Good afternoon. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Insperity Third 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 today's call. First, I'm going to discuss the details behind our third quarter 2025 financial results and provide an update on our financial guidance for the remainder of the year. Paul will then comment on our ongoing efforts to accelerate growth and improve profitability in 2026, including the rollout of our new HRScale solution. I will return to outline some initial thoughts regarding expected drivers of financial performance for 2026. We will then end the call with a question-and-answer session. Before we begin, I would like to remind you that Paul or I may make forward-looking statements during today's call, which are subject to risks, uncertainties, and assumptions. In addition, some of our discussion may include non-GAAP financial measures. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any such forward-looking statements and reconciliations of non-GAAP financial measures to their comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. Our unit growth for Q3 2025 was within our forecasted range with the average number of paid worksite employees increasing by 1.2% over Q3 2024 to 312,842. New client sales results were encouraging. While worksite employees paid from new clients in Q3 fell just short of the Q3 2024 level, our Q3 booked sales efficiency and the resulting number of accounts that are in the queue for first payroll over the next few months have increased significantly from a year ago. Client retention remains strong, averaging 99% per month and in line with prior year results. Similar to last year, the departure of seasonal summer employees caused net hiring within the client base to be negative in the third quarter. The overall hiring environment continues to be challenging, and Q3 2025 activity was slightly weaker than Q3 2024. Adjusted EPS for the quarter was minus $0.20, and adjusted EBITDA was $10 million. These results fell below our forecasted ranges, primarily due to a further continuation of higher-than-expected benefits costs. Gross profit per worksite employee in Q3 2025 was $208 per month, down from $247 in Q3 of 2024, driven primarily by higher-than-expected benefits costs of $20 million. As you may recall from last quarter's call, we had expected our benefits cost trend to taper down over the second half of 2025 due to favorable demographic changes within our plan, combined with the relative benefits cost patterns in the comparison period, which had been more favorable in the first half of 2024 and resulted in higher year-over-year cost trend in the first half of 2025 that we did not view as reflective of the underlying trend for the year. Unfortunately, while we benefited from those favorable impacts, Q3 claims data revealed that they were outpaced by higher-than-expected outpatient and inpatient utilization and pharmacy costs, including a significant increase in large claims frequency, both sequentially over Q2 and also year-over-year. These factors resulted in a benefits cost trend of 9.1% for Q3 2025 over Q3 2024. The issues that we have experienced with increased health care claims costs are not unique to Insperity. At a macro level, the health insurance industry has reported an unexpected rise in health care costs and loss ratios. From our discussions with our carriers and outside advisers, there are a number of factors driving a higher level of health care utilization, including the increased use of prescription drugs and outpatient procedures, the prevalence of high-cost conditions, and the introduction of new higher-cost treatments and drugs. Additionally, we have recently been made aware that the use of AI tools by health care providers has emerged as an additional contributor to the higher cost trends, impacting everything from condition diagnosis and treatment plans to clinical documentation and coding for insurance billings to preauthorization and appeals processing. Many insurance carriers have alluded to such issues in their comments on higher cost trends and loss ratios, and our understanding is that they are responding in a variety of ways to reduce issues around upcoding or unnecessary spending. From what we are hearing, it is the accumulation of all of these factors happening at the same time that has created the unexpected increase in trends. At this point, the prevailing view in the industry is that the higher claims trend experienced in 2025 will persist in 2026. We responded quickly to the emergence of higher-than-expected benefits costs earlier in the year by increasing our pricing targets. Over the course of the year, these costs have continued to outpace our projections, and we have revised our pricing plan accordingly. We believe that the plan we are executing remains competitive in the broader marketplace and will continue throughout 2026. This plan is focused on attracting and retaining the right clients at the right price to produce sustainable profitability at normal historical levels. To date, we believe those plans are on track, and I will provide an update later in the call. Moving on to operating expenses, we continue to actively manage these costs below budgeted levels while continuing to invest in our strategic priorities. On a year-over-year basis, operating expenses in Q3 2025 decreased by 4%. Operating expenses declined sequentially from the second quarter of 2025 by $10 million with the most significant reductions in salaries and G&A costs. During the third quarter, we achieved significant software development success on the HRScale platform, which met the threshold to capitalize a portion of our Workday strategic partnership costs for the first time. For Q3, we invested a total of $17 million, of which $11 million is included in operating expenses. This compares with $19 million in Q3 of 2024, all of which was expensed. During the third quarter, we continued to return capital to our shareholders through our regular dividend program, paying $22 million in cash dividends. On a year-to-date basis, we have paid cash dividends of $68 million and repurchased 225,000 shares of stock at a cost of $19 million. We ended the quarter with $120 million of adjusted cash, and we had $280 million available under our credit facility. Now let me provide an update to our Q4 and full year 2025 outlook. Given our recent sales, client retention, and client net hiring results, we expect average paid worksite employees to be in a range of 313,000 to 315,000 for the fourth quarter, an increase of 1.3% to 1.9% over Q4 of 2024. As a result, average paid worksite employee growth for the full year is expected to be 1%. We are forecasting full year adjusted EPS in a range of $0.84 to $1.47 and adjusted EBITDA in a range of $119 million to $153 million. As I mentioned earlier, our benefits cost trend over the first 3 quarters of the year has hovered around 9% as favorable changes in our planned demographics and planned migration have been outpaced by increased care utilization, pharmacy costs, and large claim activity. We expect our full year benefits cost trend to remain at this elevated level. Q4 operating expenses are expected to decline sequentially once again. As a result, full year 2025 operating expenses are expected to be below 2024 levels by approximately 3%. For the full year, we expect the investment in our Workday strategic partnership to total approximately $58 million, of which $48 million would be included in operating expenses. This compares to $57 million in 2024, all of which was expensed. As for Q4, we are forecasting adjusted EBITDA in a range of negative $25 million to $9 million and adjusted EPS in a range of minus $0.79 to minus $0.16. For purposes of adjusted EPS, we are forecasting an effective tax rate of 28% for Q4 of 2025. The effective tax rate on GAAP EPS could fluctuate from that based on the level of nondeductible expenses as a proportion of pretax income. Looking at the big picture of 2025 at this point, we have a significant earnings shortfall from our initial budget. Nearly all of this shortfall is related to the benefits area, driven by the unexpected increase in health care cost claims costs. Other impacts, including a lower level of growth than initially forecasted, mix changes in the business, and the impact of lower interest rates have been largely offset by the management of operating expenses below budgeted levels. Now at this time, I'd like to turn the call over to Paul.

