Good day. My name is Ali and I will be your conference operator today. I would like to welcome everyone to the Inspirity First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note, this conference call is being recorded. At this time, I would like to introduce today's speakers. Joining us are Paul Cervati, 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 afternoon's call. First, I'm going to discuss the details behind our first quarter 2026 financial results. Paul will then comment on three strategic initiatives in 2026, our margin recovery plan, our efforts to rebuild growth momentum, including the HR scale rollout, and our AI initiatives. I will return to provide financial guidance for the second quarter and full year 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 the comparable GAAP measures, please see the company's public filings, including the Form 8-K filed today, which are available on our website. Today, we reported adjusted EPS for the first quarter of $1.31 and adjusted EBITDA of $103 million dollars. Each of these results exceeded the midpoint of our expected range. Our quarterly results included outperformance in gross profit and operating expense management, partially offset by slightly lower than expected unit growth. The average number of paid worksite employees came in at the low of our forecasted range at 303,049, a 1.0% decrease versus Q1 2025. As you may recall from last quarter's call, our fall campaign sales and year-end client retention were both impacted by our margin recovery efforts, which we included in our paid worksite employee guidance. Worksite employees paid from new client sales declined by 7% compared to Q1 2025. Client attrition totaled 11% in Q1 2026, within our historical range of 9% to 12%. Net hiring within the client base was in line with our forecast and slightly higher than Q1 2025, but the hiring occurred later in the quarter than we had expected, which impacted the average worksite employees paid for the quarter. Paul will discuss our worksite employee results in more detail in a few minutes. Total gross profit in Q1 2026 decreased by 3% to $302 million. This represents a significant improvement compared to the 21% decline that we experienced in Q4 2025 and demonstrates the progress of our margin recovery plan. Gross profit per worksite employee in Q1 2026 was $332 per month, which is slightly above our forecast and within our range of expectations. The favorability was primarily driven by lower-than-expected benefit costs, partially offset by the lower worksite employee volume. Benefits cost per covered employee increased 5% over Q1 2025, which is a solid improvement compared to the 9% level we encountered throughout last year. Much of this improvement was expected, driven by the positive impacts of a favorable client mix change during our year-end client transition that was influenced by our pricing and client retention strategy, our plan design changes, and our new contract terms with UnitedHealthcare. It is important to note that the new UnitedHealthcare contract is anticipated to have a positive impact of helping to flatten our quarterly earnings pattern starting this year, with less expected earnings early in the year and more expected earnings later in the year. This is primarily the result of the pooling level change from $1 million per member per year down to $500,000. The new pooling limit includes a higher fixed premium that is charged evenly on a PEPM basis throughout the year, while the claims reimbursements are likely to be significantly weighted towards the latter quarters of the year. While it is still early in the year, we are pleased with the progress of our margin recovery plan, and the lower-than-expected Q1 benefits costs. We have seen several positive signs contributing to these results, including slightly favorable runoff of prior period claims, reduced large claim activity, and lower-than-expected pharmacy claims. At the same time, we remain cautious about the range of potential outcomes for the remainder of the year, which I will discuss later in the call. Total operating expenses decreased by 1% to $240 million in Q1 2026, which includes a $9 million restructuring charge primarily related to severance costs associated with a recent workforce realignment. Excluding the impact of the restructuring charge, our operating expenses decreased by 5%. During Q1-2026, we invested a total of $13 million in HR scale, including $8 million in operating expenses and $5 million in capitalized costs. This compares with $13 million in Q1 of 2025, all of which was expensed. For Q1-2026, the effective income tax rate for purposes of adjusted EPS was 41 percent versus 29 percent in Q1 2025. This significant change was the result of our lower stock price, which reduces our tax reduction related to the vesting of stock compensation. Since the vast majority of our stock compensation vests in Q1 of each year, our effective tax rate is expected to normalize for the remainder of the year. The higher effective tax rate for Q1-2026 had a negative impact on adjusted EPS. Our adjusted EPS of $1.31 was 17% lower than the $1.57 we reported in Q1-2025, while our adjusted EBITDA of $103 million was 1% higher than the $102 million we reported in Q1-2025. During the first quarter, we continued to return capital to our shareholders through our regular dividend program, paying $23 million in dividends, along with the repurchase of 171,000 shares of stock at a cost of $4 million. We ended the quarter with $36 million of adjusted cash. The decrease in adjusted cash was primarily the result of various seasonal working capital fluctuations, including the timing of certain corporate payroll, health care, and software maintenance contract funding. As of March 31, 2026, we had $380 million in unused capacity under our credit facility, of which approximately $330 million is available to borrow. At this time, I'd like to turn the call over to Paul.

