Q1 2025 Insperity Inc Earnings Call
Yes.
Paul: Good morning, My name is Paul and I will be your conference operator today I would like to welcome everyone to the <unk> first quarter 2025 earnings conference call. At this time, all participants right now listen only mode.
Speaker Change: Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded at this time I would like to introduce today's speakers joining us our pulsar body chairman of the board and Chief Financial Officer, and Jim Allison Executive Vice President of final.
Paul: <unk>, Chief Financial Officer and Treasurer.
Speaker Change: At this time I'd like to turn the call over to Jim Allison Mr. Allison. Please go ahead.
Paul: Thank you. We appreciate you joining us today, let.
Speaker Change: Let me begin by outlining our plan for this morning's call.
Speaker Change: First I'm going to discuss the details behind our first quarter 2025 financial results.
Paul: Paul will then comment on our first quarter results.
Paul: The macroeconomic environment and the ongoing implementation of our workday strategic partnership I.
Speaker Change: I will return to provide our financial guidance for the second quarter and full year 2025.
Speaker Change: Will then end the call with a question and answer session.
Speaker Change: Before we begin.
Speaker Change: I would like to remind you that Paul or I may make forward looking statements during todays call, which are subject to risks uncertainties and assumptions. In addition, some of our discussion may include non-GAAP financial measures for more detailed info discussion of risks and uncertainties that could cause actual results to differ materially.
Speaker Change: Any such forward looking statements and reconciliations of non-GAAP financial measures. Please see the company's public filings, including the form 8-K filed today, which are available on our website.
Speaker Change: This morning, we reported first quarter adjusted EPS of $1 57, and adjusted EBITDA of $102 million. These.
Speaker Change: These results fell below our guidance range, primarily due to higher than expected benefits costs, which I will discuss further in just a minute.
Speaker Change: The average number of paid Worksite employees increased by 0.7% over Q1 of 2024 to 306023.
Speaker Change: The paid Worksite employee growth was slightly below our guidance range as some new client starts were delayed or canceled in the second half of the quarter due to mounting uncertainty around the impact of the new administrations economic policies.
Speaker Change: However.
Speaker Change: Worksite employees paid from new client sales still increased 3% over Q1 of 2024.
Speaker Change: In addition client retention remained a bright spot in the quarter with a total client retention of just 9% in Q1 of 2025 versus 12% in.
Speaker Change: In Q1 2024.
Speaker Change: Client net hiring was just slightly positive for the quarter.
Speaker Change: But continued to be very weak compared to historical norms and lower than last year.
Speaker Change: Gross profit per Worksite employee in Q1, 2025 was $338 per month down from $378 in Q1 in of 2024 as benefits cost per covered employee increased eight 4% year over year.
Speaker Change: Other components of gross profit per worksite employee, including pricing payroll taxes and workers' compensation were generally in line with our expectations.
Speaker Change: We are obviously disappointed by the emergence of higher benefits cost.
Speaker Change: On a per covered employee basis.
Speaker Change: Benefits costs exceeded our budget by $28 million of which 12 million was related to higher than expected run off of medical claims related to prior periods.
Speaker Change: And $16 million was related to higher than expected medical claims incurred in Q1.
Speaker Change: Typically.
Speaker Change: The claims runoff from prior periods includes a mix of positive adjustments of negative adjustments.
Speaker Change: And in periods of higher than expected runoff, it's typically concentrated in the most recent prior period.
Speaker Change: Our 12 million dollar adjustment this quarter was much more widespread than that we saw an elevated level of claims adjudication and payment above normal historical levels for virtually all older periods, which is an unprecedented occurrence.
Speaker Change: To mitigate future exposure to claims from these historical periods. Our adjustment includes both the higher level of adjudicated claims plus an increase in our reserve for remaining unreported claims.
Speaker Change: We have analyzed our medical claims history to investigate the underlying causes of the higher than expected claims activity for Q1 in prior periods.
Speaker Change: Our analysis indicates a significant acceleration of claims payment activity for inpatient hospitalization and outpatient services in Q4 and Q1.
Speaker Change: Pharmacy costs also trended at higher than expected levels, although to a somewhat lesser degree.
Speaker Change: Looking at large claims we can see that the frequency of claim it's costing more than $100000 in a quarter has increased by about 10% in Q4 and Q1 compared to recent history.
Speaker Change: To summarize our data indicates that our benefits costs have been impacted by an acceleration of several interrelated factors.
Speaker Change: Claims processing affecting current and prior periods.
Speaker Change: Inpatient outpatient and pharmacy costs.
Speaker Change: And the frequency of large claims.
Speaker Change: As we look to what this means for our expectations for the full year, we have considered a range of possibilities, including whether these factors represent a longer term new normal.
Speaker Change: A shorter term increase in utilization that happens from time to time in our plant.
Speaker Change: Or possibly even a change in the timing of payments or processing speed.
Speaker Change: In addition, we have taken into consideration the impact of demographic changes and planned migration to lower cost plan options, which should provide a favorable impact to claims trends as we proceed through the year.
Speaker Change: Based on these factors, we are forecasting a range of benefits cost per covered employee of six 5% to seven 5% for the full year.
Speaker Change: From our initial projection of 5% to six 5%.
