羅致恆富 (RHI) 2003 Q2 法說會逐字稿

Good afternoon welcome to the Robert Half International second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS) At the request of Robert Half International, today's conference is being recorded for instant replay purposes. I would now like to introduce Mr. Harold Messmer Jr , Chairman and Chief Executive Officer. Sir, you may begin.

Thank you and good afternoon. With today is Keith Waddell, our Vice Chairman and Chief Financial Officer. As you know, the purpose of this call is to review our second quarter 2003 financial results and, to the best of our ability, provide you with some general guidance with regard to our expectations for the third quarter. After our prepared remarks, Keith and I will be happy to answer happy to answer some of your questions.

At this time I would to point out that our presentation contains predictions, estimates and other forward-looking statements that represent our current judgment on what the future holds. These include words such as forecast, estimate, project, expect, believe and similar such expressions. While we believe these remarks to be reasonable they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Some of these risks and uncertainties are described in today's press release and in our Form 10-K filing and other filings with the SEC. We do not undertake the obligation to update the statements made in the conference call.

Now let's review the second quarter. Revenues for the quarter were $483 million, up 2 percent from the second quarter of 2002. On a sequential basis revenues were up 2 percent from the first quarter of this year. Overall, earnings per share were at break even compared with 2 cents for the second quarter of 2002 and negative 2 cents for the first quarter of 2003. Our Staffing operations had earnings of 4 cents per share for the quarter. And our Protiviti subsidiary had negative earnings of 4 cents per share. Both revenues and earnings for the quarter were within the range of guidance that we provided you last quarter.

RHI's cash flow from operations was $27 million for the quarter before capital expenditures of $9 million. Once again, we were able to generate strong cash flow despite the challenging economic conditions.

Shortly after the end of the quarter, we completed the acquisition of our last independent Robert Half franchise, which had locations in Kansas City, Missouri and Overland Park, Kansas. This was the last remaining franchise, which means that all RHI locations were worldwide are now company-owned and operated.

We ended the second quarter with $318 million in cash and equivalents in the bank after the repurchase of approximately 200,000 shares of our Company's common stock during the period. There are approximately 10 million shares still available under the stock repurchase program previously approved by our Board.

As Keith will discuss in greater detail, we were pleased with Company's performance in a number of areas despite the difficult economy, particularly the sequential improvements in the gross margins of our Staffing operations and Protiviti's continued ramp up and resulting increase in revenues.

I will now turn the call over to Keith for a more in-depth overview of our second quarter results.

Thank you, Max. Before I start I would like to remind everyone once again that a copy of today's press release is available in our website, RHI.com. An audio version of this call will also be archived on our website later this evening.

As Max noted, total revenues for the second quarter were 483 million, up 2 percent from last year. There were 64 billing days in the quarter, which is the same as Q2 last year, and up one day sequentially from the first quarter. Second-quarter revenues for Accountemps, our largest staffing division, were 202 million, down 3 percent from last year and down 2 percent sequentially on a same-day basis. Accountemps has 329 locations worldwide and represents 42 percent of total revenues.

OfficeTeam had revenues of 125 million, up 3 percent from last year and up 2 percent sequentially on a same-day basis. OfficeTeam is our high-end administrative staffing division and began operations in 1991. It has 309 offices worldwide. It accounts for 26 percent of total revenues.

Robert Half Technology revenues were 51 million for the quarter, down 9 percent from last year and down 1 percent sequentially on a same-day basis. Launched in '94, this division specializes in placing IT professionals on a consulting and full-time basis. It has 104 locations worldwide and represents 11 percent of revenues.

Revenues for Robert Half Management Resources were 50 million, down 7 percent from last year and down 3 percent sequentially on a same-day basis. These revenues do not include the benefit of intracompany revenues from Protiviti, which have increased significantly as the two divisions work more closely together. Robert Half Management Resources was introduced in '97. It specializes in placing higher level accounting and finance professionals on a project basis. It operates in 96 markets worldwide and accounts for 10 percent of revenues.

Our perm placement division, Robert Half Financing and Accounting, reported revenues for the quarter of 24 million, down 8 percent from last year and up 7 percent sequentially. This business accounts for 5 percent of total revenues. It was established in 1948 and operates in 329 offices worldwide.

Protiviti, which reached its one-year adversity in May, had revenues of 31 million for the quarter. This exceeded the top end of our revenue guidance range provided last quarter. Protiviti now comprises 6 percent of RHI revenues. It offers businesses full outsourcing, co-sourcing and consulting services in the areas of internal audit and risk consulting. And has 34 locations in the US, Europe and Asia. As we discussed on our last quarter call, the areas of the business experiencing the greatest demand include Sybase Oxley Act, Section 404 compliance, regulatory and forensics investigations, technology security, and the establishment of new internal audit functions for clients.