Thank you, Jim. Thank you all for joining our call. Today, I plan to cover three main areas. First, I'll share insights on our strong earnings results in Q1 and how we're executing our strategy for margin recovery this year. Next, I'll talk about our actions to regain growth momentum throughout the remainder of the year, especially as we navigate macroeconomic challenges in the SMB sector. Lastly, I'll provide our perspective on the evolving AI landscape and highlight the opportunities ahead for insperities, strategic HR services, technology, and expertise. We are pleased with our Q1 earnings results, which reflect the effectiveness of our efforts to overcome the healthcare claims margin pressure experienced in 2025. As we discussed last quarter, our three-year plan prioritizes margin recovery in year one. The main drivers behind our successful margin recovery are our new agreement with UnitedHealthcare, our benefit plan design changes, our strategic pricing and client selection, and our improvements in operating efficiency. We believe these strategies and tactics provided the desired step-up in margin to begin the year, and we continued these actions throughout Q1. We plan to continue this emphasis throughout the balance of the year with the objective of achieving a substantially full recovery as we move into 2027. Our second priority for this year, after margin recovery, is regaining our growth momentum as we work to build the foundation for balanced growth and profitability in year two of our three-year plan. Worksite employee growth is driven by our client sales and retention and the net change in employment within the client base. So let's look at each one of these to understand our outlook for the timing of regaining growth momentum coming out of Q1. I mentioned last quarter as we focused on margin recovery, we expanded our tools, processes, and client-sponsored benefit options to support client selection and pricing for new and renewing accounts. While we can clearly see these steps supported our gross profit recovery. They also contributed to lower-than-expected booked sales and client retention. The effect on sales continued in Q1 as booked sales came in below our internal targets, except for our HR 360 mid-market sales. We have evaluated the processes and the outcomes and have recently implemented key learnings we believe will improve our booked sales results over the balance of the year. Our ongoing efforts to improve HR 360 and HR core sales, combined with our new growth catalyst, HR Scale, are expected to contribute to our growth momentum. I'm very pleased to report today our initial HR Scale beta clients were effectively onboarded in March, and payrolls and invoices were processed in April as scheduled. We are off and running, and the pipeline for HRScale clients is building. We believe HRScale is an unparalleled comprehensive solution that combines Insperity's flagship HR services and compliance expertise with workday client-facing technology. We believe it's a growth catalyst for two reasons. First, it addresses our historical success penalty, where clients we have helped grow and mature decide to leave Insperity for technology built for larger firms. Second, we believe we will sell many more new larger accounts since this combination of technology and services are a hand-in-glove fit for the mid-market space of businesses with 150,000 to 5,000 employees. Our early sales effort indicates that we are right on track. We currently have signed commitments for nearly 6,000 worksite employees to be on board within the next six months. We also have sales activity ramping up significantly, including meetings, demos, bids, and closing negotiations for both current clients planning to upgrade and new clients attracted to our unique comprehensive HR scale service and technology solution. Our sales and marketing efforts for HRScale have also been refined based on the specific advantages that have resonated with business leaders. In particular, they view HRScale as a lower risk decision due to the lower upfront investment, reduced time to value, and lower ongoing costs compared to typical HCM and HR service vendor combinations in the mid-market space. We are actively engaged in the HR scale sales process with new and renewing accounts, targeting start dates of January 1st and each quarter of next year. We believe our HR scale ramp-up could play a significant role in regaining growth momentum as we move into 2027. On the client retention side, while our strategy resulted in persistent attrition at the higher end of historical levels, we are seeing the desired impact as a greater percentage of departed clients were less profitable accounts, resulting in overall improvement in client profitability. We expect the slightly higher attrition to continue but moderate over the course of the year due to the smaller number of accounts renewing monthly and improvements we have put in place. The third contributor to our worksite employee growth metric is the net change in the existing client's employee base. This continued to show volatility in Q1, turning negative in February and positive in March. We are cautious about the potential impact of the ongoing international conflicts and macroeconomic factors, including inflation fears and lingering uncertainty about tariffs, which could affect small business expansion or hiring. Consistent with recent NFIB surveys, results from our business outlook survey shows a notable shift in sentiment with small and medium-sized businesses becoming more cautious since January, particularly regarding the wider economy. More clients now anticipate economic challenges in the coming year. Worries about the economy have grown significantly as 54% of respondents expect a negative impact on their businesses, an increase from 42% in January, while only 25% foresee positive effects down from 37%. Optimism among clients has decreased compared to previous quarters. Nevertheless, most, 64%, still believe they'll perform better in 2026 than 2025, although this figure has modestly dropped from 70% in January. Our survey reveals that clients are showing less confidence