Speaker Change: Based on the higher projected cost trend, we have raised our pricing targets moving forward.
Speaker Change: We have already started to implement these measures with an emphasis on strategically selected accounts.
Speaker Change: Assuming our benefits cost trends towards the mid point of the projected range, we expect to be able to realign our pricing by January of next year.
Speaker Change: In addition, we're also evaluating benefit plan design and packaging changes that could mitigate health care cost trends in 2026.
Speaker Change: We continue to closely monitor claims activity and we will adjust our pricing and plan offerings Accordingly.
Speaker Change: Moving to Q1 operating expenses they were managed slightly below budget and increased only $5 million or 2% over Q1 of 2024.
Speaker Change: The small increase was driven by the investment in our workday strategic partnership which totaled 13 million in Q1 of 2025 versus the initial ramp up of $5 million in Q1 of 2024.
Speaker Change: Other operating expenses were down slightly year over year.
Speaker Change: As for income taxes, our effective tax rate was 29% and was generally in line with Q1 of 2024.
Speaker Change: During the first quarter, we continued to return capital to our shareholders through our regular regular dividend program.
Speaker Change: And the repurchase of our shares.
Speaker Change: We paid $23 million in cash dividends and repurchased 224000 shares of stock at a cost of $19 million in Q1.
Speaker Change: We ended the quarter with $124 million of adjusted cash.
Speaker Change: And we had $280 million available under our credit facility.
Now at this time I'd like to turn the call over to Paul.
Paul: Thank you Jim and thank you all for joining our call today I'll provide comments on four areas first I will discuss the impact of the change in the macroeconomic environment that occurred in the first quarter and the effect on our full year growth outlook.
Paul: Hello with progress on initiatives to build on the growth momentum we established early in the year.
Paul: Next I'll provide some context around the benefit cost issues that developed in the quarter and the three initiatives, we expect to mitigate effects into 2026 I'll finish with what I believe is the most significant recent development the outstanding steps forward on our workday strategic partnership, including our agreement on a go to market.
Paul: Plan.
Paul: Our first quarter began with an excellent year end transition due to very successful fall sales and retention campaign, we achieved an important inflection point reestablishing positive growth and paid worksite employees.
Paul: Midway through the quarter tariff and other government policy initiatives led to turbulence in the market and uncertainty in the marketplace.
Paul: We saw quite a sudden reversal of optimism in our small and mid size business target market and client base directly affecting decision, making and the outcome of the shock factor in the small business marketplace was a number of sold accounts and in the queue to become paid Worksite employees decided not to move ahead.
Paul: Or delayed the start of their contract beyond the first quarter.
Paul: Now, although we've already seen some moderation of client and prospect in decision the dramatic change in sentiment about the economic climate and the impact on their business for 2025 was evident in our recent client survey results.
Paul: We completed our survey in the Middle of April and 66% of respondents expect economic climate to have a negative effect on their business. This year. This is up from only 29% in January client survey respondents expecting their business to perform better than last year was down to 58% in April from 71 person.
Paul: In January and those expecting to add employees in the coming quarter, we're down to 34% from 43% on a positive note HR priorities continue to support demand for our comprehensive HR services as the top three needs identified by respondents were retaining talent building a strong <unk>.
Speaker Change: Sure and keeping employee engagement high.
Speaker Change: Our new sales booked in the quarter were on track through February. However March came in below budget, we still had a relatively solid full quarter at 85% of budget, especially considering the uncertainty in the marketplace, but the effect on sales was apparent the.
Speaker Change: Q1 booked sales numbers not below budget by enough to change our annual sales target. However, the timing of these sales combined with paid Worksite employee results in Q1 slightly below our expected range has a significant cumulative effect on the year in our residual income business model.
Speaker Change: The math from this takes the shortfall in Worksite employees times, the nine months of the balance of the year in this case in our model the year over year growth rate comes down by over 1% and this lower number of employee months reduces gross profit. This.
Speaker Change: This is quite a contrast compared to the momentum we have seen in our growth drivers, including client retention and our sales and marketing efforts are exceptional start to the year and client retention of 91% has put us on track for a strong year in this key metric at the high end of our historical range.
Speaker Change: Our recent realignment in our sales and service organizations I discussed last quarter, it's already showing signs of success.
Speaker Change: Our sales activity figures, creating the opportunity for new sales was excellent with a double digit year over year increase in total business profiles or opportunities to bid our services.
Speaker Change: One of the key drivers of the sales activity.
Speaker Change: Excuse me it was a double digit increase in marketing leads over the same period last year. Many aspects of our marketing efforts are gaining traction and we believe we are in a strong position to continue to feed qualified leads to our more experienced team of business performance advisors driving sales this year, even in this economic climate.
Speaker Change: Now, let me provide some context for the benefit cost increase related to our health plan coverage, we have with United Health care and our business model, our quarterly accounting requirements for our annual Health plan policy is a source of potential volatility in our results vol.
Speaker Change: Volatility in the healthcare market at large has been more pronounced since COVID-19 and predictability has been affected to a degree but our analysis indicates that this quarters higher than expected claim activity was due to a variety of factors rather than a primary root cause.
Speaker Change: United Healthcare is going through a difficult period of their own and they've told us they have not altered their approach.
