Barrett Business Services, Inc. (BBSI) Earnings

Management highlights

- Sales Growth & Retention * Q2 new client acquisitions increased 17% year-over-year, exceeding internal targets for new clients and new WSE from client additions * Strong client retention was maintained, with 97% net retention of PEO clients for BBSI benefits during 2026 annual renewals * Total WSE grew 1% year-over-year, as strong controllable growth from new clients offset resumed workforce reductions at existing clients that began in Q3 2025 * June 2026 posted the highest new client and WSE additions in company history, and early July 2026 results outperform the prior two years - Geographic Expansion * The company's asset-light market entry model gained traction, adding 400 new WSE in Q2 * Three additional asset-light locations are on track to be converted to full traditional branches in the second half of 2026 (with some conversion potentially slipping into Q1 2027) * New markets including Dallas and Chicago are performing better than historical averages for new branch launches - Product Development * BBSI benefits (the company's health insurance offering) continued strong momentum, adding ~70 clients and over 2,000 new plan participants in Q2 2026, with a robust growth pipeline * The company has completed building out its full tech stack covering the entire employee lifecycle, including an applicant tracking system, employee document management, learning management, and performance management modules * The expanded product portfolio has improved competitiveness for white-collar client segments, which grew to a record share of new business in Q2 - Workers' Compensation Market Update * Management confirms the long-anticipated inflection point in the California workers' compensation market has arrived, with insurers pushing rate increases for the first time in over a decade, following years of rising claim costs outpacing falling premium rates * The company achieved eight consecutive months of client pricing increases as of Q2 2026, the first such upward trend in 10 years * The Q2 2026 fully insured workers' comp policy renewal was completed on favorable terms, with only a modest rate increase and no adverse downside risk for prior claim development * 2026 is expected to be the low watermark for gross margins, with gradual improvement starting in 2027 as pricing increases roll in via monthly client renewals - Capital Allocation * The company maintains a strong balance sheet with $68 million in unrestricted cash and investments, and no outstanding debt * $15 million in shares were repurchased in Q2 2026 under the existing $100 million program, with $40 million remaining in authorization at quarter end * Total capital return to shareholders over the first half of 2026 exceeded $39 million, including dividends and share repurchases

Guidance

- Full year 2026 gross billings growth guidance was narrowed to 3% to 4%, down from the prior range of 3% to 5%, reflecting ongoing macro headwinds limiting client workforce expansion - Average WSE growth guidance was narrowed to 2% to 3%, down from the prior 2% to 4% range - Full year 2026 gross margin as a percentage of gross billings is now expected to be between 2.7% and 2.75%, revised down from the prior 2.7% to 2.85% range, reflecting the gradual transition of California workers' compensation rate increases - The normalized effective annual tax rate (adjusting for the Q1 2026 one-time tax charge) is maintained at 26% to 27% - Management expects the pace of existing client workforce reductions to moderate in the second half of 2026 due to easier year-over-year comparisons - Gross margins are expected to begin improving in 2027 as more clients renew at the new higher workers' compensation rates, with compounding rate-on-rate increases driving margin expansion

Segment performance

1. PEO Segment: Q2 2026 gross billings increased 2.8% year-over-year to $2.28 billion, contributing 99.56% of total company gross billings. Total worksite employees (WSE) grew 1% year-over-year, with 4,500 net new WSE added from new clients, partially offset by workforce reductions at existing clients. Average billing per WSE per day increased 2.2% year-over-year, driven by rising wages offset by lower overtime and hours worked. By region: Southern/Northern California were flat, Mountain grew 2%, East Coast grew 16%, Pacific Northwest grew 3%, and asset-light new markets grew 73%. 2. Staffing Segment: Q2 2026 revenues declined 18% year-over-year to $14 million, contributing 0.44% of total gross billings. New business volume outpaced runoff, but reduced demand from existing clients amid macro uncertainty drove the overall decline. Successful direct applicant placement for PEO clients increased 35% year-over-year to 157 placements in the quarter.

Risks & headwinds

- Ongoing macroeconomic and geopolitical uncertainty continues to constrain existing clients' hiring, leading to resumed workforce reductions in Q2 2026 after moderation in Q1, which tempered overall topline growth - The California workers' compensation market has seen a sharp rise in costly post-termination cumulative trauma claims, which are 2.5x higher than three years ago, driving upward pressure on industry claim costs - Pricing increases for workers' compensation are implemented gradually as clients renew their contracts monthly, so full margin benefit will not be realized until 2027, keeping margins under pressure through 2026 - Industry-wide medical cost inflation is expected to drive another double-digit annual increase in health insurance rates for BBSI benefits - Staffing demand remains depressed, with existing clients reducing orders amid macro uncertainty, leading to a projected double-digit year-over-year revenue decline for full year 2026 - Workforce reduction headwinds that started in California have now spread to most geographies across the U.S., with the construction segment (which BBSI is heavily exposed to) seeing the largest impact

Analyst Q&A

• Q: How should the 6.6% September California workers' compensation rate increase be interpreted, and what are the key additional margin drivers beyond workers' comp? /

  A: The state-approved rate increase is a positive indicator of broader market shift, but actual pricing is set by individual carriers. BBSI has already achieved eight straight months of client price increases, confirming the market trough has passed. While slower-than-expected volume from existing client workforce reductions has a minor impact on margins, workers' compensation is overwhelmingly the primary driver of current margin pressure. Rising post-termination cumulative trauma claims have driven industry-wide cost increases, which are now being offset by gradual price hikes. BBSI is positioned to see compounding rate increases in 2026 and 2027, confirming 2026 will be the margin low watermark.

• Q: What has BBSI experienced with BBSI benefits renewals and claims, what is the outlook for prior year workers' comp claim adjustments, and when will asset-light locations convert to full branches? /

  A: BBSI retained 97% of PEO benefits clients after 2026 annual renewals, and added 70 new clients and 2,000 participants in Q2 with a robust pipeline. The benefits book is performing as expected, with the industry expecting another double-digit medical cost increase in the coming year. The structure of the renewed workers' comp program remains unchanged, with no administrative cost savings, and prior year claim favorable adjustments are slowing industry-wide as higher cost expectations are incorporated into actuarial estimates. Three asset-light locations are targeted for conversion to full branches in the second half of 2026, with potential minor delays into Q1 2027.

• Q: Is BBSI gaining market share, and what is driving growth in new white-collar client acquisitions? /

  A: BBSI achieved record new client and WSE additions in June 2026, with early July 2026 outperforming prior years, driven by improved product offerings and expanded sales investment. BBSI historically focused on blue-collar clients, but the completion of its full employee lifecycle tech stack and the addition of in-house health insurance now allow the firm to meet all requirements for larger white-collar client RFPs, where it was previously uncompetitive. The expanded product suite opens the door for sales, and BBSI's differentiated local client service then closes and retains new business.

• Q: Is controllable new client growth expected to continue at its current pace, how are new markets performing, and what is the outlook for staffing? /

  A: BBSI expects consistent controllable growth to continue for the remainder of 2026, as the new client acquisition process is now refined and predictable. New markets including Dallas and Chicago are outperforming historical new branch ramp-up trends, and the company invests additional resources in proven high-performing new locations. Staffing is expected to see sequential seasonal growth in Q3, but full year 2026 will still deliver a double-digit year-over-year decline, as new business volume is offset by reduced orders from existing clients. Headcount weakness is most pronounced in construction, BBSI's largest end market, and has spread from California to most other geographies.