regarding increases in compensation, hiring, net earnings, and sales volume. There's also a marked rise in expectations for higher capital asset costs compared to January, indicating greater sensitivity to cost and inflation awareness. The actual small and medium-sized business data that we monitor as employment indicators align with this decline in business leader sentiment. Overtime as a percentage of base payroll and commissions paid to the sales staff of our clients were both below historical thresholds that typically have preceded increases in hiring and pay raises. So in this environment, our paid worksite employee growth came in at the low end of our range. Based on the starting point for Q2, combined with our continued emphasis on margin recovery and the sentiment in the small to medium-sized business community, we expect the low point of our previous worksite employee range to be closer to the midpoint of our new guidance. However, we expect continued progress on margin recovery to offset the shortfall from lower worksite employee volume, and as a result, we are reiterating our original adjusted EBITDA guidance for the year. Now, I'd like to discuss how artificial intelligence is changing the landscape and could become a driving force for insperity in the years ahead. First, we'll look at broad employment challenges and how AI might affect the workforce. While the labor market faces risk of displacement, there are also exciting growth opportunities as AI sparks the rise of new businesses. AI is actively transforming the workplace by automating various tasks, which is expected to impact many roles. Although white-collar and entry-level positions are widely expected to experience the most upheaval, AI is also boosting productivity and generating new roles. So far, this shift has only slightly affected overall employment. This shift has the potential will contribute to a decline in traditional employment, while significant disruption in other roles, such as coding, may drive changes that require employees to acquire new skill sets to leverage AI effectively. We believe disruption and a high rate of change in employment can possibly affect the overall level of employment growth and volatility in the SMB sector. However, it also potentially magnifies the need for sophisticated HR services, technology, and insights, which could substantially increase demand for insperities, comprehensive HR solutions. AI is driving new business formation in the U.S. with applications reaching nearly 500,000 a month in Q1, especially in AI-focused sectors. Growth remains strong at about 12% year over year for Q1. AI appears to be expanding opportunities and making starting a business easier, leading to record entrepreneurship among small and mid-sized companies. While past technology shifts like PCs and the internet replaced jobs, they also boosted employment by fostering new businesses. Now, as we drill down into our target of the SMB community, we see exciting possibilities for our HR solution offerings. As we roll out new AI agents alongside our AI-assisted HR experts, our strategy is to provide the flexibility to service our clients and worksite employees according to their preferences, while also streamlining our operations and accelerating our product development. SMB owners wear many hats, and solution providers are increasingly becoming the principal avenue as channel partners for AI adoption among SMBs, utilizing established relationships to deliver secure and practical AI solutions that these businesses may find challenging to implement independently. Insperity is exceptionally well positioned as a premium HR channel partner to assist top performing small and medium sized businesses in managing disruptions and personnel challenges resulting from AI-driven transformations. Our recent survey of our small and medium-sized business clients indicates that AI adoption is progressing, however, it does not appear to be driving widespread workforce changes 62% of our clients are piloting or integrating AI primarily to support staff, facilitate routine operations, and improve customer service. we're leveraging our service using ai with our proprietary agent strategy we've started by implementing this solution internally in hr and payroll resulting in higher productivity and service quality we will soon expand this hr 360 agent to help hr 360 clients navigate the platform find answers they need and boost engagement this tool acts as a co-pilot removing barriers and increasing value for PEO customers. The next HR 360 agent release will further improve client and employee experiences during major events, offering personalized support, faster onboarding, and immediate access to expertise, while reducing our service workload and maintaining security. Our third HR 360 agent version will include an introduced conversational reporting using demographic and transaction data, shifting from static reports to real-time insights for better decision-making without the need for users to have advanced analytic skills. We're also applying AI across the software development cycle in an effort to accelerate product launches, improve developer productivity, and enhance code quality through AI-enabled methodologies. As we look further ahead, we believe the nature of our business offers an exciting future for insperity as the AI transformation continues to unfold. Despite technological advances, we believe human-to-human interaction remains essential and valuable in the human resource business. AI can deliver powerful data and insights, but when it's time to make the decision that affects a company and its people. There's no substitute for experienced human judgment, and having insperity standing shoulder to shoulder makes a profound difference. Our highest value for our SMB clients is the advice and support we provide through the lens of trust, judgment, care, and protection of their company and their people, both employees and their families. We believe AI will likely add value to the strategic HR services, technology, and expertise provided by Insperity. At this point, I'd like to pass the call back to Jim.