International staffing revenues for RHI were 86 million for the quarter, up 4 percent from last year and up 2 percent sequentially. Our Staffing divisions currently operate in 60 locations in 10 countries outside the U.S. International Staffing operations account for 19 percent of total staffing revenues.

Turning to gross margins. Temporary and consulting staffing gross margins were 151 million for the quarter, representing 35.2 percent of applicable revenue. This compares to 36.2 percent of revenues for Q2 2002 and 34.8 percent of revenues for Q1 2003. The 38 basis point sequential improvement is due primarily to stronger pricing in order to offset higher costs for unemployment and workers compensation insurance costs. Overall Staffing gross margins were 175 million for the quarter and 38.7 percent of staffing revenues. This compares to 39.7 percent of revenues in Q2 2002 and 38.1 percent of revenues in Q1 2003. In addition to the improvement in temporary and consulting gross margins just mentioned, overall staffing gross margins also benefited from a higher mix of permanent placement revenues.

Gross margin for our Protiviti subsidiary was 2.6 million for the quarter, a sequential improvement of 3.9 million versus the first quarter of 2003. This improvement reflects higher revenue levels for the quarter and marks the first time that Protiviti has reported positive gross margins.

Turning to selling, general and administrative costs. Staffing SG&A costs for the quarter were 164 million, representing 36.2 percent of Staffing revenues. This compares to 37.5 percent of revenues for Q2 last year and 36.3 percent of revenues for Q1 2003. Protiviti SG&A costs were 11.4 million for the quarter, up from 9.9 versus the first quarter of this year. This includes additional advertising spending to take advantage of the increased demand for services related to compliance for 404 of Sarbanes Oxley, as well startup costs associated with our newer international offices. As noted last quarter, advertising expenditures will remain relatively high for the rest of the year.

Operating income from our Staffing division was 11.2 million for the quarter. The temporary and consulting divisions contributed 9.8 million in this amount, while the perm placement division had operating income of 1.4 million. Protiviti had negative operating income of 8.8 million for the quarter before intangibles of 2.8 million. This was a 2.4 million improvement sequentially from the first quarter.

Cash and equivalents were 318 million at the end of the quarter. This was after funding 9 million in capital expenditures and repurchasing approximately 200,000 shares in the open market. As Max noted, on July 1st we completed the acquisition of our last independent franchisee in Kansas City in Overland Park. We deposited funds into an escrow account for this acquisition on June 30.

Our accounts receivable were 225 million at the end of the quarter, with implied days outstanding, or DSO, of 42 days. This compares to 47 days at the end of Q2 last year and 43 days at the first quarter of 2003. We continue to be pleased with the management of our accounts receivable.

We will now offer general guidance for the third quarter of 2003. This is in accordance with Reg FD. As you know, we do not assist analyst with their detailed models. We base our guidance on the following business trends. On a same-day, sequential basis, during the second quarter temporary and consulting revenues were down in April, up in May and up again in June. Permanent placement revenues were up sequentially all three months of the quarter. For the first week of July, revenues from our temporary and consulting businesses were up 3 percent versus June. For the first two weeks of July, revenues from our perm placement division were down 26 percent sequentially versus the first two weeks of June. Of course, perm revenue trends are difficult to measure over such short period of time, particularly in light of the Fourth of July holiday week. Accordingly, our guidance for Q3 is as follows, staffing revenues, 440 to 460 million; Protiviti revenues, 31 to 35 million; staffing earnings per share, 3 to 5 cents Protiviti earnings per share, negative 3 to 5 cents. These estimates are subject to the risks mentioned in today's release. Now I will turn the call back over to Max for additional comments.

Thank you, Keith. It was in the midst of the recession in the early '90s that we launched our OfficeTeam division, a division that now accounts for roughly a quarter of all RHI revenues. It has been only slightly more than a year since we launched Protiviti, our internal audit and risk consulting business. We are encouraged by Protiviti's performance for a number of reasons. For the first full quarter in which we reported results for this new subsidiary, we had $18 million in revenues. For the most recent quarter, we reported $31 million in revenues. And we're projecting revenues of 31 million to $35 million for the coming quarter, as Keith just stated. We are very proud of the professionals who make up Protiviti. And we're confident that they are on the road to further success in the coming quarter. In our new Protiviti offices in Tokyo and Singapore, we recently had very successful launch events that well attended by clients. We believe Protiviti has gained significant market acceptance since its introduction just over a year ago.

We're also pleased that the gross margins in our staffing operations improved this past quarter, as our very competent field managers continue to work at passing along the increased costs we must bear for workers compensation and unemployment insurance. Similarly, we were pleased with the trend of revenues throughout the last quarter, June being the stronger months than its predecessors, as Keith noted.

