Executive Summary / Key Takeaways

• Insperity, a leading provider of HR and business solutions, is executing a strategic pivot centered on a transformative partnership with Workday (WDAY), aiming to disrupt the mid-market PEO space and accelerate long-term growth and profitability.
• Despite a challenging macroeconomic environment impacting client hiring and new sales velocity, Insperity demonstrated resilience in 2024 through strong pricing discipline and effective cost management, exceeding the midpoint of initial adjusted EBITDA guidance.
• The first quarter of 2025 saw results fall below expectations primarily due to a significant spike in benefits costs driven by accelerated claims processing, higher utilization, and increased large claim frequency, prompting immediate strategic responses including pricing adjustments and plan design evaluation.
• The Workday partnership is progressing, with the successful launch of the corporate platform providing valuable insights for the client-facing solution and a joint go-to-market plan now in place, targeting early adopter clients in the latter half of 2025 for onboarding in 2026.
• While near-term guidance reflects ongoing market uncertainty and elevated benefits cost trends, management is focused on operational efficiencies, sales optimization, and leveraging the Workday initiative as a catalyst expected to drive improved financial performance and competitive positioning in 2026 and beyond.

Setting the Scene: A Foundation in HR Excellence Meets a Shifting Landscape

Insperity, Inc. has built a decades-long history as a trusted provider of human resources and business performance solutions, primarily serving the small and medium-sized business (SMB) market. Founded in 1986, the company's core offering evolved into comprehensive PEO services under its Workforce Optimization and Workforce Synchronization solutions. This model, based on a co-employment relationship, bundles critical HR functions – payroll, benefits, workers' compensation, and compliance – supported by the Insperity Premier platform. Over time, Insperity expanded its suite to include a traditional payroll solution (Workforce Acceleration) and other services like recruiting and insurance, positioning itself as a holistic HR partner.

The HR solutions industry is dynamic and competitive, with players ranging from large-scale payroll processors to specialized HCM software providers and other PEOs. Insperity operates within this landscape, differentiating itself through a high-touch service model and deep expertise, particularly in navigating complex regulatory environments and managing employee benefits and workers' compensation risks. This focus on comprehensive, integrated solutions and personalized service has historically fostered strong client relationships and retention.

However, the market is constantly evolving, influenced by macroeconomic conditions, labor market dynamics, and rapid technological advancements, particularly in cloud computing and artificial intelligence (AI). Insperity's strategic responses reflect this environment, aiming to build on its foundational strengths while adapting to new challenges and opportunities.

Insperity's competitive positioning is multifaceted. Against large-scale players like Automatic Data Processing (ADP), which dominates the broader HR & Payroll Software market with significant scale and a vast distribution network, Insperity differentiates through its PEO model's integrated service delivery and compliance expertise tailored for SMBs. While ADP's platform may offer faster payroll processing due to advanced AI integrations, Insperity's PEO structure aims for greater efficiency in compliance processing and offers a more holistic HR outsourcing solution. ADP's scale provides pricing power and higher profitability margins (operating margin ~20-25% vs. NSP's 15-20% TTM), but Insperity's niche focus and bundled services can lead to strong customer loyalty and potentially higher market share within the PEO segment for its target market.

Compared to cloud-based HCM specialists like Paylocity (PCTY) and Paycom (PAYC), Insperity's PEO model offers a more comprehensive outsourcing approach versus their primary focus on software tools. Paylocity and Paycom have demonstrated significantly higher revenue growth rates (Paylocity ~15-20% CAGR, Paycom ~25-30% CAGR) and often higher profitability margins (Paycom operating margin ~30-35% TTM) driven by agile product development and user-friendly platforms. While their software may offer faster processing or lower operating costs per user through automation, Insperity's strength lies in managing the full spectrum of HR risk and providing integrated services, which can lead to better performance in areas like workers' compensation processing and overall employee retention support. Insperity's challenge against these faster-growing tech-centric rivals is maintaining technological competitiveness and growth velocity.