Thanks, Paul. Our updated outlook for the full year 2026 is comprised of three primary drivers. First, we are revising our unit growth down to reflect both a weakening in small business economic sentiment, and a slightly larger impact of our margin recovery plan on new client sales and client retention. Second, we believe that our margin recovery plan is slightly ahead of schedule, and we expect some continued improvement from favorable client mix changes related to our pricing and client renewal strategy. Third, we expect some continuation of the operating expense savings that we experienced in Q1. As a result, we continue to forecast adjusted EBITDA in a range of $170 million to $230 million for the full year 2026. With regards to worksite employee growth, we are forecasting a range of $303,000 to $307,000 for the full year 2026, which represents a decrease of 1% to 2.3% from 2025. We have adjusted each of the drivers of our unit growth in our forecast. After being at the low end of our forecasted range in Q1, our starting point for the second quarter is a little lower than previously expected. In addition, as Paul discussed, our new client sales and client retention have been revised due to weakness in small business economic sentiment and the impact of our pricing and client renewal strategy. We continue to analyze and revise our strategies to achieve our margin recovery goals while also focusing on regaining our growth momentum, and we have implemented some changes that we believe can have a positive impact on our sales and retention results as we progress through the year. We continue to expect net hiring within the client base to be in the low single-digit range similar to last year, with some positive benefit of summer help in Q2 that should revert in Q3. Moving to margin recovery, we are pleased with the progress we have made to date, and we are forecasting some continuing improvement as we continue executing the plan throughout 2026. Some of the sales and client retention results that are a headwind to worksite employee growth also create a potential tailwind for margin recovery. We continue to see that the profitability of terminating clients, including the client terminations we know about for Q2 and Q3, has been significantly lower than the profitability of those we are retaining, producing a favorable change in client mix. We are also cautiously optimistic regarding the pricing and risk profile of our new client It's important to note that many of the factors that drive our pricing results have the potential to positively impact cost trends over time. As I mentioned earlier, our Q1 benefits cost results were slightly better than expected, including lower runoff of prior period claims, reduced large claim activity, and lower than expected pharmacy claims. While those results are generally consistent with the plan design changes and client mix changes that we've made, we are forecasting somewhat less favorability than we experienced in Q1. With regards to operating expenses, we continue to expect year-over-year reductions in 2026, driven primarily by lower headcount and lower HR scale expenses, partially offset by some increase in marketing spend and growth in the number of business performance advisors, along with other inflationary cost increases. At this point, we expect continuing favorability in the remaining quarters of the year, but at a slightly lower level than in Q1 due to a few timing-related items. HR-scale operating expenses are expected to be generally in line with our budget. We expect our full-year effective tax rate for adjusted EPS purposes to be 36%. The effective tax rate for GAAP purposes could fluctuate from that based on the level of non-deductible expenses as a proportion of pre-tax income. We expect our weighted average outstanding shares to be approximately $38.5 million for the remainder of the year, primarily reflecting the recent stock compensation vesting. As a result of the revised effective of tax rate and number of outstanding shares. Our full year 2026 adjusted EPS guidance range is now $1.60 to $2.60. As for Q2 2026, we expect the average number of paid worksite employees to be in a range of $302,500 to $304,500, a decline of 1.5% to 2.1% from Q2 2025. We are forecasting adjusted EBITDA in a range of $18 million to $46 million and adjusted EPS in a range of $0.02 to $0.50. As I mentioned earlier, our quarterly earnings pattern is expected to be somewhat flatter than our typical historical pattern for two primary reasons. First, our pooling level change with UnitedHealthcare from $1 million per covered member per year down to $500,000 resulted in significantly higher premium charged evenly on a PEPAM basis throughout the year, whereas the expected claims reimbursements in that program will likely be significantly weighted toward the later quarters in the year. In addition, as we execute our margin recovery plan throughout 2026, the positive impacts are expected to be more pronounced as we move through the year. At this time, I'd like to open up the call for questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting our question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you.