Speaker Change: Handling our claims based on the data. We received there are indications of accelerated payments utilization patterns large claims are a combination of the three all appearing to be part of the mix.
Speaker Change: We've had times in our history, where this type of quarter in hindsight simply reflected the concentration of large claims or other activity that evened out in subsequent periods. We've also had times, where a quarter. Like this was the first sign of a higher trend rate than expected and at those times.
Speaker Change: Rising in cost management tactics were important to balance price and costs going forward.
Speaker Change: We're trading this development like the latter case as a result, we're reserving additional amounts we believe are appropriate and factoring in a higher trend in our outlook, which produces a wider range of forecasted earnings for the current year.
Speaker Change: If there is such a thing as a silver lining here the timing of this occurrence allows us to begin three initiatives that we believe will help address this situation with the goal of mitigating effects in 2026 as.
Speaker Change: As Jim mentioned, we've already begun a pricing initiative, which we believe can balance price and cost by year end at the midpoint of our new expected benefit cost trend.
Speaker Change: The second initiative is our evaluation and implementation of plan design changes for the next plan year plan changes must be decided by midyear and then implemented over the second half of the year.
Speaker Change: We have this information about benefits cost now we're factoring in this information as we evaluate upcoming plan changes no.
Speaker Change: No significant plan design changes were initiated this year. So January 2026 would be a practical time for these changes to occur.
Speaker Change: The third initiative is also timely our multiyear contract with United Healthcare is scheduled to be renewed on January one 2027, United Health care has been our primary carrier since 22002, and we typically negotiate a new contract before the last year of the current term begins we've already had it.
Speaker Change: Call with United Health care leadership, and agreed to accelerate contract renewal discussions including possible structural changes. We also believe there are opportunities to further leverage our workday strategic partnership and are related to go to market plan in these discussions.
Speaker Change: So our most significant short term issue in the first quarter was certainly the benefit cost challenges and we have a plan in place that we believe will address it in a manner likely to mitigate any effect next year.
Speaker Change: The most significant development in the first quarter for the long term was the exciting progress we've made on our workday strategic partnership, including our go to market plan, which I will cover in a few minutes.
Speaker Change: First we achieved a critical milestone of launching our corporate workday platform in mid March I am very pleased to report that in spite of the complexity in the relatively short period of time to reach this milestone. This launch was nearly flawless.
Speaker Change: Both firms had prepared diligently for any possible issues.
Speaker Change: And we're very pleased this transition occurred at such a high level of effectiveness.
Speaker Change: Outside the norm of typical deployment.
Speaker Change: The launch of inspiring corporate instance was a significant milestone for the entire strategic partnership for several reasons.
Speaker Change: Notably many of the integrations and development efforts for the corporate instance are also foundational for the client incidence. In addition is very now has experienced the efficiency and effectiveness that the workday solution offers companies like ours with over 4000 4400 employees. This achievement allows us.
Speaker Change: And our people to become a strong advocate for the joint solution, we are developing for clients.
Speaker Change: The reaction across the disparity from managers and employees alike has been tremendous people leaders have been commenting that they are much more visibility into their organizations as we move from multiple systems into one brought with processes that are more efficient and happening in real time as.
Speaker Change: Part of a business process workflow.
Speaker Change: Bottom line employee comments have also been enthusiastic about the amount of information available all in one location the ability to review and complete task inside the mobile platform a fantastic issue resolution process and the ease of navigation now from the reaction and comments, it's apparent we're off to a great start in developing the advocacy.
Speaker Change: We intend to do to recommend the joint and spare the workday solution to clients and prospects in the near future.
Speaker Change: There is still a hill to climb to launch the new product, but the momentum from the team of both companies working together to achieve such a successful launch of the corporate incidence is a leverage of bolt confidence boost I believe another critical highlight of our efforts. So far this year was the completion of our workday strategic partnership go to.
Speaker Change: <unk> plan for our new joint solution with senior leadership and other key personnel from both companies together our teams agreed upon the plan to take our joint solutions to market.
Speaker Change: We are aligned on the target market for the joint solution that product name messaging and competitive positioning the sales motion and most importantly to form a new pod a product oriented delivery team focused on achieving the objectives set by leadership of both companies.
Speaker Change: This go to market plan contemplates contemplates this team of cross functional sales sales support marketing and other professionals, we will execute our plan to co sell our new joint offering.
Speaker Change: We plan for this to be a client centered approach to determine the best path forward for our prospect matching their needs with the offerings of workday in Sperry and of course, our new joint solutions.
Speaker Change: This team is rapidly forming and taking the steps necessary to begin calling on targeted early adopter candidates over the last half of this year. The goals of this team over this period include developing the sales motion and selling accounts to queue up for 2026, when the joint solution is expected to be available.
Speaker Change: This team will wake up every day with the responsibility authority flexibility and incentive to achieve the goals of the go to market plan. We believe this new join offering is a hand in glove fit for this large underserved target market.
Speaker Change: The target markets comprised of over 40000 businesses with more than 25 million employees. In total we believe our new joint solution to be a uniquely comprehensive combination of technology and services for this mid market.
Speaker Change: And has the potential to be disruptive, providing greater speed to value and lower cost and complexity up to this point, we've not provided any quantification of this new growth driver. We expect to begin at some point in 2026 now.
