Barrett Business Services, Inc. Aktie

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the second quarter ended June 30, 2026.

Joining us today are BBSI's President and CEO, Mr. Gary Kramer; and the company's CFO, Mr. Anthony Harris. Following their remarks, we'll open the call for your questions.

Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical facts, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements.

Please refer to the company's recent earnings release and to the company's quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements.

I would like to remind everyone that this call will be available for replay through September 5, starting at 8:00 p.m. ET tonight. A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at www.bbsi.com.

Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Thank you, and good afternoon, everyone, and thank you for joining the call. We delivered another quarter of top line growth and solid profitability. While revenue came in slightly below our expectations, we added more new business than anticipated. This strong top-of-the-funnel momentum was partially offset by ongoing macro and geopolitical headwinds, which continue to constrain our existing clients' ability to grow their own workforces.

Moving to our financial results and worksite employees. During the quarter, our gross billings increased 2.6% over the prior year. While this came in slightly below expectations, our go-to-market strategies are driving positive momentum at the top of the funnel. Q2 new client acquisitions were up 17% year-over-year, and we exceeded our internal expectations for both new clients and new worksite employees for client additions. Additionally, we continue to see strong client retention, a direct testament to the high-value work our teams provide every day. The result of all these efforts or what I refer to as controllable growth, is that we added approximately 4,500 worksite employees year-over-year from net new clients. That said, our overall growth was tempered by broader client workforce reductions.

As a reminder, macroeconomic uncertainty led many of our clients to reduce headcount starting in Q3 of last year. That trend persisted in Q4 and then moderated in Q1. Unfortunately, that trend resumed in Q2. However, while we have seen further workforce reductions, we expect the rate of decline to moderate in the back half of the year as we have easier year-over-year compares. To summarize, despite workforce reductions within our existing client base, strong sales volume and strong retention allowed us to achieve an increase of 1% in total worksite employees for the quarter.

Turning to our staffing operations. Our staffing business declined by 18% over the prior year quarter. Our new business outpaced our runoff business. However, our existing clients reduced their staffing demand and remained reluctant to place orders amid macroeconomic uncertainty. In response, we continue to leverage our recruiting expertise for our PEO clients, successfully placing 157 applicants during the quarter, a 35% increase over the prior year quarter.

Turning to the field operational updates. We're very pleased with our entrance into new markets with our asset-light model. These folks continue to gain traction and consistency and added approximately 400 new WSEs in the quarter. We continue to hire locally to support our existing operations while we continue to expand into new markets. We anticipate converting 3 additional locations to traditional branches later this year. Regarding product updates, we continue to execute on the sale and service of BBSI Benefits, our health insurance offering. We had a great start to the year, and our momentum continued into the second quarter as we added around 70 clients and over 2,000 participants to our various benefits plans during the quarter.

We have achieved operational consistency and continue to invest to improve the sale and service of BBSI Benefits. Our value proposition resonates well, and we are having success with small and large clients in white and blue collar industries in every state we operate and with a diverse distribution channel.

Next, I'd like to shift to our 2026 IT product objectives. I've previously mentioned that we have been investing in our tech stack on the product side to service and support our clients better. We have been rounding out the employee life cycle, which is from when an employee is hired to when the employee retires and everywhere in between. Over the last couple of years, we have launched an applicant tracking system, a BBSI Benefits offering, an employee file cabinet, a learning management system and a performance management module. We have been successfully rolling these products out to our existing clients and utilizing in our new sales efforts. Ultimately, these products will result in increased sales and better client retention, and we are excited to bring these products to market.

Regarding the California workers' compensation environment and the effect on our margins. We've been saying for several years that the California workers' compensation market was nearing an inflection point as loss cost trends consistently outpaced premium rates. We now believe that turning point has arrived with insurers pushing rate for the first time in more than a decade. As a result, we've characterized 2026 as a transition year and provided a wider-than-usual range for gross margin at the start of the year.

The encouraging news is that we're getting rate, and those rate increases are more than offsetting our cost inflation. The downside is simply timing. Because our clients renew monthly, those pricing improvements roll in gradually rather than all at once. As a result, we continue to expect 2026 to represent the low watermark for gross margin, with margins improving in 2027 as more of our clients renew at higher rates.

Next, I would like to shift to our view of the remainder of the year. We've had consecutive quarters of solid momentum. While we expect our clients to continue growing at a rate below historical norms, we expect that rate of impact from low client hiring to moderate in the second half of the year. We believe BBSI is well suited to navigate macroeconomic and geopolitical uncertainties. In challenging times, small businesses are better off in a PEO relationship and can benefit from our scale and our expertise. We remain steadfast in aligning our insurance pricing to our insurance costs.

At the same time, we are maintaining strict expense discipline while continuing to invest in the business throughout this transition. We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients, a focus that we will maintain. We have more products to sell and more folks selling. Our consistent execution, differentiated service model and strong relationships position us to continue driving sustainable growth through 2026 and beyond.

Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. Diving into our performance for the quarter, gross billings increased 2.6% to $2.29 billion in Q2 2026 versus $2.23 billion in Q2 2025. PEO gross billings increased 2.8% in the quarter to $2.28 billion, while staffing revenues declined 18% to $14 million in the quarter. Our PEO worksite employees grew by 1% in the quarter, which, as Gary noted, was driven by strong controllable growth, partially offset by year-over-year client workforce reductions. Average billing per WSE per day increased 2.2% in the quarter, which was driven by continued rising wages, partially offset by lower overtime and hours worked per WSE.

Looking at year-over-year PEO gross billings growth by region for Q2. Southern and Northern California were flat. Mountain grew by 2%, East Coast grew by 16%, the Pacific Northwest grew by 3% and our asset-light markets grew by 73%. A few comments on regional performance. Southern and Northern California, our 2 largest markets, beat expectations for new client adds, but experienced flat growth in the quarter, primarily due to year-over-year client workforce reductions. The net result was that Northern California improved slightly from last quarter, while Southern California saw slower growth.

The East Coast continued to stand out, delivering its 21st consecutive quarter of double-digit growth, supported by strong controllable growth. The Pacific Northwest region had its second consecutive quarter of growth as solid net client adds more than offset softer client hiring activity.

Turning to margin and profitability. During the second quarter, we renewed our fully insured workers' compensation policies, which were effective as of July 1, 2026. As we have emphasized in recent quarters, the California workers' compensation market has shifted towards rate increases due to industry-wide higher average claim costs driven largely by increased litigation and cumulative trauma claims. As a reminder, the California Insurance Commissioner approved an average 8.7% premium rate increase in 2025 and recently announced a 6.6% additional increase effective September 2026. Against that backdrop, we once again renewed on favorable terms, including only a modest rate increase, no downside risk for future adverse claim development and continued participation in favorable claim development through return premium.

Looking at our historical workers' compensation policies, they continued to perform well, resulting in favorable adjustments for prior year claims. In Q2 '26, we recognized favorable prior year liability and premium adjustments of $2 million compared to favorable adjustments of $8.8 million in the second quarter of 2025. Smaller favorable adjustments in the current year primarily reflect the industry-wide increase in claims costs and the fact that those higher cost expectations are incorporated into our actuarial estimates.

Turning to pricing for our workers' compensation product. We have continued to execute on our pricing strategy in this more favorable environment, and we were able to once again increase our pricing each month in the second quarter. We have now established an 8-month trend of increased pricing, first in a decade.

As a reminder, the previous period of declining workers' compensation pricing resulted in margin compression in recent years as cost trends stabilized or increased, but market prices continue to fall. While workers' compensation claims costs are expected to continue increasing in the near term, we expect the pricing actions we've implemented to more than offset those cost increases over time. As these, the long term. As pricing impacts are recognized as clients renew throughout the year, there is a natural lag before those higher prices are fully reflected in our results. We, therefore, expect gross margins to remain under pressure for the remainder of 2026 before improving in 2027 and beyond.

Moving to our operating costs and overall profitability. We continue to exercise disciplined cost control. And in Q2, SG&A decreased approximately 2%, driven primarily by employee-related expenses. We continue to expect full year SG&A growth to be lower than gross billings growth and in line with prior year SG&A growth.

Moving to investment income. Our investment portfolios earned $1.9 million in the second quarter, down approximately $400,000 from the prior year due to lower average interest rates and lower average investment balances as we continue to use excess cash to fuel our stock buyback program. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA. The combined impact of these activities resulted in net income per diluted share in the second quarter of $0.52 compared to $0.70 per diluted share in the year ago quarter.

Turning to our balance sheet. We remain in a strong position with $68 million of unrestricted cash and investments at June 30 and no debt. We continued our approach to capital allocation, making investments back into the company through product enhancement and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan. Under our $100 million August 2025 repurchase program, BBSI repurchased $15 million of shares in the second quarter at an average price of $30.92 per share, with $40 million remaining available under the program at quarter end. The company also paid $1.9 million in dividends in the quarter and reaffirmed its dividend for the following quarter. This brings total capital returned to shareholders in the last 6 months to over $39 million.

Now turning to our outlook for the full year. We are narrowing our outlook to reflect our year-to-date results and to adopt a prudent stance given the current macroeconomic and geopolitical uncertainties, which have created clear headwinds for our clients' ability to grow their workforces. We now expect gross billings to increase between 3% and 4% for the year compared to our prior 3% to 5% outlook. And we additionally expect average WSE growth to increase between 2% and 3% compared to our prior 2% to 4% range. We expect gross margin as a percentage of gross billings to be between 2.7% and 2.75% compared to our prior range of 2.7% to 2.85%. This primarily reflects the transitioning rate and cost environment of the California workers' comp market.

Finally, we continue to expect our effective annual tax rate normalized for the onetime tax charge in Q1 to be between 26% and 27%.

I will now turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from Chris with CJS Securities.

Maybe I'll start on the workers' comp side. So how should we look at the additional 6.6% rate in California in September? In reality, does that just kind of make the prior December increase more palatable and more of a certainty for everyone, not necessarily the 6.6% is going to be felt for quite a while. I know there was a lag with the original 8-plus percent increase that was put through. Just any thoughts there?

Chris, it's Kramer. So just in general, the regulatory agency gives a guide for what they think the rate should be, and that's the rate guide. Ultimately, it comes down to the different insurance carriers for what they want to charge. So you get the freedom and the flexibility to charge what you think it's worth. So in general, it's a very good sign that we see the commissioner raising rates multiple years in a row. But more importantly, it's a better sign that we see in the market. Anthony mentioned in his remarks in the market, we were able to get rate 8 months in a row. So we're pretty comfortable that we can call the bottom now and say that we are seeing this rate environment lift up.