Our first question is coming from andrew nicholas with william blair your line is live hi guys good afternoon this is daniel on for andrew today um just to start off there's there's obviously a lot of moving pieces uh in guidance but taking it all together uh do you have any change to your expectation for gross profit per wce i know last quarter you said you don't expect a recovery to pre-2025 levels, but would you still anticipate a year-over-year improvement on that line or more so in line with 2025?

Yeah, so, you know, our original guidance included an increase in gross profit per employee compared to 2025 levels. We had mentioned last time that we didn't expect it to get back fully to 2024 levels. As we look at kind of where we are now compared to where we were coming into the year, you know, we do think we're a little bit ahead of schedule on the profit recovery efforts. So we do think the gross profit per employee is likely to be a little bit higher than what we had in our original guidance. And between that and some additional favorability on the operating expense side, you know, we expect that to be an offset to the lower worksite employee levels that we've guided to this quarter.

And then maybe switching to the, more specifically on the WSE front and the lowered guidance, seems to imply that we're likely looking at year-over-year contractions in all of the remaining quarters of the year. Is that fair to say, or do you have any other insight on what the sequential cadence of WSC declines might look like over the course of the remaining quarters?

I think the best is to look at the big picture. We were forecasting minus one-half to plus one-half percent when we started the year, but based on the sales and retention levels in Q1, and in addition, you know, the sentiment change that was quite dramatic that we saw based on macroeconomic and, you know, international conflicts, et cetera, you know, causing a pause in the small, mid-sized business community mindset. That's what's driving us down to the range that we have now, you know, which is it makes that low end of minus one and a half to be more like the midpoint. But, you know, we have a fairly narrow range on that for the year in number of worksite employees is what's in the press release, you know, the range. And, you know, that's because once you get to this point of the year, the sales and retention levels, the attrition is not like the year end when you have so many that are attriting. And we're able to, you know, track that fairly well for what we are expecting. So, you know, there's not a lot of further reduction. It looks like the total year is, you know, this midpoint of our range is around minus one and a half percent growth.