Thank you, Jim, and thank you all for joining our call. Today, my comments will focus on four important topics to frame the financial performance rebound and growth acceleration we expect in 2026 and beyond. First, I'll discuss the decisive and assertive actions we are taking to navigate the significant and unexpected step-up in health care claims we have experienced this year. Second, I'll present an update and perspective regarding the official rollout of HRScale this quarter, our joint solution with Workday that's designed to effectively enhance our PEO solution set for mid-market companies ranging from 150 to 5,000 employees. We believe the addition of this offering will position Insperity uniquely within the marketplace and serve as a new driver for large client sales and retention, advancing our growth model. Third, I'll provide an overview of our recent strong book sales performance and the momentum driving our flagship PEO solution, HR360, which is a key contributor to our growth and integral to our upcoming year-end transition. I'll conclude my remarks with some thoughts about the next three years and the plan we are working through that we believe will allow us to return to historical key metrics in our business model. The most urgent issue that we continue to address is the health insurance claim cost escalation. This issue has occurred across the marketplace and industry and has impacted Insperity in a severe manner over the last three quarters. We have seen two significant negative developments in the health insurance marketplace. First, the claim trend for the industry at large for 2025 is now expected to be 200 to 400 basis points higher than industry estimates at the beginning of the year. This unexpected increase that emerged during the year is significantly higher than a typical year. Analysis of our Q3 claims data revealed our benefits cost trend has increased from our initial estimate at the beginning of the year, in line with the higher trends now reported in the health insurance industry. Secondly, the increasing adoption of AI tools by health care providers appears to be a recent additional factor driving higher costs across a wide range of claim categories. As Jim mentioned, we have seen many providers cite utilization and revenue increases, while insurance carriers are reporting higher loss ratios and passing this higher level of claim trend on to employers. Jim has specifically addressed this claim cost escalation we've experienced in his remarks, including the expected effect on adjusted EBITDA in 2025. This factor accounts for nearly all the underperformance from our target for this key financial measure at the beginning of the year. So this is certainly the most significant challenge we are confronting. Now even though the full effect of this higher-than-expected trend has made a larger impact on our estimates for the full year than we thought last quarter, we believe the actions we have taken in response have been progressing on track to achieve a rebound in 2026. When we saw signs of a step-up in claims cost in Q1, we quickly initiated action plans to address this trend. We also adjusted these plans during the year as the trend continued to increase. To date, we've had measurable success in increasing pricing appropriately with client retention remaining solid in Q3. We believe our pricing remains competitive with the industry and with the broader health benefits marketplace for our clients, and we provide plan design options and other ways for clients to mitigate these increases. These pricing measures take time to fully take effect as we price new and renewing accounts each month in line with market trends. The initial effect of these measures began in Q3, and we expect the positive impact will continue to grow over the coming months as we complete our fall sales and renewal season. These pricing initiatives are strategically designed to support our profitability recovery as we move into 2026. Now in addition, we expect a significant new agreement with UnitedHealthcare announced today will add additional support and contribute substantially to our margin recovery. Since the first quarter, we have focused on negotiating a revised contract with UHC to go into effect at the start of this year. We've now signed the contract extension through 2028, which addresses our key short- and long-term objectives. The contract incorporates financial terms, plan design modifications, and risk transfer alternatives that are projected to significantly reduce Insperity claim costs and mitigate expected trends and large claim risk for the upcoming year. Additionally, the agreement strengthens our partnership alignment to long-term favorable administrative and risk charges and credits as well as growth incentives. This structure and alignment of this agreement are paramount as we expect them to enhance the financial impact in subsequent years as the business expands. The projected immediate offset to the benefits cost trend combined with the lower large claim pooling level in 2026 presents a timely and important opportunity to reduce cost and lower risk. When you combine the effects of these significant cost management and pricing initiatives, we believe we have the foundation for a substantial rebound of gross profit and margins in 2026 beginning in January. The second topic I'd like to discuss is the rollout of our HRScale solution, which is underway with active co-marketing and co-selling target prospects, including demonstrations of the platform. We are also working on deployment and enablement of beta clients and our software development success has proven the viability of the product, a milestone that impacts accounting treatment for our investment in the platform. This is a pivotal moment for Insperity due to the potential for HRScale to be a catalyst for growth into the future. It's important to recognize the tremendous accomplishment to reach this point in this length of time. We signed a strategic partnership agreement with Workday at the end of January 2024, just 21 months ago. This partnership was established to bring a unique comprehensive HR solution to a large underserved market of more than 40,000 companies employing more than 25 million employees by combining Insperity's HR service and Workday HR technology. We identified four pillars of work to create this joint solution with the potential to be a category of one and a competitive disruptor in the marketplace. The four defined pillars included our Insperity corporate tenant, our exclusive PEO client tenant, our deployment and enablement services, and our joint go-to-market plan. This effort represented a significant financial investment and a commitment of time, effort, and resources by both partners. In our case, we estimated a $150 million investment, including $60 million in each of the first two years to build and take this joint solution to the marketplace. Following the signing of the agreement, we commenced the significant effort for this major development project, which involves integrating the client-facing Workday HR platform with our advanced Insperity HR compliance platform. Additionally, I set aggressive internal timeline goals to achieve key milestones across the other three pillars with an emphasis