Speaker Change: Now that we have an agreed upon go to market plan, we believe it's reasonable to give some frame of reference for consideration.
Speaker Change: It is important to note. This is not specific guidance in any form but just some information to help you understand the potential significant impact this new product could have to drive growth and return on investment.
Speaker Change: We expect the average size of prospects in this target market for this new solution to be higher than our historical sales of mid market accounts, which we believe could double our annual mid market sales production. As an example, we sold just 20 accounts at an average of 750 employees. This would produce 15.
Speaker Change: <unk> thousand Worksite employees, adding approximately 5% of our annual growth at our current size.
Speaker Change: When you also consider the opportunity for current mid market accounts moving to the new solution and the corresponding increase in our client retention rate. We believe there is potential to double the size of our mid market business over a reasonable period of time and drive a substantial return on investment.
Speaker Change: I had the opportunity to introduce this strategic partnership and the new solution to nearly 80 mid market business leaders owners or Ceos, both prospects and current clients at a recent event the.
Speaker Change: The reaction included a high level of enthusiasm, but also a clear understanding that in spirit and work. They have made a significant investment of resources to bring a potentially game changing solution to their doorstep.
Speaker Change: Co branding co marketing co selling all part of our go to market plan are key elements of the workday strategic partnership. We believe this new joint solution will be well received by the target market and it will be a key driver to the growth trajectory of its parity for 2026 and beyond at this point I'd like to pass the call.
Jim Allison: Now back to Jim.
Jim Allison: Thanks, Paul now, let me provide an update to our full year 2025 outlook.
Jim Allison: As Paul discussed we have trimmed our expectations for Worksite employees paid from new client sales and net client hiring due to the effects of the macroeconomic environment and the small business sentiment.
Jim Allison: As a result, we have reduced our expected worksite employee growth rate by a little over 100 basis points.
Jim Allison: From our initial guidance for the full year, we are now forecasting worksite employee growth of.
Jim Allison: 0.5% to 3% over 2024.
Jim Allison: Reflecting sequential quarterly growth of 1% to 2%.
Jim Allison: With regards to gross profit we are forecasting a range of benefit cost per covered employee of six 5% to seven 5% for the full year. The lower end of the range assumes that claims for the remainder of the year moderate toward budgeted levels, while the higher end assumes that <unk>.
Jim Allison: Elevated claims continue through the year.
Jim Allison: We anticipate that the benefit cost trend will taper down from the eight 4% experienced in Q1 as we progress through the year due to the effect the expected favorable impact of plan demographic changes and planned migration that we've seen in.
Jim Allison: In addition.
Jim Allison: Year over year comparisons in the first half of 2025 are impacted by last year's favorability and that impact should subside in the second half of the year.
Jim Allison: We are keenly focused on operating expense management as a key priority in the current environment.
Jim Allison: We expect operating expenses to decline slightly sequentially in each of the remaining quarters.
Jim Allison: For the full year, we expect that operating expenses will be an overall reduction compared to 2024.
This includes planned spending on the implementation of the Workday strategic partnership, which we expect to total approximately $62 million in 2025 versus $57 million in 2024.
Jim Allison: Based on all of these factors we are forecasting full year adjusted EBITDA in a range of 190 million to $245 million.
Jim Allison: We are forecasting full year adjusted EPS in a range of $2 23 to $3.28.
Jim Allison: As for Q2.
Jim Allison: We are forecasting the average paid worksite employees to be in a range of 308000 to 311000, which represents an increase of 0.3% to one 3% over Q2 of 2024.
Jim Allison: We are forecasting adjusted EBITDA in a range of 33 million to $53 million and adjusted EPS in a range of 29 cents to <unk> 67 cents.
Speaker Change: As I noted earlier earnings comparisons to Q2 of 2024 are expected to be significantly impacted by the favorable benefits costs in Q2 of last year compared to the challenging environment. This year.
Speaker Change: We are pleased that our year end transition has generated year over year Worksite employee growth.
Speaker Change: And barring a significant change in the macroeconomic environment, we expect some modest improvement over the course of the year.
Speaker Change: We have a pricing plan in place that we believe will address the benefit cost trend environment and we have many other options available that could contain or reduce cost and drive improved profitability in 2026.
Speaker Change: At this time I'd like to open up the Gulf for questions.
Speaker Change: Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Information tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we poll for questions.
Speaker Change: On the first question today is coming from Andrew Nicholas from William Blair, Andrew Your line is live.
Andrew Nicholas: Hi, good morning, Thanks for taking my questions.
Speaker Change: First one I wanted to ask was just on the.
Speaker Change: Some of the cancels or I guess I should say like Onboarding pauses that you cited in the back half.
Speaker Change: The first quarter, Paul could you speak a little bit more to that I think you mentioned some moderation in that dynamic.
Speaker Change: In late first quarter, but.
Speaker Change: Any any more color there even quantification of it.
Speaker Change: How that surprised you would be helpful.
Speaker Change: Yeah, absolutely you know obviously as the year began the optimism level in the small business community with Skyrocketing I was really strong post election, but even post first of the year.
Speaker Change: And the reversal was quite dramatic once the.
Speaker Change: The government actions related to tariffs and other things that were happening and we were.
