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01/10 19:46
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call revealed disappointing financial results with an EPS miss and lower EBITDA due to high benefits costs. Despite a positive outlook for 2026, the immediate financials are concerning. The Q&A highlighted management's optimism about future recovery and strong sales, but did not address current issues effectively. With a market cap of ~$3.4 billion, the negative financial results and uncertainty in guidance are likely to lead to a negative stock price movement in the short term.
Average number of paid worksite employees Increased by 1.2% year-over-year to 312,842 in Q3 2025. This growth was within the forecasted range, driven by new client sales, although worksite employees paid from new clients slightly decreased compared to Q3 2024.
Client retention Remained strong at 99% per month, consistent with prior year results. Seasonal summer employee departures caused net hiring within the client base to be negative in Q3 2025.
Adjusted EPS Reported as minus $0.20 for Q3 2025, falling below forecasted ranges due to higher-than-expected benefits costs.
Adjusted EBITDA Reported as $10 million for Q3 2025, below forecasted ranges, primarily due to higher-than-expected benefits costs.
Gross profit per worksite employee Decreased to $208 per month in Q3 2025 from $247 in Q3 2024, driven by higher-than-expected benefits costs of $20 million.
Benefits cost trend Increased by 9.1% year-over-year in Q3 2025, driven by higher outpatient and inpatient utilization, pharmacy costs, and a significant increase in large claims frequency.
Operating expenses Decreased by 4% year-over-year in Q3 2025 and declined sequentially by $10 million from Q2 2025. The reduction was primarily in salaries and G&A costs.
Investment in HRScale platform Totaled $17 million in Q3 2025, with $11 million included in operating expenses. This compares to $19 million in Q3 2024, all of which was expensed.
Cash dividends Paid $22 million in Q3 2025, with year-to-date cash dividends totaling $68 million.
Stock repurchase Repurchased 225,000 shares at a cost of $19 million year-to-date in 2025.
Adjusted cash Ended Q3 2025 with $120 million of adjusted cash and $280 million available under the credit facility.
HRScale Solution Rollout: The HRScale solution, a joint initiative with Workday, is being officially rolled out. It targets mid-market companies with 150 to 5,000 employees. The platform integrates Workday's HR technology with Insperity's HR compliance platform. Beta clients are being onboarded, and the first payroll is expected in April 2026. The solution is expected to be a growth catalyst for Insperity, with significant investment milestones achieved within budget.
Mid-Market and Enterprise Sales Growth: The company reported a 45% increase in booked HR360 sales compared to the same period last year, driven by strong performance in the mid-market and enterprise segments. This includes the largest account sale in the company's history, which will transition to HRScale in the future.
Cost Management and Efficiency: Operating expenses decreased by 4% year-over-year in Q3 2025 and sequentially by $10 million. Investments in the Workday partnership were managed within budget, and a portion of costs was capitalized for the first time.
Health Insurance Cost Management: The company faced a 9.1% increase in benefits costs in Q3 2025 due to higher healthcare claims. Measures include pricing adjustments and a new agreement with UnitedHealthcare to reduce costs and risks starting in 2026.
Strategic Partnership with Workday: The partnership aims to create a unique HR solution for mid-market companies. The HRScale platform is expected to disrupt the market and drive growth.
Three-Year Growth and Profitability Plan: The company is finalizing a plan to return to historical growth and profitability metrics, focusing on double-digit growth, margin improvement, and leveraging AI for operational efficiencies.
Health care claims cost escalation: The company has experienced a significant and unexpected increase in health care claims costs, driven by higher outpatient and inpatient utilization, pharmacy costs, and large claims frequency. This trend has led to a benefits cost trend of 9.1% for Q3 2025 over Q3 2024, and it is expected to persist into 2026. The adoption of AI tools by health care providers has also contributed to higher costs, impacting diagnosis, treatment plans, and insurance billing.
Pricing and profitability challenges: Higher-than-expected benefits costs have outpaced projections, leading to a shortfall in adjusted EPS and adjusted EBITDA for 2025. The company has had to increase pricing targets to address these costs, which could impact client retention and new client acquisition.
Macroeconomic and labor market conditions: The hiring environment remains challenging, with Q3 2025 activity slightly weaker than Q3 2024. This has contributed to restrained growth across the business services sector and impacted the company's ability to achieve higher unit growth.
