Barrett Business Services Cuts Margin Outlook as Growth Slows
Barrett Business Services posted a 30% drop in second-quarter net income to $12.9 million as client hiring softened and margin guidance narrowed for the year.
Barrett Business Services (BBSI) reported second-quarter net income of $12.9 million, or $0.52 a diluted share, down 30% from $18.5 million, or $0.70 a share, a year earlier. The staffing and professional employer organization provider also narrowed its full-year margin guidance, a shift the company said reflects 2026 as "the low point for margin".
The quarter capped a five-quarter slide in growth. Revenue rose 4% year-over-year to $319.3 million, decelerating from 5% growth in the first quarter, 5% in the fourth quarter of 2024, 8% in the third quarter and 10% in the second quarter of 2024. Gross billings followed the same pattern, up 3% to $2.29 billion versus growth rates of 3%, 6%, 9% and 10% in the preceding four quarters. Average worksite employee growth, a core demand indicator for the PEO business, nearly stalled at 0.5% in the quarter, down from 1.9% in the first quarter and 8% a year earlier, due to "continued softness in client hiring".
Margin compression compounded the slowdown. Gross margin as a percentage of gross billings fell to 2.8% from 3.3% a year earlier, extending a decline from the 2.9%-3.0% range posted in the third and fourth quarters of 2024. Workers' compensation expense rose to 2.5% of gross billings from 2.1%, even as favorable adjustments to prior-year claims reserves shrank to $2.0 million from $8.8 million a year earlier, a reversal that represents a "slowing of favorable prior-year claims adjustments" that offset improved pricing. Benefit costs, broken out as a separate line item since the first quarter, rose to 1.3% of gross billings from 0.8%.
The PEO segment, which now represents nearly all of revenue, grew 5.1% to $304.97 million from $290.17 million, while staffing services revenue declined 18.2% to $14.3 million from $17.5 million. The mix shift toward PEO has not been enough to offset the broader deceleration in worksite employee additions.
The results followed a rockier first quarter, when a U.S. Tax Court decision disallowing wage-based tax credits claimed between 2017 and 2022 produced an $11.6 million tax-effected, non-recurring charge and drove Barrett Business Services to a GAAP net loss of $14.8 million, compared with a $1.0 million loss a year earlier. That charge has been excluded from non-GAAP results going forward.
For 2026, Barrett Business Services tightened its gross margin guidance to a range of 2.70% to 2.75%, down from the 2.70%-2.85% range it had reaffirmed as recently as the first quarter. Gross billings growth guidance narrowed to 3%-4% from 3%-5%, and worksite employee growth guidance narrowed to 2%-3% from 2%-4%. The revisions stand in contrast to the year-ago period, when the company raised its 2025 gross billings growth guidance to 9%-10% from a prior 7%-9% range and its worksite employee growth guidance to 6%-8% from 4%-6%.
Barrett Business Services also pulled back on share repurchases as cash reserves thinned. The company bought back $15.0 million of stock in the quarter, or 486,811 shares at an average price of $30.92, down from $20.1 million in the first quarter and $17.0 million in the fourth quarter of 2024. Unrestricted cash and investments fell to $67.9 million at quarter-end from $91.9 million three months earlier and $157.2 million at the end of 2024, reflecting continued buybacks, dividends and tax payments. Barrett Business Services had $40.3 million remaining under its $100 million repurchase program at quarter-end, down from $55.3 million at the end of the first quarter.