Speaker Change: Yeah, we were surprised by the level of shock factor, if you will and.
Speaker Change: Say that last year that was basically the last five weeks or so of the quarter and the you know the.
Speaker Change: The level of uncertainty was high enough just to cause a pause.
Speaker Change: And we had such a strong fall campaign that you was rolling in there were just.
Speaker Change: More accounts that we would have expected that.
Speaker Change: Half that basically.
Speaker Change: To put it on pause indefinitely basically canceled for now.
Speaker Change: And have that just delayed beyond the first quarter. So they are coming in now but.
Speaker Change: That was not something really predictable.
Speaker Change: We did a really thorough.
Speaker Change: Client survey that provided good information that I went through and I think it's helpful for all of us, but we have seen some moderation you know that basically people with the mindset that okay. We still don't know all of that is happening yet theres still a lot of uncertainty but.
Speaker Change: We're moving ahead, so we've been battling through that.
Speaker Change: Our sales team service team done a great job of supporting clients communicating with prospects about.
Speaker Change: How our service is a benefit to them when they're facing uncertainty how it supports their employees in a way that helps them be more productive and helps the client and be able to focus on their profit opportunities that are right in front of them. So.
Speaker Change: We can manage as we've done this before.
Speaker Change: And where we're on a good track on that front.
Speaker Change: Got it. Thank you and then switching gears a little bit for my follow up I. Appreciate all the color on the Workday go to market plan and maybe some of the potential financial impact.
Speaker Change: Curious on on the cost side in particular, I think $62 million of cost in 'twenty five as expected only 13 million I believe in the first quarter can you walk us a little bit more through the cadence of that spend this year and maybe more importantly, how should we think about.
Speaker Change: That <unk>.
Cost item.
Speaker Change: In 26 and beyond is it something that you would expect to gradually move lower or is it part of your ongoing expense base I'm just trying to figure out now that you have to go to market plan.
Speaker Change: Agreed upon what additional visibility you have on that expense side.
Jim Allison: That's great I'll, let Jim comment on some of the cost side, but let me let me just say that.
Jim Allison: The way we look at this of course, we outlined the significant investment we were making when we started about 150 million.
Jim Allison: We spent we said it was heavily weighted toward the first two years and Youre, saying that it was $57 million last year, we've got a forecast for 62 here. The investment there is largely the development effort that's going on to launch the joint solution.
Jim Allison: And so we do anticipate that as well.
Jim Allison: Set at the beginning that investment in years, three four and five would be.
Jim Allison: <unk> blade less however that all relates to the timing of the launch et cetera, and so we'll see that.
Jim Allison: Diminished and we will see revenues start to flow in.
Jim Allison: You know 26 and beyond how much we're not sure yet.
Jim Allison: But I think we do have a plan to be pinning that down as we get closer to it and providing more information that will help you all evaluate it but I think what I wanted to make sure you understand is that this go to market plan is very straightforward. It is one that does it it's more targeted it's rifle.
Jim Allison: Shot things that we can do on that front are not going to add tremendous lead to expense.
Jim Allison: But are going to be able to we believe with <unk>.
Jim Allison: Closing relatively few accounts really start to have a dramatic effect on the business and we really do like I said in my remarks I believe.
Jim Allison: Track toward.
Jim Allison: Rapidly increasing our sales effort, increasing our client retention that we've already kind of seen signs of.
Jim Allison: And what that relates to doubling the size of our whole mid market business.
Jim Allison: Reasonable period of time really drives that return on investment so Jamie have any other comments on the cost side.
Jim Allison: And when you think about the quarterly pattern.
Jim Allison: This year, it's going to be relatively stable from quarter to quarter little bit higher as we go through the year. Obviously, we're entering a very significant time of testing there are some new functionality in the workday system, that's being deployed.
Jim Allison: As part of this workday solution that becomes part of things that we have to.
Jim Allison: Test and tweaking and work through.
Jim Allison: In the setup process. So there's a lot of people that are engaged in that in that process.
Jim Allison: And we expect that that will be the case.
Jim Allison: As we go through the year and as milestones are hit and functionality is.
Jim Allison: Deployed for us to.
Jim Allison: To include in our testing.
Jim Allison: So that's the bet that shouldn't be a really big.
Jim Allison: A really big difference as far as we know the moving forward.
Jim Allison: And the concept of.
Jim Allison: How much of this repeats or or doesn't repeat Paul obviously made the first important point, which is that the deployment date is the biggest driver for 2026.
Jim Allison: Some of the costs that we have right now.
Jim Allison: Could some of them will go away certainly some people that are on this project are likely to move back towards other projects within the company.
Jim Allison: But some of those projects, particularly on the it side.
Jim Allison: We'll be in a position, where we would be able to capitalize some dollars around software development.
Jim Allison: We may also get to a point, where some of the dollars related to this project.
Jim Allison: Our capitalized so there's a lot of variables in the mix there.
Jim Allison: And as we get closer to.
Jim Allison: To the to the deployment date.
Jim Allison: We will have a better line of sight on how all that's going to shake out.
Speaker Change: Thank you. The next question is coming from Tobey Sommer from Truest Tobey your line of sight.
Jim Allison: Okay.
Jim Allison: Thanks, So I wanted to ask.