Got it. That makes perfect sense. Obviously, workers' comp is kind of the key piece on gross margins. Are there 1 or 2 other things that we should be focused on or that's really going to drive the boat?

I mean volume is one thing, right? So we had strong client adds. We had strong client retention. Unfortunately, that was offset by our clients reducing their workforce again. So you have less volume coming in than we expected, but not by a lot. It was like 100 basis points for the year. So that's one thing. But predominantly, it's going to be workers' comp that's driving the margin. And if you just think of workers' comp, we've been talking about this for a while now, right? So we've been seeing workers' comp rates come down, claims go up. And what we've seen more in California over the last 3 years was not only claims go up, but you had what they call post-term CT claims, right?

So somebody is no longer at an employee -- somebody is no longer an employee and they file a post-termination claim and it's a cumulative trauma that they were doing an action for a while, and they've got all of these things that are built up into it. And they come in litigated and when they're litigated, they're more expensive and the industry is seeing something like 2.5x more of these claims than it did 3 years ago. So you have claims driving this behavior. And when claims drive behavior, then the industry reacts with rates and the rates are going up for premiums for what they charge, right? So cause and effect. And then that also then translates down to, all right, if you take these trends and put it into your actuarial models, you're going to reproject your prior years. And what you're seeing in the industry on your reprojection of the prior years is the ultimates are going up, which means the changes in estimates are going to be decreasing.

So you'll see -- if you look at the market, you'll see the changes in estimates for prior years for workers' comp is slowing down this year from all of these activities. So we see where this is going. We've played this game before. We think we're well positioned. As part of the well positioned, we renewed our insurance and reinsurance tower -- and we look at how much more we have to pay to the market, and then we also look at how much more we're charging our clients. So we're able to charge our clients more now and get spread in this year, but where we will get more spread is in next year because we will be on a rate on rate environment for where we're charging our clients a rate increase in '26 and a rate increase in '27. So you get to a compounding rate on rate, which is why we feel comfortable that our '26 gross margin is the low watermark and '27 is going to be higher.

Your next question comes from Jeff with ROTH Capital Partners.

I wanted to drill down a bit on the benefits side. What's been your experience, we're 7 months through the year now, the renewals, a higher rate environment, the balancing of claims cost versus rate. Could you give us a little more look under the hood there?

Yes. Just to kind of go back to 1/1. So for 1/1, we renewed 93% of our clients on benefits. 4% of them, we kept as a PEO client, but we place their business otherwhere. We've got some processes that we can act as the agent, and we can -- if the risk doesn't fit or they can get a better price, we can still be the agent and place that business elsewhere. And for that, we did 4%. So on a, call it, net PEO basis, we kept 97% of our business for 1/1. And then we're continuing to stack in Q1 and Q2, we had a really good Q2 on the benefit side. We added -- I think it was like 70 clients and a couple of thousand more participants to the plan. And if I look at the pipeline, we've got a pretty robust pipeline looking out ahead.

Regarding your question about how is the book running, the book is running as expected. I think the industry in general has elevated costs on the medical side. I think you're going to be looking at another double-digit year for rate increase is what we're -- we haven't got our numbers yet as far as working with our carrier partners. We don't have our numbers yet. So when you're looking at trend in this space, trend is looking at -- it's going to be another double-digit year trend increase. And that's kind of what you're reading all over the Wall Street Journal, CNBC and everywhere else.

Certainly a tough rate environment out there. On the renewal on the workers' comp program, is there any administrative cost savings on that renewal? And what -- how should we think about adjustments to prior year claims for the next couple of quarters? And should we see that improve? Should we see that also bottom along with margins?

As far as the structure, we're paying a little more in rate, but we're charging our clients more. So we're getting a little spread on that. But the structure itself has not changed materially. We like the structure. It's to the fact of if things develop poorly, that's why we bought the insurance. If things develop favorably, then we get money back. And we think that, that's a good deal for all parties and a good deal for our shareholders. So that's -- the structure has not changed. There's no change in the administrative cost of that. And then as you think of the changes in estimates in prior years, you're seeing the industry slow down as these cost trends break -- as these cost trends go into the models and start to get developed, you're seeing these changes in estimates slow down. And we experienced that for BBSI in Q1 and Q2. So I don't think -- I think it's still trends, but it doesn't go to 0.

Great. And then you said you're transitioning 3 additional asset-light models to branches. What kind of time frame should we expect that to occur?

Yes, it's going to be -- a lot of that's out of our control as far as we're looking for real estate now. We're close on some. We're farther on others. So we've got 3 branches that are prone position -- or 3 markets that are prone in position to turn into branches. That will be back half of the year. It may drip into Q1, but we've got 3 that are doing well, and we're going to invest more in.

Your next question comes from Marc with Sidoti.

I wanted to see if we had a chance to go over some of the benefits of the new business wins. And then maybe you talk a little bit about the renewal rate. I mean, I know certainly, given the challenging environment that's out there, but it certainly seems as though between the new business wins and sort of what you're seeing there, you seem to be in a position of gaining market share in a challenging environment. So maybe talk a little bit about renewal rates that you're seeing there and how that might be pacing.

For the new business, we had a really good Q2. We had the best June we've ever had in our history as far as clients and WSEs in June. And July is not done, but July looks like it's going to be a better July than the prior 2 years for July as far as WSEs we added. So we're getting a lot of good traction in the market. We've spent a lot of time and energy and a lot of time on technology, a lot of time on marketing, a lot of time on our go-to-market. And we're continuing to invest in that, and we're continuing to invest in that more this year and more to come next year for our salespeople, right?

So we hire good folks. We give them good training. We give them good tools, and then we kind of get out of their way and guide them along the way. So we've got that refined fairly well now that we have consistent predictability in our unit counts for what we're bringing on. And then for what we're bringing on, it's -- we're still -- we're very comfortable being a blue-collar PEO, but we are seeing more white collar business. And we saw more white collar in the second quarter than we've seen in any other quarter. So we're bringing on doctors, insurance brokers, dentists, CPAs, all those types of businesses that now that we have the tech stack and we have the health insurance, we're more competitive in that vertical now.

And do you get a sense of maybe what the driving forces are that maybe when you're adding on the white collar side, what kind of stands out and kind of maybe what the catalyst is, maybe not just from a competitive advantage standpoint, but maybe the potential for greater turnover going forward?

I would say, say you have a larger account and they have a consultant or they have some sort of intermediary that puts together their go-to-market strategy for how they're going to market to, say, a PEO or non-PEO. They put together an RFP and that RFP has checked boxes. And before, we were not able to check all of those boxes. We may have not had the health insurance. We may have not had performance management. We may have not had an HRIS. But now we're able to check all those boxes and go to the next stage. And when we go to the next stage, right, you have all these different boxes that we've checked, but I have that local team. And that local team really is the differentiator for us. It's -- these tools allow them to get in the door, but it's that local team that really is the value prop and really does the positioning and the closing and the servicing.

[Operator Instructions] Your next question comes from Vincent with Barrington Research.

Yes, Gary, to be clear, are you assuming that controllable growth continues at the current pace for the balance of the year?

For our gross billings in WSEs, yes. So we're -- we've had consistent -- we're stacking consistent years now of controllable growth. And I think we've got that dialed in very well. Don't get me wrong, we're not going to be comfortable and sit on our hands here. We're going to keep refining it and keep working harder and giving more product and doing more things. We're not just going to sit here and rest on the laurels, but we feel really good on the controllable growth. From clients we add, WSEs they have and clients we retain and WSEs they have.

The headwind that we have now is our clients have been shrinking, right? So this started back in Q3 of last year into Q4, kind of subsided in Q1, but it resurrected in Q2. But when we look at the back half of the year for Q3 and Q4, we're going to be going against softer comps as far as same customer sales. So we feel comfortable that Q3 and Q4 are going to be better growth because we're going against the comp, if that makes sense.

Yes, it does. And how are the new metros such as Dallas and Chicago ramping relative to what you've seen historically in new branches?

They're doing really well, both of those, and we're going to have a couple more that come online towards the back half of this year, right? We're -- we like to invest in winners, and we've got winners in these spots, and we're going to give them the resources to make them more formidable and more powerful. So we definitely are slow to make the investment. But when somebody proves that they can do it, then we give them all of the weight of BBSI behind them.

On the staffing side, what should we be assuming in terms of our modeling flattish or slight growth there?

So we're starting obviously at a lower point so far, Vince. Sequentially, there's a seasonality to staffing. So we'll see sequential growth in Q3. And really, we are seeing -- as Gary mentioned in his remarks, if you kind of look through the numbers into the composition of staffing, we're seeing some positive signs. So we brought on more new business than we lost. So we're building that book organically. Unfortunately, we're seeing kind of the same effect in the staffing book as we, sort of, go, which is our existing customers' orders have gone down. So within that, there's net negative volume. So the signs are positive there. We're projecting sequential growth into Q3. But still halfway through the year, it will be more than double-digit year-over-year growth for the year -- year-over-year decline, I mean, for the year.

And one last one for me. This client weakness in terms of headcount, are there any particular industries or anything you can point to that's causing this?

We're feeling it -- our book skews heavy blue gray. So we're feeling it more in the construction space than anywhere else. We're feeling it almost in every geography now as well. So it was just, say, California in Q3 and Q4. Now we're seeing it in other geographies around the country.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Kramer for closing remarks.

Sure. I just want to say thanks to all the BBSI professionals for another great quarter. I appreciate all your hard work and looking forward to the rest of the year.

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

Good afternoon, everyone and thank you for participating in today's conference call to discuss BBSI's financial results for the first quarter ended March 31, 2026. Joining us today are BBSI's President and CEO, Mr. Gary Kramer; and the company's CFO, Mr. Anthony Harris. Following their remarks, we will open the call for your questions.

Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with the information presented that does not reflect historical fact are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements.

Please refer to the company's recent earnings release and to the company's quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements. I would like to remind everyone that this call will be available for replay through June 6, starting at 8:00 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at www.bbsi.com.

Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Thank you, and good afternoon, everyone and thank you for joining the call. I am pleased to report that we had a solid start to the year and our Q1 results were in line with our expectations. We're a company that executes to a plan and we continue to grow our client base while delivering additional products across our tech stack.