Insperity's competitive advantages, or moats, include its deep PEO expertise, the integrated Insperity Premier platform, and established SMB relationships. The PEO model creates network effects and sticky client relationships, contributing to high retention rates (often 80-90%) and recurring revenue. The Insperity Premier platform, while not detailed with specific quantifiable performance metrics, is described as a cloud-based human capital management solution integral to its PEO offering. The company is also investing in leveraging its vast HR content and data through AI, aiming to build an internal tool to drive efficiencies and deeper knowledge for service and sales teams, particularly in areas like the contact center and payroll. This AI strategy is in its early stages but is seen as a way to enhance service proficiency and potentially lead to operational capacity management and optimization, contributing to operating leverage over time.

However, Insperity faces vulnerabilities, including its smaller scale compared to giants like ADP, which can result in higher operating costs per client due to less economies of scale. The pace of technological innovation from pure-play tech companies like Paycom also presents a challenge, requiring continuous investment to keep its platform competitive.

A pivotal strategic response to this evolving landscape and competitive dynamic is Insperity's strategic partnership with Workday. This initiative represents a significant investment and a potential catalyst to elevate Insperity's long-term growth trajectory and competitive positioning, particularly in the mid-market segment (generally 100-5,000 WSEs).

Performance and Strategic Execution in a Challenging Environment

Insperity's recent financial performance reflects the interplay of internal strategic execution and external market pressures. Full year 2024 results demonstrated resilience, with gross profit increasing 1% despite a 1.6% drop in average paid worksite employees (WSEs) compared to 2023. This was primarily driven by strong pricing performance throughout the year and favorable benefits claims experience in the first half. Operating expenses increased 14% in 2024, reflecting ongoing investments, including approximately $57 million related to the Workday partnership, but were managed well below the initial plan in response to lower WSE volume. This disciplined approach allowed Insperity to exceed the midpoint of its initial 2024 adjusted EBITDA guidance.

The first quarter of 2025, however, presented new challenges. While average paid WSEs saw a modest 0.7% increase year-over-year, results fell below guidance primarily due to higher-than-expected benefits costs. Gross profit per WSEE per month decreased by 11% ($40) compared to Q1 2024, driven by a significant 8.4% increase in benefits costs per covered employee. Management attributed this spike to an acceleration in inpatient, outpatient, and pharmacy costs, as well as increased frequency of large claim activity. Notably, a $12 million increase in estimated run-off related to prior periods was more widespread across older periods than typically observed. This volatility in healthcare costs, while not unprecedented in the industry, highlights a key risk factor for Insperity's profitability.

In response to the Q1 2025 benefits cost spike, Insperity has initiated several strategic actions. Pricing targets are being raised with an emphasis on strategically selected accounts, aiming to realign price and cost by January 2026. The company is also evaluating benefit plan design and packaging changes for the 2026 plan year and has accelerated contract renewal discussions with its primary carrier, UnitedHealthcare (UNH), exploring possible structural changes and leveraging the Workday partnership in these negotiations.

Beyond benefits costs, the macroeconomic environment continued to impact WSE growth. Weak client hiring persisted, described as the lowest level in at least 20 years excluding recession years. A client survey in April 2025 revealed a significant increase in businesses expecting a negative impact from the economic climate (66% vs. 29% in January) and a decrease in those planning to add employees in the coming quarter (34% vs. 43%). This uncertainty led to some new client starts being delayed or canceled in late Q1 2025.

Despite these headwinds, Insperity's core sales and retention efforts showed positive signs. Worksite employees paid from new client sales increased 3% over Q1 2024, and client retention remained strong at 91%. The fall 2024 sales campaign resulted in record-setting booked sales, up 8% over the prior year, and dramatically improved attrition from terminating accounts, particularly in larger segments. Sales activity, measured by business profiles, showed a double-digit year-over-year increase, supported by a double-digit increase in marketing leads.

Liquidity remains solid. As of March 31, 2025, Insperity held $568 million in cash, cash equivalents, and marketable securities. While operating cash flow in Q1 2025 was impacted by the timing of payroll tax payments and the distribution of client employee retention tax credits ($440 million distributed in early 2025), the company maintains adequate resources, including $280 million available under its $650 million revolving credit facility, to meet its liquidity requirements and continue its capital allocation strategy, including dividends ($23 million paid in Q1 2025) and share repurchases ($19 million in Q1 2025).