I could squeeze one more. I was wondering if you could just kind of frame any dynamics that you're seeing in the competitive environment, if there's anything worth calling out on the pricing front or any indication that competitors are being more aggressive on price or otherwise.

Well, I think the competitive environment has been, you know, has had quite a bit of pressure over the last year and a half or so. And it's normal when you have the higher pricing that's going on on benefit costs and other things to cause more shopping. And when that happens, that just causes, you know, more competitive pricing. But we are in a position where we continue to compare well and are able to give customers options for how to look at their future. And we have a significant competitive differentiation that is just launched in HR scale, which puts us in a completely different category. And that, we think, is going to be really significant as we go forward.

Thank you. Our next question is coming from Jeff Martin with Roth Capital Partners. Your line is live.

Thank you. Good afternoon, Paul, Jim. Paul wanted to dive into your sentiment survey results. Specifically, how are you seeing that effect, if you are seeing it affect the sales cycle for HR scale at all?

On the HR scale front, it's kind of a little early for us to have a comparative to compare against, you know, some of the sentiment-type issues. But, no, we definitely, you know, have a significant pipeline building. There's quite a bit of enthusiasm around the uniqueness of this offering. And, you know, as I mentioned in my remarks, the part of our sales effort that actually hit the budget was the mid-market area, where there's a lot of conversation, even though that area involves both HR 360 for mid-market and HR scale. There's definitely tremendous energy around that, and, you know, we feel really good about that. You know, the decision for HR scale and for mid-market HR 360 customers is more of a longer-term decision, so generally not as affected by the, you know, immediate circumstances as the smaller companies.

Great. And then for my follow-up, I wanted to dive into the sales productivity, if you could break that down between HR 360 and HR core. And then tied to that, how has the adoption of client-sponsored benefit programs been trending? Are you seeing that continue to be, you know, more commonplace than historically?

Yeah, well, certainly, as we talked about on our last call in the fourth quarter, we really made a change in the sales process and some of the tools that we're using to identify customers and to look at how we wanted to offer components of what we do. We want to be more values-based, talking about the full picture on the benefits side. We would determine whether being in our comprehensive plan is the right approach for that particular client. And, you know, these are new sales motions, new processes. So, you know, it took more in the first quarter to get these things working in a way that is understood by the sales team and internally by those that are supporting the organization. So, you know, when you have a new sales motion, that takes some time to think things through and figure out exactly how to go about it. Now, we did some real assessment of what worked, what didn't work, and we recently put in some new practices and tweaked, adjusted things, and we actually believe that's going to have some dramatic effect. But that's what you have to do when you are focused on margin recovery as the priority. Now, having this very successful quarter where you can see what happened and see how that worked, that is a breath of fresh air for everybody and, you know, immediately moves attitudes and activity back the positive direction.

Thank you.

Thank you.

Our next question is coming from Mark Marcon with Baird. Your line is live.

Good afternoon, and thanks for taking my questions. Paul, just with regards to HR scale, how many clients do you now have on it, and what are your expectations with regards to having it fully ramped and when the associated costs with that ramping will start falling off? How should we think about that? And then I've got a couple of follow-ups.