Moving to our financial results and worksite employees. During the quarter, our gross billings increased 3.5% over the prior year's quarter and was in line with our expectations. We continue to execute on our strategies to increase the top of the sales funnel and we continue to see positive results. While Q1 new client additions were strong, they trailed Q1 '25, which benefited from an inaugural selling season with Kaiser. Additionally, our client retention continues to trend better than our historical levels. I'd like to attribute that to the work we do with our clients and the value our teams provide. The result of all these efforts or what I refer to as controllable growth is that we added approximately 5,300 worksite employees year-over-year from net new clients. However, our overall growth was tempered by broader client workforce reductions.

As a reminder, macroeconomic uncertainties led many of our clients to reduce headcount through the back half of 2025, a trend that impacts our year-over-year comparisons. While we saw further workforce reductions in Q1, the rate of decline has begun to moderate compared to the back half of 2025. To summarize, despite client workforce reductions, we achieved a 2% increase in total worksite employee growth for the quarter, driven by strong sales volume and strong client retention. Moving to our staffing operations. Our staffing business declined 21% over the prior year quarter, reflecting a broad reluctance among clients to place staffing orders amid macroeconomic uncertainty. In response, we continue to leverage our recruiting expertise for our PEO clients, successfully placing 90 applicants during the quarter.

Moving to the field operational updates. We're very pleased with our entrance into new markets with our asset-light model. These folks continue to gain traction and consistency and added approximately 550 new WSEs in the quarter. As a reminder, we opened our newest branch in Nashville in January, following last year's openings in Dallas and Chicago. In each of these locations, we have formed business teams with local professionals to support our clients and have moved into traditional brick-and-mortar BBSI branches. We anticipate converting 3 additional locations to traditional branches this year as we continue to invest in the development of our asset-light markets.

Regarding product updates, we continue to execute on the sale and service of BBSI Benefits, our health insurance offering. We're off to a great start to the year. As a reminder, we had a successful 1/1/26 season, renewing 93% of our book despite rising health insurance rates. On an adjusted basis, we retained 97% of these clients, proving that our value proposition holds firm even when clients choose to transition off of our benefits platform while remaining with BBSI. We have achieved operational consistency and added nearly 140 clients and 3,500 participants to our various health plans during the quarter. We continue to invest and improve the sale and servicing of BBSI benefits. Our value proposition resonates well. We're having success with small and large clients in white and blue collar industries in every state we operate and with a diverse distribution channel.

Next, I'd like to shift to our 2026 IT product objectives. I previously mentioned that we've been investing in our tech stack on the product side to service and support our clients better. Over the last couple of years, we made additional investments in myBBSI to support our BBSI Benefits offering, added a learning management system and added numerous integrations with third parties. We've also been investing in our technology to better support the employee life cycle experience, which is from when an employee is hired to when the employee retires and everywhere in between.

We previously launched BBSI applicant tracking system, which addresses the front end of the employee life cycle and allows for job postings, interviews and seamless onboarding into our payroll and timekeeping systems. In January, we launched the employee file cabinet, which provides a secure, centralized and fully integrated digital repository. This allows our clients and their employees to confidently manage sensitive employee data and allows for manuscript or individualized curated forms with e-signature capability, which improves compliance and efficiency. In April, we officially launched our performance management module. This module's intuitive design will allow organizations to better align employee objectives with company expectations while tracking performance with consistency and clarity. It empowers employers to formalize performance expectations and document performance conversations through standardized review cycles, ongoing feedback and development planning.

Our beta clients were very complimentary of the overall offering as well as the ease of use of our system. We think that ultimately, these products will result in increased sales and better client retention and we are excited to offer these products to existing clients as well as new prospects. Next, I'd like to shift to our view of the remainder of the year. As we look to the remainder of the year, our outlook remains unchanged. We expect our clients to continue growing at a rate below historical norms. However, we expect that rate of impact from low client hiring to moderate in the second half of the year. We believe BBSI is well suited to navigate macroeconomic and geopolitical uncertainties.

In challenging times, small businesses are better off in a PEO relationship and can benefit from our scale and our expertise. We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients, a focus that we will maintain. We have more products to sell and more folks selling. Consistent execution, differentiated service model and strong relationships position us to continue driving sustainable growth through 2026 and beyond.

Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary. Hello, everyone. I'm pleased to report that we finished the quarter with results in line with our plan and are reaffirming our outlook for the remainder of the year. Gross billings increased 3.5% to $2.16 billion in Q1 '26 versus $2.09 billion in Q1 '25. PEO gross billings increased 3.7% in the quarter to $2.15 billion, while staffing revenues declined 21% to $14 million in the quarter. Our PEO worksite employees grew by 2% in the quarter, which, as Gary noted, was driven by strong controllable growth tempered by year-over-year client workforce reductions. Average billing per WSE per day increased 1.7% in the quarter, which was driven by increasing wages, partially offset by lower overtime and hours worked.

Looking at year-over-year PEO gross billings growth by region for Q1. Southern California grew by 2%, Northern California declined by 2%, Mountain grew by 6%, East Coast grew by 17%, Pacific Northwest grew by 1% and our asset-light markets grew by 85%. A few comments on our regional performance. Southern and Northern California, our 2 largest markets, both experienced slower growth in the quarter, primarily due to year-over-year client workforce reductions. New client adds in both regions were in line with expectations. However, Northern California also had slightly elevated runoff in the quarter and was more impacted by the negative client hiring trends.

The East Coast continued to stand out, delivering its 20th consecutive quarter of double-digit growth, supported by strong controllable growth and positive client hiring. The Pacific Northwest region returned to growth as solid net client adds more than offset softer client hiring activity. Turning to margin and profitability. Our workers' compensation program continues to perform well, resulting in favorable adjustments for prior year claims. In Q1 '26, we recognized favorable prior year liability and premium adjustments of $1.1 million compared to favorable adjustments of $3.8 million in the first quarter of 2025.

We've previously discussed the market inflection in workers' compensation pricing and the positive momentum that followed the California insurance commissioner's approval of an average 8.7% premium rate increase in 2025. In the first quarter of 2026, we were able to increase our pricing each month and have now established a 5-month trend of increased pricing. Reinforcing this broader market trend, the WCIRB has recommended an additional 10% increase in California advisory rates for 2026. As a reminder, the previous period of declining workers' compensation pricing has resulted in margin compression in recent years.

And while we expect cost trends to continue to increase as well, we expect the improved pricing environment to stabilize margins and support margin expansion over time. We continue to prioritize thoughtful risk management. And to that end, our workers' compensation claims are primarily fully insured and our health insurance product is

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looking at our payroll tax costs. Payroll taxes are typically highest in Q1 as taxable wage caps reset, which results in lower margins in the first quarter of the year and a typical net operating loss. Payroll tax rates were in line with expectations for the quarter.

You will also see that we have separated benefits costs into a discrete financial statement line item, representing the direct costs of our client benefits offering. As a fully insured product, these costs primarily represent the pass-through premiums for our client health plans and are directly correlated to the related client billings included in PEO revenue. We expect benefits volumes to continue growing with first quarter benefits costs up 56% year-over-year, broadly consistent with BBSI Benefits billings growth. Overall, our gross margin rate was in line with our expectations and reflected stronger pricing trends and increased benefit sales with some headwind from lower staffing revenues.

Moving to our operating costs and overall profitability. In Q1, SG&A increased approximately 6% due primarily to the timing of certain employee-related expenses. We continue to expect full year SG&A trends lower than gross billings growth and more in line with prior year SG&A growth. Moving to investment income. Our investment portfolios earned $2 million in the first quarter, down approximately $600,000 from the prior year due to interest rates and lower average investment balances as we continue to use excess cash in our stock buyback program. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA.

Looking at our net results for the quarter. As a reminder, on March 31, we announced the company had recorded a onetime tax charge related to credits from tax years 2017 through 2022, which were disallowed by the IRS and the related tax court decision. The amount of this charge was $11.6 million or $0.46 per share. We continue to evaluate our available legal options, including our right to appeal. As a result of this charge, our GAAP net loss per diluted share was $0.59 for the quarter. Excluding the onetime charge, our adjusted net loss per diluted share was $0.13 compared to a net loss of $0.04 per diluted share in the year ago quarter.

Turning to our balance sheet. We are in a strong position with $92 million of unrestricted cash and investments at March 31 and no debt. We continued our consistent approach to capital allocation, making investments back into the company through product enhancement and geographic expansion and distributing excess capital to our shareholders through our dividend and stock buyback plan. Under our $100 million August 2025 repurchase program, BBSI repurchased $20 million of shares in the first quarter at an average price of $28.68 per share, with $55 million remaining available under the program at quarter end. The company also paid $2 million in dividends in the quarter and reaffirmed its dividend for the following quarter. This brings total capital returned to shareholders in the last 6 months to over $40 million.

Now turning to our outlook for the full year. Our Q1 operating results aligned with our expectations, reflecting continued strong execution of our fundamentals across the company. Accordingly, we are reiterating our full year outlook. We expect gross billings growth between 3% and 5% for the year, WSE growth between 2% and 4% for the year, gross margin as a percentage of gross billings between 2.7% and 2.85% and an effective annual tax rate normalized for the onetime tax charge between 26% and 27% I will now turn the call back to the operator for questions.

[Operator Instructions] And we have our first question from Chris Moore with CJS Securities.

Maybe we'll start on the workers' comp pricing. Obviously, encouraging 5 months straight increased pricing. I assume pricing is still -- hasn't caught up to the state of California increase at this point in time. That's fair, still lots of room there.

Yes. I mean the rates went up last year by about 9%. The market was a little slow to start to go out and reflect that immediately. We started to see rates going up as far as charge rates for what we're able to get in the market. We started to see that it was choppy at the back half of the year. So we have 2 good months, 1 bad month kind of thing. But from December until April, we had positive rate increases on all of our renewals and our new business. So we're seeing it in the market as far as rates going up. It varies by market as far as -- this is predominantly California but it varies by location but just in the aggregate, the tide is coming in.

Got it. And what would it take to raise the upper end? I guess is that more of a '27 really kind of situation? I know that there's a lag between the time you raise pricing, you've got different contracts that are renewing at different periods. Just trying to understand if you had another 3 or 4 months, would that have a meaningful impact on the -- on that 2.7 to 2.85% range?

