Barrett (BBSI) Q1 2026 Earnings Transcript

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Date

Wednesday, May 6, 2026 at 5 p.m. ET

Call participants

• Chief Executive Officer — Gary Edward Kramer
• Chief Financial Officer — Anthony J. Harris
• Operator

Takeaways

• Gross billings -- $2.16 billion, up 3.5%, meeting management’s internal forecast.
• PEO gross billings -- Increased 3.7% to $2.15 billion, with regional growth led by 17% on the East Coast and 85% in asset-light markets.
• Staffing revenue -- Declined 21% to $14 million, reflecting broad client reluctance to place staffing orders.
• PEO worksite employees (WSEs) -- Grew 2%, adding approximately 5,300 net new WSEs despite continued client workforce reductions.
• Average billing per WSE per day -- Up 1.7%, driven by higher wages, slightly offset by lower overtime and hours worked.
• Client retention -- Remained above historical levels, with 93% renewal of the benefits book; adjusted benefits client retention reached 97%.
• Benefits growth -- 140 new clients and 3,500 new benefits participants added; first-quarter benefits costs rose 56%, aligned with billings growth.
• IT product launch -- New digital modules rolled out, including an employee file cabinet (January) and performance management module (April), aiming to enhance product suite and client stickiness.
• Asset-light expansion -- 550 WSEs added in new markets; three additional locations set to convert to traditional branches in 2026, extending the company’s reach.
• Workers’ compensation -- 2026 saw favorable prior year reserve and premium adjustments of $1.1 million (down from $3.8 million); five consecutive months of rate increases achieved.
• SG&A expense -- Increased about 6%, primarily from timing of certain employee expenses; full-year SG&A is projected to grow slower than gross billings.
• Investment income -- $2 million earned, down $600,000 attributable to lower balances and interest rates, as stock buybacks continued.
• Capital return -- $20 million in shares repurchased at an average price of $28.68 and $2 million in dividends paid, with $55 million authorization remaining for repurchases.
• Balance sheet -- $92 million in unrestricted cash and investments, with no debt outstanding.
• Guidance reaffirmed -- Full-year gross billings expected to grow 3%-5%, WSEs 2%-4%, gross margin between 2.7%-2.85%, and normalized annual tax rate at 26%-27%.
• One-time tax charge -- $11.6 million taken, resulting in a GAAP net loss per diluted share of $0.59; adjusted net loss per diluted share was $0.13.

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Risks

• Management cited "broader client workforce reductions" and "year-over-year client workforce reductions" as tempering growth; staffing revenue declined 21% due to "broad reluctance among clients to place staffing orders amid macroeconomic uncertainty."
• Northern and Southern California regions experienced slower growth, impacted by "negative client hiring trends" and workforce reductions across all major industries, especially construction.
• First-quarter benefits costs increased 56%, aligned with volume, but represent a direct pass-through of higher health insurance premiums, reflecting industry-wide rate increases.
• A one-time tax charge of $11.6 million was recorded due to IRS disallowance of past tax credits, leading to a GAAP loss; the company is evaluating legal options.

Summary

Barrett Business Services (NASDAQ:BBSI) delivered topline and margin results consistent with management’s plan, while reaffirming its full-year 2026 guidance for gross billings, gross margin, and effective tax rate despite continued headwinds from client workforce reductions and staffing softness. Regional dynamics were mixed, with significant growth concentrated in the East Coast and asset-light markets, whereas the core California regions underperformed amid broad-based client hiring reluctance, particularly in construction. The company executed several product launches, expanded its asset-light geographic footprint, and reported robust benefits adoption metrics, while returning $22 million to shareholders during the quarter through buybacks and dividends. A sizable one-time tax charge led to a GAAP loss, but cash and investments remained substantial and the company held no debt.

