Barrett Business Services 2026 Q2 Earnings Call

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 in 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. Our existing clients reduced their staffing demand and remained reluctant to place orders amid macroeconomic uncertainty. In response, we continued 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 are 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 three additional locations to traditional branches later this year. Regarding product updates, we continued 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've 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. 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. 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 two 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 2026, 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.