Yes, Chris, I'll jump in on that. So it's obviously early in the year now and we're encouraged by the trend we've seen in pricing. But remember, we finished 2025 lower than we started 2025. So really, as we kind of build that back, we're going to kind of work back towards where we were and see sequential improvement but we also only renew about 1/12th of our book each month. And so really, that will continue to build and build profitability towards the second half of the year. And to your point, really where you'll see that on a year-over-year basis on a gross margin rate is going to be in 2027.

Got it. That makes sense. And maybe just last one for me. In terms of the technology that -- features that Gary was talking about, how does that work from a pricing standpoint? Or is it more just about retention really?

We're -- good question. We're not going to get rich on these products. What it's going to do is, it's going to get us to the table with every competitor out there, right? So there's not going to be something that knocks us out because our tech can do what everybody else tech does. And anything, it gets you in the door, #1. Then #2, these products, we're not charging a lot. If we have variable costs on them, we try to push the variable cost through. We're not doing this to -- we're not doing this to get rich. We're doing this to -- really the more SKUs you sell someone or the more products you have, the longer they're going to stay with you. And the more product you have, the more it appeals to the white collar business and the more appeals to the larger clients. So we think of this as it gets us to the table, it gets us to the table with white collar, it gets us to the table with larger clients. So we're optimistic. The tech is good. We're optimistic that it's going to be received well by our clients and new prospects.

We have our next question from Jeff Martin with ROTH Capital Partners.

Wanted to start by diving in on the health care benefits side. How are you feeling about the take rate and the renewal rate on that? And are you seeing a relatively material size amount of your new clients coming on as a result of the benefits offering?

So we -- when we launched benefits, we did more upsell than new sell. Now we're at the point that we do more new sell than upsell. So for Q1, it was about 60% of the clients that we put on to the benefits were new to BBSI. So we're getting better at our craft. We're getting better at positioning. We're getting better at selling it. So that's one. As far as the volume and the conversions, we have a really good conversion rate on benefits, better than just PEO. So when we actually present a benefits quote, we have a higher close rate. So math just says do more of it, right? So that's what we're trying to do.

The interesting part for 1/1 was everybody's rates went up double digits, some went up more. So you had a lot of shopping. And when you had the shopping, you had somebody come in and they were getting a, call it, a 40% or 50% rate increase on the renewal. And then they came to us and we looked at it and there was a reason why they were getting that 40% to 50% rate increase. So we did see more business flowing, more opportunities came across our desk in end of Q4, Q1. But some of these, we got to protect -- we don't take the risk on the underwriting but we got to protect the pool and there was a lot of business that we had to decline to quote.

Makes sense. Okay. And then just curious what else you can tell us about the Northern and Southern California markets, your 2 biggest markets in terms of maybe what you're seeing or hearing from that client base with respect to their reluctance to hire or even cutting back on their headcount?

Yes. Just in general, Southern Cal, on a WSE basis, Southern Cal had more reductions. But on a proportion basis, Northern Cal had a bigger proportion, if that makes sense. So that was broad-based for Northern Cal and for Southern Cal and it was broad-based pretty much for all industries. We saw it from the cookie stores to the construction companies and we saw them pull back. I get out and visit clients and some of the themes that I heard in Northern Cal where the Bay Area construction has slown down. So the contractors are pushing out of the Bay, right, because they got to work, they got to find business and they got to go out as far as Fresno and places like that. So it's interesting that they shrunk. They've got their base but you're not seeing the robust housing starts, you're not seeing any of those things yet. I don't think interest rates are helping

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at this point.

Right, right. Okay. And then with respect to the asset-light markets, you've got 3 at critical mass. It sounds like you're rolling out 3 additional branches this year. Any -- can you refresh our memory on how many new markets you're starting greenfield on the asset-light this year?

The reason we didn't give that is because it gets complicated, right? Do I call Chicago or Dallas a new market anymore? But in total, if you include Chicago, Dallas, Nashville, we're at like -- I think it's 22. And we started to go into states that we haven't been in. So we started to hire some folks and they're selling in Florida and some other places that we're...

We have our next question from Vince Colicchio with Barrington Research.

Yes. Curious, the new client pipeline, how does it look in comparison to recent quarters?

Pipeline is strong. Pipeline continues to be strong. We've got a lot of focus and attention on our direct efforts. We've got a lot of focus on attention on active acquiring new referral partners. We've got more referral partners referring to us now than we've ever had. And that piece is working very well as far as the top of the funnel. The conversion could be a little higher. You're seeing a reluctance right now unless there's a cost savings. I think it's got to do with the macroeconomic. But unless you can show a cost savings or explain the value, that's how you're going to get the conversion rates up.

And how are the health care brokers performing in terms of providing the lead of referrals?

That's a new channel for us. Typically, because of our workers' comp product, we aligned with the P&C brokers but now that we have the employee benefits, we align better with the health insurance brokers. With those, we're doing well. We have some national partners, some big brokers that we work with. We're doing well with them on the benefit side. I would like to do better with the smaller health agencies. We have some that are referring to us but I'd like to have more of those.

[Operator Instructions] We have our next question from Marc Riddick with Sidoti.

I wanted to touch a little bit on -- a lot of my questions have been covered but I did want to touch a little bit on cash usage during the quarter and maybe just hear some thoughts around the share repurchase activity in the quarter and if that sort of continued into April there? And then I have a quick follow-up after that.

Yes, absolutely. So we generate a lot of cash. As you know, we're not a capital-intensive business. So when we talk about our capital allocation strategy opportunities to invest in our business, the most clear way is through our IT investments we've been talking about there and obviously investing in our sales teams and asset-light expansion. But we are going to have excess cash generated through operations. And we have consistently shown that we want to deploy that back to shareholders. In particular, right now, there's a lot of, we believe, intrinsic value in our stock. And so we look at where we can invest. That's something we've increased our share purchasing both in Q4 2025 and through Q1.

Okay. Great. And then I wanted to circle back on -- you touched on the client vertical behaviors that you're seeing out there. I was just sort of wondering if there was much in the way of change or differentiation in certain areas, particularly whether it's retail or construction, residential construction or the like? And whether you've seen any impact or change that was more directly tied to the geopolitical and the war and the like or if that was just sort of consistent across the board through the quarter?

Good question. If you think of how the last, call it, 4 quarters or how '25 progressed, right, we -- in Q1 of '25, our customers grew, which makes this a harder compare, right, for Q1 of '26, right? We're going against growth. Q1, our clients grew, Q2, they moderated back to flat. Q3, they reduced. Q4, they reduced more. So a lot of the negative effects we're feeling are from reductions that happened in the.

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Our clients reduced further in Q1 but at a much lower rate than they did in Q3 and Q4. So we're not seeing bad numbers. We're not seeing as bad numbers in Q1 as we saw in Q3 and Q4. But in general, it's -- East Coast, there's a couple of regions that have growth. The East Coast is one. But just if you think of these industries, in California, it was pretty much down in every industry with construction being the most. And then when you look at it by region, it kind of -- you have some puts and takes. Some regions are growing, some regions are shrinking. But for the aggregation of our clients in California, just in general, all industries reduced their workforce.

At this time, this concludes our question-and-answer session. I will now turn the call back over to Mr. Kramer for closing remarks.

I just want to thank everybody for dialing in and thank all of our BBSI employees for another great quarter. Thank you, everybody.

And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the fourth quarter and full year ended December 31, 2025. Joining us today are BBSI's President and CEO, Mr. Gary Kramer; and the company's CFO, Mr. Anthony Harris. Following their remarks, we'll open the call for your questions.

Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical fact, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements. Please refer to the company's recent earnings release and to the company's quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements.

I would like to remind everyone that this call will be available for replay through March 25, starting at 8:00 p.m. Eastern tonight. and a webcast replay will also be available via the link provided in today's press release as well as available on the company's website at www.bbsi.com.

Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Please go ahead.

Thank you, Marissa. Good morning, everyone, and thank you for joining the call. I am pleased to report that we had another solid quarter, capping off a year of strong results. While fourth quarter same-customer sales trends moderated and revenue came in slightly below our forecast, our earnings exceeded our full year guidance. We remain optimistic about the future as we execute our short- and long-term objectives and continue to achieve record growth in our worksite employee base.

Before I speak about our financial performance, I would like to recap some of the key operational and strategic accomplishments for the year. We are successfully selling and servicing BBSI benefits in every one of our markets. Notably, we are seeing significant wins in white collar verticals, a segment where we previously had a difficult time penetrating. Our strategic sales initiatives have been operationalized and are resulting in greater velocity at the top of the sales funnel, resulting in record WSE adds. We have more referral partners that understand and appreciate our value proposition and are referring more business to BBSI. We finished the year with approximately 26% more active referral partners over the prior year.

We continue to invest in our asset-light model and have successfully expanded into new geographies and continue to gain momentum. We successfully converted 2 of these emerging markets to traditional branches. We continue to invest in myBBSI and in our tech stack, which resulted in multiple product releases in 2025. We also made further advancements on our employer of choice initiative and earned the Great Place to Work designation for a fifth year in a row.

Client satisfaction continues to drive favorable retention rates. Every year, we conduct a survey of our clients to evaluate customer needs and satisfaction, and I am pleased to report that our Net Promoter Score remains in the high 60s for a third straight year. This gives us great confidence in the value our clients place on the service and solutions we provide. Our clients love what we do, and they are ready and willing to spread the word about BBSI. 2025 was a great year with great results, and I am proud of what our teams accomplished.

Moving to our financial results and worksite employees. During the quarter, our gross billings increased 6.4% year-over-year. We continue to execute various strategies to increase the top of the sales funnel, and we achieved a record number of WSEs from new client adds. The result of all the sale and services or what I refer to as our controllable growth is that we added approximately 8,300 WSEs year-over-year from net new clients.

However, our growth was slightly tempered by client workforce reductions. which exceeded our expectations. Although client net hiring has been below historical norms all year due to macroeconomic uncertainties, workforce reductions accelerated in Q4. We saw reductions across all geographies and nearly all industries with our California clients and the construction industry having the most pronounced impact on gross billings.

To summarize, despite client workforce reductions, we achieved a 5.1% increase in worksite employees for the quarter, driven by record sales volume and strong client retention. For the year, our gross billings grew nearly 8.6%, driven by a 6.7% growth in average worksite employees.