• Only one-twelfth of PEO client contracts renew monthly, suggesting a lagged impact of ongoing pricing improvements on gross margin expansion.
• Sixty percent of new benefits clients acquired were new to Barrett Business Services, shifting the mix away from upsells and indicating maturation in the benefits sales channel.
• Referral partner engagement reached record levels, though conversion rates currently depend on demonstrable client cost savings amid macro uncertainty.
• Leadership stated that expanded IT capabilities competitively position the company for both white-collar and larger-client segments but clarified that technology product pricing is structured to support retention rather than serve as a profit center.
• Guidance for gross margin expansion is contingent on sustained improvements in workers' compensation pricing and normalization of benefit cost pass-throughs.

Industry glossary

• PEO (Professional Employer Organization): Business providing HR solutions, co-employing client company workers, and managing payroll, benefits, and compliance.
• WSE (Worksite Employee): Employees under co-employment with a PEO, counted as the worksite employee population managed for clients.
• Asset-light market: Strategic market entry with minimal physical infrastructure, often preceding full-scale branch establishment.
• Workers’ compensation: Insurance and risk program covering employee workplace injuries and claims; a major cost and operational focus for PEOs.

Full Conference Call Transcript

Gary Edward Kramer: Thank you, and good afternoon, everyone, and thank you for joining the call. I am pleased to report that we had a solid start to the year, and our Q1 results were in line with our expectations. We are a company that executes to a plan, and we continue to grow our client base while delivering additional product across our tech stack. Moving to our financial results and worksite employees, during the quarter our gross billings increased 3.5% over the prior year's quarter and were in line with our expectations. We continue to execute on our strategies to increase the top of the sales funnel, and we continue to see positive results.

While Q1 new client additions were strong, they trailed Q1 2025, which benefited from an inaugural selling season with Kaiser. Additionally, our client retention continues to trend better than our historical level; I attribute that to the work we do with our clients and the value our teams provide. The result of all these efforts, or what I refer to as controllable growth, is that we added approximately 5,300 worksite employees year over year from net new clients. However, our overall growth was tempered by broader client workforce reductions. As a reminder, macroeconomic uncertainties led many of our clients to reduce headcount through 2025, a trend that impacts our year-over-year comparisons.

While we saw further workforce reductions in Q1, the rate of decline has begun to moderate compared to 2025. To summarize, despite client workforce reductions, we achieved a 2% increase in total worksite employee growth for the quarter, driven by strong sales volume and strong client retention. Moving to our staffing operations, our staffing business declined 21% over the prior year quarter, reflecting a broad reluctance among clients to place staffing orders amid macroeconomic uncertainty. In response, we continue to leverage our recruiting expertise for our PEO clients, successfully placing 90 applicants during the quarter. Moving 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 550 new WSEs in the quarter. As a reminder, we opened our newest branch in Nashville in January, following last year's openings in Dallas and Chicago. In each of these locations, we have formed business teams with local professionals to support our clients and have moved into traditional brick-and-mortar Barrett Business Services, Inc. branches. We anticipate converting three additional locations to traditional branches this year as we continue to invest in the development of our asset-light markets. Regarding product updates, we continue to execute on the sale and service of Barrett Business Services, Inc. benefits, our health insurance offering. We are off to a great start of the year.

As a reminder, we had a successful 01/01/2026 season, renewing 93% of our book despite rising health insurance rates. On an adjusted basis, we retained 97% of these clients, proving that our value proposition holds firm even when clients choose to transition off of our benefits platform while remaining with Barrett Business Services, Inc. We have achieved operational consistency and added nearly 140 clients and 3,500 participants to our various health plans during the quarter. We continue to invest in and improve the sale and servicing of Barrett Business Services, Inc. benefits.

Our value proposition resonates well; 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 would like to shift to our 2026 IT product objectives. I previously mentioned that we have been investing in our tech stack on the product side to service and support our clients better. Over the last couple of years, we made additional investments in MyBBSI to support our Barrett Business Services, Inc. benefits offering, added a learning management system, and added numerous integrations with third parties.

