BARRETT BUSINESS SERVICES INC Q4 FY2025 earnings call

• Operational and strategic accomplishments: Successfully selling and servicing BBSI benefits in all markets, significant wins in white-collar verticals, strategic sales initiatives resulting in greater velocity at top of sales funnel and record WSE ads, more referral partners, expanded into new geographies and converted two emerging markets to traditional branches, invested in myBBSI and tech stack with multiple product releases, earned great place to work designation for fifth year, net promoter score in high 60s for third straight year.
• Financial and worksite employees: Fourth quarter gross billings increased 6.4% YOY, added ~8,300 WSEs from net new clients despite client workforce reductions, full year gross billings grew nearly 8.6% driven by 6.7% growth in average worksite employees. Staffing business declined 13% YOY quarter and 11% YOY year, but placed 81 applicants for PEO clients in quarter and 432 for full year. Asset light model added ~1,600 new WSEs in 2025, with grand openings in Chicago, Dallas, Nashville, and anticipation to convert three more locations to traditional branches this year and invest in additional asset light markets. Product updates: Continued selling and servicing of BBSI benefits, with growth in clients and participants, and IT product objectives including investments in tech stack, launch of applicant tracking system, employee file cabinet, and performance management module in beta to be released in Q2.

During the quarter, gross billings increased 6.4% year-over-year. PEO gross billings increased 6.6% to $2.38 billion, while staffing revenues declined 13% to $18 million. PEO worksite employees grew by 5.1% in the quarter. For the full year, gross billings increased 8.6% to $9 billion, diluted earnings per share increased 5% to $2.08. PEO gross billings for the year grew by 6.7% in average worksite employees. Regionally, southern and northern California grew by 5%, mountain and east coast regions grew by 10%, Pacific Northwest declined by 4%, and asset light markets grew by 95%. BBSI benefits: started with 575 clients and around 16,000 participants, ended with approximately 800 clients and more than 24,000 participants, had successful 1-1-26 selling and renewal season with over 80 new clients and 93% renewal rate on adjusted basis with 97% retention.

• Expect gross billings to increase between 3 - 5% and average WSEs to increase between 2 - 4% in 2026. - Gross margin to range between 2.7 - 2.85% in 2026, balancing top-line growth with margin protection. - Effective annual tax rate to range between 26 - 27% in 2026.

• Macroeconomic uncertainties affecting client hiring trends, with negative hiring trend seen in 2025 and expected to continue into 2026. - Workers' compensation market inflection with choppy and inconsistent rate changes, including positive and negative rate on renewals, and schedule credits decreasing. - Impact of AI on business with uncertainty on joblessness and industry impact, though not specifically hitting clients in the short term. - Fluctuations in investment income due to lower average interest rates and investment balances, and impact on margin due to timing differences in payroll tax repricing.

Q: U.S. job growth in early 2026 has been modest, but shown some signs of recovery after 2025. What are you hearing from your clients in terms of being able to improve growth throughout 2026?

A: Anticipate negative hiring trend to continue into 2026, worse same customer sales in early 2026 and improving as year goes on in line with macro forecasts.

Q: What are you hearing from clients in terms of being able to pay higher wages in 2026?

A: Wage growth is real, moderated in 2 - 4% range, client hiring still has issue of finding good skilled labor, especially in industries like trucking and logistics due to immigration trends.

Q: 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?

A: Front loading of payroll taxes in Q1, unemployment tax modestly higher, but mechanisms to price in and recapture in repricing.

Q: Drill down on the workers' compensation pricing environment. 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: Predominantly workers' comp California, costs not coming down anymore, need to get more rate, seen positive trend in last four months of renewals with aggregate portfolio rate increase, but market conduct and timing of price increases unknown, but if trends persist margins could be at high end.

Q: In terms of the adjustments to your worker comp claims and the benefit that brings down through the P&L, are you expecting much change from the last two years?

A: Trend will predominantly persist, consistent though may have slight changes.

Q: The new client pipeline of qualified leads, how does that look currently versus what you've seen in previous, in recent quarters?

A: Pipeline still strong, got better benefit selling season last year with Kaiser in offering, got over 80 new clients in 1-1-26 season, good volume in top of pipeline, more people selling product, better product to sell, more referral partners, strong track record of controllable growth.

Q: Related to the hiring trending better this year, Is that broad-based, or are some of the weaker areas like construction continuing to not see any good signs?

A: Deterioration was broad-based across country and industries, construction has been depressed for multi-year period in California but still optimistic on long-term trajectory.

Q: 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.

A: Spend energy on AI internally to be more efficient, AI industry specific and not specifically hitting clients soon, PEO industry model durable, investments in tech stack to bring AI later to augment service model.

Q: 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 more outsourcing of what had been done internally up to this point.

A: More benefit deal flow for 1-1, better at doing benefits, health insurance rates up leading to more shopping, had PEO takeaways but still converting businesses to PEO model for first time as lion's share of client acquisitions