Moving to our staffing operations. Our staffing business declined by 13% over the prior year quarter and 11% for the year. reflecting a broad reluctance from our clients to place staffing orders amid macroeconomic uncertainty. In response, we continue to leverage our recruiting expertise for our PEO clients, successfully placing 81 applicants during the quarter and 432 for the full year.

Moving to the field operational updates. We're very pleased with our entrance into new markets with our asset-light model. These folks continue to gain traction and consistency and added approximately 1,600 new WSEs in 2025. As a reminder, in September, we had grand openings for our Chicago and Dallas branches. And in January, we opened our newest branch in Nashville. In each of these locations, we have formed business teams with local professionals to support our clients and have moved into traditional brick-and-mortar BBSI branches. We anticipate that we will convert 3 additional locations to traditional branches this year, and we will continue to invest in the development of additional asset-light markets.

Regarding our product updates, we continue to execute on the sale and service of BBSI Benefits, our health insurance offering. To recap, we started off the year with 575 clients on our various plans with around 16,000 total participants. At the end of January, we have approximately 800 clients on our various plans with more than 24,000 total participants. We had a successful 1/1/26 selling and renewal season, bringing on more than 80 new clients and renewing 93% of our book despite rising health insurance rates.

On an adjusted basis, our retention of these clients was 97%, proving that our value proposition holds firm even when clients choose to transition off of our benefits platform while remaining with BBSI. We are gaining traction and continue to improve the sales and servicing of BBSI benefits. Our value proposition resonates well, and we are having success with small and large clients in white and blue-collar industries in every state we operate. and with a diverse distribution channel.

Next, I would like to shift to our IT product objectives. I've previously mentioned that we've been investing in our tech stack on the product side to service and support our clients better. Over the last couple of years, we made additional investments in myBBSI to support our BBSI benefits offering, learning management systems and to integrate with additional third parties. We have also been investing in technology to better support the employee life cycle experience, which is from when an employee is hired to when the employee retires and everywhere in between.

We previously launched BBSI applicant tracking system, which addresses the front end of the employee life cycle and allows for job postings, interviews and a seamless onboarding into our payroll and timekeeping system. In January, we launched the employee file cabinet, which provides a secure, centralized and fully integrated digital repository. This allows our clients and their employees to confidently manage sensitive employee data and allows for manuscript or individualized curated forms with e-signature capability and improves compliance and efficiency.

Up next is our performance management module that is currently in beta and will be released in Q2. The model's intuitive design will allow organizations to better align employee objectives with company expectations while tracking performance with consistency and clarity. It empowers employers to formalize performance expectations and document performance conversations through standardized review cycles, ongoing feedback and development planning. Our various IT folks have been working tirelessly on these new products, and it is gratifying to see it all come together. We are excited about these launches and future launches as we execute on our product road map in 2026.

Next, I would like to shift to my view of 2026. As we look to the upcoming year, we expect our clients to continue growing at a rate below historical norms due to broad macroeconomic headwinds. However, we have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients, a focus that we will maintain.

Regarding margin, as the workers' compensation market inflects, we will be laser-focused on increasing our rates with the market. We have been executing on the sale and service of BBSI benefits, which has now become one of our core competencies. Moving forward, we have IT product enhancements rolling out, a broader suite of products to sell, more folks selling them and a growing network of referral partners recommending BBSI. Our culture is built on taking care of our clients and executing to a plan, and I look forward to 2026.

Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I'm pleased to report we finished the year with strong results. For the full year, gross billings increased 8.6% to $9 billion versus $8.3 billion in the prior year, while diluted earnings per share increased 5% to $2.08 compared to $1.98 in the prior year. For the quarter, our gross billings increased 6.4% to $2.4 billion versus $2.25 billion in Q4 2024, while diluted earnings per share increased 2% to $0.64 compared to $0.60 in the prior year quarter.

Looking at the quarterly results more closely, PEO gross billings increased 6.6% in the quarter to $2.38 billion, while staffing revenues declined 13% to $18 million in the quarter. Our PEO worksite employees grew by 5.1% in the quarter, which, as Gary noted, was driven by record WSEs added from new clients. This continued a strong trend of controllable growth, which was partially offset by client workforce reductions. Average billing per WSE per day increased 1.5% in the quarter, which was driven by sustained wage growth, partially offset by lower average hours per WSE.

Looking at year-over-year PEO gross billings growth by region for Q4. Southern and Northern California both grew by 5%. Our Mountain and East Coast regions grew by 10%. The Pacific Northwest declined by 4% and our asset-light markets grew by 95%. Southern and Northern California are our largest markets. And while we saw growth slow this quarter due to client hiring, the region continues to be supported by strong controllable growth. Our Mountain and East Coast regions continue to deliver very strong results. Our disciplined execution of our growth initiatives has largely mitigated a reduction in year-over-year client hiring. The Pacific Northwest remains the region most impacted by economic conditions. Lastly, our asset-light markets continue to perform well and build their client base at a near 100% growth rate.

Turning to margin and profitability. Our workers' compensation program continues to perform well. And in Q4, we recognized favorable prior year liability and premium adjustments of $2.2 million compared to favorable adjustments of $2.4 million in the fourth quarter of 2024. While workers' compensation costs and pricing have trended downward over the last several years, we have seen a positive shift following the California Insurance Commissioner's approval of an average 8.7% premium rate increase in the latter part of 2025.

As we enter this time of market inflection, we are encouraged to see carriers having filed for similar rate increases, and we are seeing higher competitive quotes in the market. Although the market response and timing of price increases remains a key unknown variable, we are being diligent in our commitment to managing pricing and limiting margin compression while balancing our strategy of top line growth. Although we're being cautious in our plan for margin for the year, we are being rigorous in our execution, and we believe our strong value proposition and integrated model uniquely position us to capitalize on these emerging market trends. As a reminder, our workers' compensation claims are primarily fully insured and our client health benefits offering is 100% fully insured.

Moving to our operating costs and overall profitability. Our 2025 results benefited from sustained operating leverage with SG&A growing slower than both billings and gross margin for the full year. In Q4, SG&A expense decreased by approximately 2.5% year-over-year. Full year 2025 SG&A increased by a modest 2.5% as we continue to carefully manage our operating costs. As we head into 2026, we remain focused on maintaining a high level of operating discipline. We are mindful of the broader macroeconomic environment and continue to proactively manage our cost structure to align with both our growth and profit objectives.

Turning to investment income. Our investment portfolios earned $2.3 million in the fourth quarter, down approximately $200,000 from the prior year. This reflects the impact of lower average interest rates and lower average investment balances as we used excess cash to execute on our share buyback program during the year. Looking ahead to 2026, we expect these trends to continue, and we anticipate that both average balances and yields will remain lower. As a reminder, our investment portfolio continues to be managed conservatively with an average quality of investment at AA.

Our balance sheet remains strong with $157 million of unrestricted cash and investments at December 31 and no debt. Our approach to capital allocation remains consistent, and that includes, first, making investments back into the company where we can. In 2025, these investments included several initiatives Gary mentioned, including technology investments related to ongoing product development as we continue to invest in and expand our value proposition and investments in our sales teams, including our asset-light expansion in 2025.

In 2026, we expect to continue these investments and we'll launch additional IT enhancements and initiatives that will improve our product and make our internal operations more efficient, including leveraging modern systems, AI tools and streamlined processes. We will see a corresponding increase in depreciation expense in 2026 as these IT systems come online.

After investing in our company, we continue to generate excess cash flow, and we continue to distribute excess capital to our shareholders through our dividend and stock buyback plan. Under our $100 million August 2025 repurchase program, BBSI repurchased $17 million of shares in the fourth quarter with $75 million remaining available under the program at year-end. In total, in 2025, we repurchased nearly 4% of the company's shares outstanding through purchases of $42 million. We also paid $8.2 million in dividends for the year, bringing total capital returned to shareholders in 2025 to $50 million. Looking ahead to 2026, we expect to continue to generate excess available cash and to continue these capital allocation strategies.

Now turning to our outlook for 2026. We expect gross billings to increase between 3% and 5% and average WSEs to increase between 2% and 4%. This represents continued controllable growth, offset by weakness in client hiring trends, particularly earlier in the year. For 2026, we expect gross margin to range between 2.7% and 2.85%. This outlook reflects the insurance pricing and cost dynamics we referenced earlier. And while this range implies a more cautious starting point, we believe it appropriately balances our strategy of driving sustainable top line growth with a disciplined commitment to protecting margin.

We are planning conservatively given the fluid nature of pricing behavior during this market inflection, and we are also closely monitoring pricing trends and are already seeing opportunities to increase price as we renew contracts and onboard new clients. Finally, we expect our effective annual tax rate to range between 26% and 27%.

I will now turn the call back to the operator for questions.

[Operator Instructions] And your first question comes from Chris Moore with CJS Securities.

This is [ Will ] on for Chris. U.S. job growth in early 2026 has been modest, but has shown some signs of recovery after a weak 2025. What are you hearing from your clients in terms of being able to improve growth throughout 2026?

Yes. So it's a great question. Thank you for dialing in. We -- I guess I'll recap what we've seen maybe for 2025 in that trend. So we started 2025, we anticipated modest positive growth, which is really the trend we saw coming out of 2024. That's how we started 2025 in Q1. Q2, that decreased to more of a flat client hiring position. Q3, we reported that went negative for our client base. And then Q4, that deteriorated a little bit further. So throughout 2025, we saw a negative hiring trend sequentially each quarter.

And so as we look ahead to 2026, we see the same data you do in terms of there's a lot of fundamentals that look strong in the economy. For our client base, we want to plan conservatively. So we are anticipating that negative trend to continue into 2026 and really kind of reverse pattern. So worse same customer sales in early '26 and then improving as the year goes on in line with those macro forecasts.

And just a follow-up, what are you hearing from clients in terms of being able to pay higher wages in 2026?

Wage growth is real, okay? It's hard -- once you pay somebody a certain amount, it's hard to pay them less. The only way you can kind of reset that is with your new hires. Wage growth is real. It's moderated. It's been in that 2% to 4% range is what we see. So wage growth is real. Client hiring has -- the #1 complaint we still hear is finding good skilled labor. So that hasn't changed. And then on the macroeconomic trends, the -- we're hearing finding workers more and more is an issue, specifically as it relates to immigration trends.