We have also been investing in our technology to better support the employee life cycle experience, which is from when an employee is hired to when the employee retires and everywhere in between. We previously launched the Barrett Business Services, Inc. applicant tracking system, which addresses the front end of the employee life cycle and allows for job postings, interviews, and seamless onboarding into our payroll and timekeeping systems. In January, we launched the employee file cabinet, which provides a secure, centralized, and fully integrated digital repository. It allows our clients and their employees to confidently manage sensitive employee data and allows for manuscript or individualized curated forms with e-signature capability, which improves compliance and efficiency.

In April, we officially launched our performance management module. This module's intuitive design will allow organizations to better align employee objectives with company expectations while tracking performance with consistency and clarity. It empowers employers to formalize performance expectations and document performance conversations through standardized review cycles, ongoing feedback, and development planning. Our beta clients were very complementary of the overall offering, as well as the ease of use of our system. We think that ultimately these products will result in increased sales and better client retention. We are excited to offer these products to existing clients as well as new prospects. Next, I would like to shift to our view of the remainder of the year.

As we look to the remainder of the year, our outlook remains unchanged. We expect our clients to continue growing at a rate below historical norms; however, we expect that the rate of impact from low hiring will moderate in the second half of the year. We believe Barrett Business Services, Inc. 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 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.

Consistent execution, a differentiated service model, and strong relationships position us to continue driving sustainable growth through 2026 and beyond. Now I am going to turn the call over to Anthony for his prepared remarks.

Anthony J. Harris: Thanks, Gary, and hello, everyone. I am pleased to report that we finished the quarter with results in line with our plan and are reaffirming our outlook for the remainder of the year. Gross billings increased 3.5% to $2.16 billion in Q1 2026, versus $2.09 billion in Q1 2025. PEO gross billings increased 3.7% in the quarter to $2.15 billion, while staffing revenues declined 21% to $14 million in the quarter. Our PEO worksite employees grew by 2% in the quarter, which, as Gary noted, was driven by strong controllable growth tempered by year-over-year client workforce reductions.

Average billing per WSE per day increased 1.7% in the quarter, which was driven by increasing wages, partially offset by lower overtime and hours worked. Looking at year-over-year PEO gross billings growth by region for Q1, Southern California grew by 2%, Northern California declined by 2%, Mountain grew by 6%, East Coast grew by 17%, Pacific Northwest grew by 1%, and our asset-light markets grew by 85%. A few comments on our regional performance: Southern and Northern California, our two largest markets, both experienced slower growth in the quarter primarily due to year-over-year client workforce reductions. New client adds in both regions were in line with expectations.

However, Northern California also had slightly elevated runoff in the quarter and was more impacted by the negative client hiring trends. The East Coast continued to stand out, delivering its twentieth consecutive quarter of double-digit growth supported by strong controllable growth and positive client hiring. The Pacific Northwest region returned to growth, as solid net client adds more than offset softer client hiring activity. Turning to margin and profitability, our workers' compensation program continues to perform well, resulting in favorable adjustments for prior year claims. In Q1 2026, we recognized favorable prior-year liability and premium adjustments of $1.1 million compared to favorable adjustments of $3.8 million in 2025.

We have previously discussed the market inflection in workers' compensation pricing and the positive momentum that followed the California Insurance Commissioner's approval of an average 8.7% premium rate increase in 2025. In 2026, we were able to increase our pricing each month and have now established a five-month trend of increased pricing. Reinforcing this broader market trend, the WCIRB has recommended an additional 10% increase in California advisory rates for 2026. As a reminder, the previous period of declining workers' compensation pricing resulted in margin compression in recent years, and while we expect cost trends to continue to increase as well, we expect the improved pricing environment to stabilize margins and support margin expansion over time.

We continue to prioritize thoughtful risk management; to that end, our workers' compensation claims are primarily fully insured, and our health insurance product is fully insured. Looking at our payroll tax costs, payroll taxes are typically highest in Q1 as taxable wage caps reset, which results in lower margins in the first quarter of the year and a typical net operating loss. Payroll tax rates were in line with expectations for the quarter. You will also see that we have separated benefits costs into a discrete financial statement line item, representing the direct costs of our client benefits offering.

