of that stuff down. But I appreciate the question. And I will just say that, that's exactly what I see ahead and what we're working to accomplish.

Your next question is coming from Jeff Martin from ROTH Capital Partners.

I wanted to discuss the launch of the joint marketing effort. It seems you'll be dedicating a significant amount of time and resources in 2026 to getting these beta clients up and running smoothly and bringing in new clients. How do you assess the relationship between the joint marketing go-live and the capability to sell and activate those clients within a reasonable timeframe?

Yes. So if you think about the typical scenario for a company who's having these types of needs, let me just remind you what we have validated is there's a deep need in this target marketplace for both services, HR services, having a better HR function, a strategic HR function that's really working and the technology to help make that happen efficiently and effectively. And so if you are such a client out there today, in order to move that direction, the amount of time that it takes, the amount of investment it takes, the amount of complexity, it's all very difficult, takes a long time. And most companies have a mixed bag or a hodgepodge of components that they're trying to make all this happen. And we're bringing them a rifle to nail this down and have ultimate scalability on both the service and the technology side. Insperity HRScale is the perfect name for this. If I were one of those potential clients and I learned that Insperity and Workday are both fully dedicated to making this a long-term solution for me, I would definitely want to be part of that. Even if it takes 18 months, that's still less time than trying to piece things together myself, which would be more expensive and much more difficult. Plus, I don't really have the necessary resources to accomplish that on my own. I'm sharing what we're observing in the marketplace, and I'm genuinely excited about the conversations we've been having with potential clients. They quickly understand the value of having these two great companies working together to address their long-term needs. Being part of this opportunity is going to be appealing to these prospects. We're also in a position to finalize our pricing and create attractive incentives for those who want to get involved early, which is fantastic. That's an excellent step in addition to that. But I just believe we see the demand out there and the need. I wouldn't even call it demand because they don't know the solution is out there yet, but the need for what we're bringing to the table is clear and the perceived value of it, we believe, is going to be high. So that's why being out there now, having our team already out there having these conversations and being able to get this on people's plate to put in their plan for the future is very appropriate, even though we're launching the beta group early next year.

Great. And then one other here, if I could. I think you said the sales force BPA count is down 11% year-over-year. Sales efficiency drove a 13% sales efficiency ratio, which is encouraging. How are you thinking about growth in the BPA base over the next 12 to 24 months as this joint solution becomes really more prominent in the sales effort?

Yes. I believe this is the first time that we're going to have what I would call operating leverage on the sales side of the business. We are going to grow the BPA base, but nominally, not near at the pace we had to in the past. Once we get this in place, we're already having good success in the mid-market space. And this is going to enhance that and allow for us to grow the business, the worksite employee growth, the unit growth more rapidly with fewer BPAs. So that's the game plan. There will be some growth pretty nominal for the balance of the year and into next year. But the efficiency gain that is evident is another reason why we are really ready to market more heavily and get more opportunities into the hands of these BPAs whose effectiveness is at a high level.

Your next question is coming from Mark Marcon from Baird.

I have a couple of questions. Paul and Jim, thank you for all the details regarding health care costs. Clearly, everyone is experiencing the same issues and pressures. I'm curious if you have any initial thoughts about the combination of plan design changes, pricing, and potentially receiving more favorable treatment from UnitedHealthcare. How do you view that combination? Specifically, how much of the impact would come from plan design changes versus pricing? I realize it's still early, and if there are any regional differences, how should we consider those? I also have a follow-up question regarding Workday.

Thank you for the question, Mark. In response, I would say that when trends are moving in a certain direction, the main way to keep pace and adjust to those trends is through pricing. We're focusing on plan design changes and aiming to influence both participant and client choices regarding the plans they select, along with other strategies we’re implementing in our negotiations with United. These efforts are intended to mitigate the overall cost trend impact. But most of it, the majority of it is through the pricing changes. You mentioned regional differences. There's always some local and regional differences. Different carriers are stronger in different parts of the country and people have their eyes set on growth targets that may vary from state to state. So the process that we look at as we're going through things is dynamic from that standpoint. But I would not say that there's a part of the country right now that is not seeing the impact of higher trends.

Mark, I would add one more thing to what Jim is saying because it is important that pricing is the appropriate methodology to balance price and cost when the claim cost is what you're addressing. Now the contract discussions, though, are really important because if there's anything structural that needs to be changed to handle how we're affected by these things in the future, that is really important. And that's a central element of what we're dealing with and working on with UnitedHealthcare. Once you make such a change, it can provide an early term benefit to your outlook, but what's most important is structuring things in a way that helps mitigate these issues in the future.