So we've seen it in some of our industries like trucking and logistics, where clients are reducing their workforce because they're like CDL drivers, transportation drivers, things of that nature that they're resetting and restructuring their employee base. So it's going to be interesting to see what happens with -- for these skilled trades and these skilled workers for what the growth is going to be in '26. But overall, I mean, we know that our clients have been in a net reduction. And the positive that we have is we've -- we're able to sell and service through it, right? So we've got a good sales machine. We've got a good service machine, which results in good client retention. And year-over-year, we're putting up the best controllable growth we've put up.

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

I wanted to dive in on payroll taxes a bit. That's also hit the margin this year. Is there any improvement in sight for 2026 on the payroll tax side?

Yes. So those reset, that's a good call out, Jeff. We always have a front-loading of those payroll taxes in Q1, which is why we typically lose money in the first quarter and then balance for the rest of the year. For the trend in terms of the rates for unemployment tax, in particular, we are seeing those modestly higher. Again, that's logical given the correlation to the reduced hiring trends. Not significantly different, though. It's a smaller increase than last year actually. And again, we have mechanisms to price those in. A little bit of a timing difference there on margin sometimes, but we're able to recapture those in our repricing pretty confidently.

Great. And then I wanted to drill down on the workers' compensation pricing environment. It sounds like first half of the year is going to be absorbing some margin with a wait-and-see approach in terms of what market rate does and how you react to that. Is that an accurate understanding? And are you expecting that margins will improve a little bit as we progress throughout the year relative to the starting point, primarily due to the workers' comp pricing environment?

Yes. Jeff, it's Kramer. It's predominantly workers' comp California where we see this, which is a large percentage of our book. I mean we've been we've been talking about for years how costs have been coming down. And with the cost coming down, they've really been passed through as a rate decrease in the market. And we're at the point in the market cycle now that costs aren't coming down anymore. So the only way to inflect is to get more rate.

And for us, we've -- you've seen California raise rates. Our trading partners are telling us that the everybody's renewals are more expensive. We're watching the rate filings go up with our competitors. We're looking at scheduled credits decreasing as well. So we're seeing the market conduct behave in an inflection mode. We've been trying to force the market or raise rates for a couple of years now. And some months are good, like if I go back into '25, right, some months are good and we get positive rate on our renewals and some months are bad where we get negative rate.

Typically, those -- I'll call it choppy, right? It was choppy and inconsistent. Typically, on those bad months, it was because we had larger accounts that the market was competitive on, and we had to match competitive pricing. So we had puts and takes all throughout '25, good months, bad months. The positive trend that we're seeing now is that when we go and look at the, call it, the last 4 months of our renewals, those last 4 months, we've been able to increase the aggregate markup or the aggregate portfolio rate. So we're able to see -- and if you say you have a good 1/1, you get that for a whole 12 months, right, because you build that every month. When you get a 2/1, which we have positive 2/1, you get that for 11 months, and that's kind of how the shape of the curve earns out.

But when we look at kind of the forecast for this, right, there's 2 unknowns, and they're all within a band, right? So the unknown is same customer sales, which we have a good gut on. And then there's the workers' comp market on the pricing. So when we did our gross margin, you can look at the last couple of years, our gross margin as a percentage of billings has been coming down as these costs have come down, pricing has come down. As we look at the last, call it, 4 to 6 months, we're seeing positive consistent trends. What we don't know is if the market is going to be done, it's hard to fight stupid, stupid is, stupid does, it's out there.

But when we look at this and we say, all right, based upon what happened in these last 3 and 4 months, if this continues throughout the year, we could easily be at the high end of that range or above that range. But we don't know. It's market conduct, it's market forces. So if I think of if it persists, if it persists, we're going to be at the high end, but you just don't know. And if you look at the sector, our industry has kind of done a reset right now, and we thought prudent to go out with a conservative guide on this one.

Okay. And then one more, if I could. In terms of the adjustments to prior year workers' comp claims and the benefit that brings down through the P&L, are you expecting much change from the last 2 years? I think it was about $18 million in aggregate for the year that you brought back?

Just in general, if you look at that trend, that trend will predominantly persist, right? It's never going to go to a 0. If anything, it goes to a slightly lower or slightly higher drip. But it's going to be set up so that knock on wood, all things go well that, that is consistent.

[Operator Instructions] And your next question comes from Vincent Colicchio with Barrington.

Yes, Gary, curious, the new client pipeline of qualified leads, how does that look currently versus what you've seen in previous -- in recent quarters?

Yes. The pipeline is still strong. We've got strong controllable growth. The interesting part was, if I look at 1/1 specifically for what we brought on, we had a better benefit selling season last year. And that was predominantly because we brought Kaiser into our offering for the first time. So we sold into our installed base. But it was, I think, of the benefit season for 1/1, we brought on 80-some clients, which was a really good add. We brought on a lot of clients with no workers' comp or with no benefits as well. We're seeing -- it's not a top of the pipeline issue. We're getting good volume in the top of the pipeline, good consistency through the pipeline.

So we've got more people selling our product. We've got better product to sell. We've got more referral partners recommending BBSI. We've got a lot of focus and attention on the controllable. And then when we get the client on, we got all service plans and service procedures that we have. So we feel really strong. If you just go and look at our track record over the last 3 years, right, we've got a very strong track record of controllable growth, and we don't foresee that slowing down.

The one thing I would say is as a market is trying to push rate, you do play a game of chicken, right, as far as pricing -- as far as the price to risk and if somebody is willing to do it for cheaper. You do run the risk of higher runoff. But we're modeling in slightly higher runoff because of the moving of the market forces, but it's nothing that gives us any concern. It's what I would say is prudent action at the market timing.

Is -- related to the hiring trending better this year, is that broad-based? Or are some of the more weaker areas like construction continue to not see any good signs?

Yes. I'd say the deterioration we saw broadly was across the country and across industries. But -- and so when we look at that recovery, we're looking at that at the macro level. Certainly, we've said that construction over a kind of multiyear period has been depressed for us as interest rates went up, and we just didn't really see that rebound, particularly in California. So we are still optimistic and really bullish on the long-term trajectory group a lot of homes that need to be built and infrastructure out there.

Your next question comes from Marc Riddick with Sidoti.

So I wanted to just sort of maybe touch on the sort of the question of the day, if you will. I was wondering if you could talk a little bit about what you're seeing or anticipating as far as impact of artificial intelligence on the business and whether that's from the customer end or from yours and how you sort of see that playing out currently?

If you thought my rate answer was long, you better buckle up for this one. We are very thoughtful and very mindful of AI, and we spend a lot of energy on it internally. Anthony can geek out for hours if you allow them, trust me, I try to avoid it. We spent a lot of time with the Board. It's just been -- it's on the top of everybody's list, right? It's -- as a business person, you got to be well aware of what's going on in the world. We -- I think of this as really kind of the 4 legs of the stool, right?

So first and foremost, how are you going to use this internally, right? So internally, we've been adopters. We bought models, we bought agents. We're using it within most of the disciplines of the organization to make us more efficient. So IT to accounting to marketing to HR, really, what that allows us to do is to moderate our SG&A growth, right? So we're using it to be more efficient internally.

The overarching question for the macro, which is will this create joblessness or better efficiency. I think that this is going to be very industry-specific and will vary. For the industries that we're in the most of, which is the blue collar, I think that this is going to be less impactful. Plumbers still have to plumb and carpenters need to bang nails, and I don't see that going away. We talk to a lot of clients, and I've not heard from any of our clients that any of their reductions in the last 6 months are AI related. They are typically referring to a cooling macroeconomic economy as it's relating immigration tariffs, trade uncertainty, interest rates. So for us, I don't see it specifically hitting our clients. I'm not trying to say we're immune to it, but I don't think it's going to specifically hit our clients, especially anytime soon.

And then the next thing we look at is the industry. So for the PEO industry, as far as co-employment and pulling for insurances, if you do it well, then I think the model is durable and it creates a moat that I don't think AI impacts. And then really, the fourth leg is how is it going to evolve for our product. So for that, it's -- we've been making these investments into our tech stack. The investments into our tech stack are all with the most modern technology that we have the plans to bring AI into it at a later time to make our clients more efficient and independent.

I don't think this replaces our service model. I think it will help augment it. I don't think our service model goes away because running a business is hard and HR is complicated and regulations are complicated. And I don't see AI replacing the human need on complicated issues. I think we're in a -- I'm not trying to be pollyannish with this view. I'm just trying to be realistic. I think we're in a fortunate spot for us, and we're in a time where all of the facts are not yet known. But I feel like for what I do know, we are positioned well.

I do appreciate it. I know it's kind of a tricky time to answer that question. I guess one of the other things I sort of would want to talk on -- if you could talk a little bit about as far as general demand trend-wise, if you're seeing much in the way of -- as far as market share gain opportunities, maybe where you're seeing that coming from and how much you're seeing that coming from competitors as opposed to a little less -- a little more outsourcing of what had been done internally up to this point? Are you seeing much of a shift in the way of that demand driver? Or has that changed much over the last couple of quarters?

We get this question a lot of -- we see it more now than we ever have as far as PEO takeaways because we have the health insurance offering that we didn't have previously. But I would say, in general, there's just so much ocean out there to fish in our space that we don't have to have this whole PEO takeaway strategy. So I can tell you that we saw more benefit deal flow for 1/1, right? A, we're getting better at doing benefits, the words out; and then b, health insurance rates were up, and they're up for everybody, not just PEO. So when rates go up, there's more shopping.

We did have PEO takeaways, but I would say it's a little more than last year, but not a measurable piece of the book at this point. It's still converting businesses over to the PEO model for the first time. That's our lion's share of our client acquisitions.

There are no further questions at this time. I would like to turn the call back over to Mr. Kramer for closing remarks.

Sure. Thank you, everybody, for dialing in. And I just want to say thanks to all of the BBSI professionals for a great Q4 and a great year, and we are all looking forward to 2026. Thank you, everybody.

This concludes today's conference call. We thank you so much for your participation. You may now disconnect.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss BBSI's financial results for the third quarter ended September 30, 2025. Joining us today are BBSI's President and CEO, Mr. Gary Kramer, and the company's CFO, Mr. Anthony Harris. Following their remarks, we will open your call for questions.

Before we go further, please take note of the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995. The statement provides important cautions regarding the forward-looking statements. The company's remarks during today's conference call will include forward-looking statements. These statements, along with other information presented that does not reflect historical fact, are subject to a number of risks and uncertainties. Actual results may differ materially from those implied by these forward-looking statements.