As a fully insured product, these costs primarily represent the pass-through premiums for our client health plans and are directly correlated to the related client billings included in PEO revenue. We expect benefits volumes to continue growing, with first-quarter benefits costs up 56% year over year, broadly consistent with Barrett Business Services, Inc. benefits billings growth. Overall, our gross margin rate was in line with our expectations and reflected stronger pricing trends and increased benefits sales, with some headwind from lower staffing revenues. Moving to our operating costs and overall profitability, in Q1, SG&A increased approximately 6% due primarily to the timing of certain employee-related expenses.

We continue to expect full-year SG&A trends lower than gross billings growth and more in line with prior-year SG&A growth. Moving to investment income, our investment portfolios earned $2 million in the first quarter, down approximately $600,000 from the prior year due to interest rates and lower average investment balances as we continue to use excess cash in our stock buyback program. Our investment portfolio continues to be managed conservatively, with an average quality of investment at AA.

Looking at our net results for the quarter, as a reminder, on March 31 we announced the company had recorded a one-time tax charge related to credits from tax years 2017 through 2022 which were disallowed by the IRS and their related tax court decision. The amount of this charge was $11.6 million, or $0.46 per share. We continue to evaluate our available legal options, including our right to appeal. As a result of this charge, our GAAP net loss per diluted share was $0.59 for the quarter. Excluding the one-time charge, our adjusted net loss per diluted share was $0.13, compared to a net loss of $0.04 per diluted share in the year-ago quarter.

Turning to our balance sheet, we are in a strong position with $92 million of unrestricted cash and investments at March 31 and no debt. We continued our consistent approach to capital allocation, making investments back into the company through product enhancement and geographic expansion, and distributing excess capital to our shareholders through our dividend and stock buyback plan. Under our $100 million August 2025 repurchase program, Barrett Business Services, Inc. repurchased $20 million of shares in the first quarter at an average price of $28.68 per share, with $55 million remaining available under the program at quarter end. The company also paid $2 million in dividends in the quarter and reaffirmed its dividend for the following quarter.

This brings total capital returned to shareholders in the last six months to over $40 million. Now turning to our outlook for the full year, our Q1 operating results aligned with our expectations, reflecting continued strong execution of our fundamentals across the company. Accordingly, we are reiterating our full-year outlook. We expect gross billings growth between 3% and 5% for the year, WSE growth between 2% and 4% for the year, gross margin as a percentage of gross billings between 2.7% and 2.85%, and an effective annual tax rate, normalized for the one-time tax charge, between 26% and 27%. I will now turn the call back to the operator for questions.

Operator: Thank you. Ladies and gentlemen, we will now open the call for questions. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Our first question comes from Chris Moore with CJS Securities.

Christopher Paul Moore: Hey, good afternoon, guys. Thanks for taking a couple. Maybe we will start on the workers' comp pricing. Obviously encouraging, the five months of straight increased pricing. I assume pricing still has not caught up to the State of California increase at this point in time. That is fair? There is still lots of room there?

Anthony J. Harris: Yes. I mean, the rates went up last year by about 9%. The market was a little slow to start to go out and reflect that immediately. We started to see rates going up as far as charge rates for what we are able to get in the market. We started to see that. It was choppy at the back half of the year, so we would have two good months, one bad month kind of thing. But from December until April, we had positive rate increases on all of our renewals and our new business. So we are seeing it in the market as far as rates going up.

It varies by market, predominantly California, but it varies by location. But just in the aggregate, the tide is coming in.

Christopher Paul Moore: Got it. And what would it take to raise the upper end? I guess, is that more of a 2027 really kind of situation? I know there is a lag between the time you raise pricing. You have different contracts that are renewing at different periods. Just trying to understand if you had another three or four months would that have a meaningful impact on that 2.7% to 2.85% range?