on speed to market of the new product. We did not share these at the time due to too many unknowns, but we believe it's important to note now so we can look at the big picture and assess how we have performed up to this point. It's not uncommon for a significant project of this magnitude to take substantially more time and investment than initially projected to create a new product and prepare to take it to market. The internal goal for launching the first pillar, our corporate instance of Workday, was January 1, 2025, and implementation was completed by April 1, 2025. We set the goal for the client tenant for completion to initiate deployment and enablement for beta clients on July 1, 2025. The client tenant uses functionality in the Workday solution that did not exist when we entered the agreement, and both of our companies had to work diligently together to create a solution that had not been built before. This milestone was achieved by October 1, 2025. Our deployment and enablement capability is in place now to allow us to bring on beta clients for a go-live date in March 2026 for first payroll in April 2026. In August, our go-to-market plan was launched with our product page on the website going live, our demand generation campaign implemented, and prospect outreach underway. Co-selling, co-marketing, and co-branding is in full swing and a product-oriented delivery team of sales professionals from both partners are working together every day on a team that's wholly dedicated to this solution. They are rapidly advancing the sales motion and identifying and meeting with prospects to fill the HRScale sales pipeline. Based on our forecasted investment for the rest of the year, we expect to achieve all these milestones while staying within our original $120 million estimated investment for the first two years. The achievement of these initiatives within this time period and within the budget reflects the professionalism, dedication, and proficiency of both the Insperity and Workday teams. It also demonstrates the strong cultural alignment of the strategic partnership, which we expect will support the successful rollout of HRScale and positively affect our return on investment for years to come. We expect the launch of HRScale as a significant growth catalyst for Insperity is particularly timely given the broader macro trends impacting our industry. For the past two years, the labor market has posed considerable challenges for small and medium-sized businesses, which has contributed to restrained growth across the business services sector. There's also uncertainty regarding the future impact of AI on employment, prompting companies in the HR service sector to seek a new catalyst for sustained growth. Had we not established our strategic partnership with Workday, we believe we would also be searching for such an opportunity. Instead, we believe we have our new growth driver already in place. Now on to my third topic, our confidence in this new growth driver is growing due to recent booked sales success. In Q3, our booked HR360 sales were substantially over budget and 45% greater than the same period last year. These strong results were driven primarily by outperformance in our mid-market and enterprise space, which is the target market for HRScale. We sold our largest account in history during this quarter, which is scheduled to come on HR360 in January and is planned to upgrade to HRScale by the end of the second contract year. The opportunity to have a discovery call with this large potential client resulted from the client becoming aware of the HRScale as an Insperity Workday joint solution. Over the last quarter, we've been encouraged by prospective clients' receptivity to the Insperity Workday strategic partnership in a number of ways, including the ability to set appointments and the nature and level of the conversation. The system and service demos to beta and prospective clients have resonated well, and we are very pleased with the receptivity of the proposed value proposition. We believe the early feedback is validating our strong competitive positioning in the marketplace. It's also compelling to see prospective clients considering two product options with the opportunity to start on HR360 with a plan to upgrade to HRScale in the future. We also believe that the availability of HRScale and HR360 at different price points will positively impact the level of sales for both solutions. We believe our success and momentum in book sales through the third quarter puts us in a favorable position going into our year-end transition with more client worksite employees in the pipeline scheduled to become paid in January. This is also important in a year where we have higher pricing for new and renewing business, which could have some impact on client retention when our priority is to see margin improvement into the new year. The last topic I'd like to address today is our three-year plan we expect to finalize this quarter with the objective of returning to the targeted growth and profitability metrics of our business model. Our historical key metrics in good times include double-digit unit revenue and gross profit growth, combined with operating leverage to achieve adjusted EBITDA annual growth rates north of 20%. Our work on this three-year plan includes specific initiatives designed to return our key drivers to these metrics and generate corresponding shareholder returns. We are confident that a return to double-digit growth is possible with the implementation of our new growth driver, HRScale, even if future small- and medium-sized business employment gains remain modest. We anticipate improvements in gross profit margin as we align price allocations and direct costs moving forward and expect that the value proposition and pricing of HRScale will further support these outcomes. We expect operating expense efficiencies and improved margins from both internal and client-facing AI initiatives. As we grow, our AI strategy is already generating efficiency gains and should help us achieve greater operating leverage. Earlier this year, we launched a proprietary Insperity HI tool called Compass, which is already being used by our service providers. We are continuing to develop AI capabilities across our operations, including targeted and proprietary tools for things like predictive analytics and prospect scoring. We are also working to combine the speed and information reach of AI with the validation of our HR expertise to more efficiently deliver complete and accurate information to our clients. This improves response time and enables us to focus even more on the high-touch nature of our customer relationships, which continues to be a strong competitive differentiator and retention driver. So in summary, we believe the elevated health care trend and malaise in the small- and medium-sized business labor market is masking significant progress we are making across the company in these areas to return to historical growth and profitability metrics. We take full responsibility for continuing to take appropriate action steps to address these issues, and we believe we will see significant progress ahead. At this point, I'll pass the call back to Jim to provide some further perspective on 2026 expectations.