Please refer to the company's recent earnings release and the company's quarterly and annual reports filed with the Securities and Exchange Commission for more information about the risks and uncertainties that could cause actual results to differ from those expressed or implied by the forward-looking statements. I would like to remind everyone that this call will be available for replay through December 5, starting at 8:00 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release as well as available on the company's website at www.bbsi.com.

Now I would like to turn the call over to the President and Chief Executive Officer of BBSI, Mr. Gary Kramer. Sir, please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining the call. We continue to build on our momentum in the third quarter, delivering a record number of worksite employees. Solid revenue growth was fueled by new client sales, expanded adoption of new products and excellent client retention.

Moving to our financial results and worksite employees. During the quarter, our gross billings increased 8.6% over the prior year's quarter. We continue to execute various strategies to increase the top of the sales funnel, and we achieved a record number of worksite employees from new client adds. Client satisfaction continues to drive favorable retention rates. Every year, we conduct a survey of our clients to evaluate customer needs and satisfaction, and I am pleased to report that our Net Promoter Score remains in the high 60s for a third straight year. This gives us great confidence in the value our clients place on the service and solutions we provide.

Our clients love what we do, and they are ready and willing to spread the word about BBSI. The result of all these efforts or what I refer to as controllable growth is that we added a record 10,400 worksite employees year-over-year from net new clients. However, our client hiring was lower than we forecasted. We experienced a slowdown in California across the most industries, fueled by macro uncertainty, including tariff policy and interest rates. So our record controllable growth was slightly offset by a decline in our clients' workforce and resulted in a total growth of worksite employees by 6.1%.

Moving to our staffing operations. Our staffing business declined by 10.3% over the prior year quarter and was within our expectations. We continue to see reluctance from our clients to place staffing orders amid the macroeconomic uncertainty. We continue to execute our strategy to recruit for our PEO clients and placed 116 applicants in the quarter, which is 11 more than the prior year quarter.

Moving to the field operational updates. We are very pleased with our entrance into new markets with our asset-light model. We have 22 total new market development managers in various stages of their development. These folks have been gaining traction and consistency and have added approximately 1,400 new worksite employees through Q3. In September, we had grand openings for our new Chicago and Dallas branches. In each of these locations, we have formed business teams with local folks to support our clients and have moved into traditional brick-and-mortar BBSI branches. We are also planning another grand opening for Nashville in January. We continue to see positive results from our investments in new markets and are actively recruiting additional new market development managers.

Regarding product updates, we continue to execute on the sale and service of BBSI Benefits, our health insurance offering. Our strong momentum continued into the third quarter. We added approximately 1,300 participants to our various benefits products in Q3, I am pleased to report that through October, we have approximately 750 clients on our various plans with over 20,000 total participants. We are gaining traction and continue to improve the sales and service of BBSI Benefits. Our value proposition resonates well, and we're having success with small and large clients in white and blue collar industries in every state we operate and with a diverse distribution channel.

Our teams are now in the midst of the heavy selling and benefits renewal season. As many of you are aware, health insurance rates are increasing, which is causing consumers to shop around. Our October submissions for 1/1 transactions are 60% greater than October of the prior year. I attribute this to the market forces plus the trust we have earned from our referral partner network. We anticipated an increase in activity, and we have staffed up accordingly. It is still too early to comment on 1/1, but we are optimistic that we can repeat or exceed our successful selling campaign from the prior year.

Next, I'd like to shift to our 2025 IT product objectives. I've previously mentioned that we've been investing in our tech stack on the product side to better service and support our clients. Over the last couple of years, we've made additional investments in myBBSI to support our BBSI Benefits offering, adding a learning management system, added an applicant tracking system as well as numerous integrations with third parties. We continue to execute our product road map to round out the employee life cycle experience. We think of this life cycle from a client's perspective from when an employee is hired to when the employee retires and everywhere in between.

We will be replacing or bolstering attributes of the life cycle with additional product launches over the next 6 months. Our client-centric focus is on delivering more technology and more products, all supported by the best local talent. We believe these enhancements will make it easier to sell to new customers and retain existing businesses. Additionally, we believe this offering will strongly resonate with white-collar businesses and larger employers.

Next, I'd like to shift to our view of the remainder of the year. We've had consecutive quarters of great momentum. We are consistently growing our WSE stack. We ended Q3 with a record number of worksite employees, and we continue to be optimistic about the road ahead. We have consistently achieved strong controllable growth by focusing on the needs of our clients and by adding new clients. We have more products to sell, more people selling them and more referral partners recommending BBSI.

Now I'm going to turn the call over to Anthony for his prepared remarks.

Thanks, Gary, and hello, everyone. I'm pleased to report we finished the quarter with strong results. Gross billings increased 8.6% to $2.32 billion in Q3 '25 versus $2.14 billion in Q3 '24. PEO gross billings increased 8.8% in the quarter to $2.3 billion, while staffing revenues declined 10% to $19 million in the quarter. Our PEO worksite employees grew by 6.1% in the quarter which, as Gary noted, was driven by a record number of WSEs added from new clients. This was coupled with ongoing favorable client retention, which continued a strong trend of controllable growth. This was partially offset by modest net negative client hiring year-over-year compared with our original expectation of flat hiring in the quarter.

Average billing per WSE per day increased 2.5% in the quarter, which was driven by continued increasing wages. Looking at year-over-year PEO gross billings growth by region for Q3. Southern California grew by 9%, Northern California grew by 3%, Mountain grew by 13%, East Coast grew by 14%. The Pacific Northwest declined by 3%, and our asset-light markets grew by 132%. Southern California represents our largest region and has maintained strong growth driven primarily by strong client adds and favorable client retention. Northern California was the region most negatively impacted by client hiring trends in the quarter with several larger clients having an outsized impact. The strong Mountain and East Coast results also continue to be driven by strong controllable growth performance, and the Pacific Northwest has continued to be primarily soft due to economic conditions in the region.

Turning to margin and profitability. Our workers' compensation program continues to perform well and benefit from favorable claim frequency trends and favorable claim development. In Q3, we recognized favorable prior year liability and premium adjustments of $3.9 million compared to favorable adjustments of $4.3 million in the third quarter of '24. We previously discussed that workers' compensation pricing has been trending downward for several years. While these pricing reductions have largely been offset by cost savings, they have nonetheless created some margin pressure. Looking at our overall margin for the year, results are broadly in line with expectations, though modestly lower than prior year due to a combination of this pricing pressure and lower staffing volume.

As a reminder, our staffing business carries a higher margin rate than our PEO services. Looking ahead, we are optimistic about the pricing environment. The California Insurance Commissioner recently approved an average 8.7% increase in workers' compensation premium rates and several carriers in the state have filed for similar rate increases. We are also seeing increased pricing and competitor renewal quotes for both workers' compensation and health benefits, which is leading to more shopping in the market.

As a reminder, our workers' compensation claims are primarily fully insured, and our client health benefits offering is 100% fully insured. Our strategy of derisking our insurance operations continues to bring stability to our operating results while continuing to allow us to offer best-in-class, high-value products to our small business customers.

Moving to our operating costs and overall profitability. Our results have continued to benefit from operating leverage with SG&A costs continuing to grow more slowly than our billings and gross margin. For Q3, SG&A expense increased by approximately 2% due primarily to employee-related costs. Looking at investment income. Our investment portfolios earned $1.9 million in the third quarter, down approximately $300,000 from the prior year due to lower average interest rates. Our investment portfolio continues to be managed conservatively with an average quality of investment at AA. The combined results of these activities was 7% growth in net income per diluted share in the third quarter to $0.79 compared to $0.74 per diluted share in the year ago quarter.

Our balance sheet remains strong with $110 million of unrestricted cash and investments at September 30 and no debt. We continue our consistent approach to capital allocation, making investments back into the company through product enhancements and geographic expansion and distributing excess capital to our shareholders through our dividend and stock repurchase plan. Continuing under the Board's August 2025 buyback program announced last quarter, BBSI repurchased $8 million of shares in the third quarter at an average price of $47 per share. The company also paid $2.1 million in dividends in the quarter and reaffirmed its dividend for the following quarter.

This brings our return of capital to shareholders to $10 million in the quarter and $31 million year-to-date. Now turning to our outlook for the full year. We now expect gross billings growth between 8.5% and 9.5% for the year after adjusting for the slower client hiring in the quarter. We continue to expect our year-end controllable growth to be strong and WSEs to increase between 6% and 8% for the year. Given my earlier comments on pricing and margin, we are tightening our range for gross margin as a percent of gross billings and expect it to be between 2.9% and 3.0%. Finally, we continue to expect our effective annual tax rate to be between 26% and 27%.

I will now turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from the line of Jeff Martin from ROTH Capital Partners.

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

Yes. I mean that's an important part, Jeff, because we don't take the risk on health insurance, and we've derisked on the workers' comp. But at the end of the day, we've got to be good stewards of capital and good underwriters, and we're in a good spot. You got a lot of carriers on the program. You're in many different states. But the one thing that's common is rates are going up, and they're going up for every carrier in every state for everybody. You're seeing that with all of the public insurance companies and the rate filings and everything going on. So I can just tell you that I don't think our rates are going up any more than anybody else's.

But what I think we're seeing is just when folks are getting rate increases depending upon the size of the company and the size of the program they're in, if it's priced to risk, they're seeing some larger increases. And when that happens, you're seeing a lot more accounts go out to market. So our volume for what's coming into us for 1/1 business through October was about 60% higher than what we saw or 60% more opportunities than we saw in the prior year. And I think that's twofold, right, a, it's the market; but b, we're better at our craft and referral partners trust us and referral partners are comfortable recommending us. So ultimately, we're viewing this as an opportunity. Our renewal book is not as big as a lot of our competitors in the space. So we can spend more time on offense than defense.

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

It's -- we've been getting this question every quarter for the last couple of quarters, and it's not -- it's honestly not one thing. It's many things, we've -- between our tech, between our product, between our people, between our sales efforts. It's -- in the new markets -- we're getting good results in our new markets. It's really 9 or 10 different things we've been working on, and we're feeling the tailwind from those 10 things. It's not one thing. It was a lot of years of hard work to get to where we are.