Anthony J. Harris: Yes, Chris, I will jump in on that. It is obviously early in the year now, and we are encouraged by the trend we have seen in pricing. But remember, we finished 2025 lower than we started 2025. So, really, as we build that back, we are going to work back towards where we were and see sequential improvement, but we also only renew about a twelfth of our book each month. And so that will continue to build and build profitability towards the second half of the year. And to your point, where you will see that on a year-over-year basis on a gross margin rate is going to be in 2027.

Christopher Paul Moore: Got it. That makes sense. And maybe just the last one for me. In terms of the technology features that Gary was talking about, how does that work from a pricing standpoint, or is it more just about retention really?

Anthony J. Harris: Good question. We are not going to get rich on these products. What it is going to do is get us to the table with every competitor out there. So there is not going to be something that knocks us out because our tech can do what everybody else's tech does. It gets you in the door, number one. And number two, these products—we are not charging a lot. If we have variable costs on them, we try to push the variable cost through. We are not doing this to get rich. We are doing this because the more SKUs you sell someone or the more products you have, the longer they are going to stay with you.

The more product you have, the more it appeals to the white-collar business and the more it appeals to the larger clients. We think of this as: it gets us to the table with white collar, it gets us to the table with larger clients. We are optimistic. The tech is good. We are optimistic that it is going to be received well by our clients and new prospects.

Christopher Paul Moore: Got it. Sounds good. I will leave it there. Thanks, guys.

Operator: Thank you. We have our next question from Jeff Martin with ROTH Capital Partners.

Jeffrey Michael Martin: Thanks. Good afternoon, guys. Wanted to start by diving in on the health care benefits side. How are you feeling about the take rate and the renewal rate on that? And are you seeing a relatively material amount of your new clients coming on as a result of the benefits?

Anthony J. Harris: Yes. When we launched benefits, we did more upsell than new sell. Now we are at the point that we do more new sell than upsell. So for Q1, it was about 60% of the clients that we put onto the benefits who were new to Barrett Business Services, Inc. We are getting better at our craft. We are getting better at positioning. We are getting better at selling it. So that is one. As far as the volume and the conversions, we have a really good conversion rate on benefits—better than just PEO. So when we actually present a benefits quote, we have a higher close rate. So math just says do more of it.

That is what we are trying to do. The interesting part for 1/1 was, everybody's rates went up double digits; some went up more. So you had a lot of shopping. When you had the shopping, you had somebody come in and they were getting a 40% or 50% rate increase on the renewal. Then they came to us, and we looked at it, and there was a reason why they were getting that 40% to 50% rate increase. So we did see more business flowing, more opportunities came across our desk in Q4 and Q1. Some of these, we have to protect.

We do not take the risk on the underwriting, but we have to protect the pool, and there was a lot of business that we had to decline to quote.

Jeffrey Michael Martin: Makes sense. Okay. And then just curious what else you can tell us about the Northern and Southern California markets, the two biggest markets, in terms of what you are seeing or hearing from that client base with respect to reluctance to hire or even cutting back on their headcount.

Anthony J. Harris: Yes. Just in general, Southern Cal, on a WSE basis, had more reductions, but on a proportionate basis Northern Cal had a bigger proportion, if that makes sense. That was broad-based for Northern Cal and for Southern Cal, and it was broad-based across pretty much all industries. We saw it from the cookie stores to the construction companies. We saw them pull back. I get out and visit clients, and some of the themes that I heard in Northern Cal were that the Bay Area construction has slowed down. So the contractors are pushing out of the Bay because they have to find business, and they have to go out as far as Fresno and places like that.

It is interesting that they shrunk. They have their base, but you are not seeing robust housing starts. You are not seeing any of those things yet. I do not think interest rates are helping at this point.

Jeffrey Michael Martin: Right. Right. Okay. And then with respect to the asset-light markets, you have got three at critical mass. It sounds like you are rolling out three additional branches this year. Can you refresh our memory on how many new markets you are starting greenfield on the asset-light this year?

Anthony J. Harris: The reason we did not give that is because it gets complicated. Do I call Chicago or Dallas a new market anymore? But in total, if you include Chicago, Dallas, Nashville, we are at, I think, 22. We have started to go into states that we have not been in. We started to hire some folks, and they are selling in Florida and some other places that we are entering.