Thanks, Paul. As this year has progressed, we have worked diligently to create and execute plans aimed at generating a significant profitability rebound in 2026. In the benefits area, we expect the elevated benefits cost trend to persist in 2026 based on input from our carriers, outside advisers, and industry benchmarks. As a result, our response must remain swift and steadfast, and our focus is both on right pricing our book of business and reducing planned costs. On the pricing side, we continue to strategically implement higher pricing targets for both new and renewing business using AI tools and revised methodologies. Our focus is to attract and retain the right clients at the right price that can produce sustainable forward-looking profitability at our normal historical levels. This process began earlier this year, is progressing according to plan, and will continue throughout 2026, consistent with what we're hearing in the broader market. Through a combination of higher pricing and the exit of lower profitability clients, we believe that we are on pace to exceed the projected benefits cost trends. Regarding our planned costs, I'm happy to report that we have successfully completed our contract negotiation with UHC and have extended our contract through 2028. The combination of cost savings from this contract and other plan design changes, both of which will be effective in January, are expected to have a favorable impact of about 2% of our gross benefits costs. In addition, we plan to reduce our health care claims risk in 2026 by lowering our pooling level from $1 million per member per year down to $500,000. For clarification, the pooling level represents the maximum annual amount of claims exposure we have for any individual plan participant, which provides a measure of protection against the severity of large claims. Taken altogether, these contractual changes reflect the strategic alignment of Insperity and UHC to provide exceptional value for our clients and plan participants, and they are foundational to both our 2026 financial performance and our long-term success. Regarding the rollout of HRScale, we expect to add clients into this solution during 2026, which is expected to incrementally impact worksite employee growth and revenue as we move through the year. As the rollout plan continues, we should be in a better position to comment on client traction and revenue potential in future calls. Once we achieve go-live and a stabilization period, the level of our investment is expected to decline and certain product development costs will be capitalizable, which we expect to positively impact operating expenses. A portion of those savings will be offset by new costs to build service capacity and for the implementation and ongoing service of HRScale clients as well as Workday platform maintenance and support. Taken altogether, operating expenses associated with HRScale in 2026 are expected to be about $15 million lower than the $48 million estimate for 2025. Even though we expect each of these positive contributors to be significant, we also recognize that there are likely to be a variety of other puts and takes in our financial performance. In addition, there are risks and uncertainties that could impact 2026 results, including changes in prevailing health care cost trends or planned utilization, the successful completion of our fall sales and renewal season, and more broadly, changes in the macroeconomic environment and labor market. We will not be providing our financial outlook for 2026 until our earnings call in early February. But given the significant positive contributors that we have outlined, we believe that 2026 represents an opportunity to recover a majority of the earnings shortfall we have experienced this year. At this time, I'd like to open up the call for questions.