All these developments give us cautious optimism for the future, but we are quick to remind you as we have on many occasions that Keith and I are clearly not macroeconomists. We are well aware that the economy has experienced several false starts. And we certainly do not think it would it prudent to forecast a continuation of the trends we saw this past quarter. Consequently our guidance, as Keith noted, is for a quarter that essentially looks much like the one which we just completed, at least in many respects. Given the uncertainty of the economy, this seems to us to be the appropriate advice at this time. We do remain optimistic about the long-term outlook for RHI and the staffing industry as a whole for that matter. RHI is in very strong financial condition with no debt, strong cash reserves, a proven track record, and the ability to generate cash flow in difficult economic climate.

At this time, Keith and I will be happy to answer your questions. As usual we would like to ask that you limit yourself to one question and a single follow-up, so that we can allow as many people to participate as possible. If you have additional questions, we will certainly try to return to you later in the call.

(CALLER INSTRUCTIONS) Jeff Silber with Gerard Klauer.

I was just wondering on the guidance for the second quarter, excuse me for the third quarter, if you can give us what you are assuming for both share count and tax rates?

Share count is much an easier question to answer than tax rates. Share count, as we flip to positive income for the quarter, we were over 170 million in shares, which includes -- those are fully diluted shares. So the share count shouldn't change much absent further buybacks for the third quarter.

The tax rate is problematic because at such small levels of income the percentage rate that results is a function of several somewhat esoteric items that includes such things as the deductibility of meals and entertainment, Protiviti's state losses that are not offset by Robert Half income, because it is a separate subsidiary, as well as some of the states -- some of the international losses of Protiviti. So quite frankly, Jeff, on a go forward basis depending on the mix of Protiviti and staffing for the third quarter, the tax rate could vary anywhere from 25 to 60 percent. And I understand that is a huge range percentage wise, but in terms of dollars that difference isn't as much as the percentage would indicate.

That's fair. One quick follow-up. On the repurchase of the Kansas City franchises, roughly what impact will that have on the third quarter numbers? I am just wondering how large those franchises were?

Keith WaddellI would say it would have a diminimus impact.

Greg Capelli of Credit Suisse First Boston.

I guess one quick one here on Protiviti. You did a nice job reading the guidance. I guess even in the space of Sarbanes getting pushed back to June, how much did that, you know if any impact, the business this quarter in the division. And then when do you actually expect spending to peak? And when would you expect breakeven, if you could share any color on that?

As to Sarbanes, what we found with our clients is that virtually all of them that signed up before the date was delayed, are continuing with us. That many are being more measured and more kind of plodding about how they get done. So that as opposed to this huge spike that was expected in the third and fourth quarters in anticipation of calendar year end, that is going to kind of be spread over the next twelve or so months.

So quite frankly, we move from a situation where we have been so successful selling work that we were worried we were going to be resource constrained to a situation now where we are more comfortable with our resources. During the quarter, kind of in anticipation of that resource constraint, we used more consultants from Management Resources, and we did a modest amount of hiring as well, because we felt like we're going to have to. So if you look at kind of the marginal contribution to earnings versus the marginal contribution to revenues of Protiviti during the quarter, it suffered a bit by the additional cost I just mentioned that kind of geared up for something that got smoothed out ultimately.

Net we think it is a good thing that Sarbanes got pushed back. And I can assure you there are some clients that don't necessarily think so because with the new date, as an example, we visited with a couple of August 31 retailers recently whereas they thought they were at the back of the line, now they are at the front of the line. So isn't necessarily great news for everybody. So that work that was ultimately going to be pushed back, that's now on the front burner.

Okay. And then just the other part of that question was in terms of maybe if you have any update on when you might expect breakeven in the division?

Well, Greg, as we have said in the past we kind of limit our guidance and comments to one quarter out. You can certainly with fairly simple math kind of look at a trajectory of the last few quarters and kind of come to some conclusions.

Okay. I just was curious to whether you thought spending kind of would peak. I know at certain points you talked about going into other countries and whatnot. But I guess.. .

We still have a short list of a handful of international countries that we will expand Protiviti to as the right people present themselves or are found by us. But that is a relatively short list. I would say again, as I just said, for the quarter just ended, we would have had more marginal contributions to the bottom line had we not been anticipating a resource constrain issue and acted accordingly.

Andrew Steinerman of Bear Stearns.

Looking at the guidance on the staffing and perm placement side alone, it looks like you're guiding to a minus 3 percent to up 2 percent. And going into this past quarter that was just pretty solid on that front, you were guiding minus 2 to plus 2. And if we were just thinking about staffing and perm placement, and I know we're just talking about 1 percent more, are you more encouraged by the business now than a quarter go, or are you as uncertain about the sort of next quarter as you were going into this quarter?