Jim Allison: About your.
Jim Allison: Your view of the customer base and in in sentiment.
Jim Allison: Hum.
Jim Allison: Certainly in the last 100 days or so we've had uncertainty increased.
Speaker Change: Paul would you what do you look for in terms of matching.
Speaker Change: Out of Washington that could.
Speaker Change: And stuff to the other side of the ledger.
Speaker Change: To allow for confidence to should grow in the customer base and therefore.
Speaker Change: Affect the trajectory of the company's sales and retention.
Tobey: Thank you for that question Tobey.
Speaker Change: Really had a lot of interaction this quarter.
Speaker Change: Full week of client interaction every evening at one of our corporate events, where I was able to have direct discussions and I have to say I was pretty astonished that the comments about the government action and tariffs and uncertainty of the time of the.
Speaker Change: <unk>.
Speaker Change: It was mentioned but was not.
Speaker Change: Primary topic of discussion that the long term view of where their businesses. We're going the energy around that was still strong. This was just more of a.
Speaker Change: Of a common sense pause in decision making.
Speaker Change: It was it you know.
Speaker Change: I think very little has to happen for this to turn the other way.
Speaker Change: In terms of for example.
Speaker Change: Locking down the tax system for the going forward I think would have a significant effect.
Speaker Change: To rebalance those.
Speaker Change: Certainty about the future.
Speaker Change: Thank <unk>.
Speaker Change: Regulatory environment industry by industry.
Speaker Change: Makes a big difference.
Speaker Change: And I think we'll be hearing more about that that should also flow the other way.
Speaker Change: But in terms of you know us just evaluating what to do this year I think we've done the right thing to kind of factor in this sentiment level for the immediate decisions about.
Speaker Change: Tiring people in and.
Speaker Change: There is some of the capital spending that theyre not doing right now.
Speaker Change: Based on who is waiting for some things to turn the other direction, but I don't think it's going to take much in I think it's going to be.
Speaker Change: A strong move the growth direction, because theres so much emphasis on supporting growth in the business community.
Speaker Change: And then I was wondering I know, it's a little bit out in the future.
Speaker Change: Four five months from starting.
Speaker Change: Could you maybe anticipate for us.
Speaker Change: This year's fall selling campaign may.
Speaker Change: May be different from last year's because of perhaps progress.
Speaker Change: Not only the the workday implementation at the firm, but also your kind of tangible working relationship with workday itself by that time.
Speaker Change: Yeah, I think I tried to mention that a little bit of that in my script about the contrast between some of the recent happenings.
Speaker Change: The macroeconomic et cetera, and the momentum that we have going in our sales service and our workday.
Speaker Change: Same implementation. So it's I think we're really building some strong momentum it's too early for me to kind of.
Speaker Change: Kind of project out fall campaign, but I can tell you. We're very excited about it and I think it can be.
Speaker Change: Very favorable compared to last year's environment, which was in the midst of an election environment and we actually saw a slow start last year.
Speaker Change: Followed by a pretty strong strong finish had a really good campaign, but I think theres a lot of things that are in place now and happening over the year.
Speaker Change: That.
Speaker Change: Put us in a good position for the for the fall and for the start of 2026.
Speaker Change: Thank you. The next question is coming from Mark Marcon from Baird Mark Your line of sight.
Mark Marcon: Good morning, and thanks for taking my questions.
Speaker Change: So two two questions I'll start with one of them to have a follow up with regards to you.
Speaker Change: You know the healthcare cost Paul.
Speaker Change: We've seen this before and you've handled before just wondering.
Speaker Change: How quickly can you start making adjustments with regards to the pricing. It sounded like you know by January of next year, we should be.
Speaker Change: Relatively well set.
Speaker Change: In terms of making the adjustments, but just wondering.
Speaker Change: You know intra quarter or over the course of the year how quickly can we make some adjustments and when we would start seeing some improvement in terms of the gross margin.
Speaker Change: On a per WMC.
Speaker Change: Relative to last year. So that's the first question and then I'll follow up.
Speaker Change: Sure. Let me you know it brings up the comment I made in the script about the silver lining you know obviously, we never like for this kind of thing that happens and it's disappointing, but we've been through it before we know how to handle it and and frankly the timing of this happening early in the year like this.
Speaker Change: Actually optimizes, the likelihood of going into 'twenty, six and a favorable environment on this issue.
Speaker Change: Because we have the large majority of our client base that we have the smallest part of the client base that actually goes through their renewal bidding process in Q1, the rest of the year north of 80%, 85% I don't have the exact number but it's the large majority of our client base will renew.
Speaker Change: Over that period, so from a pricing perspective, Jim and his team already started the changes, which we do because we're looking at it month by month and when the quarter ends that's when we make those kind of pricing.
Speaker Change: Gameplan and they've already put that in place.
Speaker Change: We also Jim mentioned in the in the book of business, we actually have had some.
Speaker Change: M. A graphic changes that are favorable so the pricing as it happens and the demographic change should improve.
Speaker Change: The margin as the year goes on but the main thing for all of US I believe to be focused on is.
Speaker Change: The likelihood of 2026.
Speaker Change: Being that step up into a different level of profitability, we're going through this investment period, we're going to be much closer to the launch of the product we're going to be selling the new offering in the marketplace over the last half of the year and.