Strategic execution risks: The rollout of the HRScale solution, while promising, involves significant investment and operational complexity. The success of this initiative is critical to driving future growth and profitability, but it carries risks related to client adoption, implementation, and achieving projected returns on investment.
Dependence on health insurance carriers: The company’s financial performance is heavily influenced by its agreements with health insurance carriers. While a new agreement with UnitedHealthcare is expected to mitigate some risks, any changes in carrier terms or industry trends could adversely impact costs and margins.
Q4 and Full Year 2025 Outlook: Average paid worksite employees expected to range from 313,000 to 315,000 in Q4, representing a 1.3% to 1.9% increase over Q4 2024. Full-year adjusted EPS forecasted between $0.84 and $1.47, and adjusted EBITDA between $119 million and $153 million. Full-year benefits cost trend expected to remain elevated at 9%. Operating expenses for 2025 projected to be 3% below 2024 levels. Q4 adjusted EBITDA forecasted between negative $25 million and $9 million, and adjusted EPS between minus $0.79 and minus $0.16.
2026 Financial Performance Expectations: Elevated benefits cost trend expected to persist. Strategic pricing adjustments and plan cost reductions, including a new contract with UnitedHealthcare, are expected to offset these trends. The contract includes cost savings and a reduction in health care claims risk by lowering the pooling level from $1 million to $500,000. HRScale rollout expected to incrementally impact worksite employee growth and revenue. Operating expenses associated with HRScale in 2026 expected to be about $15 million lower than in 2025. 2026 represents an opportunity to recover a majority of the earnings shortfall experienced in 2025.
HRScale Rollout: HRScale, a joint solution with Workday, is expected to enhance growth in the mid-market segment (150 to 5,000 employees). Active co-marketing and co-selling efforts are underway, with beta clients expected to go live in March 2026. The solution is anticipated to be a significant growth catalyst, with potential to disrupt the market and drive large client sales and retention.
Three-Year Plan: The company aims to return to historical growth and profitability metrics, including double-digit unit revenue and gross profit growth, and adjusted EBITDA annual growth rates above 20%. Initiatives include leveraging HRScale as a growth driver, improving gross profit margins, and achieving operating expense efficiencies through AI initiatives. The plan is designed to generate corresponding shareholder returns.
Regular Dividend Program: During the third quarter, the company paid $22 million in cash dividends. On a year-to-date basis, the company has paid $68 million in cash dividends.
Share Repurchase Program: The company repurchased 225,000 shares of stock at a cost of $19 million year-to-date.
The earnings call revealed disappointing financial results with an EPS miss and lower EBITDA due to high benefits costs. Despite a positive outlook for 2026, the immediate financials are concerning. The Q&A highlighted management's optimism about future recovery and strong sales, but did not address current issues effectively. With a market cap of ~$3.4 billion, the negative financial results and uncertainty in guidance are likely to lead to a negative stock price movement in the short term.
The earnings call presents a mixed picture: strong client retention and efficient sales are positive, but reduced growth guidance and declining gross profit per employee are concerns. The Q&A reveals optimism about future growth and strategic initiatives, yet lacks concrete guidance on the Workday partnership's financial impact. The partnership with Workday and share repurchases provide some optimism, but increased healthcare costs and uncertain future projections temper enthusiasm. Given the market cap of $3.44 billion, the stock price is likely to remain stable, resulting in a neutral prediction.
The earnings call reveals several negative factors: disappointing financial results with missed EPS and EBITDA guidance, higher-than-expected benefits costs, and delays in client onboarding. The Q&A section highlights uncertainties due to government actions and healthcare cost volatility, with management providing unclear responses. Despite some positive elements like share repurchases and a strategic partnership with Workday, the immediate outlook is clouded by these challenges. Given the market cap and the negative sentiment from analysts, the stock price is likely to see a negative reaction in the range of -2% to -8%.
The earnings call reflects several negative aspects: declining EPS and EBITDA, increased operating expenses, and significant benefits costs. Despite share repurchases and dividends, the financial performance is weak. The Q&A reveals uncertainty about client onboarding and profitability of the Workday partnership, with unclear management responses. Market uncertainty and economic concerns further dampen outlook. The stock, with a market cap of $3.44 billion, is likely to experience a negative reaction in the range of -2% to -8% over the next two weeks.
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