Our first question comes from Andrew Nicholas with William Blair.

I wanted to ask for some clarification, Jim, on your last comment regarding the opportunity to recover the majority of the earnings shortfall. Is that related to 2024 as the baseline? Is it specifically about the shortfall in relation to your initial guidance? I'm just trying to understand what you're specifically referencing concerning the shortfall as we consider next year, given all the moving pieces.

Yes. Thanks for the question, Andrew. Our initial guidance for 2025 and our actual results for 2024 were relatively similar. So what I'm referencing is pretty well aligned with both of those.

I think the best way to look at it...

Go ahead, Paul.

I'm sorry, yes. I believe what we're discussing is quite clear. We had expectations at the start of the year, and our current guidance shows where we anticipate this year to conclude. Almost all of the shortfall experienced this year is due to this one issue. We expect, as Jim mentioned, to see a recovery from these three significant factors that will cover most of that shortfall in 2026.

Understood. For my second question regarding worksite employee growth in 2026, I recognize that the macroeconomic environment hasn’t been very favorable for changes in client hiring. To what extent should we be concerned about these cost trends and the repricing related to attrition? Do you anticipate it will have any impact? Additionally, how do you expect it to affect new sales heading into next year? I want to know if we should brace for a noticeable sequential decline in the first quarter due to some of this repricing activity.