Speaker Change: We'll have that picture come together, where we can.
Speaker Change: Hopefully be able to time when things are happening into next year that will give us a better picture of how things will work.
Speaker Change: Great.
Speaker Change: For my follow up just are you seeing any sort of regional differences or industry differences both in terms of the.
Speaker Change: The health.
Health care costs as well as the the hesitancy with regards to.
Speaker Change: You know two to finalize some of the hires that were initially planned.
Speaker Change: And then are you seeing any sort of.
Speaker Change: Any sort of lead generation from the Workday partnership is yet or when would you start expecting to see that thank you.
Speaker Change: Yeah.
Speaker Change: Thank you so I'll start with the.
Speaker Change: Last part of that question.
Speaker Change: So what's what's exciting about is that the the go to market plan involves.
Speaker Change: Putting this pod together this product oriented.
Speaker Change: Pain that delivery chain.
Speaker Change: We'll actually be.
Speaker Change: Handling ore handling actually doing the marketing and the lead generation in the lead management.
Speaker Change: Of.
Speaker Change: Of everything that we're targeting together as a partnership and so its really a whole new approach to.
Speaker Change: To that whole effort.
Speaker Change: That.
Speaker Change: It makes so much sense, it's such a perfect fit.
Speaker Change: So where we're expecting to see that start.
Speaker Change: As we go as we put this new program in place.
Speaker Change: Looking at our July 1st kind of effective date.
Speaker Change: Managing those things differently. So we're positive about that front.
Speaker Change: Now the first part of your question I've lost track of it what.
Speaker Change: What was that first part of the question.
Speaker Change: So either hiring or just in terms of.
Speaker Change: Health care cost inflation.
Speaker Change: Yes, so I mean, I think what we've done is build into our going forward scenario.
Speaker Change: Both of the.
Speaker Change: The.
Speaker Change: The stumbling blocks that appear in the first quarter.
Speaker Change: The sentiment of the client base, which I believe will get better as the year progresses like I said win win.
Speaker Change: Some of these things move the other way, possibly on taxes or other regulation things. You also were asking I think about geographic we actually had some <unk>.
Speaker Change: Our results in the in the northeast than we'd had in part of last year.
Speaker Change: Other than that it's been kind of across the board.
Speaker Change: So it's more of a.
Speaker Change: Nationwide issue than it is any regional type issue.
Speaker Change: Thank you and the next question will be from Jeff Martin from Roth Capital Partners, Josh Your line is life. Thanks.
Jeff Martin: Thanks, Good morning.
Jeff Martin: So wanted to just kind of get your your initial view you feel that the pricing changes historically and you know once known each other a long time here. So I've seen this happened numerous occasions.
Jeff Martin: What's your sense of research.
Jeff Martin: Any of the client base to these pricing adjustments I would assume that.
Jeff Martin: This is a broader health care industry trend and you know theres really attrition is not likely to tick up as a result, because it's industry rate is going to go up just curious your thoughts there.
Jeff Martin: Yes, Jeff Thanks for the question I would agree with you that.
Jeff Martin: The health care cost trends are elevated and.
Jeff Martin: Being experienced by.
Jeff Martin: We are very very broadly across.
Jeff Martin: The whole industry.
Jeff Martin: So the receptivity from our perspective.
Jeff Martin: Higher than normal Pos is certainly out there.
Jeff Martin:
Jeff Martin: I do think that whenever we do this.
Jeff Martin: You know our goal is not necessarily just.
Jeff Martin: To take up.
Jeff Martin: Pricing.
Jeff Martin: So every client across the whole across the whole book.
Jeff Martin: So you know when we when we're looking at that pricing changes, we're always taken into consideration.
Jeff Martin:
Jeff Martin: You know what the pop.
Jeff Martin: Population of that particular company it looks like how it may have changed from one year to the next what's the relative level of pricing too.
Jeff Martin: To that particular client.
Jeff Martin: What is their overall profitability picture look like.
Jeff Martin: And so there's a lot of different factors that are going in to that and allows us to.
Jeff Martin: Strategically select.
Jeff Martin: Customers.
Jeff Martin: To implement pricing strategies on so there's a few different groups that that falls into and kind of helps kind of balanced it out a little bit that also helps.
Jeff Martin: You have to make sure that you're.
Jeff Martin: Having the least impact on on.
Jeff Martin: You have customers that are in the <unk> that are in the best profitability picture.
Jeff Martin: Picture.
Jeff Martin: Great and then just to add to that just.
Jeff Martin: To add to that.
Jim Allison: I was just going to say just to add that those things that Jim's talking through.
Speaker Change: <unk> helped to be certain that our pricing approach does mirror to a great degree what they are facing in the marketplace. So to not have.
Speaker Change: More attrition is is something that we manage through many times and we're comfortable we're in the right position for that today.
Speaker Change: Great and then with respect to.
Speaker Change: The results or the potential results from Workday partnership.
Speaker Change: How should we think about profitability of that book of business relative to what <unk> done historically or are we talking.
Speaker Change: You know significantly higher potential EBITDA contributions here just any perspective, there would be helpful.
Speaker Change: Yeah, we haven't locked that down yet we're going to do a very detailed pricing analysis over the course of this quarter.