Sure. Well, let me describe, first of all, the stage that we're at. Obviously, we just brought on the first clients are on that new platform, that new entity on HR scale, and we are in that ramp-up phase of selling new accounts and selling current accounts to upgrade from HR 360. So we have a significant pipeline already, and as I mentioned in my remarks, we have nearly 6,000 scheduled to be on board in the next six months on that program. We also, of course, are now beginning to sell accounts to be scheduled in because it's a six-month period for us to do the deployment and enablement to bring them on board. So the way to look at it for now, of course, is that we are converting current accounts onto the platform. That doesn't add worksite employee count, but it adds retention for those customers for multi-year accounts, and many were focused on the larger accounts. So it's a very positive foundational effect on retention going forward and pricing. Now, in addition to that, we are now selling new accounts that are coming straight onto HR scale. And over the balance of this year, those accounts will largely be set to start January 1st or April 1st next year, July 1st. We will start literally filling the pipeline for those quarterly starts. And we'll, of course, start the deployment enablement as we sign those contracts. Now, that will feed in directly into the growth momentum that we see for 2027 and beyond. So that should give you a picture of how to think about it. So in terms of, you know, how that offsets cost, obviously we have the cost in here now for being able to do the deployment enablement. And as we ramp up this employee count, there's your revenue to offset those costs in addition to the actual deployment enablement fees, which is a new element that we have not had to offset those costs before. So it's, you know, again, it's a startup of that business, but it's on a great track, and we really see it being a hand-in-glove fit for these target clients. The other point I wanted to make that I made in my remarks is that we have already seen a very clear picture in the business leadership evaluating this. They can readily see and feel that there's less risk to this decision than they've had to consider doing these things in a different way. Going through the traditional effort to have an HCM system and multi-vendors to provide the support services, there's a lot of risk around that because of the size of the investment, the length of time it takes to actually get to some realized value, and ongoing ultimate cost. HR scale is very easy for them to understand how it has changed that equation.

That's really encouraging. I was referring to the implementation cost that you had outlined. When you first announced the partnership and we talked about the incremental expense just on your end to implement it and to get the system up and running, I was just wondering if we could see some costs falling away either later this year or next year, just purely from, you know, your own systems development perspective now that you've got some clients on it and that you're getting ready to bring on more.

Yeah, so we definitely expect that investment costs related to HR scale are going to decline in the second half of the year. We're kind of in a little bit of a stabilization period right now that we've talked about in our last couple of quarters. But, you know, as we get through the second quarter, a lot of people and their time are going to be going to other things. I think that we'll still have a typical pipeline that you would have for any product from an investment standpoint going forward. One of the things that's happening is that people that have been involved in the investment side of this deal now transition to becoming the service providers, The onboarding resources, the service provider resources that actually go along with the revenue that is being generated. Other costs that are third-party costs we expect to taper away. And then the third piece being, you know, some internal technology resources that get, you know, reprioritized onto other key initiatives that we're working on, kind of working on next, if you will. So there's a variety of different places that those resources go.

Got it. And then just on the health care costs and the benefit costs, if I heard you correctly, I think they were up like 5% year over year, which is a really good outcome given the level of inflation. Is that basically due to plan design changes that you were able to set through? And is it your expectation that over the balance of the year, that 5% will kind of hold in terms of benefit cost inflation on a per-user basis? Thank you.

Yeah, I would say that the biggest impact is the client mix. So, obviously, we've increased our pricing, and then you have the client mix change that comes from, you know, lower profitability, clients terminating, higher profitability, clients staying, and that's kind of an embedded feature of the way we're playing out our strategy. I think that's a little bit bigger than of an impact on Q1 benefits cost than the plan design changes themselves. But the plan design changes also have, you know, an additive cost savings there. And then the third component being the new contract with UnitedHealthcare. And I think the one thing that we wanted to try to make sure we pointed out today is, you know, the impact of that is more back-end loaded than I think probably, you know, we have maybe clearly communicated in the past and are in some earnings estimates that are out there on the analyst side. But, you know, we are paying a higher premium for the $500,000 coverage. The claim reimbursements and the exposure that we're not going to have on claims going forward is more back-end loaded in the year. So we are expecting there to be a little flatter impact to our quarterly earnings pattern. So that's a smaller impact on Q1, the new contract. and it'll be significantly larger as we go through the year.

Thank you. Our next question is coming from Toby Sommer with Truist. Your line is live.

Excuse me. I wanted to ask about your sales counselors and advisors, how you're thinking about growing those to drive growth, you know, beyond this year into, you know, 27 and 28. I'm sure you've been busy training, but trying to figure out how you can brute force some growth by getting more feet on the street.