Thank you for your question. We have a strong sales effort continuing and believe the pricing changes we are implementing are in line with the broader market trends. In the third quarter, our sales were up 45% compared to last year, and our renewal rates remained high at 99%. We have not observed any negative impact from these dynamics. As we move into this period, we have a larger number of worksite employees scheduled to be paid in January. While we may see some attrition due to our focus on margin recovery, I anticipate that this will be balanced out by our success in new sales.

Our next question comes from Jeff Martin with ROTH Capital Partners.

I wanted to explore some initial anecdotal feedback from the team involved in the joint marketing of the new solution. What insights are you gathering from them? Are they finding the process relatively smooth? Have they discovered anything along the way? And how encouraged are you by the initial results?

Yes. It's hard to hold it all back because it's been very exciting. We even had a 3-day retreat meeting with the full pod just a week or two ago. And what's really exciting is that they are now seeing the full picture of this unique solution that we have developed, which is the full HRScale. It is the full scalable solution of both service and technology in one comprehensive solution. And they've worked through how to help customers understand even a cost comparison to other options they have. They started to understand better how we have gone through the research to understand how to price this for the client. And the energy level is really impressive, and we are already beginning to fill the pipeline. We're ahead of where I thought we'd be. Remember, we put this in place on July 1, gone through a lot of effort just to make all that work at this point. But now we're already out there calling on customers. We've got the messaging down, and we're getting great reaction from the prospects.

Great. My other question is about the benefits repricing. Have you made any adjustments since the initial repricing in the first quarter? If so, could you provide some details on that? Also, is this something that changes on a quarterly basis, or how are you planning to approach it going forward as we move closer to the start of 2026?

Yes, that's always been a part of our whole operation where we are literally month-to-month on a rolling basis, we're looking at what pricing is necessary for the trend rate. In this case, of course, we've seen the trend escalate. And so where we were at the end of the first quarter, we started processing some pricing changes. But as the year progressed, we were continuing to raise the level of price increase up to and through and including everything we sent out for January 1. So we believe we're in good shape on that front. As Jim mentioned in his remarks, we expect our pricing going into next year to actually be exceeding this continuing higher rate that we've seen. So we're on a good track to balance that out in the appropriate timetable.

Our next question comes from Mark Marcon with Baird.

Just on the health care pricing, Paul and Jim, is it your expectation that on an apples-for-apples basis, same plan design, we're basically looking at a benefit cost trend that would be somewhere in the 9% range for next year? Or would it be higher or lower?

So apples-to-apples, same client, same people, same plan design. We would expect the average increase to be in the low double digits range.

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

I appreciate that. The second question is about the potential management of some lower profitability clients. Can you provide insight into the scale of that segment of the client base? Also, Paul, if I may add another question. You and I, along with many investors, have previously discussed risk mitigation, especially regarding the advantages of being at $1 million versus $500,000. We've had many conversations about this since 2019. Now that you're moving down to $500,000, while the benefits are clear, what are the costs or factors we should consider when evaluating this change?

To provide some historical context, we have been examining this for quite some time. There was once a period when the $1 million limit did not exist in our framework. Over the years, however, the number of ways a significant claim can arise has increased. It's also crucial to highlight that our recent contract with UHC represents an improved alignment in our overall strategy for the program. Specifically, this agreement allows us to analyze various levels annually and set prices that align with our program's goals. The entire program is designed with growth incentives and similar factors in mind. The terms of the agreement are structured to create the best program possible for our clients while ensuring greater consistency and predictability in our model. Additionally, we are fortunate to experience an immediate reduction in costs that will allow us to recover most of the shortfall from this year as we transition into next year, while also implementing a lower cooling level at $500,000, especially given the recent increase in claim levels.

Mark and on your question, I was going to answer the question about pricing and a little bit more focus on unprofitable clients. I think generally speaking, as we're increasing our pricing, the curve is a little bit higher than it was. So you're not just raising the pricing equally across the board. We're taking actions to make sure that we're doing everything we can to retain our profitable clients. And so we think that the ones that do terminate are likely to be lower profitability than the ones that stay.

Our next question comes from Tobey Sommer with Truist.

I was hoping if you could provide a little bit more detail on the pricing. On the prior earnings call, you said you've done some work and we're really encouraged by the opportunity being more significant than you had mentioned. And I just want to understand that to also provide color in a better grasp on how you can offset the incremental operating and service expenses associated with the new platform.