I really appreciate that. Regarding Workday, if I'm interpreting things correctly, it seems we will have three waves of beta. Does that suggest that when we begin broad marketing to new or existing clients, it would likely happen more towards the fall of 2026? I'm just trying to understand that better.

Sure. Well, first of all, on the waves, I'm not going to get out ahead of the amazing team of people that are going to great lengths to go into great detail to determine the exact times for these other two waves. I have my thoughts about it. I have my feelings about it, but I owe it to them to go through the work and to see the plan for this. Even though there are costs that will be incurred, it's important to focus on ensuring that the experience for our early new customers is excellent, which will require significant investment. However, I believe that much of this investment should not be reflected in the income statement, as it's intended for long-term capital rather than current expenses. Now there is a time when that gets mitigated through the rules once you have a new product that you know is developed and working. So I don't know when and how that works. Jim can comment about that if he wants. But I think between the combination of revenue that we're going to have coming in, I don't know when it can be recognized either yet. So I'm not the accountant, but between revenue coming in and being able to account for the expense side, I believe, more appropriately, I think we have some nice upside coming hopefully sooner than later.

If I can add to that briefly, there are costs arising from various categories. Specifically, there are third-party costs related to implementation. Additionally, there are significant costs connected to internal resources working on the project. Previously, when these resources were engaged in projects, they were likely involved in activities that could be capitalized, but we are not capitalizing those costs at this time. And then there's a third part of the costs that are going on right now, which are kind of the prebuild of operational expenses, onboarding and enablement teams, as an example, that are going to kind of transition over to working on actually setting up new customers. The difference between now and then is that we will have implementation fees that will be associated with that activity once we get to launch. So that helps.

Your next question is coming from Andrew Polkowitz from JPMorgan.

I had two questions. The first one, I just wanted to ask, in terms of the 3Q and 2025 outlook, what's the range of outcomes embedded from a health care cost trend perspective kind of hitting at the low and high ends of your EBITDA and EPS guidance?

We have concentrated more on our expectations for the year. The comparison to last year will primarily be influenced by our trajectory toward that target rather than what occurred last year. Therefore, we anticipate a slight normalization from the 9% year-to-date observed in the current quarter or in 2025 thus far. However, I don't focus too much on the exact quarterly trend; instead, I consider what we are aiming for in terms of the annual trend. In comparison to our previous forecast, we are projecting an increase of 75 to 100 basis points.

Yes. I would like to add that about a quarter ago, we mentioned that the low end of our range was influenced by the same factors that increased costs in the first quarter. The issues from last year have been resolved. However, when we reviewed this quarter's numbers, we realized that the high end of our range did not align with the results. Consequently, we needed to make adjustments for the remainder of the year, which is why we added 75 to 100 additional basis points.

Okay. That's super helpful. And then my follow-up question, I wanted to ask a little bit about renegotiations with UnitedHealth. Just wanted to get some color on kind of what has been the outcomes in the past. Is it really about plan design, visibility or earlier visibility into data trends, price risk sharing? Just wanted to kind of understand what the range of potential outcomes for Insperity can be.

Well, if I just look at the big picture of our history, and Jim has been the person in the hot seat on that front for a long time and has done a great job with UnitedHealthcare. But I would say that we've gone from being just an amazing client for them and we've seen our actual administrative expense, et cetera, and our risk charges really at really low levels for what the industry sees. But we've kind of gone past that to being a very solid channel partner for them and have worked toward other aspects to the relationship to where we're more aligned on doing what we can together to grow. Now that was interrupted with some of these things happening in the marketplace at large. But I think that's what we're looking to make sure that we've got this relationship structured where both of our incentives are aligned around what we do together and that we benefit accordingly as we grow and manage these costs going forward together.

If I can add on to that, I think one of the real keys in the middle of this is when we have discussions like that around alignment, it is very often around what is the best situation for our plan participants. When we do things that are beneficial and advantageous to plan participants, not only is that a fiduciary responsibility we have but that sets an environment that is good for us and good for UnitedHealthcare as we approach the market because it's no different than what we talk about from a cultural perspective of having a people-centric approach and a customer-centric approach. In this world, when we have a participant-centric approach, it's good for everybody. It's good for our participants. It's good for us in the long run. It's good for UnitedHealthcare in the long run.

This does conclude our question-and-answer session for today. I would now like to hand the call back to Mr. Sarvadi for closing remarks.

Once again, we would just like to thank all of you for joining us today, and we appreciate the questions and the detailed questions, and we hope we have provided information for you to see why we are so excited about the future and how we're looking forward to executing an important game plan for the balance of the year and looking forward to growth acceleration and improved profitability in 2026 and beyond. Thank you very much for participating today.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you once again for your participation.