Insperity's Q3 2025: Contradictions Emerge on Workday Partnership Progress, Profitability Recovery, and Healthcare Cost Trends

Date of Call: November 3, 2025

Financials Results

• EPS: Adjusted EPS of -$0.20 for Q3 2025; full-year adjusted EPS guidance $0.84 to $1.47.
• Gross Margin: Gross profit per worksite employee $208/month in Q3 2025, down from $247 in Q3 2024; driven primarily by $20M higher-than-expected benefits costs and a 9.1% benefits cost trend YOY.
• Operating Margin: Operating expenses down 4% YOY in Q3 2025; sequential decline of $10M from Q2 2025; adjusted EBITDA $10M for Q3; Q4 adjusted EBITDA guidance -$25M to $9M.

Guidance:

• Q4 average paid worksite employees expected 313,000–315,000 (up 1.3%–1.9% vs Q4 2024); full-year average paid WSE growth ~1%.
• Full-year adjusted EPS guidance $0.84–$1.47; adjusted EBITDA $119M–$153M; Q4 adjusted EPS guidance -$0.79 to -$0.16; Q4 adjusted EBITDA -$25M to $9M.
• Full-year benefits cost trend expected to remain elevated (around 9%) and management expects persistence into 2026.
• Full-year operating expenses expected ~3% below 2024; Workday/HRScale investment ~ $58M in 2025 (≈ $48M expensed).
• Executed UHC contract extension through 2028 and reduced pooling to $500k for 2026; 2026 financial outlook to be provided in February.

Business Commentary:

* Benefits Cost Escalation: - Insperity's benefits cost trend increased by 9.1% for Q3 2025 over Q3 2024, impacting gross profit per worksite employee significantly. - The escalation is attributed to higher-than-expected outpatient, inpatient utilization, pharmacy costs, and a significant increase in large claim frequency, driven by the adoption of AI tools by healthcare providers.

• Revenue and Unit Growth:
• The average number of paid worksite employees increased by 1.2% over Q3 2024 to 312,842.

• New client sales results were encouraging, though the number of worksite employees paid from new clients fell short of the previous year. The overall hiring environment remains challenging, with a negative net hiring within the client base due to seasonal employee departures.

• Operating Expenses Management:

• Operating expenses in Q3 2025 decreased by 4% year-on-year, with significant reductions in salaries and G&A costs.

• This was achieved by actively managing costs below budgeted levels while continuing to invest in strategic priorities, such as software development for the HRScale platform.

• Contract Negotiations and Cost Reduction:

• Insperity signed a contract extension with UnitedHealthcare through 2028, addressing key short- and long-term objectives, including financial terms, plan design modifications, and risk transfer alternatives.
• This agreement is expected to significantly reduce claim costs and large claim risk, enhancing financial impact in subsequent years.

Sentiment Analysis:

Overall Tone: Neutral

• Mixed message: management reported a Q3 adjusted EPS loss of -$0.20 and persistent elevated benefits costs (“benefits cost trend of 9.1% for Q3 2025”), but emphasized corrective actions and optimism for a 2026 rebound driven by pricing, a UHC contract extension and the HRScale rollout (“we believe we have the foundation for a substantial rebound of gross profit and margins in 2026”).

Q&A:

• Question from Andrew Nicholas (William Blair): Clarification on the comment about recovering the majority of the earnings shortfall — is that versus 2024 or initial guidance?
  Response: Management said the recovery reference aligns with both their initial 2025 guidance and 2024 results.

• Question from Andrew Nicholas (William Blair): To what extent should we expect repricing-related attrition to impact new sales or cause a sequential step down in Q1 2026?
  Response: Management does not expect material adverse impact — renewals remained ~99% in Q3, new sales are ahead, and a larger January pipeline should offset attrition from repricing.

• Question from Jeff Martin (ROTH Capital Partners): What are you hearing from the joint pod marketing HRScale; is the process smooth and encouraging?
  Response: The pod is highly energized, messaging is resonating, pipeline is filling faster than expected and early feedback from prospects has been very positive.

• Question from Jeff Martin (ROTH Capital Partners): Have you adjusted benefits repricing since initial Q1 actions and is repricing a dynamic quarterly/monthly process?
  Response: Yes — repricing is dynamic on a rolling monthly basis; price increases were escalated through the year (including actions for Jan 1) and management expects pricing to continue into 2026 to outpace the elevated trend.

• Question from Mark Marcon (Robert W. Baird): On an apples-to-apples basis (same client, same plan), what benefit cost trend should we expect for next year?
  Response: Management expects an apples-to-apples average increase in the low double-digits next year.

• Question from Mark Marcon (Robert W. Baird): How large might the pool of lower-profit clients be that you could manage out, and what trade-offs come from lowering pooling to $500k?
  Response: Higher pricing is targeted to retain profitable clients and likely causes lower-profit clients to terminate; the UHC contract plus lowering pooling to $500k materially reduces large-claim exposure and improves predictability.

• Question from Tobey Sommer (Truist Securities): How should we think about HRScale pricing vs. the incremental operating/service expenses it creates?
  Response: HRScale has a meaningful base-price uplift with a three-stage pricing approach (beta, early-adopter, growth), offering substantial early discounts but higher pricing than comparable HR360 for similar-sized clients; the two products are complementary.

