Barrett Business Services Q2 Earnings Call Highlights

Key Points

• Q2 growth was modest: Gross billings rose 2.6% year over year to $2.29 billion, while diluted EPS fell to $0.52 from $0.70. New client acquisitions increased 17%, but workforce reductions and cautious hiring among existing clients limited worksite-employee growth to 1%.
• Workers’ compensation pricing is improving, but margins remain pressured: BBSI renewed California policies on favorable terms and has raised pricing for eight consecutive months. Management expects 2026 to be a gross-margin low point, with improvement anticipated in 2027 as higher pricing flows through monthly client renewals.
• The company lowered its 2026 outlook to 3%–4% gross-billings growth, 2%–3% worksite-employee growth and 2.7%–2.75% gross margin, citing continued economic uncertainty. BBSI remains debt-free, held $68 million in cash and investments, repurchased $15 million of stock and reaffirmed its dividend.

Barrett Business Services NASDAQ: BBSI reported second-quarter growth in gross billings and worksite employees, though management said persistent economic uncertainty continued to weigh on hiring among existing clients.

Gross billings increased 2.6% year over year to $2.29 billion for the quarter ended June 30, 2026. PEO gross billings rose 2.8% to $2.28 billion, while staffing revenue declined 18% to $14 million. Diluted earnings per share were $0.52, compared with $0.70 in the prior-year quarter.

President and CEO Gary Kramer said revenue was “slightly below” the company’s expectations, but client acquisition trends exceeded internal expectations. New client acquisitions rose 17% from a year earlier, and the company added approximately 4,500 worksite employees from net new clients year over year.

Those gains were partly offset by workforce reductions at existing clients. Total worksite employees increased 1% during the quarter as client hiring remained below historical levels and some customers reduced headcount.

Client additions and regional performance

Kramer said the company’s sales and retention efforts produced “strong controllable growth,” even as macroeconomic and geopolitical conditions constrained client hiring. BBSI expects the impact from lower client hiring to moderate during the second half as comparisons become easier.

Chief Financial Officer Anthony Harris said average billing per worksite employee per day rose 2.2%, reflecting continued wage growth, partly offset by lower overtime and fewer hours worked per employee.

• Southern and Northern California PEO gross billings were flat year over year, as stronger new-client additions were offset by workforce reductions among existing clients.
• The Mountain region grew 2%, while the Pacific Northwest grew 3%.
• East Coast gross billings increased 16%, marking the company’s 21st consecutive quarter of double-digit growth, according to Harris.
• Asset-light markets grew 73% and added roughly 400 worksite employees during the quarter.

The company expects to convert three additional asset-light locations into traditional branches later in the year, although Kramer said the timing could extend into the first quarter depending partly on real estate availability. He added that newer markets including Dallas and Chicago were performing well.

Workers’ compensation pricing and margin outlook

Management continued to characterize 2026 as a transition year for California workers’ compensation pricing. Harris said the company renewed its fully insured workers’ compensation policies effective July 1 on favorable terms, including a modest rate increase, no downside exposure for future adverse claim development, and continued participation in favorable claim development through return premiums.

The California Insurance Commissioner approved an average 8.7% premium rate increase in 2025 and announced an additional 6.6% increase effective in September 2026. Kramer said the regulatory guidance is a positive sign, though individual insurance carriers ultimately determine the rates they charge.

BBSI has raised workers’ compensation pricing for eight consecutive months, its first sustained period of price increases in a decade. Management said the increases are expected to more than offset higher claims costs, but their effect will be gradual because clients renew monthly.

Harris said favorable prior-year workers’ compensation liability and premium adjustments totaled $2 million in the second quarter, down from $8.8 million a year earlier. The smaller adjustment reflected industrywide increases in claim-cost expectations that are now being incorporated into actuarial estimates.

Kramer said higher litigation and cumulative trauma claims have contributed to the market shift, including post-termination cumulative trauma claims. He said the company expects 2026 to represent a low point for gross margins before improvement in 2027 as higher client pricing compounds through additional renewals.

Benefits, products and staffing

BBSI added about 70 clients and more than 2,000 participants to its BBSI Benefits plans during the quarter. Kramer said the company retained 93% of benefits clients at Jan. 1 renewals, while another 4% remained PEO clients but had their benefits business placed elsewhere through BBSI’s agency capabilities.

The company has expanded its technology offerings across the employee lifecycle, including an applicant tracking system, benefits offering, employee file cabinet, learning management system and performance management module. Kramer said the added products have helped BBSI compete for more white-collar accounts, including doctors, insurance brokers, dentists and certified public accountants, alongside its traditional blue-collar focus.

Staffing revenue declined as existing customers reduced orders, though the company’s new staffing business exceeded runoff business. BBSI also placed 157 applicants for PEO clients during the quarter, a 35% increase from the prior-year period. Harris said staffing should grow sequentially in the third quarter due to seasonality, but is still expected to show a double-digit year-over-year decline for the full year.

Updated outlook and capital return

BBSI narrowed its 2026 outlook, citing year-to-date results and continued uncertainty affecting client workforces. The company now expects:

• Gross billings growth of 3% to 4%, compared with its prior outlook of 3% to 5%.
• Average worksite employee growth of 2% to 3%, compared with the previous 2% to 4% range.
• Gross margin of 2.7% to 2.75% of gross billings, versus prior guidance of 2.7% to 2.85%.
• A normalized effective annual tax rate of 26% to 27%, excluding a one-time first-quarter tax charge.

SG&A expenses declined about 2% in the second quarter, primarily due to employee-related expenses. BBSI expects full-year SG&A growth to remain below gross billings growth.

At June 30, the company had $68 million in unrestricted cash and investments and no debt. During the quarter, BBSI repurchased $15 million of stock at an average price of $30.92 per share under its August 2025 authorization, leaving $40 million available. It also paid $1.9 million in dividends and reaffirmed its dividend for the following quarter.

About Barrett Business Services (NASDAQ:BBSI)

Barrett Business Services, Inc NASDAQ: BBSI is a professional employer organization (PEO) headquartered in Northridge, California. Founded in 1971 by Barrett K. Levesque, the company provides comprehensive human resources outsourcing solutions to small and mid-sized businesses. Through its consultative model, Barrett Business Services helps clients streamline administrative processes, mitigate regulatory risk and focus on core operations.

The company's core offerings include payroll administration, employee benefits management, workers' compensation and risk management services.

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