Speaker Change: And we anticipate that the value.
Speaker Change: Of this offering.
Speaker Change: Is a dramatic.
Speaker Change: Advantage.
Speaker Change: And we believe that we're going to have.
Speaker Change: Higher upfront.
Speaker Change: Pricing.
Speaker Change: For the deployment and implementation and and a higher ongoing.
Speaker Change: Component of price.
Speaker Change: We're late to the what they are receiving and the service support that we're providing.
Speaker Change: So we were not in a position to anticipate what that is yet we're going we're doing even more favorable things for the beta customers and four.
Speaker Change: Early adopters to get that launch off the way, we want to but we do expect it to be.
Speaker Change: Our margin.
Speaker Change: Builder in the future and we will try to lock more of that down as we get closer to launch.
Andrew Nicholas: Thank you and the next question is coming from Andrew <unk> from J P. Morgan Andrew Your line is live.
Andrew Nicholas: Hey, good morning, guys.
Andrew Nicholas: My first question I just wanted to ask about 2025 outlook what is assumed for the balance of the year as far as net hiring and just as a second part to that question, obviously, <unk> and battled through us battle tested through several cycles over the years I was curious if the current period of uncertainty would come.
Andrew Nicholas: <unk> to anything in the past or any past cycles that you've been through.
Andrew Nicholas: Okay.
Andrew Nicholas: So relative to our employer client hiring.
Andrew Nicholas: We definitely have diminished it to how to pretty non.
Andrew Nicholas: Nominal level.
Andrew Nicholas: We do have you have to factor in some summer helped that comes on and goes away. So there is.
Andrew Nicholas: The little factors in there but.
Andrew Nicholas: You know or at least we're in a growth front I know compared to the world, having us move to positive growth and having some.
Both in the forecast I think reflects that our what we're doing day in and day out as is working well, but we're not anticipating much support from the client growth in the model for this year that happens well, we'll all be.
Andrew Nicholas: More excited about that.
Andrew Nicholas: Let's see what was the other part of the question.
Andrew Nicholas: Sorry, the other part of the question was just obviously <unk> been there Barry.
Andrew Nicholas: Cycles over the years I was curious if theres any comparisons you could draw as far as the current F&B sentiments of past cycles.
Andrew Nicholas: Yeah, so kind of the way I am looking at it.
Andrew Nicholas: Like I said, we don't like when this happens when there is a benefit cost.
Andrew Nicholas: Happening or instance, or issues that come up.
Andrew Nicholas: But as you.
Andrew Nicholas: We decided to look at this compared to the times when we.
Andrew Nicholas: Felt the likelihood.
Andrew Nicholas: You had to factor in.
Andrew Nicholas: Change in trend level.
Andrew Nicholas: There are times of course, when that doesn't actually happened as you as things.
Andrew Nicholas: Lay out but this had such a variety of contributing factors that we felt it was less likely to be more of a spike that just goes away quickly.
Andrew Nicholas: So.
Andrew Nicholas: You know I think we have properly and appropriately move.
Andrew Nicholas: Move toward the direction of saying, Hey, let's let's factor in whatever we think right now and be conservative.
Andrew Nicholas: Because hey, we want to be sure that whatever we do over the course of this year puts us in a strong position.
Andrew Nicholas: For 2026, and so that was why we looked at it that way.
Speaker Change: Got it that makes sense and just my one follow up question Paul in your remarks, you mentioned that.
Speaker Change: The acceleration of discussions with United Health care, you believe theres opportunities to leverage the workday partnership as part of those discussions. So just wanted to know could you unpack that a little bit for us.
Speaker Change: Yeah, Let me, let me just say that this.
Speaker Change: This target market for our workday joint solution.
Speaker Change: As you know clients that have like we've said before 302.
Speaker Change: Or even a $150 to 5000 employees and let me just say that this is really underserved market.
Speaker Change: And as we go up market from our small business community. There are many times, where we see that there.
Speaker Change: This client size.
Speaker Change: Has other considerations to think through some want to have a self funded benefit plan. Some of you know have MP.
Speaker Change: Employees in so many different places they want a different environment for their benefit plan than what our standard programs are.
Speaker Change: And so we've we've had an approach where we can.
Speaker Change: Them onto our current service, where they keep their benefit plan, but us being able to come in the door together with workday and then they actually have some others with us.
Speaker Change: For example, United Healthcare.
To help evaluate that element as well is certainly a part of this strategy. We think that this size customer really needs.
Speaker Change: That.
Speaker Change: Person to come in there shoulder to shoulder and help evaluate their entire situation of what relates to their employees and we believe we can do that bringing some others to the table with us.
SAVAS: Thank you that does conclude today's Q&A session I would now like to hand, the call back to Mr. SAVAS <unk> for closing remarks.
SAVAS: Once again I want to thank everyone for joining us today and.
Speaker Change: Even though we had some difficulties this quarter. We believe we've got things on the right track to get where we need to go through this year and looking forward to.
Speaker Change: 2026, and so many different ways.
Speaker Change: With our sales and marketing effort with our workday relationship.
Speaker Change: We're on a very good track and looking forward to.
Speaker Change: Giving you an update on how we're progressing next quarter. Thank you again for participating today.
Speaker Change: Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.