BARRETT BUSINESS SERVICES INC Q3 FY2025 earnings call

• Record worksite employees from new clients, with a net addition of 10,400 year-over-year from net new clients, though client hiring was lower than forecasted due to macro uncertainty in California.
• Staffing business declined 10.3% as clients were reluctant to place orders amid macroeconomic uncertainty, but 116 applicants were placed in the quarter, 11 more than prior year.
• Field operations: Entered new markets with an asset-light model, having 22 new market development managers, and grand openings in Chicago, Dallas, with another planned for Nashville in January.
• BBSI Benefits: Added ~1,300 participants in Q3, with over 20,000 total participants through October, and October submissions for 1/1 transactions 60% greater than prior year.
• IT product objectives: Investing in tech stack to round out the employee life cycle experience, with product launches planned in the next 6 months, targeting white-collar businesses and larger employers.

During the third quarter, BBSI's gross billings increased 8.6% to $2.32 billion. PEO gross billings grew 8.8% to $2.3 billion, while staffing revenues declined 10% to $19 million. PEO worksite employees saw a 6.1% growth. The staffing business declined by 10.3% as expected. BBSI Benefits added approximately 1,300 participants in Q3, with over 20,000 total participants through October. The asset-light model added approximately 1,400 new worksite employees. Revenue contribution: Gross billings at $2.32 billion, PEO at a significant portion, staffing at a smaller portion, BBSI Benefits contributing through participant growth.

• Gross billings growth expected to be between 8.5% and 9.5% for the full year.
• Year-end controllable growth is expected to be strong, with worksite employees (WSE) increasing between 6% and 8% for the year.
• Gross margin as a percent of gross billings expected to be between 2.9% and 3.0%.
• Effective annual tax rate expected to be between 26% and 27%.

• Macro uncertainty including tariff policy and interest rates led to lower client hiring in California across most industries.
• Workers' compensation pricing has been trending downward, creating margin pressure despite cost savings.
• Economic conditions in the Pacific Northwest have continued to be soft, impacting certain regions' performance.

Q: Curious how BBSI Benefits policies are performing given rising claims costs?

A: Rates are going up for all carriers, volume for 1/1 business through October was 60% higher, and it's an opportunity as renewal book is not as big as competitors, allowing more offense than defense.

Q: How much is BBSI Benefits driving record WSE adds?

A: It's multiple factors including tech, product, people, sales efforts, and new markets, not just one thing.

Q: Thoughts on workers' comp rate increases and WSE growth in 2026?

A: California regulator approved rate increases, carriers filing for similar, working to capture rate increases, but time will tell on 1/1 cycle.

Q: Key variables for gross billings in 2026?

A: Controllable growth (client acquisition and retention), wage inflation, and client workforce expansion/contraction.

Q: Growth from asset-light model?

A: Added over 2,000 WSEs this year, expecting better next year, potentially 2% plus growth on WSE basis.

Q: New client pipeline?

A: More business in the funnel than last year, especially on the benefit side, with good process and focus.

Q: Existing client growth in Q4 and economy in California?

A: Construction and trades in Northern Cal likely transitory, transportation/logistics and retail shops possibly not, with expectations for Q4 benefit from construction rehiring.

Q: Revenue from third-party integrations?

A: Integrations are for better client service, not upcharge, aiding retention.

Q: Thoughts on Chicago and Dallas openings?

A: Successful grand openings, proud of teams, good attendance from clients, referral partners, and community.

Q: IT product objectives and AI?

A: Building AI-enabled tech for employee life cycle, product launches planned, comprehensive platform for white-collar and larger enterprises.

Q: 60% increase in quote pipeline mix?

A: Similar to existing client portfolio, based on solving client pain points and wrapping BBSI's services.

Q: Hours worked trends?

A: Slight reduction in average hours worked, part of softening trend.

Q: Impact of 60% increase in health care quote pipeline on 2026?

A: Closing rate same would mean 60% better, but market uncertain, reserved on details for Q4 call.

Q: Average size of new clients?

A: New clients this year average about 2 worksite employees greater than last year, due to combination of good people, products, and referral partners.