The Workday Catalyst and Future Outlook

The Workday strategic partnership stands as the most significant strategic initiative for Insperity's future growth. This collaboration aims to create a preeminent PEO solution for the mid-market by embedding Workday's advanced HR technology within Insperity's comprehensive service framework. The value proposition is compelling: offering businesses a sophisticated HCM platform with less upfront capital cost, ongoing expense, complexity, and implementation time compared to traditional Workday deployments or alternative solutions.

Progress on the partnership is tangible. The successful launch of the Workday platform for Insperity's corporate use in mid-March 2025 was a critical milestone, providing valuable insights for the client-facing solution and positioning Insperity employees as advocates. Development of the exclusive client tenant is underway, incorporating platform enhancements expected from Workday. A joint go-to-market plan has been finalized, including alignment on target market, messaging, and sales motion, and the formation of a dedicated team (POD) to execute co-selling efforts. This team will begin targeting early adopter candidates in the latter half of 2025, with onboarding expected in 2026.

Management believes this joint solution has the potential to be competitively disruptive and significantly impact Insperity's key growth drivers. It is expected to enhance client retention, particularly for larger accounts, by providing a scalable, premium technology solution that addresses a historical reason for larger client departures. The partnership is also anticipated to accelerate new sales in the mid-market, with the potential for average prospect size to be higher than historical norms. Management estimates that selling just 20 accounts averaging 750 employees could add approximately 15,000 WSEs, representing roughly 5% of current WSE count and adding approximately 5% to annual growth at the current size. Over a reasonable period, the partnership has the potential to double the size of Insperity's mid-market business. Furthermore, the premium nature of the joint offering is expected to contribute positively to future margins.

The outlook for 2025 reflects a blend of near-term challenges and strategic investments. Management forecasts full-year 2025 WSEE growth of 0.5% to 3% over 2024, reflecting sequential quarterly growth of 1% to 2%. This outlook incorporates the impact of the current macroeconomic environment and conservative assumptions regarding client hiring. The forecast for full-year benefits cost per covered employee is a range of 6.5% to 7.5%, acknowledging the elevated trends observed in Q1 2025, with an expectation that the trend may taper from the Q1 peak as the year progresses due to demographic changes and plan migration. Operating expenses are expected to see an overall reduction in 2025 compared to 2024, despite a planned increase in Workday investment to approximately $62 million (from $57 million in 2024), reflecting a focus on operational efficiencies.

Based on these factors, full-year 2025 adjusted EBITDA is guided to a range of $190 million to $245 million, and adjusted EPS to a range of $2.23 to $3.28. The Q2 2025 forecast anticipates average paid WSEs between 308,000 and 311,000, adjusted EBITDA between $33 million and $53 million, and adjusted EPS between $0.29 and $0.67. Comparisons to Q2 2024 earnings will be significantly impacted by favorable benefits costs in the prior year period and the increased Workday investment this year.

Key risks to this outlook include the persistence of elevated benefits costs, the duration and severity of the macroeconomic slowdown impacting client hiring and new sales, the competitive response to Insperity's strategies, and the successful execution and market adoption of the Workday joint solution.

Conclusion

Insperity is at a pivotal juncture, leveraging its established position and deep expertise in the HR solutions market while embarking on a transformative strategic initiative with Workday. The company's history of navigating complex HR environments and managing risk provides a solid foundation, but near-term performance is being tested by macroeconomic headwinds and volatility in healthcare costs. Management's swift response to the Q1 2025 benefits cost spike, coupled with ongoing efforts in sales optimization and operational efficiency, demonstrates a commitment to mitigating current pressures.

The Workday partnership represents a significant investment with the potential to fundamentally reshape Insperity's competitive landscape, particularly in the attractive mid-market. While the financial benefits are expected to materialize more significantly in 2026 and beyond, the progress on development and the establishment of a joint go-to-market strategy signal tangible steps towards realizing this long-term growth catalyst. Investors should monitor the execution of the Workday partnership, the trajectory of benefits costs, and signs of recovery in the small business hiring environment as key indicators of Insperity's ability to translate its strategic vision into sustained financial performance and competitive advantage.