I guess, Andrew, a couple of comments. First of all, we gave you the intraquarter trends, which strengthen in staffing and in Protiviti as the quarter progressed.

Yes, it looked good.

We could also say that if you talk to our field people that the tone today is more positive that was 90 days ago. That said, it seemed to us to be prudent rather than to sit here and definitively call a turning point, and therefore get more aggressive in our guidance, we thought we would kind of say, hey, let's kind of go one more quarter at amounts and rates kind of consistent what it has been for a while and play it by ear. But clearly, we had an improving trend during the quarter. And clearly, the tone of business today is more positive than it was 90 days ago.

And within that range, do you feel more positive about staffing vs. perm placement?

Well perm placement, as you know, is lumpy as we have used many times. But an interesting thing about perm placement, if you look at the last ten years, nine of the last ten years, perm placement has outperformed temp in the second quarter on a sequential basis, because of what is typically seasonal weakness in temp in Q2 that doesn't happen in Q1. So that phenomenon doesn't typically reoccur in Q3, so I wouldn't read too much into perm versus temp mix other then pursuant to what I just said.

Chris Gutek of Morgan Stanley.

A follow up here on Protiviti. I know when you guys made this (inaudible) higher a little over year ago, I believe that you said this type of business it would be typical to assume about $2 million of revenue per partner. And the concept of the partner, who the partner (inaudible) a bit fuzzy. But if I simply assume that you have about 63 " partners" and $2 million per year runrate, that gives us over $31 million of revenue in the third quarter, or at the lower end of the guidance range.

I guess the question is, could you comment on the number of partners, some of the people you have? And a (inaudible) follow up to that is, what kind of additional capacity do you have for revenue generation based on the current head count at Protiviti?

Right, a couple of points. We're close to 70 partners. I think it is 68 or 69. I do not know precisely. What we said was that it had been published publicly that the average accounting firm did 2 million per partner. And that in their former life when they were at Andersen these guys did, or these people did, more than 2 million per partner, and in some cases significantly more than 2 million per partner. So I just wanted to clarify that we weren't saying that was Protiviti specific, but that was kind of the industry norm, quickly pointing out that they had done better than the industry norm.

Okay. Fair enough. And could you comment on the excess capacity or revenue generation potential (multiple speakers ).

There's still significant excess capacity at the staff ranks at Protiviti. Notwithstanding the comment I just made, we have sold so much Sarbanes work that our belief that we're not only going to go through that excess capacity that we needed additional resources, which is why we acted in the way that we did. That said, with a more rational Sarbanes outlook for the next two to three quarters, we do have significant unutilized capacity that can be used for those efforts. And therefore, there should be a nice contribution to margins from incremental contributions of revenue.

And the final follow up on Protiviti. A similar question I think I have asked in each of the last four conference calls. But would you care to discuss the non-recurring transitional integration and/or marketing costs of the above the baseline cost structure for Protiviti?

Clearly, our advertising spend particularly is high. In the past quarter it was particular high, because we did a lot around Sarbanes-Oxley. We have a booklet, which is a Q&A on Section 4 of Sarbanes-Oxley Act which has kind of gotten industry wide acclaim for its comprehensiveness, as well as its practicalness. We did a significant mailing of those. We hand those out every chance we get. There was additional, unusually high advertising around our first year anniversary event. You may have seen some of those ads in the Wall Street Journal. So second quarter was heavier even in a normal heavy amount. That should subside somewhat in the third and fourth quarters. But again, we've said, it continues high. In addition to that, we did absorb some cost relative to the international startups, particularly Japan and Singapore, as Max mentioned with those opening events in his comments.

Randy Mehl with Robert W. Baird.

Just a quick follow-up first to the Protiviti question. Now that you have had it for a year, and obviously built it up over the last year, what do you see as a reasonable margin target for that business?

We said from the beginning that at steady-state it should have higher gross margins and higher operating margins than we get out of staffing, and we're sticking to that. And we have made significant progress in the last few quarters, and we expect that significant progress to continue.

So nothing has changed in the way you look at you look at the ultimate profitability there?

Not at all. They have -- they being Protiviti. They have done a very nice job at maintaining their bill rates that drive the kind of profitability they were used to in their former life. And we have no reason to believe that once we get steady-state utilization of the staff, we will get steady-state margins.

Okay. And you had a little improvement in the temp gross margin in the quarter. It sounds like you have been able to control the rate wage spread nicely. I'm wondering what we should extrapolate going forward on that front? And I was also wondering if you could quantify the bill rate change in the period?