Yeah, thank you. We will be, over the balance of this year, modestly increasing the number of BPAs, BPCs, but we do not have to increase that as many to regain growth momentum substantially because of the average size of the HR scale accounts and how even having an HR scale available is increasing interest in HR 360 mid-market accounts. So we believe there's a built-in factor that helps drive the growth based on the average size of clients where it doesn't take as many BPAs and BPCs. But we are expecting, once we get into 2027, to have a more steady, continuous uptrend in the number of BPAs for the target small business market.

And I would add, we saw some solid growth in the BPA count, even in Q1. So, you know, that process has already started underway, and we expect to add more as we go through the year.

And from a balance sheet and capital allocation standpoint, what are the priorities and expectations as you work your way through the balance of 26?

So pretty much the same as it has been in terms of our prioritization. And, you know, obviously for investment, we've invested heavily the last couple of years in our new offering. And now we're at that break point where the investment is tapering down and we're about to see revenue start coming in. So that's the exciting part about that picture. But we also continue to have the same priorities with the board on capital allocation and not seeing that change at this time.

Thank you.

Our final question today is coming from Brendan Biles with J.P. Morgan. Your line is live.

Hey, Paul and Jim. Thank you so much for having me on the call. Appreciate you guys going through all the detail with us. I have two questions for you guys. One probably more interesting and one boring one. So first of all, I'm curious. When you get a result back like you guys heard in the survey from your customers that everyone's a little bit more worried about the environment, people are concerned that their business might not do as well this year than it did last year, what levers are available to you to adjust your go-to-market to ensure that you're still kind of providing the most valuable to your clients and helping them through this time? So you can maybe maintain a little bit more share of wallet. And to what extent are you guys able to put that into place this year? And then on my boring question, I'm sorry if I missed it. Just I know you called out the two things that led to the guidance revision. It was like macro and then also a little bit more churn from the pricing initiatives. To what extent are you able to attribute the revision between those? I know it might be tough. It might be just comes from some of both. Or is it coming from more one or the other? That'd be great. Thank you so much.

Sure. No, we looked at, you know, on the three drivers for growth. Remember, it's sales, retention, and the net change in the client base. And all three of those are slightly lower than we were expecting when the year started. And so when you factor all those in, that's just going to affect you as the year goes on. We do change the messaging. We do emphasize different aspects of what we're doing to help client by client. We also, though, have on the sales and retention side, having this good quarter under our belt changes the dynamic for the environment for the selling and retention effort as the year progresses. And as I mentioned in the call, we have, you know, fewer to contend with on the renewal side because the heavy renewal period is behind us now. And so, you know, we see some optimism on moving forward, but it is affected. The lower starting point already makes the year. You have to take down that projection for growth for the year. Like I said, so that means that that, you know, low end of our previous range is now about the midpoint of our range for the year. So that kind of gives you a feel for that aspect.

And I think the one thing that I would add to that is, you know, if you look at the guidance range, obviously, we took a little bit more off the top side of that, more than the bottom side of that. So, you know, the sentiment change has some impact on, you know, I think, you know, the top end, kind of where we are and what we've experienced so far, you know, changes, the lower end a little bit more than the sentiment changes more of the top end.

Got it. Totally makes sense. Thank you both, gentlemen. Appreciate you.

I think one more aspect on that that's probably worth putting in there is that some of these things that affect that slightly lower growth on all three of those areas actually enhance the profit recovery mode that we're in, and actually that's why there's a great offset between those two factors that we're changing and, you know, still have very strong feelings about our recovery for the full year.

Yeah, absolutely right. No, great to hear that the retained clients are the ones you want to hold on to anyway.

Absolutely.

Ladies and gentlemen, we have reached the end of our question and answer session, so I would like to turn the call back over to Mr. Sarvati for any closing remarks.

We just want to thank everybody for participating today, and we're excited that we have reached that first milestone of our profit recovery, and we will be working to regain growth momentum as the year progresses. Thank you for your participation today, and we look forward to being in touch with you, either out in the marketplace or on our next call.

Thank you, ladies and gentlemen. This does conclude today's call, and you may disconnect your lines at this time. And we thank you for your participation.