Thank you for the question, Tobey. Just to clarify for everyone listening, you are talking about HRScale pricing. Yes, if you consider what we are offering, we have many services similar to what we provide today, alongside some new services that become available or enhanced due to new functionality in the Workday platform. This also includes opportunities for strategic services related to these features as we maintain the platform's relevance. We have factored all of this into our pricing. There is a significant increase in what I would consider the base or list price of the product. In terms of pricing over the first 6 to 12 months, we envision three stages for new clients: a beta stage, an early adopter stage, and then moving into the growth stage. We plan to offer substantial discounts to the initial customers willing to sign contracts and join the platform. These discounts will decrease as we progress towards the growth stage. Even with these significant discounts, we expect the pricing to be higher than what we historically charged for HR360 for similar clients. It's important to note, as Paul hinted in his remarks, that having two different price points for these products is beneficial and positively affects the pricing of HR360 based on our discussions and sales projections for 2025. We view these products as complementary and supportive of each other at their respective price points.

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

Yes, Tobey, that's what I mentioned in my script. I'm noting what's happening with our new offering, which targets over 40,000 businesses with more than 25 million employees. The typical size of these businesses is significantly larger, averaging 400 to 700 employees, compared to our usual clients of 25 to 30 employees. This presents a major growth opportunity, and the timing is particularly exciting given the current state of the small- and medium-sized business labor market. It's notable that we've experienced three consecutive years of minimal net gains in our client base, which I wouldn't have expected. We're also at the forefront of AI, positioning us uniquely with a precise solution for these underserved clients. We're collaborating with two leading HR companies that are committed to creating an ideal solution for these target accounts. When we consider the different pricing elements coming together, we can offer this at unprecedented costs, both upfront and ongoing, which serves as a growth engine. While it's not yet time to translate this into monthly sales per salesperson or related metrics, we are tracking our progress with every call. I believe that over the next year, we'll witness exciting developments that will provide a clearer vision of our future.

Our next question comes from Andrew Polkowitz with JPMorgan.

Congrats again on the launch of HRScale. I appreciate the color that you guys gave on the investment over year 1 and year 2. You also mentioned that you expect something to be effective, call it, low $30 million in investment in 2026. So that gets us pretty close to the aggregate $150 million you called out at the start of the process. I was just curious now that we're kind of in the early days of go-live, is that $150 million aggregate investment still the right framework? Or is there a different way we should be thinking about the cost of the go-live?

Thank you for the question, Andrew. I want to clarify that when we discuss the operating expense impact of HRScale for next year, we mean the ongoing operating expenses that have some revenue offsetting them, along with some expected inefficiencies in the first year. I see these as operating expenses rather than investments, which are actually much lower. As Paul mentioned, there are still several months until we reach the first go-live and stabilization period, during which our investment will continue and then drop significantly, aligning with a typical product roadmap. Currently, we don't have a better estimate for ongoing costs than $10 million a year. When considering the product roadmap, we are assessing available resources across various projects and initiatives, including HR360 and potential AI projects. This involves making resource allocation decisions. As we plan for the next three years and budget for 2026, we will make decisions in this area, balancing the investment level with the needs of other parts of the company while remaining flexible to seize opportunities.

Got it. That clarification is super helpful. Just for my quick follow-up, Paul, you mentioned that you guys consider for your midterm framework uncertainty about AI and employment. And just understanding that at this stage, no one really knows the full impact, I'm curious how you just think about that over the midterm relative to your kind of prior 3-year plan that you called out in the past.

Sure. It's interesting because we haven't yet seen any indication that the slowdown in hiring is specifically due to job displacement from AI. Thus far, what we've observed is more related to broader economic conditions and uncertainties that have led to delays in decision-making. However, as we move forward, we want to be prepared for potential changes, which is why it makes sense for everyone to explore other growth opportunities. The timing of our initiatives coming together right now is quite favorable.

If I can add to that a little bit, I would say when considering the current small business environment, those utilizing AI tools are likely becoming more effective rather than more efficient at this moment. While efficiency may come in the future, it's important to note that larger companies may achieve efficiency gains and reduce headcount, which has historically spurred entrepreneurship. People who are skilled often leave large companies to start their own small businesses. Therefore, I believe that over time, the creation of new businesses could help mitigate the impact of employment efficiency.

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

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

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