• Question from Tobey Sommer (Truist Securities): Can HRScale enable historical double-digit worksite-employee growth even if SMB job growth remains flat?
  Response: Management believes yes — HRScale targets much larger mid-market accounts (avg. 400–700 employees) and can be a significant growth catalyst even in a sluggish SMB labor market.

• Question from Andrew Polkowitz (JPMorgan): Is the original ~$150M aggregate HRScale investment still the right framework given go‑live timing and 2026 spend?
  Response: Management expects total investment to align with earlier frameworks but says investment will drop significantly after go‑live, with a longer‑term product investment run rate around $10M/year.

• Question from Andrew Polkowitz (JPMorgan): How do you view AI risk to employment over the midterm relative to your prior 3-year plan?
  Response: So far AI hasn’t driven headcount declines in the SMB market; management expects AI to improve effectiveness now, may bring future efficiencies, and could be offset by entrepreneurship/new business formation — uncertainty remains.

Contradiction Point 1

Workday Partnership Progress and Revenue Impact

It involves differing expectations regarding the progress and revenue impact of the Workday partnership, which is a strategic initiative for business growth.

Can you clarify whether the recovery of most earnings shortfall is based on 2024 as the base or relative to initial guidance? - Andrew Nicholas(William Blair & Company L.L.C., Research Division)

2025Q3: We are excited about the progress in the Workday partnership, but it's early to predict precise revenue and profitability impact. We expect to launch with a beta group in early 2026 and add more client groups throughout the year. - Paul Sarvadi(CEO)

What is the expected financial impact of the Workday partnership in 2026? - Andrew Owen Nicholas(William Blair)

2025Q2: We expect to launch with a beta group in early 2026 and add more client groups throughout the year. We have just received information for pricing elements exceeding our expectations. - Paul Sarvadi(CEO)

Contradiction Point 2

Profitability and Margin Recovery

It involves differing expectations regarding profitability and margin recovery, which are critical for the company's financial health and investor confidence.

Can you clarify how the majority of the earnings shortfall will be recovered? Is this based on the 2024 baseline or the initial guidance? - Andrew Nicholas(William Blair & Company L.L.C., Research Division)

2025Q3: We are on the path to recovering the majority of the earnings shortfall experienced in 2024 to the mid-teens in 2026. This is supported by several favorable operating levers. - James Allison(CFO)

Do you expect margins to be better, the same, or lower over the next three years compared to historical levels? - Tobey O'Brien Sommer(Truist Securities)

2025Q2: Our historical operating leverage is enhanced by technology. While it's early to lock in specifics, this investment is validating our business model. - Paul J. Sarvadi(CEO)

Contradiction Point 3

Sales Growth and Market Trends

It involves differing perspectives on sales growth and market trends, which are critical for understanding the company's performance and future outlook.

How much should we worry about cost trends and repricing due to attrition affecting 2026 worksite employee growth? - Andrew Nicholas(William Blair & Company L.L.C., Research Division)

2025Q3: Sales are strong, with a 45% increase over last year, and pricing parallels market trends. The priority is margin recovery, but new sales are robust. - Paul Sarvadi(CEO)

What are your sales leads with Workday like and how satisfied are you with them? How is the Workday partnership affecting client retention in your high-end market? - Mark Marcon(Robert W. Baird & Co. Incorporated, Research Division)

2024Q4: In the fourth quarter, we accelerated sales with marketing and sales execution improvements that delivered an 11% increase in sales leads and improved conversion rates. - Paul Sarvadi(CEO)

Contradiction Point 4

Healthcare Cost Trend Expectations

It involves differing expectations about healthcare cost trends, which directly affect pricing strategies and cost management for Insperity's offerings.

Will the 2026 health care benefit cost trend be in the 9% range on an apples-to-apples basis? - Mark Marcon (Robert W. Baird & Co. Incorporated, Research Division)

2025Q3: The average increase expected is in the low double digits range. Pricing adjustments account for trends and maintain competitive positioning. - James Allison(CFO)

Have you adjusted the initial benefits repricing, and what are the ongoing dynamics? - Jeff Martin (ROTH Capital Partners, LLC, Research Division)

2025Q1: We are expecting probably a little over 9% increase in the people costs for health insurance for 2026, so we've made some adjustments to our pricing to cover that. - James Allison(CFO)

Contradiction Point 5

Workday Partnership Impact on Sales

It concerns the expected impact of the Workday partnership on sales, which could influence Insperity's growth and market penetration.

How concerned should we be about cost trends and attrition-related repricing affecting 2026 worksite employee growth? - Andrew Nicholas(William Blair & Company L.L.C., Research Division)

2025Q3: Sales are strong, with a 45% increase over last year, and pricing parallels market trends. The priority is margin recovery, but new sales are robust. - Paul Sarvadi(CEO)

How will the Workday implementation affect the fall selling campaign this year? - Tobey Sommer(Truist Securities, Inc., Research Division)

2025Q1: We're optimistic about the fall selling campaign due to the momentum in sales service and Workday team implementation. The election environment last year slowed the start, but we finished strong. This year, we expect to be in a favorable position with strong sales results. - Paul Sarvadi(CEO)