Jeffrey Michael Martin: Thank you.

Operator: To confirm, Jeff, was that your final question?

Jeffrey Michael Martin: It is. Thank you.

Operator: Thank you. We have our next question from Vince Galicchio with Barrington Research.

Vincent Alexander Colicchio: Yes. Curious, the new client pipeline—how does it look in comparison to recent quarters?

Anthony J. Harris: Pipeline is strong. Pipeline continues to be strong. We have a lot of focus and attention on our direct efforts. We have a lot of focus and attention on acquiring new referral partners. We have more referral partners referring to us now than we have ever had, and that piece is working very well at the top of the funnel. The conversion could be a little higher. You are seeing a reluctance right now unless there is a cost savings. I think it has to do with the macroeconomic backdrop. Unless you can show a cost savings or explain the value, that is how you are going to get the conversion rates up.

Vincent Alexander Colicchio: And how are the health care brokers performing in terms of providing the lead referrals?

Anthony J. Harris: That is a new channel for us. Typically, because of our workers' comp product, we aligned with the P&C brokers. But now that we have the employee benefits, we are aligned better with the health insurance brokers. With those, we are doing well. We have some national partners, some big brokers that we work with. We are doing well with them on the benefits side. I would like to do better with the smaller health agencies. We have some that are referring to us, but I would like to have more of those.

Vincent Alexander Colicchio: Okay. I will go back in the queue. Thanks.

Operator: Thank you. As a reminder, if you wish to ask a question, please press star then 1. We have our next question from Mark Riddick with Sidoti.

Marc Frye Riddick: Hey. Good evening, everyone. A lot of my questions have been covered, but I did want to touch a little bit on cash usage during the quarter. Maybe share some thoughts around the share repurchase activity in the quarter and if that continued into there, and then I have a quick follow-up after that.

Anthony J. Harris: Yes, absolutely. We generate a lot of cash. As you know, we are not a capital-intensive business. When we talk about our capital allocation strategy, we do look at opportunities to invest in our business. The most clear way is through our IT investments that we have been talking about, and obviously investing in our sales teams and asset-light expansion. But we are going to have excess cash generated through operations, and we have consistently shown that we want to deploy that back to shareholders. In particular, right now we believe there is intrinsic value in our stock. We look at where we can invest. We increased our share repurchasing both in Q4 2025 and through Q1.

Marc Frye Riddick: I wanted to circle back on the client vertical behaviors that you are seeing out there. Wondering if there was much in the way of change or differentiation in certain areas, particularly whether it is retail or construction, residential construction, or the like. And whether you have seen any impact or change that was more directly tied to the geopolitical environment and the war and the like, or if that was just sort of consistent across the board through the quarter? Thank you.

Anthony J. Harris: Good question. If you think of how the last call of Q4 2025 progressed, in 2025 our customers grew, which makes this a harder compare for 2026—we are going against growth. So Q1 2025, our clients grew. Q2, they moderated back to flat. Q3, they reduced. Q4, they reduced more. So a lot of the negative effects we are feeling are from reductions that happened in 2025. Our clients reduced further in Q1 2026, but at a much lower rate than they did in Q3 and Q4 2025. We are not seeing as bad numbers in Q1 as we saw in Q3 and Q4. In general, East Coast has growth—it is one region standing out.

But if you think of industries in California, it was down in almost every industry, with construction being the most impacted. By region, you have some puts and takes—some regions are growing, some are shrinking—but for the aggregation of our clients in California, in general, all industries reduced their workforce.

Marc Frye Riddick: Okay. Great. Thank you for the feedback.

Operator: Thank you. At this time, this concludes our question and answer session. I will now turn the call back over to Mr. Kramer for closing remarks.

Gary Edward Kramer: I just want to thank everybody for dialing in and thank all of our Barrett Business Services, Inc. employees for another great quarter. Thank you, everybody.

Operator: And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.

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