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

I'll talk about just the comp market. I'll let Anthony comment on the WSEs. We're seeing -- you saw the regulator approve rate increases. It's mainly California where we're seeing the rate increases. So let me preface it with that. But you're seeing the regulator make recommendations and approve rate increases. We're seeing carrier filings increase to about 8% to 10%, and then as we started to get into the 10/1 renewal cycle, by that time, things were baked in, and we were seeing incumbent renewals start to have price increases. So with that triangulation, we kind of know that rates are going up that way, and we're not going to be shy about asking for more rate too because more rate is warranted in the industry.

So we're able to -- we have the pricing and the discipline and the process to make sure that we're going to go and try to capture those rate increases, and we're working on that now for Q4 and for Q1. And then honestly, time is going to tell. We're not into the 1/1 workers' comp cycle yet. That's probably not going to really start until 2 more weeks. It's a slower or it's a later process than the benefits because you don't have to go through the enrollment for all the employees and whatnot. So right now, we're heavy in the mix for the benefit side. And then as soon as we get through that, we get into the workers' comp 1/1. So we're probably about 45 days away from knowing -- now we're probably about 30 days away from knowing how much business is going to go to market on the workers' comp side.

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

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

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

Yes. I mean there's no change in the formula, right? That's why we break it out the way we do. It's the controllable growth, which we've got a very good handle on, right? We're good at bringing on business. We're good at keeping the business we have, right? That is one of the -- that's the lion's share of our growth this year. And we probably anticipate that to be the lion's share of the growth next year. And then wage inflation is going to happen no matter what. It will probably be less than we've had coming out of the pandemic. And then the known unknown is do our clients add workforce or shrink workforce. It's hard to say what's going to happen for that in '26. The way we're modeling it now is if we think of how we started our year this year when we gave our initial guide and then we moved our guide up, we're conservative when we guide. That's probably how we would think of the guide as we got out into February of next year.

Sounds good. Obviously, the [ asset-light ] model is working well. I'm just trying to estimate what kind of growth -- percentage growth you could get over the next, say, 5 years from geographic expansion? Can you get 1 point per year out of geographical expansion? Is that modest? Is that aggressive? Just trying to understand kind of how you're looking at that.

Sorry, I'm doing math on my calculator here. Yes. I mean we'll finish -- for what we add this year, we'll finish with over plus or minus 2,000 WSEs that we're going to add from our asset-light model. And if you do that math, that's, call it, 1.5 points for this year for WSE growth. Next year, I think we'll do better than that 2,000. So I think our growth we can get out of there would be 2% plus on the WSE basis.

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

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

Yes. I mean we have a lot of effort on getting our -- getting the top of the funnel filled. And then if you get to the top of the funnel, how do you get the discovery meetings with our clients, how do we get [ started ] with the prospects, how do we get to our consultative sale. We've got a very good process and good focus and attention on making sure that we're hitting our metrics and our numbers. Everybody kind of -- everybody knows what they got to get done and everybody is working to get it done. And you're seeing the good results of that. And honestly, we're -- it's one of those situations where we have more business in the funnel now than we did this time last year by a healthy percentage more, especially with the benefit side.

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

I'm laughing because transitory is one of those words that I think has been [ ruined ] by the Fed here. If we just think of -- for what happened with our clients in Q3, right? So Q1, our clients grew. Q2, our clients got back to flat. Q3, our clients started to reduce. The reduction was predominantly all of California. And in California, it was skewed to Northern Cal. And when you peel back and you look at the clients and the industries that they're in, in Northern Cal, the #1 that we saw in Q3 is the construction and the trades. And that's one that I think is transitory. We looked at -- clients we talked to and the data we looked at, the new housing starts around the San Francisco Bay Area dropped precipitously in Q3. Our clients had to reduce workforce to accommodate that lack of business.

The positive there for why I think that industry specifically is transitory because the clients we're talking to have orders for new home starts, and we think that we're going to see benefit for them to rehire back in Q4 from the clients we're talking to. So that's the transitory. The ones that I don't believe are transitory are our next one that shrunk, and this was Northern Cal and Southern Cal was transportation and logistics. And it's not a lot, but it's less than 0, right? So we had them go negative. So transportation and logistics, Q1, we saw that business go up as folks were trying to get ahead of tariffs. Q3 came down as they were absorbing tariffs -- or Q2, it came down. Q3, it came down more.

I don't know if that one is going to rebound. I think that one, depending upon where we are, may stay there for a little bit. And then the other one that we saw, the third biggest was, believe it or not, it was our retail shops and our retail shops that are predominantly franchises. So we do a lot of work with franchisees. And those franchisee business on the retail food front, we saw them pull back in Q3. And from what I'm reading with in that open market with the Chipotles and stuff like that, I feel like our clients weren't alone in that space. So I don't believe that, that one is going to come back either. But construction is one of our bigger industries. And if construction comes back, it makes up for all of that.

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

That's not -- when we integrate with third-party systems, predominantly, it's to provide better services and better value. It's not to do the upcharge, right? So if we hook into their GL or we hook into a different timekeeping or we hook into a different -- a bunch of different systems, it's -- call it, it's an ease of business for the client and another reason why they would stay with us because we handle servicing for them. It's -- think of it as another barb in the hook for why our retention stays up so high.

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

I wanted to touch on the -- a couple of things. First, maybe we could start with the -- your thoughts -- early thoughts on Chicago and Dallas openings, whether there was any things that were -- that stood out as to maybe being different than what you were expecting there? And then how that sort of plays into what you're looking at for Nashville in the early part of next year?

Sure. That was -- we opened -- we did the grand opening for both branches, Chicago and Dallas in September, and it was a fun event. The folks that were building out those branches and the teams there, it was a big moment of accomplishment for them that they got to display their office. They had referral partners there. They had clients come in. I mean it was just a nice feeling of they've been working really hard to get it done. They got it done, and it was a great accomplishment, and it was really good. Both branches did an excellent job where they had clients, referral partners and folks from the community and folks in their business community and their business adviser groups all there celebrating their success. So overall, both were great and both were -- both -- I'm proud of both of them for what they've done.

Excellent. And then I wanted to shift over to the product -- IT product objectives that you discussed in the focus of white collar and larger enterprises. Are there any sort of particular areas that you see as opportunities there that you're more excited about than others or maybe how that sort of -- and to what extent, if any, it sort of plays into sort of the overall AI strategy that's out there?

Yes. Feel like you can't talk about anything without having AI in it. But just in general, like we're...

I had to sneak it in where I could.

I mean, in general, we're building the technology, and we're building it with the most up-to-date technology that's AI-enabled. If you think of the employee life cycle, it's everything from hire to retire and in between, and we're working to fill those holes, and we're going to have a product launch in January. We're going to have a product launch in March. After we have the product launches, we can continue to make investments. But really, what we're going to get to is a comprehensive, what the industry calls, human resource information system. So a comprehensive platform that has all of that. And really, that platform, when you get into the white collar, when you get into the larger, more sophisticated clients, they look for you to have that platform. So I think we're going to have good tech with good integrations with great people. And I think that when you put that up against any other tech platform, if you can go tech for tech and have great people that are there locally to support it, why would you not go with BBSI?

Great. And then I appreciate you sharing the Net Promoter Score update. That's always really helpful and important. I wanted to -- maybe the last one for me on the 60% increase on -- as far as -- is there sort of anything that you saw there as far as the mix of those? Is it similar to your existing mix? Or is there any differentiation that you saw maybe perk up whether it's in a client vertical or by enterprise size?

Yes. Good question. It's -- I would say it's nothing different than the construction of the existing portfolio of clients. It's really if you think of why somebody joins BBSI, like we don't care if it's for payroll, if it's for HR, if it's for workers' comp, if it's for benefits, right? Whatever they join us for, we can sell that product. And then after we sell that product, we can bring the best of BBSI. And when we wrap the product with the best of BBSI, that's why we get the retention we get, right?

So if we can bring them in for benefits and then keep them and do the HR, then great. If we bring them in for comp and can wrap the services, then great. So just in general, we try to find their pain point, try to solve their pain point and bring them the rest that we have to offer. So we don't -- we're not targeting vertical A or vertical B or white collar this or blue collar that. It's really what problem can we help that client solve and then how do we solve problems that they didn't even know they had.

[Operator Instructions] Your next question comes from the line of Bill Dezellem from Tieton Capital.

Gary, you referenced the WSE change Q1 to Q2 to Q3. Did the hours worked trends mirror that -- those full WSE numbers?

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

Okay. And then relative to the increase that you referenced in the health care quote pipeline here in October versus a year ago, if you have your normal level of wins coming out of that quoting process, what is the incremental impact on 2025 -- excuse me, on 2026, next year?

Simple math would be -- it would be -- if closing rate stays the same, it would be 60% better, but we're not going to give 60% better than we did in '25. And we had a great '25, if you can remember for the 1/1 selling season, but we're not going to -- I'm not going to -- this is a little bit of an uncertain market because of how much these rates are going up for certain carriers, and I'm going to reserve my right to talk about that one at the Q4 call.

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

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

And would you please remind us the base?

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

It's the fine print that gets us all.

I can tell you it's too, and I want to say it's -- I can't see it. I can't see it. So it's embarrassing for me to say that, but...

It is what it is. Okay. So here's -- just conceptually then, are you seeing either health insurance or anything else that you are providing that is specifically increasing the average size? Or is it truly a combination of all pieces of the puzzle? And then are there any -- I guess my follow-on question to that is, are there any other interesting stats that are coming out of your new clients this year versus prior years?

I would say it starts with having good people that understand how to position BBSI, and we put a lot of work into that. It's having good products for them to position, and we put a lot of work into that. It's having referral partners that understand your value prop and are comfortable that you're going to execute, and we'll put them in front of their clients, and we've really executed on that. So that's kind of the 3-prong. But in general, right, our tech is better, our products, we have benefits. There's a lot of things we've been working on that lean to a larger client. So it's not just one thing. It's the combination of all those things.

So bottom line, if your WSEs from existing clients were to stay flat, it sounds like you would be anticipating an increasing rate of growth from your new client adds, both because the number of new client adds would be increasing, but also the number of WSEs per account would be higher.

Yes. I would say the -- it's not so much as the reason we're growing is because we're adding larger clients, like the 2 on the average doesn't really skew it that much. It's really the velocity that we're bringing on clients, and I don't see that velocity slowing down.

Appreciate you taking the time and have fun at the eye doctor.

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

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

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