The bill rate change was 1 or 2 percent up. The assumption going forward should be kind of flat in margins with what you saw in the second quarter. Toward the end of last year, we saw the unemployment increases coming. We began as we got new assignments to try to price accordingly. It took a while to get there, but we're very pleased that over a two quarter period we fully passed through the extra unemployment and workers comp costs that we were faced with. And so I think we're particularly pleased and proud that the kind of the earnings power of the business as we come out of this downturn is very much intact.

Okay. And just a final comment, I thought the Protiviti book was good. It almost made '04 interesting. It did the best job it could.

Let's don't get carried away here.

Kelly Flynn of UBS Warburg.

A broad question about Sybase Oxley. I am trying to understand what was difficult and what was secular this quarter in your other businesses. (inaudible) this last this quarter you touched on Management Resources, but to what extent do you guys think that Sarbanes-Oxley may be helping you in your other businesses? In particular I noticed, it seemed relative to last quarter you added a few offices at Management Resources. I'm wondering, did that had have anything to do with Sarbanes-Oxley, or just general comments there?

The latter question is easy in that the additional locations were principally international locations that had little to do with Sarbanes-Oxley. As to the Sarbanes-Oxley impact on Management Resources, merely giving Management Resources credit for the business it did with Protiviti, part of which, but not all of which was Sarbanes-Oxley, would actually swing Management Resources sequential revenue growth from negative to a positive number. So clearly, Management Resources benefited, but much of that benefit was intracompany so it doesn't get reported in the numbers that you see.

Okay. Any of the other businesses seeing any impact?

I guess, clearly, there is a little bit of impact, but since our sweet spot, particularly in Accountemps, is with middle market companies, you're not going to see the kind of impact there that you would with smaller public and larger companies, which is where we're much more exposed with Protiviti, and to a lesser extent Management Resources. You know I would also add that we kind of segmented our financial offerings between Management Resources and Protiviti. If you put the two together and look at your sequential performance, you would find that sequentially the combination was up 8 percent quarter over quarter, which is pretty nice growth, which reflects that we are exposed not only to middle market through Management Resources, but we're exposed to larger companies through Protiviti as well.

Okay. And just a follow-up in terms of competition at Protiviti. Have you seen the competitive landscape change at all? And maybe just touch on the typical assignment, you know the average number of people you're putting out? I don't need exact numbers there, but just the picture would be helpful?

Protiviti, the competitive landscape has changed virtually not all. I mean the principal competition of the big four and Protiviti has made increasing headway as we tried to note in our preparatory remarks. It has been very, very well accepted. And I think that, frankly, you could talk to anyone from the big four and they would tell you that there is a big five in internal audit, and Protiviti is number five. They were given quite a compliment by one of the other large firms at the Stanford Directors College.

So in other words, we're very happy with the market acceptance. The big four are clearly our principal competition. There's always at least one of the big four it seems that is conflicted. We get a lot of referrals from the big four. We have good working relationships. And I think that part of the equation really hasn't changed since we talked to you at the last call. You might want to comment on (inaudible).

As to size, actually there is quite a range in the size. During the past quarter as an example we've been very fortunate. We have had two or three huge wins with household name, public companies, among which are some of the largest companies in the world, quite frankly. And those are huge engagements, huge assignments that involve many people over a long of period of time. On the other hand, some of the engagements are a month or two, but you don't think of it as much in terms of assignments the way we do in staffing in Protiviti. It is kind of what is the project? What is the solution desired by the client? And how do we deliver that?

Okay. And I know that there is a third question, but I have to ask. As far as winning these two to three big assignments, talk a little bit about why you did, and maybe how your prices compare to the big four?

We virtually never compete based on price, because again the perception in the marketplace, particularly until SOA got delayed, was that the marketplace was sold out and was resource constrained, so nobody has been competing on price. And I would include Protiviti with that.

As to why we were chosen, I would say it is a combination of many factors. It is that we are independent. We don't have the conflict issues of the big four. We have the deep skills and expertise of the big four, but as a smaller boutique type firm we can be more responsive than the big four firms are responsive. We have really carved a place for ourselves with Sarbanes. We have made a huge investment in training. We have made a huge investment in intellectual capital development. We made a huge investment in technology. Our Sarbox (ph) tool as we call it, which is a repository where companies can kind of keep their evaluation of their controls. The keep the documentation of those controls. It is Web based so you can go back to that over time in the future and update that fairly easily. We have actually gotten quite a bit of a acclaim for the technology tools that we developed around Sarbanes to the point that we actually have software companies that have approached us asking to integrate some of our tools into their packages. So the combination of tools, skills, lack of conflicts we have been incredibly successful.

And the other thing that I will say is don't underestimate the Andersen, the friends of Andersen in the marketplace starting with the alumni over many, many years that are still out there. The partners that have now spread out to other firms in the external audit sense that were former Andersen, there are a lot of friends of Andersen in the marketplace that are very helpful to Protiviti in these situations.

On that last point, Keith, all I would add to what he said, Kelly, is that you know a lot has happened in the last year. It is hardly a day that goes by that you're not reading something about an accounting firm with one sort of problem or another. I think a lot of people the business community, whether they are Andersen alumni or not, recognize that the internal audit and risk consulting group at Andersen had nothing to do Enron or WorldCom or any of these other matters that you read about. They had a very good reputation. They had many strong client relationships. And quite frankly, a lot of people are empathetic and feel like they got a very tough deal. They probably deserve better than to have happen what happened to their firm. That having been said, they are extraordinarily confident. They've got long track records. Their references are very easy to check. And references are something that anybody is going to check before awarding you the type of assignments that they had been winning. And I think a lot of people in this community recognize that they are highly competent with a long track record and can do a great job. So all of those things have combined to build the current momentum.

Brandt Sakakeeny of Deutsche Bank.

Two questions actually both on the same topic. Can you just revisit the international expansion? How many offices do you think you'll have by the end of year as you look out into next year? And then I just -- one housekeeping item. I missed your Accountemps office locations.

Okay. As to international locations, are we talking staffing or are we talking Protiviti?

Staffing.

Staffing. We may add you know 3 to 5, but they are very modest numbers in the scheme of things. As to Accountemps the count was the 329. And that is up, I believe, one office from last time and that office is international.

Okay. What is your CapEx budget, Keith, for the year?

We have been, I think we said 40 to 50 million for a few quarters now. And our spend rate has been 9 to 11 per quarter. And we continued that this quarter. So it is down significantly from what it had been, and in fact tailed down a little bit the last few quarters as well.

Adam Waldo of Lehman Brothers.

Max, a question for you philosophically as you hopefully are coming out of the second downturn on your watch at Robert Half. As you look at this cycle versus prior cycles, given that we're now about five quarters -- pardon me, I'm sorry, about seven quarters past the trough in the U.S. GDP cycle and we're seeing kind of a halting upturn. What do you see about the end market that has changed versus the prior downturn exit? And in terms of the future market opportunity, you know I am a bit surprised frankly not to see this snap back having come faster. I think a lot of people are. Maybe give us some sense for how the market has changed as you see it?

I think I may need to be an accomplished economist to give you the type of answer you would like, Adam, but I will do the best I can. This downturn is actually, as you know, taken much longer from a labor market standpoint that anybody expected. One reason for our cautious guidance, as I noted, is that we witnessed a couple of false starts already. It is certainly the longest downturn that the staffing industry has seen.

I think that middle market companies to some extent have been even more reticent than normal to bring in staffing. It has been a tougher recession in some ways than I think most of our typical with middle market clients expected. I guess I view that glass as somewhat half full, Adam, in the sense that if in fact you believe the recession is long in the tooth and that we are near an upturn, I guess our feeling, which maybe only a hope, but it is our belief, that they will give us quite a boost as they begin to start adding temporaries again.

If you think about it our typical staffing client is less than 1/4 or 1/5 of 1 percent of our revenues. So we like our positioning. Our ten year returns are very strong in large part because we have a strong middle market clientele. But there's no question in the current environment the regulatory push with Sarbanes-Oxley and so forth has probably meant there is more work at big companies. And so we're happy to Protiviti helping us precipitate in that along with Management Resources.

But I think where we sit today we're cautiously optimistic. I have said before, we just simply can't believe it is going to rain forever. I don't think the reasons that have driven the growth of the temporary industry are going to go away. We operate in enough European countries to recognize that the penetration levels in many of those countries are much greater than in this country. I don't think the regulatory environment is going changed dramatically in the sense that somehow midsize employers are now not going to want to use temporary workers. I think it will be just the opposite, they will continue to have additional incentives use temporaries.

We have struggled to maintain our marketing budgets to keep our office network in tact, to keep our best people on the payroll in the belief that we will be well positioned for a strong rebound as things begin to improve. Admittedly, we're waiting like you and everyone else to see more an upturn, but we believe it will happen. And we believe we're well positioned. Beyond that, I don't have a lot to add, unless you want to say something, Keith.

Well, don't forget about the long-term demographic impact on supply. And clearly, as the baby boomers age and come out of the market, there are fewer people coming into the market. And particularly in short-term with all the counting scandals of the last couple of years, there is fewer and fewer, not more and more people, going into accounting. And typically we do a little better in a supply constrained market than the opposite. So longer-term, I think that is a driver that is very much in tact.

Just as a quick follow-up. Last quarter you all did about a 4 percent organic revenue decline in constant currency. And it looks like this quarter your organic revenue decline was about 2 percent to 3 percent. I wonder if you can just tell us what impact year-over-year you saw from the weak dollar in terms of positive impact on the rate of revenue growth and then the EPS benefit you saw?

Given that the total our international exposure is 19 percent of revenue, and given that the currencies that impact us, I believe, had a swing of 5 to 6 percent, the impact to international would swing from a small single digit sequential growth to a small single digit sequential decline. So there was a nominal impact on revenues and virtually no impact on earnings.

Matt Litfin of William Blair & Co.

At the one year mark on Protiviti I believe that it is true that some of the more senior consultants came off of some guaranteed pay packages. Were there any changes that you made to the compensation structure for them, either in total dollars or in the ratio of fixed to variable pay?

The very most senior, we tweaked the fixed to variable a bit in favor of more variable. Additionally, for the whole managing director group, we settled on an equity component as part of their incentive pay that had heretofore been somewhat discretionary. But there weren't major, major changes to what had been done. Just at the upper end, a bit more variable. And across the board, a more defined mix of equity. And that equity mix, as your total compensation rises, the percentage delivered in equity rises as well.

And Keith, when you are discussing the equity portion are you talking more about options or restricted stock or some combination?

It will probably end up more restricted stock than options. We actually give them a choice. And particularly given all the press around the switch to restricted stock by other companies, my guess is there will be a bigger selection of restricted stock than options.

Mark Marcon of Wachovia Securities.

How much of Protiviti's business is Sarbanes-Oxley related?

Without getting into specifics, it is significantly less than half.

And when there were questions earlier in terms of how we should model this forward, and you said take the current trajectory and move it forward. Did you mean that in terms of the gross cost in the SGA as well as the revenue or something different than that?

It was a purposefully general comment. That was not intended to specifically hone in on any of those line items. But there's a lot of operating leverage in Protiviti and I guess my suggestion was there should be even more than just demonstrated itself for the reason that I talked about.

Yes, I was just trying to figure out -- obviously we're all trying to figure out exactly where the breakeven point is.

I understand. But if you look at last couple of quarters at the operating income line, we had a sequential improvements of 2 to $3ish million. And you just lost 8.8. And so that is one simple math. Not that we're making a projection.

Right. Okay. That's fair. DSO's, a tremendous job there. Can you improve it any further or are we hitting the limits here?

Well, I think for a few quarters now we have said we could not get any better, and then we got better by a day. And so believe me, we try to get better and we will continue to try to get better. I just think it is not prudent to count on it getting better.

Okay. And with regards to excess capacity particularly on the staffing side, I mean can you give us a feel for how much you could add in terms of revenue without having to add to your cost materially? Or would you -- if thing started picking up, would you just start adding folks per your normal metrics so you don't get left behind in a true recovery?

I missed the first part of your question. Are we talking staffing or Protiviti?

Staffing.

Staffing. Clearly there's capacity in staffing. I think there would be some period of time where you would you that capacity and lever yourself. However, to participate in the continued growth, you have to get ahead of that a bit by adding to staff. So it would be kind of a mix.

Could you give us a feel in terms of if revenues were up 10 percent, would you have to add materially to your offices or not?

I think the safest thing to do is kind of look what happened as we lost revenues, and kind of use that as a proxy for what happens as we add to revenues.

Okay. A little bit of a follow on to Adam's questions earlier just in terms of cycles and things of that nature. When you take a look at the prior peak that we went through, particularly in terms of perm placement, have you gone back and taken a look and said, how much of that do we think is on the perm side is going to be sustainable that we could eventually get back there? And how much of that business was kind of bubbly, and maybe we wouldn't see it again? (multiple speakers)

Remember now, we've been in the perm business since 1948. And I can certainly remember back in the early '90s these same questions occurred because perm took a similar hit. Peak to trough perm was down over 50 percent in the early '90s. And there were questions often about would the good old days ever return. And there were many questions as to whether they would. And look what happened thereafter. It is a cyclical business. There's no question about that. I go back to the demographic trends longer-term that we talk about, all the very much favor the perm business.

That's true. I mean your feeling is that you should be able to -- on virtually every line item, you should be able to get back to where you were. You don't see any reason why you shouldn't be able to bet there?

Traditionally it takes longer to get back in perm than it does in temp, because people want to make sure they have a full-time need before they add full-time people. So that trend has been consistent across many downturns. But timing aside, I think history would say that absolutely perm would come back. And that furthermore added to history, look at the demographics as you look forward.

Marta Nichols of Bank of America Securities.

Just as a follow up to Matt's question. Now that the employee -- employment guarantees have rolled off -- and can you confirm tha they have rolled off for everybody at Protiviti -- has that impacted your voluntary turnover at all as you anticipate increasing involuntary turnover at all? Or are you really comfortable that the acceleration in revenues there should absorb the excess capacity in an acceptable period of time?

It is a combination of voluntary and involuntary turnover consists of two or three people. So it has been a very stable group, a very motivated group, a group very desirous to show that they can win in the marketplace, and they're doing it. So it is a very cohesive group.

Okay great. Thanks. And then on a separate question, you have talked about your ability -- you're improving ability to pass on these employment rate increases -- or unemployment rate increases to your customers. Is it possible to extrapolate from that that pricing competition is getting somewhat less fiercer or less difficult now? Or is it more just a matter of your ability to sell that concept to your clients?

Well, you have to remember we tend to manage the spread. It is not always necessarily a price increase, although there is certainly some of that. But it is really a question of managing the spread between what the candidate is paid and what the client is charged. We have never been known as a big discounter, and that was certainly the case in the last session as well. And so again, when your typical assignment in the staffing business is you know a couple of people at a time, quality is the issue, much more so than price. People don't care about what the cost of getting a particular job done is going to be more than they care about the hourly rate. So again, but there's a big focus on the spread more so than just charging the client more.

Okay. I guess even in light of that, are you finding the pricing environment is any less difficult for you right now than you felt like it might have been six months ago?

I think it is pretty much the same.

Okay. And then I think, Keith, you mentioned that you have a real mixture of projects coming through Protiviti, some very large engagements that should be revenue generators over a long period of time, and then some one off project that may only last a month or two at a time. Can you give us any sense what the mix of revenues coming from larger long-term projects versus smaller project is?

The really difficult thing to analyze at the moment is Sarbanes-Oxley. And we talked about this a little bit on last call. To what extent, if your first project ever with a client is Sarbanes, to what extent are you going to do work once you have complied with Sarbanes. And as we said, many companies are using their internal budget to fund a big part of Sarbanes. So this year that budget goes to Sarbanes. Next year the budget still exists. You better believe we're going to do everything in our power to leverage the knowledge we get from Sarbanes to do other work for those clients. But there is uncertainty around that because it hasn't happened.

Right.

That said, a lot of new wins we've had, some of the most rewarding wins that we've had are for annual internal audit co-sourcing and outsourcing engagements. And traditionally those are annuity like engagements.

And largely non Sarbox related or at least not that being the leading factor in getting you in the door?

We have a significant number of those that are not Sarbox related.

And then the final question, I was intrigued by your comment about software companies that are interested in some of the tools that you have put on your Sarbanes-Oxley -- in your Sarbanes-Oxley packages.

That's right.

Licensing, something like that? Is that a potential revenue stream for you, or is that...?

There are negotiations about whether it is a revenue stream or whether it is a referral stream that we're talking about. And so I certainly wouldn't go penciling in any number for that. But as a minimum what you may do with the a software company that to extent it markets its package inclusive of your own tools, you get an exclusive period to go market your services to that company in connection with your use of the software.

Right.

And my guess is -- I don't want to predispose the outcome, nor do I want to -- in case some of those companies are listening, deny ourselves revenue, but we don't know where that is headed. But the good news is large household name software companies knocked on our door and said the marketplace said, you guys have, if not the best, among the best software tools for Sarbox. I think that is a great tribute to a Company that is a year old.

Our final question comes from Mr. Fred McCrea of Thomas Weisel Partners.

I will make it quick. In terms of advertising spend this quarter, certainly a big play in the Bay area for Accountemps, is that a nationwide trend? And how long has that play been going on for?

The advertising is fairly consistent on a sequential basis, particularly in staffing, between the first and second quarters. The increase in advertising from a dollar standpoint that happened in the second quarter was principally Protiviti driven along the lines that we talked about earlier. So we have always had a commitment particularly to drive time radio, and we have maintained that commitment through the downturn.

Any comments in terms of how that has driven Accountemps business, at least one to two quarters? Has that had any change in impact or has that just been pretty continuous?

You know, it is always a challenge to measure the effectiveness of advertising. I guess our belief is that the accumulative effect over the number of years that we're done it is a major contributor to the value of our brands that are a major part of Robert Half.

That is the age-old question about measuring the effect of your advertising. I think Keith summed it up pretty well. We have long been committed to advertising, particularly the type you referred to. We can't prove the direct benefit based on a one quarter or two quarter campaign. But we have been long committed to it and continue to believe it is effective over the long-term.

I thank all of you for your time today. This does conclude the teleconference. A tape recording of this call will be available for replay later today. The dial in number is 800-947-6621. This phone number is also included in today's press release. The phone replay will be available until 8 pm Eastern time on Tuesday, July 22nd. You can also listen to this call through the Investor Center of our website where it will be archived. Thank you again for your time.

(CONFERENCE CALL CONCLUDED)